item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index financial statements schedules appearing page list financial statements schedules filed part report 2 see exhibit index appearing pages ii2 ii3 list exhibits filed incorporated herein part report b form 8k current reports filed itt quarter ended december 31 1993 schedules report management itt corporation responsible preparation integrity information contained financial statements sections annual report financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information annual report consistent financial statements itts financial statements audited arthur andersen co independent public accountants elected shareholders management made itts financial records related data available arthur andersen co believes representations made independent public accountants valid complete itts system internal controls major element managements responsibility provide fair presentation financial statements system includes accounting controls internal auditing program designed provide reasonable assurance corporations assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itts internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itts employees management continually monitors system internal controls compliance itts internal auditors independently assess effectiveness internal controls make recommendations improvement regular basis independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itts financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation internal auditors independent public accountants audit committee board directors composed nonemployee directors meets periodically management independent public accountants internal auditors evaluate effectiveness work performed discharging respective responsibilities assure independent free access committee report independent public accountants stockholders itt corporation audited financial statements itt corporation delaware corporation subsidiaries december 31 1993 1992 three years period ended december 31 1993 described accompanying index financial statements schedules financial statements schedules referred responsibility corporations management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt corporation subsidiaries december 31 1993 1992 results operations cash flows three years period ended december 31 1993 conformity generally accepted accounting principles discussed accompanying notes financial statements corporation adopted new accounting standards promulgated financial accounting standards board changing methods accounting 1993 reinsurance shortduration longduration contracts effective january 1 1992 postretirement benefits pensions postemployment benefits audits made purpose forming opinion basic financial statements taken whole schedules listed index financial statements schedules presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audits basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen co new york new york february 3 1994 itt corporation subsidiaries consolidated income millions except per share reported net loss 1992 causes calculation fully diluted loss per share 1992 antidilutive case generally accepted accounting principles suggest fully diluted loss per share primary loss per share however corporation presented actual calculated amount order calculations comparisons previously reported future amounts consistent basis accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated balance sheet millions except shares per share accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated cash flow millions accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated retained earnings millions except per share consolidated capital stock surplus millions except shares cumulative preferred stock stated value millions corporation authorized 50000000 shares cumulative preferred stock without par value issuable series esop series shares redeemable july 1 1994 7720 per share reduced annually june 30 1999 7459 per share liquidation preference shares outstanding 34 per share series n 7772 per share esop series accompanying notes financial statements integral part statements notes financial statements dollar amounts millions unless otherwise stated accounting policies consolidation principles financial statements include accounts majorityowned subsidiaries significant intercompany transactions eliminated insurance operations policy acquisition costs representing commissions premium taxes certain underwriting costs developing implementing new insurance programs deferred amortized periods benefited estimates future revenues including investment income compared estimates future costs including amortization policy acquisition costs determine policies currently force expected result net loss revenue deficiencies determined periods presented liability property casualty claims includes amounts determined claim adjusters individual cases estimates unreported claims based past experience asbestos pollution liabilities established claims legal defense costs ultimate liabilities cannot reasonably estimated due unpredictability notification resolution therefore liabilities established may adjusted additional information becomes available however based current evaluation corporation believes ultimate resolution claims including reinsurance effects material adverse impact overall financial condition certain liabilities unpaid claims discounted interest rates 3 35 permanently disabled claimants 3 14 terminated reinsurance treaties certain reinsurance contracts fund loss runoffs unrelated parties discount amounted 362 325 december 31 1993 1992 unearned premiums calculated principally application monthly pro rata fractions unexpired terms policies force liability future life insurance payments excluding investment universal lifetype contracts computed net level premium method based estimated future investment yields withdrawals mortality assumptions made time policies issued liability investment universal lifetype contracts stated policyholder account values surrender charges revenue contracts represents policyholder charges cost acquiring new business recognized term contracts proportion estimated gross profits separate account assets corresponding liabilities totalling 166 billion 88 billion december 31 1993 1992 respectively netted accompanying balance sheet finance operations revenues finance receivables recognized using interest method whereby finance charges loan origination fees direct loan origination costs recognized life related loan provide constant effective yield insurance subsidiaries finance companies integral parts finance operations accounts subsidiaries included finance revenues operating costs expenses assets liabilities reserve credit losses based analysis historical loss experience factors considered adequate cover incurred losses finance receivables portfolio may 1993 financial accounting standards board issued new standard related accounting creditors impairment loan sfas 114 standard must adopted 1995 requires impaired loans defined measured based present value expected future cash flows corporation reviewing requirements timing adoption standard however impacts expected material corporations financial position results operations hotel operations 1993 corporation changed presentation operations partiallyowned hotel properties hotel properties longterm management agreements include revenues expenses consolidated results operations change made operating control responsibilities associated properties substantially notes financial statements continued owned leased hotel properties inclusion revenues expenses properties clearly reflects results operations properties actively managed controlled corporation prior year amounts reclassified conform 1993 presentation sales expenses increased 24 billion 23 billion 21 billion impact operating income 1993 1992 1991 respectively inventories generally valued lower cost firstin firstout market manufacturing operations full absorption procedure employed using standard cost techniques revenue longterm contracts recognized percentageofcompletion method expected losses longterm contracts potential losses obsolete slowmoving inventories provided current period plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost corporation normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved accumulated depreciation 3054 2916 december 31 1993 1992 earnings per share fully diluted earnings per share based weighted average common stock equivalents assumes conversion esop series convertible preferred stock 1992 1991 assumes conversion outstanding series convertible preferred stock net income applicable fully diluted earnings per share consists reported net income loss adjusted amount net tax corporation would required contribute esop series preferred shares converted common stock primary earnings per share based 1993 weighted average common equivalent shares outstanding include series n convertible preferred stock options 1992 common equivalent shares include series k n convertible preferred stock options considered since effect antidilutive common equivalent shares however included primary earnings per share calculation 1991 respect options assumed proceeds received upon exercise used acquire common stock corporation 1993 1991 net income applicable primary earnings per share consists reported net income adjusted dividend requirements preferred stock considered common stock equivalents net related tax benefits 1992 net income applicable primary earnings per share consists reported net loss adjusted dividend requirements preferred stock series net related tax benefits changes accounting principles change adopted 1993 first quarter 1993 corporation adopted statement financial accounting standards sfas 113 accounting reporting reinsurance shortduration longduration contracts restating balance sheet prior period new standard requires reinsurance recoverables prepaid reinsurance premiums reported assets result restatement reinsurance recoverables increased 102 billion prepaid insurance premiums included assets increased 3 billion policy liabilities accruals increased 105 billion december 31 1992 income statement impact adoption significant changes adopted 1992 effective january 1 1992 corporation adopted sfas 106 employers accounting postretirement benefits pensions sfas 112 employers accounting postemployment benefits using immediate recognition method accordingly cumulative adjustments december 31 1991 580 tax 437 per fully diluted share 45 tax 34 per fully diluted share respectively recognized january 1 1992 corporations cash flows impacted changes accounting principles notes financial statements continued special charges extraordinary item 1992 result adverse loss developments certain surplus lines reinsurance business corporations insurance operations recorded 900 pretax charge fund expected loss developments surplus lines reinsurance business 250 pretax expected legal defense costs associated environmentalrelated claims effect two charges 759 tax 575 per fully diluted share corporation also announced 1992 strategic transformation consumer finance operations considerably reduce business domestic unsecured consumer small loan area pursue growth opportunities portions finance business domestic unsecured consumer small loan portfolio totalled 24 billion december 31 1992 conjunction decision reserves established fourth quarter totalling 928 pretax 612 tax 466 per fully diluted share including 693 pretax provision cover future unsecured consumer small loan losses runoff existing portfolio 103 pretax restructuring consolidation loan offices 132 pretax anticipated losses commercial real estate portfolio june 1993 domestic unsecured consumer small loan portfolio sold group investors resulting 95 pretax gain 63 tax 48 per fully diluted share proceeds sale used retire fixedrate debt resulting extraordinary loss 50 tax 38 per fully diluted share alcatel nv july 1992 corporation sold 30 equity interest alcatel nv alcatel joint venture partner alcatel alsthom resulting pretax gain 942 622 tax 471 per fully diluted share corporation received cash closing 1 billion two notes payable 1993 1994 valued 14 billion 91 million shares alcatel alsthom stock recorded 806 alcatel alsthom stock carried cost included assets accompanying balance sheet value 13 billion 11 billion based quoted market prices december 31 1993 1992 equity earnings alcatel 1992 1991 represents corporations 30 equity tax income alcatel adjusted amortization amount corporations investment exceeded equity joint venture periods longer 40 years receivables finance receivables 7556 9280 december 31 1993 1992 net unearned income 567 917 reserves credit losses 222 1119 estimated fair value finance receivables net december 31 1993 1992 approximates recorded value computed discounting projected cash flows rate similar loans would made borrowers similar credit ratings maturities consumer receivables 3647 5932 commercial receivables 4698 5384 december 31 1993 1992 receivables generally written maximum original terms 60 months consumer small loans 84 months commercial loans 180 months consumer mortgages 120 months commercial mortgages net chargeoffs percentage average net finance receivables 322 485 458 1993 1992 1991 receivables 5163 5403 december 31 1993 1992 net allowances doubtful accounts 127 133 included balances notes receivable sale alcatel totalling 785 1461 december 31 1993 1992 respectively approximate fair value also included insurance premiums receivable agents balances 1842 1791 trade receivables 2395 1989 receivables 268 295 notes financial statements continued income tax income tax data continuing operations follows provision made us taxes payable undistributed foreign earnings amounting approximately 800 since amounts permanently reinvested deferred income taxes represent tax effect related recording revenues expenses different periods financial reporting tax purposes december 31 1993 1992 balance sheets include net us federal deferred tax assets 1044 1037 respectively included assets net foreign deferred tax liabilities 196 244 respectively included liabilities deferred tax assets liabilities include following reconciliation tax provision benefit us statutory rate provision benefit income tax reported follows notes financial statements continued debt december 31 debt consisted fair value corporations commercial paper bank loans shortterm loans approximates carrying value estimated fair value longterm debt december 31 1993 1992 6590 6135 finance 3071 2935 based discounted cash flows using corporations incremental borrowing rates similar arrangements longterm debt maturities interest rates december 31 balances december 31 1993 1992 exclude amortizable debt discounts 111 110 finance 158 174 operations bank loans shortterm debt drawn lines credit extend fixed term several years december 31 1993 corporation unused credit lines 33 billion finance majority supports outstanding commercial paper 20 billion operations corporation enters interest rate swap agreements major financial institutions manage exposure fluctuations interest rates interest expense adjusted changes interest rate credit risk considered remote december 31 1993 1992 interest rates effectively converted following notional principal amounts estimated fair value interest rate swap agreements december 31 1993 1992 amount net payable 25 32 recorded amounts fair value interest rate swaps estimated amount corporation would receive pay terminate swap agreements december 31 1993 1992 taking account current interest rates notes financial statements continued capital stock 1993 3588008 common shares repurchased 310 excess par value charged capital surplus extent available retained earnings 1992 1664518 common shares repurchased 109 excess par value charged capital surplus also 1992 corporation called redemption outstanding 400 convertible series k 500 convertible series cumulative preferred stock 100 per share plus accrued dividends redemptions totalled 106 reduced common equivalent shares additional 1562559 shares balance converted 5822118 shares common stock share repurchases 1991 december 31 1993 reserved shares authorized unissued common stock totalled 13344783 connection convertible preferred stock incentive stock plans shares held treasury totalled 27587131 certain subsidiaries subject various restrictions transfers funds form dividends advances without prior regulatory approval net assets subsidiaries subject restrictions approximately 12 billion december 31 1993 foreign currency balance sheet accounts translated exchange rates effect year end income accounts translated average rates exchange prevailing year national currencies foreign operations generally functional currencies corporation enters foreign exchange contracts major financial institutions currency swaps forward exchange contracts reduce exposure fluctuations foreign currencies agreements meant either hedge exchange exposure corporations net investment foreign country corporations foreign denominated debt therefore longterm duration meant hedge specific transaction contractual amounts foreign exchange contracts december 31 1993 1992 totalled 966 1122 respectively mature varying dates 1997 estimated fair value december 31 1993 1992 approximates recorded amounts estimated fair value present value change cash flows would result agreements replaced yearend market rate remaining term agreements cumulative translation adjustments adjusted contracts hedge corporations foreign investments differential paid received fluctuates foreign exchange rate credit risk considered remote translation adjustments recorded separate component stockholders equity employee benefit plans pension plans corporation subsidiaries sponsor numerous pension plans funded trustees except countries outside us funding required notes financial statements continued total pension expenses us pension expenses included net periodic pension costs table 85 100 86 1993 1992 1991 following table sets forth funded status pension plans amounts recognized corporations balance sheet december 31 1993 1992 principal weighted average assumptions inherent determination substantially domestic plans assets exceed accumulated benefits substantially foreign plans accumulated benefits exceed related assets investment savings plan itt investment savings plan salaried employees includes employee stock ownership plan esop feature 1989 itt sold esop 9384951 shares new series cumulative preferred stock price 745875 per share financed borrowings esop guaranteed itt shares allocated participants percent covered employees salary respective contribution december 31 1993 1968237 shares allocated participants esop debt 603 included balance sheet due corporations guarantee repayment esop offset reduction stockholders equity deferred compensation debt fixed rates ranging 84 88 matures varying amounts 2004 fair value esop debt december 31 1993 686 based discounted cash flows using incremental borrowing rates similar arrangements interest principal repayments funded dividends esop series preferred stock plan contributions corporation notes financial statements continued postretirement health life corporation subsidiaries provide health care life insurance benefits certain eligible retired employees effective january 1 1992 corporation adopted sfas 106 using immediate recognition method benefits accumulated date corporation adopted certain changes number postretirement benefit plans 1992 effect changes reflected determination expense recorded 1993 1992 reported corporation prefunded portion health care life insurance obligations trust funds prefunding accomplished tax effective basis postretirement health care life insurance benefits expense excluding cumulative catchup adjustment 1992 comprised following 1993 1992 1991 aggregate costs amounted 27 prior accounting method following table sets forth funded status postretirement benefit plans pensions amounts recognized corporations balance sheet december 31 1993 1992 principal weighted average assumptions inherent determination assumed rate future increases per capita cost health care health care trend rate 121 1993 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing accumulated postretirement benefit obligation 40 annual expense 3 extent actual experience differs inherent assumptions effect amortized average future service covered active employees stock incentive plans corporations stock option incentive plans provide common shares options employees exercisable tenyear periods options become exercisable upon attainment specified sustained market price appreciation corporations common shares options become exercisable threeyear period commencing date grant exercise price per share fair market value date option granted notes financial statements continued december 31 1993 options 1684000 shares exercisable corporations incentive plans common shares subject options 1993 thousands shares december 31 1993 94498 shares available future grants corporations various incentive plans grants contingent acceptance new incentive plan corporations shareholders total 307300 included number options outstanding well exercise price outstanding options adjusted 1994 recognize effect rayonier spinoff insurance finance investments fixed maturity investments insurance finance subsidiaries substantially carried amortized cost consisted following december 31 1993 1992 corporation considers fixed maturity portfolio held primarily investment although times changing interest rates tax position factors result portfolio activity insurance finance investments primarily equity securities real estate policy loans equity securities carried market 1367 1045 december 31 1993 1992 gross unrealized gains losses equity securities 183 61 respectively 1993 91 46 respectively 1992 tax difference cost equity securities reflected stockholders equity real estate policy loans carried cost approximates fair value notes financial statements continued excluding us government agency investments corporation exposed significant credit concentration risk net investment income including realized gains reflected insurance finance revenues totalled 2375 2692 2287 1993 1992 1991 net investment expenses 104 98 96 total realized investment gains pretax 1993 1992 1991 161 511 208 net pretax changes unrealized gains losses fixed maturity equity securities 218 1993 685 1992 1096 1991 amortized cost estimated market value fixed maturity investments december 31 1993 estimated maturity shown maturities reflected contract date except assetbacked securities distributed maturity year based corporations estimate rate future prepayments principal remaining life securities actual maturities differ contractual estimated maturities reflecting borrowers rights call prepay obligations corporation manages exposure market price andor interest rate fluctuations certain planned investment purchases existing investments entering interest rate cap swap agreements well exchangetraded financial futures contracts major financial institutions december 31 1993 1992 respectively notional amounts investments interest rate swap agreements 4120 4200 interest rate cap agreements 1685 1357 futures contracts 3302 1237 fair value instruments together similar financial instruments december 31 1993 1992 approximates recorded amounts estimated fair value present value cash flows would result agreements replaced yearend market rate remaining term agreements mature varying dates 2003 credit risk considered remote may 1993 financial accounting standards board issued new standard accounting reporting certain investments debt equity securities sfas 115 new standard must implemented 1994 first quarter requires among things securities classified heldtomaturity available sale trading based corporations intentions respect ultimate disposition security ability effect intentions classification determines appropriate accounting carrying value cost basis fair value case fair value whether adjustment impacts stockholders equity directly reflected statement income corporation reviewing standard primarily impact investment portfolios insurance finance segments anticipated generally portfolios classified available sale accordingly investments reflected fair value corresponding impact included stockholders equity december 31 1993 estimated impact standard increase stockholders equity approximately 250 tax implementation generally accepted accounting principles finalized respect certain investments accordingly charge expected significant may recorded income statement cumulative effect accounting change standard adopted notes financial statements continued reinsurance corporations insurance operations cede insurance insurers limit maximum loss transfers relieve originating insurers primary liabilities operations also assume insurance insurers failure reinsurers honor obligation could result losses corporation evaluates financial condition reinsurers monitors concentrations credit risk effect reinsurance property casualty premiums written earned follows reinsurance recoveries reduced loss expenses incurred 12 billion 12 billion 17 billion years ended december 31 1993 1992 1991 life insurance net retained premiums comprised following life insurance recoveries reduced death benefits approximated 19 years ended december 31 1993 1992 1991 1992 itt hartford entered agreement mutual benefit life insurance company rehabilitation mutual benefit whereby assumed block contract obligations mutual benefit individual corporate owned life insurance coli contracts part agreement itt hartford received 56 billion cash invested assets 53 billion coli policy loans itt hartford coinsured approximately 84 contract obligations back mutual benefit two insurers december 31 1993 itt hartford reinsurance receivable mutual benefit 45 billion risk mutual benefit becoming insolvent mitigated reinsurance agreements requirement assets kept security trust itt hartford sole beneficiary itt hartford significant reinsurancerelated concentrations credit risk policy liabilities accruals policy liabilities accruals december 31 december 31 1993 1992 estimated fair value policy claims benefits payable approximates recorded amount based present value estimated future cash flows using current market rates similar arrangements notes financial statements continued insurance operating costs expenses insurance operating costs expenses discontinued operations december 1993 corporation announced plans spinoff itt rayonier corporations whollyowned forest products subsidiary itt shareholders february 28 1994 shares common stock itt rayonier approximately 296 million shares distributed holders itt common stock holders itt cumulative preferred stock 225 convertible series n basis one share rayonier common stock every four shares itt common stock held one share rayonier common stock every 31595 shares itt series n held itt rayonier reflected discontinued operation accompanying financial statements net assets discontinued operations included assets summarized information follows itt rayoniers results operations 1992 include charge 180 pretax 115 tax recorded connection closedown grays harbor pulp paper complex leases rentals december 31 1993 minimum rental commitments operating leases 237 186 149 123 103 1994 1995 1996 1997 1998 remaining years commitments amounted 742 aggregating total minimum lease payments 1540 rental expenses operating leases 322 341 328 1993 1992 1991 respectively commitments contingencies corporation subsidiaries involved various legal matters including related antitrust issues government contracts environmental matters actions include claims substantial sums reserves established outcome probable reasonably estimated ultimate result claims litigation cannot determined corporation expect matters material adverse effect results operations consolidated financial position supplementary condensed financial statements itt corporation subsidiaries insurance finance subsidiaries equity basis following condensed balance sheets statements income cash flows reflect insurance finance subsidiaries equity basis presentation affect consolidated income stockholders equity condensed balance sheets supplementary condensed financial statements continued itt corporation subsidiaries insurance finance subsidiaries equity basis condensed statements income condensed statements cash flows business segment information financial business services insurance segment writes broad range life property casualty insurance finance makes consumer commercial loans services mortgages communications information services primarily publishes telephone directories provides educational services manufactured products automotive defense electronics fluid technology units engaged manufacture sale equipment commercial military process industries products include automotive equipment accessories parts oem aftermarket pumps valves electrical connectors components integrated circuits semiconductors defense activities include development manufacture sale installation maintenance operation military electronic communications equipment primarily us government hotels operates worldwide network hotels resorts casinos sheraton name dispositions include operating results gain loss sale closedown units discontinued operations including domestic unsecured consumer small loan business itt components distribution world directories uk turkey operations along sales operating income noncore businesses income loss consists gross profit sales revenues less operating expenses incurred includes nonoperating income corporate assets expenses minority equity intercompany sales priced armslength basis eliminated consolidation material geographical information total segments refer page 2 business segment sales revenues income information provided quarterly results 1993 1992 unaudited restated see notes financial statements reported net loss 1992 causes calculation fully diluted loss per share 1992 antidilutive case generally accepted accounting principles suggest fully diluted loss per share primary loss per share however corporation presented actual calculated amount order calculations comparisons previously reported future amounts consistent basis export sales unaudited serving global markets itt generates significant export sales benefit local economies sales products including intercompany manufactured various countries shipment countries consisted following itt corporation subsidiaries valuation qualifying accounts millions dollars note 1 principally retirements well companies sold year 2 principally related sale receivables year s1 itt corporation subsidiaries shortterm borrowings millions dollars note 1 finance calculations based primarily daily balances include commitment fees impact interest rate exchange agreements calculations based primarily monthend balances itt corporation subsidiaries supplementary income statement information millions dollars noteitems totalling less 1 sales revenues shown elsewhere herein omitted schedule s2 itt corporation subsidiaries summary insurance investments millions dollars note 1 market values stocks bonds approximate quotations published applicable stock exchanges received reliable sources s3 itt corporation subsidiaries supplementary insurance information millions dollars 1 net investment income allocated based property casualty life healths share investable funds 2 restated 1992 1991 adoption statement financial accounting standards 113 accounting reporting reinsurance shortduration longduration contracts supplemental information concerning property casualty insurance operations millions dollars 1 reserves permanently disabled claimants discounted present value rates interest ranging 30 35 three years ended december 31 1993 reserves terminated reinsurance treaties certain reinsurance contracts fund loss runoffs unrelated parties discounted present value rates interest ranging 3 6 1993 6 14 1992 7 13 1991 s4 itt corporation subsidiaries reinsurance millions dollars s5 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation jon f danski jon f danski senior vice president controller principal accounting officer march 24 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index financial statements schedules appearing page list financial statements schedules filed part report 2 see exhibit index appearing pages ii2 ii3 list exhibits filed incorporated herein part report b october 20 1994 itt filed form 8k current report reporting item 5 would seek offers purchase itt financial corporation subsidiary would report results company discontinued operations december 15 1994 itt filed form 8k current report reporting item 5 certain clarifications expanded descriptions concerning accounting matters including insurance matters derivative securities schedules report management itt corporation responsible preparation integrity information contained financial statements sections annual report financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information annual report consistent financial statements itts financial statements audited arthur andersen llp independent public accountants elected shareholders management made itts financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itts system internal controls major element managements responsibility provide fair presentation financial statements system includes accounting controls internal auditing program designed provide reasonable assurance corporations assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itts internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itts employees management continually monitors system internal controls compliance itts internal auditors independently assess effectiveness internal controls make recommendations improvement regular basis independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itts financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation internal auditors independent public accountants audit committee board directors composed nonemployee directors meets periodically management independent public accountants internal auditors evaluate effectiveness work performed discharging respective responsibilities assure independent free access committee report independent public accountants stockholders itt corporation audited financial statements itt corporation delaware corporation subsidiaries december 31 1994 1993 three years period ended december 31 1994 described accompanying index financial statements schedules financial statements schedules referred responsibility corporations management responsibility express opinion financial statements schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt corporation subsidiaries december 31 1994 1993 results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles discussed accompanying notes financial statements corporation adopted new accounting standards promulgated financial accounting standards board changing methods accounting effective january 1 1994 certain investments debt equity securities effective january 1 1992 postretirement benefits pensions postemployment benefits corporation also changed effective january 1 1994 method used discount certain workers compensation liabilities accounting method certain marketing startup costs audits made purpose forming opinion basic financial statements taken whole schedules listed index financial statements schedules presented purposes complying securities exchange commissions rules part basic financial statements schedules subjected auditing procedures applied audits basic financial statements opinion fairly state material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp new york new york february 2 1995 itt corporation subsidiaries consolidated income millions except per share reported net loss 1992 causes calculation fully diluted loss per share 1992 antidilutive case generally accepted accounting principles suggest fully diluted loss per share primary loss per share however corporation presented actual calculated amount order calculations comparisons previously reported future amounts consistent basis accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated balance sheet millions except shares per share accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated cash flow millions accompanying notes financial statements integral part statement itt corporation subsidiaries consolidated retained earnings millions except per share consolidated capital stock surplus millions except shares cumulative preferred stock stated value millions corporation authorized 50000000 shares cumulative preferred stock without par value issuable series esop series shares redeemable 7720 per share reduced annually june 30 1999 7459 per share liquidation preference shares outstanding 34 per share series n 7720 per share esop series accompanying notes financial statements integral part statements notes financial statements dollar amounts millions unless otherwise stated accounting policies consolidation principles financial statements include accounts majorityowned subsidiaries significant intercompany transactions eliminated insurance operations policy acquisition costs representing commissions premium taxes certain underwriting costs developing implementing new insurance programs deferred amortized periods benefited estimates future revenues including investment income compared estimates future costs including amortization policy acquisition costs determine policies currently force expected result net loss revenue deficiencies determined periods presented liability property casualty claims includes amounts determined claim adjusters reported losses estimates unreported claims based past experience ultimate loss respect asbestos environmentalrelated claims particularly uncertain cannot estimated using conventional reserving techniques due inconsistencies past experience discussed commitments contingencies certain liabilities unpaid claims discounted interest rate 81 december 31 1994 liabilities relate permanently disabled claimants terminated reinsurance treaties certain reinsurance contracts fund loss runoffs unrelated parties discount amounted 432 362 december 31 1994 1993 unearned premiums calculated principally application monthly pro rata fractions unexpired terms policies force liability future life insurance payments excluding investment universal lifetype contracts computed net level premium method based estimated future investment yields withdrawals mortality assumptions made time policies issued liability investment universal lifetype contracts stated policyholder account values surrender charges revenue contracts represents policyholder charges cost acquiring new business recognized term contracts proportion estimated gross profits consolidated balance sheet includes insurance separate account assets liabilities market value separate account assets liabilities represent funds maintained accounts policyholders meet specific investment objectives exchange management fee policyholders bear investment risk subject certain cases minimum guaranteed rates account values investment income including investment gains losses accrues directly policyholders assets account segregated subject claims arise business corporation investment income including investment gains losses insurance separate account assets reflected consolidated income statement separate account management fees net minimum guarantees 256 189 92 1994 1993 1992 corporation primarily insurance operations uses variety derivative financial instruments including swaps caps floors exchange traded financial futures options means hedging exposure price foreign currency andor interest rate risks corporation subsidiaries endusers utilize instruments speculative purposes see insurance investments derivative financial instruments relevant accounting policies additional discussion hotel operations december 31 1994 corporation operates 143 hotels longterm management agreements effectively convey corporation right use hotel properties exchange payments properties owners based primarily hotels profitability accordingly corporation includes operating results hotel properties longterm management agreements consolidated financial statements revenues related hotel properties 26 billion 24 billion 23 billion 1994 1993 1992 amounts provided payments property owners use hotel properties 5 billion 4 billion 4 billion 1994 1993 1992 notes financial statements continued cash equivalents corporation considers highly liquid investments purchased original maturity three months less cash equivalents inventories generally valued lower cost firstin firstout market manufacturing operations full absorption procedure employed using standard cost techniques revenue longterm contracts recognized percentageofcompletion method expected losses longterm contracts potential losses obsolete slowmoving inventories provided current period plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost corporation normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved accumulated depreciation 3490 2974 december 31 1994 1993 revenue recognition product sales recognized upon shipment service revenue recognized services rendered research development research development costs expensed incurred costs included costs expenses 396 460 502 1994 1993 1992 respectively earnings per share fully diluted earnings per share based weighted average common stock equivalents assumes conversion convertible preferred stock including esop series net income applicable fully diluted earnings per share consists reported net income loss adjusted amount net tax corporation would required contribute esop series preferred shares converted common stock primary earnings per share based 1994 1993 weighted average common equivalent shares outstanding include series n convertible preferred stock options 1992 common equivalent shares include series k n convertible preferred stock options considered since effect antidilutive respect options assumed proceeds received upon exercise used acquire common stock corporation 1994 1993 net income applicable primary earnings per share consists reported net income adjusted dividend requirements preferred stock considered common stock equivalents net related tax benefits 1992 net income applicable primary earnings per share consists reported net loss adjusted dividend requirements preferred stock series net related tax benefits reclassifications certain amounts prior years financial statements reclassified conform current year presentation changes accounting principles changes adopted 1994 first quarter corporation adopted sfas 115 accounting certain investments debt equity securities new standard requires among things securities classified heldtomaturity available sale trading based companys intentions respect ultimate disposition security ability effect intentions classification determines appropriate accounting carrying value cost basis fair value case fair value whether adjustment impacts stockholders equity directly reflected statement income investments equity securities previously recorded fair value corresponding impact included stockholders equity sfas 115 corporations portfolios classified available sale accordingly investments reflected fair value corresponding impact included component stockholders equity designated unrealized gain loss securities net tax december 31 1994 unrealized loss securities net tax 14 billion adopting sfas 115 corporation followed guidelines emerging issues task force eitf issue 9318 prescribes specific accounting treatment respect mortgage notes financial statements continued backed interestonly investments eitf 9318 reached conclusion measure impairment instruments changed undiscounted cash flows fair value accordingly amortized cost basis instruments determined otherthantemporary impairment losses time initial adoption sfas 115 written fair value reflected cumulative effect accounting change january 1 1994 writedown totaled 36 million tax 029 per fully diluted share also 1994 first quarter corporation changed method used discount longterm tabular workers compensation liabilities statutory interest rate appropriate market interest rate market rate approximated 7 represents rate return corporation could receive riskfree investments maturities comparable liabilities discounted december 31 1993 liabilities discounted 3 12 accordance statutory insurance guidelines 42 million tax 033 per fully diluted share benefit recorded cumulative effect accounting change accompanying consolidated income statement 1994 fourth quarter corporation changed method accounting certain marketing startup costs expense costs incurred effective january 1 1994 costs related principally student recruitment itt educational services previously deferred amortized charge 17 million tax 013 per fully diluted share recorded cumulative effect accounting change accompanying consolidated income statement 1994 earnings impact change accounting 5 tax 004 per fully diluted share changes adopted 1992 effective january 1 1992 corporation adopted sfas 106 employers accounting postretirement benefits pensions sfas 112 employers accounting postemployment benefits using immediate recognition method accordingly cumulative adjustments december 31 1991 580 tax 437 per fully diluted share 45 tax 34 per fully diluted share respectively recognized january 1 1992 corporations cash flows impacted changes accounting principles alcatel nv july 1992 corporation sold 30 equity interest alcatel nv alcatel joint venture partner alcatel alsthom resulting pretax gain 942 622 tax 471 per fully diluted share corporation received cash closing 1 billion two notes payable 1993 1994 valued 14 billion 91 million shares alcatel alsthom stock recorded 806 alcatel alsthom stock carried cost included assets accompanying balance sheet value 8 billion 13 billion based quoted market prices december 31 1994 1993 respectively equity earnings alcatel 1992 represent corporations 30 equity tax income alcatel adjusted amortization amount corporations investment exceeded equity joint venture periods longer 40 years receivables 4779 5011 december 31 1994 1993 net allowances doubtful accounts 157 127 included insurance premiums receivable agents balances 2064 1842 trade receivables 2572 2243 receivables 300 1053 receivables 1993 included notes receivable sale alcatel totaling 785 collected july 1994 notes financial statements continued income tax income tax data continuing operations follows provision made us taxes payable undistributed foreign earnings amounting approximately 11 billion since amounts permanently reinvested deferred income taxes represent tax effect related recording revenues expenses different periods financial reporting tax purposes december 31 1994 1993 balance sheets include net us federal deferred tax assets 1998 1098 respectively included assets net foreign deferred tax liabilities 180 198 respectively included liabilities deferred tax assets liabilities valuation allowances provided include following reconciliation tax provision us statutory rate provision income tax reported follows notes financial statements continued debt borrowings december 31 excluding included liabilities discontinued finance operations consisted fair value corporations commercial paper bank loans shortterm loans approximates carrying value weighted average interest rate commercial paper 60 56 december 31 1994 1993 respectively insurance 59 46 weighted average interest rate bank loans shortterm borrowings 61 33 december 31 1994 1993 respectively insurance 60 70 bank loans shortterm debt drawn lines credit extend fixed term several years december 31 1994 corporation unused credit lines 35 billion approximately 60 supports outstanding commercial paper separately corporation unused credit lines 46 billion finance substantially supports outstanding commercial paper finance segment included liabilities discontinued finance operations longterm debt maturities interest rate percentages december 31 balances december 31 1994 1993 exclude amortizable debt discounts 146 158 respectively estimated fair value longterm debt december 31 1994 1993 2869 3071 based discounted cash flows using corporations incremental borrowing rates similar arrangements esop debt 562 603 december 31 1994 1993 respectively included consolidated balance sheet due corporations guarantee repayment esop offset reduction stockholders equity deferred compensation debt fixed rates ranging 84 88 matures varying amounts 2004 fair value esop debt december 31 1994 1993 566 686 based discounted cash flows using incremental borrowing rates similar arrangements interest principal repayments funded dividends esop series preferred stock plan contributions corporation enters interest rate swap agreements major financial institutions manage exposure fluctuations interest rates described insurance investments derivative financial instruments notes financial statements continued capital stock 1994 12288516 common shares repurchased 10 billion excess par value charged capital surplus extent available retained earnings 1993 3588008 common shares repurchased 310 1992 1664518 common shares repurchased 109 also 1992 corporation called redemption outstanding 400 convertible series k 500 convertible series cumulative preferred stock 100 per share plus accrued dividends redemptions totaled 106 reduced common equivalent shares additional 1562559 shares balance converted 5822118 shares common stock december 31 1994 21144994 shares common stock reserved connection convertible preferred stock incentive stock plans addition shares held treasury totaled 39475756 foreign currency balance sheet accounts translated exchange rates effect year end income accounts translated average rates exchange prevailing year national currencies foreign operations generally functional currencies cumulative translation adjustments adjusted contracts hedge corporations foreign investments differential paid received fluctuates foreign exchange rate translation adjustments recorded separate component stockholders equity leases rentals december 31 1994 minimum rental commitments operating leases 216 186 154 123 102 1995 1996 1997 1998 1999 remaining years commitments amounted 695 aggregating total minimum lease payments 1476 rental expenses operating leases 256 268 287 1994 1993 1992 respectively miscellaneous income expense miscellaneous income expense included following employee benefit plans pension plans corporation subsidiaries sponsor numerous pension plans funded trustees except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate notes financial statements continued total pension expenses us pension expenses included net periodic pension costs table 115 85 100 1994 1993 1992 following table sets forth funded status pension plans amounts recognized corporations balance sheet december 31 1994 1993 principal weighted average assumptions inherent determination substantially domestic plans assets exceed accumulated benefits substantially foreign plans accumulated benefits exceed related assets investment savings plan itt investment savings plan salaried employees includes employee stock ownership plan esop feature 1989 itt sold esop 9384951 shares new series cumulative preferred stock price 745875 per share financed borrowings esop guaranteed itt shares allocated participants percent covered employees salary respective contribution december 31 1994 2544514 shares allocated participants postretirement health life corporation subsidiaries provide health care life insurance benefits certain eligible retired employees effective january 1 1992 corporation adopted sfas 106 using immediate recognition method benefits accumulated date corporation prefunded portion health care life insurance obligations trust funds prefunding accomplished tax effective basis postretirement health notes financial statements continued care life insurance benefits expense excluding cumulative catchup adjustment 1992 comprised following table sets forth funded status postretirement benefit plans pensions amounts recognized corporations balance sheet december 31 1994 1993 principal weighted average assumptions inherent determination assumed rate future increases per capita cost health care health care trend rate 110 1994 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing accumulated postretirement benefit obligation 53 annual expense 5 extent actual experience differs inherent assumptions effect amortized average future service covered active employees stock incentive plans corporations stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation corporations common shares nine years date grant remaining options become exercisable threeyear period commencing date grant exercise price per share fair market value date option granted notes financial statements continued following table summarizes activity common shares subject options three years ended december 31 1994 march 1994 number exercise price options outstanding adjusted recognize effect rayonier spinoff adjustment increased number shares reduced exercise price reflect value rayonier shares transferred itts shareholders december 31 1994 1993 options 1914000 1684000 shares respectively exercisable corporations incentive plans yearend 1994 212000 shares available future grants effective january 1 1995 option shares available future grants increased 2390000 result allotment formula established 1994 incentive stock plan incentive stock plans also provide awarding restricted stock employees subject restriction period cannot sold exchanged pledged otherwise disposed period 1994 31500 shares awarded restriction periods ranging one six years discontinued operations december 1993 corporation announced plans spin itt rayonier corporations whollyowned forest products subsidiary itt shareholders february 28 1994 shares common stock itt rayonier approximately 296 million shares distributed holders itt common stock holders itt cumulative preferred stock 225 convertible series n basis one share rayonier common stock every four shares itt common stock held one share rayonier common stock every 31595 shares itt series n held net assets itt rayonier including total equity 607 debt 498 included assets december 31 1993 sales totaled 147 962 1005 two months ended february 28 1994 years ended december 31 1993 1992 respectively income loss rayonier operations totaled 12 53 72 comparable periods september 1994 corporation announced plans seek offers purchase finance business segment comprised primarily itt financial corporation subsidiary proceeds sale notes financial statements continued expected exceed carrying value net assets summarized financial information follows 1993 includes 95 pretax gain 63 tax sale domestic unsecured consumer small loan business proceeds sale used retire fixedrate debt resulting extraordinary loss 50 tax 1992 pretax charge 928 612 tax recorded primarily strategically transform consumer finance business december 1994 corporation announced signing agreements sell two large units itt financial approximately 37 billion cash february 1995 preliminary agreement signed sale three additional businesses 18 billion proceeds expected used repay finance debt fair value finance debt approximated book value december 31 1994 98 billion december 31 1993 january 1995 holders 34 billion itt financial term debt consented merger itt financial corporation result corporation becoming obligor debt issues finance segment interest rate swaps derivative instruments generally used conjunction debt obligations hedge corporations exposure interest rate changes cases counterparties agreements major financial institutions risk non performance considered remote notional amount dollar denominated interest rate swaps hedging various categories debt liabilities detailed following table notes financial statements continued following table summarizes maturities interest rate swaps outstanding december 31 1994 related weighted average interest pay rate receive rate rates following table represent spot rates primarily 90day libor addition purchased interest rate caps notional principal amount 12 billion effect december 31 1994 caps used mitigate risk rising interest rates corporations variable rate obligations reinsurance corporations insurance operations cede insurance insurers limit maximum loss transfers relieve originating insurers primary liabilities operations also assume insurance insurers failure reinsurers honor obligation could result losses corporation evaluates financial condition reinsurers monitors concentrations credit risk effect reinsurance property casualty premiums written earned follows reinsurance recoveries reduced loss expenses incurred 10 billion 12 billion 12 billion years ended december 31 1994 1993 1992 net retained premiums life operations comprised following notes financial statements continued life insurance recoveries reduced death benefits approximated 113 114 38 years ended december 31 1994 1993 1992 corporation entered agreement mutual benefit life insurance company rehabilitation mutual benefit whereby assumed block contract obligations mutual benefit individual corporate owned life insurance coli contracts part agreement corporation received 56 billion cash invested assets 53 billion coli policy loans corporation coinsured approximately 84 contract obligations back mutual benefit two insurers december 31 1994 corporation reinsurance receivable mutual benefit 44 billion risk mutual benefit becoming insolvent mitigated reinsurance agreements requirement assets kept security trust corporation sole beneficiary corporation significant reinsurancerelated concentrations credit risk also 1992 result adverse loss developments certain surplus lines reinsurance business corporations insurance operations recorded 900 pretax charge fund expected loss developments surplus lines reinsurance business 250 pretax expected legal defense costs associated environmentalrelated claims effect two charges 759 tax 575 per fully diluted share policy liabilities accruals policy liabilities accruals december 31 december 31 1994 1993 estimated fair value policy claims benefits payable approximates recorded amount based present value estimated future cash flows using current market rates similar arrangements refer table item 1 page 15 reconciliation liabilities unpaid claims claim adjustment expenses provided insurance operating costs expenses insurance operating costs expenses insurance investments derivative financial instruments corporations insurance subsidiaries maintain active investment portfolios insurance investments comprised primarily fixed maturity bonds notes guaranteed various government governmentsponsored agencies lesser extent equity securities policy loans investments excluding us government agency investments corporation exposed significant concentration risk corporation trader securities defined accordingly investment portfolios classified available sale accordance sfas 115 december 31 1994 carried fair value prior adoption notes financial statements continued sfas 115 insurance investments except equity securities carried amortized cost insurance investments consisted following december 31 1994 1993 net investment income including realized gains reflected insurance revenues totaled 2349 2188 2429 1994 1993 1992 net investment expenses 96 102 97 total realized investment gains pretax 1994 1993 1992 90 155 443 net pretax changes unrealized gains losses fixed maturity equity securities 2460 1994 197 1993 668 1992 estimated market value fixed maturity investments december 31 1994 estimated maturity shown maturities reflected contract date except assetbacked securities distributed maturity year based corporations estimate rate future prepayments principal remaining life securities actual maturities differ contractual estimated maturities reflecting borrowers rights call prepay obligations notes financial statements continued corporation enduser derivative financial instruments including swaps caps floors exchange traded financial futures options means prudently hedging exposure price foreign currency andor interest rate risk anticipated investment purchases existing assets liabilities notional amounts derivative contracts represent basis upon pay receive amounts calculated reflective credit risk credit risk limited amounts calculated due corporation contracts payment obligations corporation counterparties typically netted quarterly basis corporation policies regarding financial stability credit standing major counterparties typically requires credit enhancement provisions limit credit risk summary insurance investments segregated major category along types derivatives respective notional amounts follows december 31 1994 millions life operations inverse floaters variations cmos coupon rates move inversely index rate ie libor risk principal considered negligible underlying collateral securities guaranteed sponsored government agencies address volatility risk created coupon variability corporation uses variety derivative instruments primarily interest rate swaps issued floors b comprised primarily caps 1663 weighted average strike rate 78 ranging 68 102 74 mature 1997 1998 issued floors total 125 weighted average strike rate 83 ranging 66 109 mature 2004 c comprised purchased floors 2056 purchased options collars 644 purchased caps 404 floors weighted average strike price 57 ranging 48 66 86 mature 1997 1998 options collars generally mature 1995 2002 caps weighted average strike price 72 ranging 45 89 66 mature 1997 1999 95 futures contracts expire december 31 1995 notes financial statements continued e following table summarizes maturities interest rate swaps outstanding december 31 1994 related weighted average interest pay rate receive rate assuming current market conditions millions f includes 28 contracts various currencies expiring 2002 g estimated fair value present value cash flows would result agreements replaced yearend market rate remaining term agreements december 31 1993 fair value approximated recorded amounts addition derivative financial instruments pertaining investment portfolio interest rate sensitivity related certain liabilities life operations altered primarily interest rate swap agreements notional amount agreements company generally pays one variable rate exchange another 17 billion 13 billion december 31 1994 1993 respectively weighted average pay rate 62 weighted average receive rate 66 december 31 1994 agreements mature various times 2004 additional 269 notional amount interest rate swaps entered related insurance operations variable rate debt derivative activity derivatives significantly used insurance operations corporation also uses derivatives lesser extent manage exposure fluctuations interest rates foreign currencies business segments interest rate swap agreements effect major financial institutions manage exposure fluctuations interest rates variable rate debt corporation entered agreements notional principal amount 175 require corporation make fixed payments exchange variable payments weighted average pay rate agreements mature various times 1999 69 weighted average receive rate 57 estimated fair value swaps 1 december 31 1994 5 december 31 1993 fair value represents estimated amount corporation would receive pay terminate swap agreements based current interest rates corporation also entered purchased interest rate caps notional amount 450 interest rate collars notional amount 500 december 31 1994 manage exposure variable rate obligations agreements expire 1996 1997 corporation enters foreign exchange contracts major financial institutions currency swaps forward exchange contracts reduce exposure fluctuations foreign currencies agreements meant either hedge exchange exposure corporations net investment foreign country corporations foreign currency denominated debt therefore longterm duration meant hedge specified transaction notes financial statements continued contractual amounts foreign exchange contracts december 31 1994 1993 totaled 1093 966 respectively mature varying dates 1997 contracts 724 relates swaps corporation seller 675 buyer 49 369 relates forward exchange contracts corporation seller 36 buyer 333 approximately 321 hedges deutsche marks belgium francs 250 hedges dollars french francs balance principally hedges dollars major european currencies significant unrealized gain loss contracts estimated fair value december 31 1994 1993 approximates recorded amounts estimated fair value present value change cash flows would result agreements replaced yearend market rate remaining term agreements accounting policies derivative financial instruments corporations minimum threshold hedge designation 80 correlation inception assetliability management strategy corporations policy requires 80 correlation threshold maintained correlation falls 80 hedge accounting terminated gains losses futures purchased anticipation future receipt product cash flows deferred time ultimate purchase reflected basis adjustment purchased asset gains losses futures used invested asset risk management deferred adjusted basis hedged asset contract closed basis adjustments amortized investment income remaining asset life open forward commitment contracts marked market stockholders equity contracts recorded settlement recording purchase specified securities previously committed price gains losses resulting termination forward commitment contracts delivery securities recognized immediately income statement component investment income corporations accounting interest rate swaps purchased written caps floors options used manage risk accordance concepts established sfas 80 accounting futures contracts american institute certified public accountants statement position 862 accounting options various eitf pronouncements derivatives used part risk management strategy must designated inception hedge measured effectiveness inception ongoing basis derivatives used create synthetic asset must meet synthetic accounting criteria including designation inception consistency terms synthetic instrument replicated synthetic instrument accounting consistent industry practice provides synthetic asset accounted like financial instrument intended replicate interest rate swaps purchased written caps floors options fail meet risk management criteria accounted fair value impact reflected statement income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment income swap terminated gains losses adjusted basis asset liability amortized remaining life basis underlying asset liability adjusted reflect changing market conditions prepayment experience asset sold liability terminated gains losses terminated position immediately recognized earnings interest rate swaps purchased anticipation asset purchase anticipatory transaction recognized consistent underlying asset components settlement component recognized income statement change market value recognized unrealized gain loss premiums paid purchased floor cap agreements premium received issued cap floor agreements used risk management well net payments adjusted basis applicable asset amortized asset life gains losses termination positions adjusted basis asset liability amortized remaining asset life forward exchange contracts foreign currency swaps accounted accordance sfas 52 changes spot rate instruments designated hedges net investment notes financial statements continued foreign subsidiary reflected cumulative translation adjustment component stockholders equity commitments contingencies described accounting policies corporations insurance operations establishes insurance reserves estimates claims reported estimates unreported claims based past experience also includes estimates expenses associated processing settling claims regard asbestos environmental claims deviations past experience significantly impact ability insurance companies estimate ultimate reserves unpaid losses related settlement expenses corporation finds conventional reserving techniques cannot estimate ultimate cost claims inadequate development patterns inconsistent emerging legal doctrine virtually agreement consistent precedent determine coverage exists policy years insurers may liable uncertainty arises environmental claims often made policies existence may dispute terms may changed many years may provide legal defense costs may contain pollution exclusion clauses may absolute allow fortuitous events courts different jurisdictions reached disparate conclusions similar issues certain situations broadened interpretation policy coverage liability issues future social economic legal developments continue expand original intent policies scope coverage need additional reserves may arise adversely affecting future results due uncertainties described range reserve increases cannot meaningfully quantified light extensive claim settlement process asbestos environmental claims involving comprehensive fact gathering subject matter expertise extensive litigation corporation established environmental claims facility aggressively defend unwarranted claims reserves reported unreported asbestos environmental claims 1191 1179 1994 1993 respectively net reinsurance reported losses 1016 1994 974 1993 asbestos environmental claims insurance segment corporation subsidiaries involved various legal actions including related antitrust issues government contracts noninsurance related environmental matters actions include claims substantial sums reserves established outcome probable reasonably estimated ultimate result legal actions related claims cannot determined corporation expect material adverse effect consolidated financial position subsequent event january 1995 corporation completed cash tender offer outstanding shares caesars world inc 17 billion business segment information insurance segment writes broad range life property casualty insurance industries automotive defense electronics fluid technology units engaged manufacture sale equipment commercial military process industries products include automotive equipment accessories parts oem aftermarket pumps valves electrical connectors components integrated circuits semiconductors defense activities include development manufacture sale installation maintenance operation military electronic communications equipment primarily us government hospitality entertainment information services hospitality entertainment operates worldwide network hotels resorts casinos sheraton name communications information services primarily publishes telephone directories provides educational services dispositions include operating results gain loss sale closedown units discontinued operations including corporations instruments operations itt components distribution world directories uk turkey operations along sales operating income noncore businesses includes assets discontinued finance operations corporate assets intercompany sales priced armslength basis eliminated consolidation material geographical information total segments refer page 2 business segment sales revenues income information provided income loss consists gross profit sales revenues less operating expenses incurred quarterly results 1994 1993 unaudited march 31 1994 quarter restated accounting change related accounting certain marketing startup costs export sales unaudited serving global markets itt generates significant export sales benefit local economies sales products including intercompany manufactured various countries shipment countries consisted following itt corporation subsidiaries valuation qualifying accounts millions dollars note 1 principally retirements well companies sold year s1 itt corporation subsidiaries supplementary insurance information millions dollars 1 net investment income allocated based property casualty life healths share investable funds supplemental information concerning property casualty insurance operations millions dollars 1 reserves permanently disabled claimants terminated reinsurance treaties certain reinsurance contracts discounted using rate return corporation could receive riskfree investments 81 1994 using interest rates ranging 3 6 3 14 1993 1992 respectively s2 itt corporation subsidiaries reinsurance millions dollars s3 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation jon f danski jon f danski senior vice president controller principal accounting officer march 15 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index financial statements schedules appearing page list financial statements schedules filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b november 7 1995 itt delaware filed current report form 8k reporting item 5 certain changes projections forecasted data information previously reported proxy statement dated august 30 1995 november 16 1995 itt delaware filed current report form 8k reporting item 7 information respect recently issued 740 debentures due november 15 2025 december 21 1995 itt industries filed current report form 8k reporting items 5 7 respect distribution itt delawares shareholders outstanding shares whollyowned subsidiaries itt destinations renamed itt corporation nevada corporation itt hartford merger itt delaware itt industries index consolidated financial statements schedule report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections annual report consolidated financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information annual report consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance itt industries internal auditors independently assess effectiveness internal controls make recommendations improvement regular basis independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation internal auditors independent public accountants audit committee board directors composed nonemployee directors meets periodically management independent public accountants internal auditors evaluate effectiveness work performed discharging respective responsibilities assure independent free access independent accountants internal auditors report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation formerly named itt corporation incorporated delaware subsidiaries december 31 1995 1994 three years period ended december 31 1995 described accompanying index consolidated financial statements schedule consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 1995 1994 results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles discussed accompanying notes consolidated financial statements effective january 1 1994 company changed methods accounting certain investments debt equity securities workers compensation liabilities marketing startup costs audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 30 1996 itt industries inc subsidiaries consolidated income statements millions except per share accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets millions except shares per share accompanying notes consolidated financial statements integral part balance sheets itt industries inc subsidiaries consolidated statements cash flows millions accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements retained earnings millions except per share dividend itt hartford itt corporation applied retained earnings extent available capital surplus itt industries inc subsidiaries consolidated statements common stock capital surplus millions except shares dividend itt hartford itt corporation applied retained earnings extent available capital surplus accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share unless otherwise stated december 19 1995 itt corporation delaware corporation itt delaware made distribution shareholders consisting shares common stock itt destinations inc nevada corporation held itt delawares interests hospitality entertainment information services businesses shares common stock itt hartford group inc whollyowned subsidiary held itt delawares interests insurance businesses itt hartford effective december 20 1995 pursuant statutory merger itt delaware merged itt industries inc indiana corporation itt industries itt industries surviving corporation company itt destinations changed name itt corporation purposes consolidated financial statements references itt corporation itt hartford include companies subsidiaries affiliated companies assets liabilities transferred companies accompanying consolidated financial statements periods presented itt corporation itt hartford previously discontinued operations company reported discontinued operations 1 accounting policies consolidation principles consolidated financial statements prepared accordance generally accepted accounting principals include accounts majorityowned subsidiaries significant intercompany transactions eliminated revenue recognition company recognizes sales products shipped customers sales longterm contracts recognized percentage completion method generally based ratio units delivered total units expected losses longterm contracts recognized currently research development significant costs incurred year connection research development engineering programs expected contribute profits future operations costs charged income incurred except extent recoverable existing contracts total expenditures 422 396 460 1995 1994 1993 respectively approximately 50 expended pursuant customer contracts cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories generally valued lower cost firstin firstout market full absorption procedure employed using standard cost techniques standards customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided current period plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income goodwill excess cost fair value net assets acquired amortized straightline basis 40 years accumulated amortization 32 29 december 31 1995 1994 respectively company continually reviews goodwill assess recoverability future operations using undiscounted cash flows based upon companys review impairment occurred december 31 1995 foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated losses foreign currency transactions reported currently operating expenses 4 8 1995 1994 1993 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks company subsidiaries endusers utilize instruments speculative purposes company strict policies regarding financial stability credit standing major counterparties interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment income swap terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument forward exchange contracts foreign currency swaps accounted accordance statement financial accounting standards sfas 52 changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity earnings per share fully diluted earnings per share based weighted average common stock common stock equivalents include stock options proceeds received upon exercise used acquire common stock company fully diluted earnings per share also reflect conversion convertible preferred stock including esop series net income applicable fully diluted earnings per share consists reported net income loss adjusted amount net tax company would pay excess common stock dividends extinguish related esop debt primary earnings per share based weighted average common stock common stock equivalents net income applicable primary earnings per share consists reported net income adjusted dividend requirements preferred stock considered common stock equivalents net related tax benefits esop terminated 1995 esop series preferred stock converted shares companys common stock see employee benefit plans conversion occurred january 1 1995 primary earnings per share year ended december 31 1995 would 601 use estimates preparation consolidated financial statements required use certain estimates management determining companys assets liabilities sales expenses reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation 2 changes accounting principles 1994 company made several accounting changes included cumulative effect accounting changes related solely discontinued operations first quarter 1994 company adopted sfas 115 accounting certain investments debt equity securities sfas 115 companys portfolios classified available sale accordingly investments reflected fair value corresponding impact included component shareholders equity designated unrealized loss securities net tax december 31 1994 unrealized loss securities net tax 14 billion amortized cost basis mortgagebacked interestonly investments determined otherthantemporary impairment losses time initial adoption sfas 115 written fair value writedown totaled 36 tax 29 per fully diluted share itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated also first quarter 1994 company changed method used discount longterm tabular workers compensation liabilities discontinued insurance segment statutory interest rate appropriate market interest rate benefit 42 tax 33 per fully diluted share recorded fourth quarter 1994 company changed method accounting expense certain marketing startup costs itt educational services unit itt corporation previously deferred amortized charge 17 tax 13 per fully diluted share recorded companys cash flows impacted changes accounting principles 3 alcatel nv 1992 company sold 30 equity interest alcatel nv alcatel joint venture partner alcatel alsthom resulting pretax gain 942 622 tax 471 per fully diluted share company received cash closing 10 billion two notes payable 1993 1994 valued 14 billion 91 million shares alcatel alsthom stock recorded 806 alcatel alsthom stock contributed itt corporation prior distribution included december 31 1994 net assets discontinued operations accompanying balance sheet 4 receivables consist following 5 inventories consist following 6 current assets december 31 1995 current assets consist primarily tax refund claims advance payments contracts prepaid expenses december 31 1994 current assets consist mainly prepaid expenses itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 7 plant property equipment plant property equipment consist following 8 assets december 31 1995 assets consist primarily prepaid pension employee benefit plan costs tax refund claims expected recoveries third parties relation environmental claims december 31 1994 assets consist mainly prepaid pension employee benefit plan costs tax refund claims 9 income tax income tax data continuing operations follows provision made us taxes payable accumulated undistributed foreign earnings approximately 456 since amounts permanently reinvested deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes december 31 1995 1994 balance sheets include net us federal deferred tax assets 218 161 respectively net foreign deferred tax liabilities 121 90 respectively itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated deferred tax assets liabilities valuation allowances provided include following reconciliation tax provision us statutory rate income tax expense reported follows 10 debt consists following fair value companys commercial paper bank loans shortterm loans approximates carrying value weighted average interest rate commercial paper 576 541 december 31 1995 1994 respectively weighted average interest rate bank loans shortterm borrowings 539 588 december 31 1995 1994 respectively estimated fair value longterm debt december 31 1995 1994 12 billion 14 billion respectively based discounted cash flows using companys incremental borrowing rates similar arrangements bank loans shortterm debt drawn lines credit extend fixed term several years november 1995 company entered two new revolving credit agreements terms ranging one five years 61 domestic foreign banks providing aggregate commitments 30 billion commitments unused december 31 1995 made itt industries certain subsidiaries intended assure working capital needs support commercial paper interest rate itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated borrowings agreements generally based london interbank offered rate libor plus spread dependent companys debt rating provisions agreements require company maintain certain financial ratios restrict indebtedness commitment fees revolving credit agreements range 045 150 total commitment based companys debt ratings previous quarter longterm debt maturities interest rate percentages december 31 1995 balances december 31 1995 1994 include amortizable debt discounts 70 146 respectively assets pledged secure indebtedness including mortgage loans amounted approximately 15 december 31 1995 esop debt 562 december 31 1994 included balance sheet due companys guarantee repayment esop offset reduction shareholders equity deferred compensation fixed rates ranging 84 88 repaid 1995 proceeds sale common shares held esop trustee see employee benefit plans 11 early extinguishment debt july 1995 company announced successful completion tender offer aggregate 41 billion debt securities 34 billion 82 aggregate principal amount tendered tender offer financed proceeds commercial paper borrowings approximately 37 billion tender offer resulted company paying tender premium 307 tax 472 pretax 261 per fully diluted share third quarter 1995 recorded extraordinary loss early extinguishment debt 1993 fixed rate debt retired resulting extraordinary loss 50 tax 38 per fully diluted share 12 capital stock itt industries authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series preferred stock issuable pursuant provisions rights agreement dated november 1 1995 itt industries bank new york rights agent 1995 company repurchased 377202 common shares 35 1994 company repurchased 12288516 common shares 10 billion excess par value charged capital surplus extent available retained earnings 1993 total 3588008 common shares repurchased 310 itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated december 31 1994 8756883 shares esop series preferred stock outstanding stated value 653 1995 company terminated esop portion companys investment savings plan trustee esop converted preferred stock held trustee 9660766 shares companys common stock december 31 1994 545546 series n preferred shares outstanding stated value 2 shares redeemed august 29 1995 december 31 1995 7627461 shares common stock reserved connection incentive stock plans addition shares held treasury totaled 28079175 13 foreign currency translation adjustments recorded separate component shareholders equity 14 leases rentals december 31 1995 minimum rental commitments operating leases 91 84 67 49 38 1996 1997 1998 1999 2000 respectively remaining years commitments amounted 68 aggregating total minimum lease payments 397 rental expenses operating leases 87 74 69 1995 1994 1993 respectively 15 miscellaneous income expense miscellaneous income expense includes following 16 employee benefit plans pension plans company subsidiaries sponsor numerous pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated total pension expense 1995 1994 1993 us pension expense included net periodic pension cost table 43 60 49 1995 1994 1993 respectively discontinued operations accounted 10 18 20 1995 1994 1993 respectively us pension expense following table sets forth funded status companys pension plans amounts recognized companys balance sheets principal weighted average assumptions inherent determination substantially domestic plans assets exceed accumulated benefits substantially foreign plans accumulated benefits exceed related assets investment savings plan itt investment savings plan salaried employees included employee stock ownership plan esop feature 1989 company sold esop 9384951 shares new series cumulative preferred stock price 745875 per share financed borrowings esop guaranteed company shares allocated participants percent covered employees salary respective contribution connection distribution company terminated esop portion itt investment savings plan salaried employees result termination 1995 trustee esop converted preferred stock held trustee company common stock trustee completed sale 53 million shares open market sales proceeds used repay itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated debt associated esop remainder allocated pro rata participants plan company changed name plan itt industries investment savings plan salaried employees transfer balances related employees itt corporation itt hartford plans created companies postretirement health life company subsidiaries provide health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations trust funds prefunding accomplished tax effective basis postretirement health care life insurance benefits expense comprised following 1995 1994 1993 net periodic expense includes expenses related discontinued operations 1 three years ended december 31 1995 following table sets forth funded status postretirement benefit plans pensions amounts recognized companys balance sheet principal weighted average assumptions inherent determination assumed rate future increases per capita cost health care health care trend rate 101 1995 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing accumulated postretirement benefit obligation 47 annual expense 4 extent actual experience differs inherent assumptions effect amortized average future service covered active employees 17 stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant remaining options become exercisable threeyear period commencing date grant exercise price per share fair market value date option granted itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated following table summarizes activity common shares subject options three years ended december 31 1995 shares thousands december 1995 conjunction distribution individuals became employees itt hartford itt corporation offered substitute awards respective stock new employer stock awards options held respect itt industries reflected canceled table remaining holders unexercised options including employees itt industries retirees certain former employees company number shares subject options increased option exercise price decreased immediately following distribution preserve closely possible economic value options existed prior distribution march 1994 number exercise price options outstanding similarly adjusted recognize effect rayonier spinoff december 31 1995 1994 options 6942000 1914000 shares respectively exercisable companys incentive plans yearend 1995 2811000 shares available future grants effective january 1 1996 option shares available future grants increased 4988000 result allotment formula established 1994 incentive stock plan incentive stock plans also provide awarding restricted stock employees subject restriction period cannot sold exchanged pledged otherwise disposed period december 31 1995 shares outstanding itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 18 discontinued operations summarized financial information itt corporation itt hartford follows income statement data 1995 reflects earnings december 19 1995 1994 1993 reflects earnings full year itt corporation itt hartford company interest expense allocated discontinued operations based upon amount debt repaid proceeds operations refinanced operations addition results discontinued operations include 109 legal advisory fees taxes costs related distribution 39 tax severance costs related restructuring companys headquarters operations connection distribution result distribution discontinued operations included consolidated federal income tax return itt industries december 19 1995 allocation tax burdens benefits occurred prior december 19 1995 determined accordance tax allocation agreement company itt hartford itt corporation september 1994 company announced plans seek offers purchase financial business segment gross proceeds totaling 127 billion realized 1995 sale businesses comprising itt financial proceeds transactions used primarily repay itt financial debt company recognized tax gain 403 667 pretax 344 per fully diluted share second quarter 1995 including provision remaining asset sales closedown costs itt financial 1993 tax gain 63 realized sale itt financials domestic unsecured consumer small loan portfolio itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated summarized financial information follows january 1995 holders itt financial term debt consented merger itt financial company completed may 1 1995 december 1993 company announced plans spin itt rayonier companys whollyowned forest products subsidiary companys shareholders february 28 1994 shares common stock itt rayonier approximately 296 million shares distributed holders company common stock holders company cumulative preferred stock 225 convertible series n basis one share rayonier common stock every four shares company common stock held one share rayonier common stock every 31595 shares company series n held sales totaled 147 962 two months ended february 28 1994 year ended december 31 1993 respectively income rayonier operations totaled 12 53 respectively comparable periods 19 derivative financial instruments interest rate swap agreements effect major financial institutions manage exposure fluctuations interest rates companys variable rate debt company entered agreements notional principal amount 389 require company make fixed payments exchange variable payments weighted average pay rate agreements mature various times 2000 69 weighted average receive rate 46 estimated fair value swaps 15 december 31 1995 1 december 31 1994 fair value represents incremental benefit cost recorded amount company would receive pay terminate swap agreements based current interest rates company enters foreign exchange contracts major financial institutions currency swaps forward exchange contracts hedge exchange exposure net investment foreign country foreign currency denominated debt contracts therefore longterm duration meant hedge specified transaction contractual amounts foreign exchange contracts december 31 1995 1994 totaled 11 billion 843 respectively mature varying dates 1998 contracts 505 relates swaps company seller 552 relates exchange contracts company seller 31 buyer 521 approximately 401 hedges deutsche marks belgian francs balance principally hedges dollars major european currencies significant unrealized gain loss contracts estimated fair value december 31 1995 1994 approximates recorded amounts estimated fair value present value changed cash flows would result agreements replaced yearend market rate remaining term agreements itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 20 commitments contingencies company subsidiaries involved various legal actions including related government contracts environmental matters actions include claims substantial sums reserves established outcome probable reasonably estimated ultimate result legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows business segment information millions 1994 1993 restated reflect noncore business operations within automotive segment itt semiconductors electron technology within defense electronics business segment divested 1995 closed divested 1996 dispositions automotive itt automotive one largest independent suppliers systems components vehicle manufacturers worldwide also supplies related products aftermarket operations located europe north america south america joint ventures licensees asia itt automotive designs engineers manufactures broad range automotive systems components two major worldwide product groupings brake chassis systems group produces antilock brake systems abs traction control systems tcs chassis systems foundation brake components fluid handling products konir shock absorbers body electrical systems group produces automotive products door window assemblies wiper module assemblies seat systems air management systems switches fractional horsepower dc motors sales two customers accounted approximately 42 44 1995 1994 sales respectively sales three customers accounted approximately 46 1993 sales defense electronics itt defense electronics companies develop manufacture support high technology electronic systems components defense commercial markets worldwide basis operations north america europe asia defense market products include tactical communications equipment electronic warfare systems night vision devices radar space payloads operations maintenance services commercial products include interconnect products connectors switches cable assemblies night vision devices companies electronics sector segment operate several european countries japan north america produce wide variety electronic connectors switches components used industrial professional telecommunications equipment well consumer appliances automobiles approximately 65 66 68 1995 1994 1993 sales respectively governmental entities approximately 90 94 respectively us government fluid technology itt fluid technology worldwide enterprise engaged design development production sale products systems services used move handle transfer control contain fluids kinds itt fluid technology leading supplier pumps valves heat exchangers mixers instruments controls management fluids sales 100 countries majority itt fluid technology sales north america western europe principal markets water wastewater treatment industrial process construction dispositions include operating results units discontinued operations including itt community development corporation itt semiconductors noncore businesses sold operating income table primarily includes service charges affiliated companies corporate charges identifiable assets table consists primarily corporate assets intercompany sales priced armslength basis eliminated consolidation material geographical information country origin total segments millions quarterly results 1995 1994 millions except per share unaudited quarterly full year earnings per share amounts calculated independently based average common equivalent shares applicable period conversion esop series preferred stock common stock 1995 sum four quarters 1995 equal calculation full year export sales millions serving global markets itt industries generates significant export sales benefit local economies sales products including intercompany manufactured various countries shipment countries consisted following valuation qualifying accounts millions principally retirements well companies sold year s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc richard jm hamilton richard jm hamilton senior vice president controller principal accounting officer march 25 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries last quarter period covered report index consolidated financial statements schedule report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections annual report consolidated financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information annual report consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 1996 1995 three years period ended december 31 1996 described accompanying index consolidated financial statements schedule consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles discussed accompanying notes consolidated financial statements effective january 1 1994 company changed methods accounting certain investments debt equity securities workers compensation liabilities marketing startup costs audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 28 1997 itt industries inc subsidiaries consolidated income statements millions except per share accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets millions except shares per share accompanying notes consolidated financial statements integral part balance sheets itt industries inc subsidiaries consolidated statements cash flows millions accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements retained earnings capital stock capital surplus millions except shares per share dividend itt hartford itt corporation applied retained earnings extent available capital surplus accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share unless otherwise stated 1 distribution itt corporation itt hartford december 19 1995 itt corporation delaware corporation itt delaware made distribution shareholders consisting shares common stock itt destinations inc nevada corporation held itt delawares interests hospitality entertainment information services businesses itt destinations shares common stock itt hartford group inc delaware corporation whollyowned subsidiary held itt delawares interests insurance businesses itt hartford effective december 20 1995 pursuant statutory merger itt delaware merged itt industries inc indiana corporation itt industries itt industries surviving corporation company itt destinations changed name itt corporation purposes consolidated financial statements references itt corporation itt hartford include companies subsidiaries affiliated companies assets liabilities transferred companies accompanying consolidated financial statements periods presented itt corporation itt hartford previously discontinued operations company reported discontinued operations 2 accounting policies consolidation principles consolidated financial statements prepared accordance generally accepted accounting principles include accounts majorityowned subsidiaries significant intercompany transactions eliminated revenue recognition company recognizes sales products shipped customers sales longterm contracts recognized percentage completion method generally based ratio units delivered total units expected losses longterm contracts recognized currently research development significant costs incurred year connection research development engineering programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 50 expended pursuant customer contracts three years ended december 31 1996 cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories generally valued lower cost firstin firstout market full absorption procedure employed using standard cost techniques standards customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided current period plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable recoverability assessed using undiscounted cash flows based upon companys review impairment occurred december 31 1996 goodwill excess cost fair value net assets acquired amortized straightline basis 40 years accumulated amortization 432 320 december 31 1996 1995 respectively company continually reviews goodwill assess recoverability future itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated operations using undiscounted cash flows based upon companys review impairment occurred december 31 1996 foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains losses foreign currency transactions reported currently operating expenses 58 45 37 1996 1995 1994 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks company subsidiaries utilize instruments speculative purposes interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments generally recognized adjustment income swap terminated unrealized gains losses generally deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument foreign exchange contracts foreign currency swaps accounted hedges extent designated effective hedges firm foreign currency commitments foreign exchange contracts swaps marked market current basis environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included balance sheet liabilities undiscounted amounts exclude claims recoveries insurance third parties accruals insurance third party recoveries recorded assets probable claim realized earnings per share fully diluted earnings per share based weighted average common stock common stock equivalents include stock options proceeds received upon exercise options used acquire common stock company fully diluted earnings per share 1995 1994 also reflects conversion convertible preferred stock including esop series net income applicable fully diluted earnings per share consists reported net income loss adjusted 1995 1994 amount net tax company would pay excess common stock dividends extinguish related esop debt primary earnings per share based weighted average common stock common stock equivalents net income applicable primary earnings per share consists reported net income adjusted 1995 1994 dividend requirements preferred stock considered common stock equivalents net related tax benefits esop terminated 1995 esop series preferred stock converted shares companys common stock see employee benefit plans use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts related disclosures actual results could differ estimates itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation 3 changes accounting principles 1994 company made several accounting changes included cumulative effect accounting changes related solely discontinued operations first quarter 1994 company adopted statement financial accounting standards sfas 115 accounting certain investments debt equity securities sfas 115 companys portfolios classified available sale accordingly investments reflected fair value corresponding impact included component shareholders equity amortized cost basis mortgagebacked interestonly investments determined otherthantemporary impairment losses time initial adoption sfas 115 written fair value writedown totaled 365 tax 29 per fully diluted share also first quarter 1994 company changed method used discount longterm tabular workers compensation liabilities statutory interest rate appropriate market interest rate benefit 422 tax 33 per fully diluted share recorded fourth quarter 1994 company changed method accounting expense certain marketing startup costs itt educational services previously deferred amortized charge 169 tax 13 per fully diluted share recorded companys cash flows impacted changes accounting principles 4 receivables consist following 5 inventories consist following 6 current assets december 31 1996 current assets consist primarily advance payments contracts prepaid expenses december 31 1995 current assets consist mainly tax refund claims advance payments contracts prepaid expenses itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 7 plant property equipment plant property equipment consist following 8 assets december 31 1996 assets consist primarily prepaid pension employee benefit plan costs equity investments expected recoveries third parties relation environmental claims december 31 1995 assets consist mainly prepaid pension employee benefit plan costs equity investments tax refund claims expected recoveries third parties relation environmental claims 9 income tax income tax data continuing operations follows itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes december 31 1996 1995 balance sheets include net us federal deferred tax assets 2051 2177 respectively net foreign deferred tax liabilities 1095 1211 respectively deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings approximately 5494 since amounts permanently reinvested december 31 1996 company approximately 72 foreign tax credit carryforwards available reduce future tax liabilities credits expire december 31 2001 shareholders equity december 31 1996 1995 reflects tax benefits related exercise stock options approximately 57 225 respectively 10 debt consists following weighted average interest rate bank loans shortterm borrowings 369 539 december 31 1996 1995 respectively weighted average interest rate commercial paper 576 december 31 1995 fair value companys commercial paper bank itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated loans shortterm loans approximates carrying value estimated fair value longterm debt december 31 1996 1995 9899 12 billion respectively based discounted cash flows using companys incremental borrowing rates similar arrangements company maintains revolving credit agreement expires november 2000 sixtyone domestic foreign banks providing aggregate commitments 15 billion commitments unused december 31 1996 made itt industries certain subsidiaries intended assure working capital needs general corporate purposes interest rate borrowings agreements generally based london interbank offered rate libor plus spread dependent companys debt rating provisions agreements require company maintain certain financial ratios restrict indebtedness commitment fees revolving credit agreements range 060 150 total commitment based companys current debt ratings longterm debt maturities interest rate percentages december 31 1996 balances december 31 1996 1995 include amortizable debt discounts 514 706 respectively assets pledged secure indebtedness including mortgage loans amount approximately 157 december 31 1996 11 early extinguishment debt 1995 company announced completion tender offer aggregate 41 billion debt securities 34 billion 82 aggregate principal amount tendered tender offer financed proceeds commercial paper borrowings approximately 37 billion tender offer resulted company paying tender premium 3070 tax 4723 pretax 261 per fully diluted share third quarter 1995 charge recorded extraordinary loss early extinguishment debt 12 capital stock itt industries authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 itt industries bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated market value rights beneficially owned acquiring person including one affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock 1996 independent agent purchased 522132 shares common stock market prices satisfy stock option exercises 1995 company repurchased 377202 common shares 352 1994 company repurchased 12288516 common shares 10 billion excess par value charged capital surplus extent available retained earnings 1995 1994 common shares repurchased systematic stock repurchase program implemented 1994 december 31 1994 8756883 shares esop series preferred stock outstanding stated value 6532 1995 company terminated esop portion companys investment savings plan trustee esop converted preferred stock held trustee 9660766 shares companys common stock december 31 1994 545546 series n preferred shares outstanding redeemed 1995 december 31 1996 26711429 shares common stock held treasury 13 foreign currency translation adjustments recorded separate component shareholders equity 14 leases rentals december 31 1996 minimum rental commitments operating leases 1088 955 825 671 597 1997 2001 respectively remaining years commitments amounted 947 aggregating total minimum lease payments 5083 rental expenses operating leases 928 869 738 1996 1995 1994 respectively 15 miscellaneous expense miscellaneous expense includes following itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 16 employee benefit plans pension plans company subsidiaries sponsor numerous pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate total pension expense 1996 1995 1994 us pension expense included net periodic pension cost table 584 427 600 1996 1995 1994 respectively following table sets forth funded status companys pension plans amounts recognized companys balance sheets principal weighted average assumptions inherent determination substantially domestic plans assets exceed accumulated benefits larger foreign plans accumulated benefits exceed related assets savings plans company sponsors numerous savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 167 147 140 years ended 1996 1995 1994 respectively itt investment savings plan salaried employees plan included employee stock ownership plan esop feature connection distribution company terminated itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated esop portion plan result termination 1995 trustee esop converted preferred stock held trustee company common stock trustee completed sale 53 million shares open market sales proceeds used repay debt associated esop remainder allocated pro rata participants plan company changed name plan itt industries investment savings plan salaried employees transferred balances related employees itt corporation itt hartford plans created companies postretirement health life company subsidiaries provide health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations trust funds prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate postretirement health care life insurance benefits expense comprised following 1996 1995 1994 following table sets forth funded status postretirement benefit plans pensions amounts recognized companys balance sheet principal weighted average assumptions inherent determination assumed rate future increases per capita cost health care health care trend rate 93 1996 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing accumulated postretirement benefit obligation 466 annual expense 55 extent actual experience differs inherent assumptions effect amortized average future service covered active employees itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated 17 discontinued operations summarized income statement data itt corporation itt hartford follows data 1995 reflects earnings december 19 1995 1994 reflects earnings full year itt corporation itt hartford company interest expense allocated discontinued operations based upon amount debt repaid proceeds operations refinanced operations addition results discontinued operations included 1092 legal advisory fees taxes costs related distribution 390 tax severance costs related restructuring companys headquarters operations connection distribution result distribution discontinued operations included consolidated federal income tax return itt industries december 19 1995 allocation tax burdens benefits occurred prior december 19 1995 determined accordance tax allocation agreement company itt hartford itt corporation 1995 gross proceeds totalling 127 billion realized sale businesses comprising itt financial proceeds transactions used primarily repay itt financial debt company recognized tax gain 4034 6673 pretax 344 per fully diluted share second quarter 1995 including provision remaining asset sales closedown costs itt financial summarized income statement data follows february 28 1994 shares common stock itt rayonier itt delawares whollyowned forest products subsidiary approximately 296 million shares distributed holders company common stock holders company cumulative preferred stock 225 convertible series n basis one share rayonier common stock every four shares company common stock held one share rayonier common stock every 31595 shares company series n held sales income rayonier operations totaled 1470 117 respectively two months ended february 28 1994 18 derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated companys credit risk associated interest rate foreign exchange contracts generally limited unrealized gain contracts positive fair value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors positions credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management itt industries maintains global debt portfolio fund operations company subsidiaries use interest rate swaps cross currency interest rate swaps order effectively manage companys debt portfolio related financing costs december 31 1996 company held interest rate swaps notional principal values totaling 410 million deutsche marks swaps original maturities ranging 1998 2000 require company pay fixed rates averaging approximately 68 receive floating rates based german libor averaged approximately 32 41 december 31 1996 1995 respectively certain swaps notional principal values totaling 260 million deutsche marks recorded fair value longer effective hedges swaps terminated 1997 cross currency interest rate swaps notional values totalling approximately 506 maturities ranging one year twentyfive years effectively convert specific longterm us dollar denominated fixed rate borrowings average interest rate approximately 89 equivalent deutsche mark denominated variable rate debt based german libor average interest rate approximately 62 december 31 1996 foreign currency risk management itt industries significant foreign operations conducts business various foreign currencies itt industries subsidiaries may periodically hedge net investments currencies functional currency contractual nonfunctional currency cash flows obligations including intercompany financings itt industries regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 1996 itt industries held foreign currency forward swap contracts notional amounts totalling approximately 12 billion hedge foreign currency exposures approximately 9 billion contracts represent cross currency contracts sell one foreign currency another foreign currency companys significant foreign currency exposures belgian francs german marks contracts maturities prior july 31 1998 majority contracts maturing within one year fair value derivative financial instruments fair values companys derivative financial instruments follows following method assumptions used estimate fair value derivative financial instruments currency interest rate swap agreements fair value currency interest rate swap agreements estimated based quotes market makers instruments represents itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated estimated amounts company would expect receive pay terminate agreements reporting date foreign exchange contracts fair value associated foreign currency contracts estimated valuing net position contracts using applicable spot rates forward rates reporting date 19 commitments contingencies company subsidiaries involved various legal actions including related government contracts environmental matters actions include claims substantial amounts reserves established outcome probable reasonably estimated ultimate result legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies itt industries subject extensive changing federal state local foreign environmental laws regulations december 31 1996 itt industries subsidiaries responsible alleged responsible environmental investigation remediation sites north america europe itt industries received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cerclaor superfund state equivalent many proceedings itt industries liability considered de minimis glendale california itt industries involved epa administrative proceeding relating san fernando valley aquifer itt industries one numerous prps alleged epa contributed contamination aquifer currently itt industries involved allocation among prps fund cleanup required epa itt industries filed suit insurers recovery costs incurred connection environmental matters company accrued environmental remediation costs associated identified sites consistent policy set forth accounting policies managements opinion total amounts accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination itt industries share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company 20 stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant remaining options become exercisable threeyear period commencing date grant exercise price per share fair market value date option granted 1996 company made shares available exercise stock options shares held company treasury purchasing shares open market managements current intention make shares available exercise stock options purchasing shares open market itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated summary status companys stock option incentive plans december 31 1996 1995 1994 changes years ended presented shares thousands company accounts plans pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts method accounting prescribed sfas 123 required applied options granted prior january 1 1995 resulting pro forma effect may representative expected future years fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 1996 1995 1994 dividend yield 240 expected volatility 23 expected life six years riskfree interest rate 615 646 740 respectively december 1995 conjunction distribution individuals became employees itt hartford itt corporation offered substitute awards respective stock new employer stock awards options held respect itt industries reflected canceled table remaining holders unexercised options including employees itt industries retirees certain former employees company number shares subject options increased option exercise price decreased immediately following distribution preserve closely possible economic value options existed prior distribution march 1994 number exercise price options outstanding similarly adjusted recognize effect rayonier spinoff itt industries inc subsidiaries notes consolidated financial statements continued dollars millions except per share unless otherwise stated following table summarizes information companys stock options december 31 1996 shares thousands december 31 1996 2964000 shares available future grants effective january 1 1997 option shares available future grants increased 5142000 result allotment formula established 1994 incentive stock plan incentive stock plans also provide awarding restricted stock subject restriction period stock cannot sold exchanged pledged 1996 pursuant itt industries inc 1996 restricted stock plan nonemployee directors company awarded 10396 restricted shares fiveyear restriction periods lieu annual retainer directors business segment information millions automotive itt automotive one largest independent suppliers systems components vehicle manufacturers worldwide also supplies related products aftermarket operations located europe north america south america joint ventures licensees asia itt automotive designs engineers manufactures broad range automotive systems components two major worldwide product groupings brake chassis systems group produces antilock brake systems abs traction control systems tcs chassis systems foundation brake components fluid handling products konir shock absorbers body electrical systems group produces automotive products door window assemblies wiper module assemblies seat systems air management systems switches fractional horsepower dc motors sales two customers general motors corporation ford motor corporation accounted approximately 40 42 44 1996 1995 1994 sales respectively defense electronics itt defense electronics companies develop manufacture support high technology electronic systems components defense commercial markets worldwide basis operations north america europe asia defense market products include tactical communications equipment electronic warfare systems night vision devices radar space payloads operations maintenance services commercial products include interconnect products connectors switches cable assemblies night vision devices companies electronics sector segment operate several european countries japan north america produce wide variety electronic connectors switches components used industrial professional telecommunications equipment well consumer appliances automobiles approximately 64 65 66 1996 1995 1994 sales respectively governmental entities approximately 86 90 respectively us government fluid technology itt fluid technology worldwide enterprise engaged design development production sale products systems services used move handle transfer control contain fluids kinds itt fluid technology leading supplier pumps valves heat exchangers mixers instruments controls management fluids sales 100 countries majority itt fluid technologys sales north america western europe principal markets water wastewater treatment industrial process construction dispositions include operating results units discontinued operations including itt community development corporation itt semiconductors noncore businesses sold operating income table primarily includes service charges affiliated companies corporate charges identifiable assets table consists primarily corporate assets intercompany sales priced armslength basis eliminated consolidation material geographical information country origin total segments millions quarterly results 1996 1995 millions except per share unaudited includes research development engineering expenses b quarterly full year earnings per share amounts calculated independently based average common equivalent shares applicable period issuance common stock upon exercise stock options 1996 conversion esop series preferred stock common stock 1995 sum four quarters equal calculation full year either 1996 1995 export sales millions serving global markets itt industries generates significant export sales benefit local economies sales products including intercompany manufactured various countries shipment countries consisted following valuation qualifying accounts millions principally retirements well companies sold year s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc richard j townsend richard j townsend vice president controller principal accounting officer march 26 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries last quarter period covered report index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities travis engen travis engen chairman president chief executive heidi kunz heidi kunz senior vice president chief financial officer itt industries inc subsidiaries report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 1997 1996 three years period ended december 31 1997 described accompanying index consolidated financial statements schedule consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles discussed note 2 consolidated financial statements 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force issue 9713 audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 26 1998 itt industries inc subsidiaries consolidated income statements millions except per share amounts accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets millions except per share amounts accompanying notes consolidated financial statements integral part balance sheets itt industries inc subsidiaries consolidated statements cash flows millions accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity millions except shares per share amounts dividend hartford itt corporation applied retained earnings extent available capital surplus accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 accounting policies consolidation principles consolidated financial statements prepared accordance generally accepted accounting principles include accounts majorityowned subsidiaries significant intercompany transactions eliminated revenue recognition itt industries inc company recognizes sales products shipped customers sales longterm contracts recognized percentage completion method generally based ratio units delivered total units expected losses longterm contracts recognized incurred research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 715 656 587 total rde costs expended pursuant customer contracts three years ended december 31 1997 cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout market full absorption procedure employed using standard cost techniques customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided identified goulds domestic inventories valued using lastin firstout lifo method represent 16 total 1997 inventories would material difference value inventories fifo method used company value inventories asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income goodwill excess cost fair value net assets acquired amortized straightline basis periods 40 years accumulated amortization 671 432 december 31 1997 1996 respectively foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains losses foreign currency transactions reported currently operating expenses income 95 58 45 1997 1996 1995 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties interest rate swaps involve periodic exchange payments without exchange underlying itt industries inc subsidiaries notes consolidated financial statements continued principal notional amounts net payments recognized adjustment interest swap terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included balance sheet liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties recorded assets probable claim realized earnings per share diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options diluted earnings per share 1995 also reflects conversion convertible preferred stock including esop series net income applicable diluted earnings per share consists reported net income adjusted 1995 amount net tax company would pay excess common stock dividends extinguish related esop debt basic earnings per share based weighted average number common shares outstanding net income applicable basic earnings per share consists reported net income adjusted 1995 dividend requirements preferred stock net related tax benefits use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting policies december 1997 company adopted statement financial accounting standards sfas 128 earnings per share provisions sfas 128 company replaced primary fully diluted earnings per share basic diluted earnings per share respectively prior period earnings per share data restated conform provisions sfas 128 december 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force eitf issue 9713 eitf issue 9713 requires reengineering costs previously could deferred amortized expensed incurred costs previously capitalized writtenoff current year june 1997 financial accounting standards board issued sfas 130 reporting comprehensive income allinclusive income concept statement effective fiscal years beginning december 15 1997 requires reclassification financial statements earlier periods comparative purposes allinclusive income concept revenues expenses gains losses recognized period included comprehensive income regardless whether considered results operations period adoption sfas 130 impact itt industries inc subsidiaries notes consolidated financial statements continued itt industries financial results exception reclassification adjustments company display information different format june 1997 financial accounting standards board issued sfas 131 disclosures segments enterprise related information sfas 131 requires financial information reported components enterprise separate financial information available evaluated regularly chief operating decisionmaker deciding allocate resources assessing performance statement effective financial statements periods beginning december 15 1997 initial year application comparative information earlier years restated adoption sfas 131 impact itt industries financial results company display type segment information different format note 3 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 options purchase 205900 1924300 shares common stock 3194 2538 per share outstanding 1997 1996 respectively included computation diluted eps options exercise price greater annual average market price common shares options expire 2007 2006 outstanding end respective periods note 4 acquisitions may 23 1997 company acquired goulds pumps incorporated goulds purchase price 8652 complementing companys existing pump businesses goulds leader manufacture marketing high quality pumps residential chemical sewage drainage pulp paper agricultural mining variety applications acquisition funded shortterm borrowings accounted using purchase method accordingly purchase price allocated assets acquired liabilities assumed adjusted earlier estimates based completion evaluation fair values goulds assets liabilities date itt industries inc subsidiaries notes consolidated financial statements continued acquisition excess purchase price plus assumed liabilities 442 fair value assets acquired 688 recorded goodwill amortized period 40 years operating results goulds included consolidated income statements date acquisition following unaudited pro forma financial information presents results acquisition occurred beginning respective periods pro forma results prepared comparative purposes include certain adjustments additional depreciation expense result stepup basis fixed assets additional amortization expense result goodwill arising purchase increased interest expense acquisition debt pro forma results necessarily indicative results operations actually would resulted purchase effect beginning respective periods future results december 30 1997 company acquired kaman sciences corporation renamed itt systems sciences corporation purchase price approximately 135 itt systems sciences corporation supplies government high technology services information systems acquisition funded shortterm borrowings accounted using purchase method purchase price allocations prepared preliminary basis changes expected evaluations assets liabilities completed additional information becomes available purchase price plus assumed liabilities 23 exceeded fair value assets acquired approximately 111 recorded goodwill 1997 company also acquired several businesses net cost 1037 results operations businesses itt systems sciences corporation material relation companys consolidated results operations note 5 special charges third quarter 1997 company took several actions strengthen operating performance improve operating efficiencies result itt industries recognized 2390 pretax charge operating income 1458 taxes 121 per diluted share restructuring charge 1144 recognized itt automotive itt fluid technologies units restructuring charges relate primarily writedown assets severance costs associated closure consolidation facilities related workforce reductions additional charge 1246 recognized company principally estimated losses planned sales certain noncore businesses including sale itt semiconductors business consummated october 1997 sale automotive body systems europe consummated december 1997 pretax basis charges cash impact approximately 73 incurred 1998 upon full implementation 1999 restructuring automotive would result annual pretax savings approximately 115 cash savings approximately 104 note 6 dispositions discontinued operations 1997 company divested several noncore businesses included divestments sale automotives north american aftermarket seats operations well defense electronics industrial lighting plastics components businesses total proceeds sales businesses 1337 pretax gain 142 company also disposed automotive itt industries inc subsidiaries notes consolidated financial statements continued body systems europe semiconductors businesses losses disposal businesses included part special charges taken third quarter 1996 company disposed several noncore businesses including general controls product line portion itt community development corporation well certain minor automotive product lines proceeds sales 1377 pretax gain 146 december 1995 itt corporation made distribution shareholders consisting shares common stock subsidiary itt destinations inc renamed itt corporation held interest hospitality entertainment information services businesses shares common stock itt hartford group inc known hartford financial services group inc hartford held interests insurance business subsequently merged itt industries inc purposes consolidated financial statements references itt corporation hartford include companies subsidiaries affiliated companies assets liabilities transferred companies accompanying consolidated financial statements periods presented itt corporation hartford previously discontinued operations company reported discontinued operations 1995 gross proceeds totaling 127 billion realized sale businesses comprising itt financial proceeds transactions used primarily repay itt financial debt company recognized tax gain 4034 6673 pretax 361 per diluted share second quarter 1995 including provision remaining asset sales closedown costs itt financial summarized 1995 income statement data itt corporation hartford itt financial follows note 7 miscellaneous income expenses miscellaneous income expenses includes following itt industries inc subsidiaries notes consolidated financial statements continued note 8 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes deferred tax assets liabilities valuation allowances provided include following itt industries inc subsidiaries notes consolidated financial statements continued provision made us taxes payable accumulated undistributed foreign earnings approximately 7725 since amounts permanently reinvested shareholders equity december 31 1997 1996 reflects tax benefits related exercise stock options approximately 79 57 respectively note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 current assets december 31 1997 1996 current assets consist primarily advance payments contracts prepaid expenses note 12 plant property equipment net plant property equipment consist following itt industries inc subsidiaries notes consolidated financial statements continued note 13 assets december 31 1997 1996 assets consist primarily prepaid pension employee benefit plan costs equity investments expected recoveries third parties relation environmental claims note 14 leases rentals rental expenses operating leases 1088 928 869 1997 1996 1995 respectively future minimum operating lease payments longterm operating leases december 31 1997 shown future commitments capital leases significant note 15 debt consists following weighted average interest rate bank loans shortterm borrowings 498 369 december 31 1997 1996 respectively fair value companys commercial paper bank loans shortterm loans approximates carrying value estimated fair value longterm debt december 31 1997 1996 6547 9899 million respectively based discounted cash flows using companys incremental borrowing rates similar maturities company maintains revolving credit agreement expires november 2000 sixtyone domestic foreign banks providing aggregate commitments 15 billion commitments unused december 31 1997 interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain certain financial ratios restrict indebtedness commitment fees revolving credit agreements range 060 150 total commitment based companys current debt ratings itt industries inc subsidiaries notes consolidated financial statements continued longterm debt maturities interest rate percentages december 31 1997 balances december 31 1997 1996 include amortizable debt discounts 469 514 respectively assets pledged secure indebtedness including mortgage loans amount approximately 136 december 31 1997 early extinguishment debt 1995 company announced completion tender offer aggregate 41 billion debt securities 34 billion 82 aggregate principal amount tendered tender offer financed proceeds commercial paper borrowings approximately 37 billion tender offer resulted company paying tender premium 3070 tax 4723 pretax 275 per diluted share third quarter 1995 charge recorded extraordinary loss early extinguishment debt note 16 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management itt industries maintains global debt portfolio fund operations company subsidiaries primarily use interest rate cross currency interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 1997 1996 company interest rate swaps outstanding notional values totaling 150 million 410 million deutsche marks respectively swaps designed manage interest exposure companys shortterm debt 1997 company effectively terminated interest rate swaps notional values totaling 260 million deutsche marks original maturities ranging 1998 2000 entering offsetting swaps identical terms maturities swaps related counterswaps accounted fair market value time termination related gains losses recorded income swaps longer deemed effective hedges companys underlying deutsche mark debt outstanding 150 million deutsche mark interest rate swap agreements maturing year 2000 require company pay interest fixed rates averaging 696 receive interest floating rates based libor averaged 375 december 31 1997 itt industries inc subsidiaries notes consolidated financial statements continued december 31 1997 1996 company held cross currency interest rate swap agreements notional values totaling approximately 212 506 respectively swaps maturities ranging one year twentyfour years effectively convert specific longterm us dollardenominated fixed rate borrowings average interest rate 88 89 respectively equivalent deutsche markdenominated variable rate debt based libor average interest rate 61 62 respectively foreign currency risk management company subsidiaries significant foreign operations conduct business various foreign currencies company subsidiaries may periodically hedge net investments currencies functional currency non functional currency cash flows obligations including intercompany financings company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 1997 itt industries held foreign currency forward swap contracts notional amounts totaling approximately 560 hedge foreign currency exposures companys significant foreign currency exposures deutsche marks belgian francs swedish krona italian lira contracts maturities prior may 31 1998 commodity price risk management companys recently acquired subsidiary goulds utilized commodity derivatives limited basis hedge anticipated purchases nonferrous metals used production products december 31 1997 company held two zero cost collars total notional amount 35 weighted average ceiling 2500 whole dollars per metric ton weighted average floor 2034 whole dollars per metric ton contracts mature 1998 december 31 1996 company commodity derivatives fair value derivative financial instruments fair values companys derivative financial instruments follows following method assumptions used estimate fair value derivative financial instruments currency commodity contracts interest rate swap agreements fair value commodity contracts currency interest rate swap agreements estimated based quotes market makers instruments represents estimated amounts company would expect receive pay terminate agreements reporting date foreign currency exchange contracts fair value associated foreign currency contracts estimated valuing net position contracts using applicable spot rates forward rates reporting date note 17 employee benefit plans pension plans company subsidiaries sponsor numerous pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate itt industries inc subsidiaries notes consolidated financial statements continued total pension expense 1997 1996 1995 us pension expense included net periodic pension cost table 417 584 427 1997 1996 1995 respectively table includes 107 pension expense recorded foreign operations company sold 1997 following table sets forth funded status companys pension plans amounts recognized companys balance sheets principal weighted average assumptions inherent determination substantially domestic plans assets exceed accumulated benefits substantially foreign plans accumulated benefits exceed related assets significant decrease foreign benefit obligations liabilities recognized balance sheet result divestitures significant overseas operations effect currency translation adjustments domestically increase benefit obligations primarily result acquisition goulds change discount rate increases plan assets result acquisition goulds strong investment experience investment savings plan company sponsors numerous savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 180 167 147 years ended 1997 1996 1995 respectively itt industries inc subsidiaries notes consolidated financial statements continued itt investment savings plan salaried employees included employee stock ownership plan esop feature 1995 connection spinoff hartford itt corporation company terminated esop portion itt investment savings plan salaried employees result termination trustee esop converted preferred stock held trustee company common stock trustee completed sale 53 million shares open market sales proceeds used repay debt associated esop remainder allocated pro rata participants plan company changed name plan itt industries investment savings plan salaried employees transferred balances related employees itt corporation hartford plans created companies postretirement health life company subsidiaries provide health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations trust funds prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate postretirement health care life insurance benefits expense comprised following 1997 1996 1995 following table sets forth funded status postretirement benefit plans pensions amounts recognized companys balance sheet principal weighted average assumptions inherent determination increase benefit obligations 1996 1997 includes effect acquisition goulds 1997 change discount rate assumed rate future increases per capita cost health care health care cost trend rate 85 1997 decreasing ratably 60 year 2001 increasing table health care cost trend rates one percent per year would effect increasing accumulated itt industries inc subsidiaries notes consolidated financial statements continued postretirement benefit obligation 594 annual expense 60 extent actual experience differs inherent assumptions effect amortized average future service covered active employees note 18 shareholders equity capital stock itt industries authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 itt industries bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including one affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 1997 26702181 shares common stock held treasury stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant remaining options become exerciseable threeyear period commencing date grant exercise price per share fair market value date option granted 1997 company made shares available exercise stock options purchasing shares open market 1996 company made shares available shares held company treasury purchasing shares open market itt industries inc subsidiaries notes consolidated financial statements continued summary status companys stock option incentive plans december 31 1997 1996 1995 changes years ended presented shares thousands company accounts plans pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts method accounting prescribed sfas 123 required applied options granted prior january 1 1995 resulting pro forma effect may representative expected future years fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 1997 1996 1995 dividend yield 235 240 respectively expected volatility 31 23 expected life six years riskfree interest rate 645 615 646 respectively december 1995 conjunction distribution individuals became employees hartford itt corporation offered substitute awards respective stock new employer stock awards options held respect itt industries reflected canceled table remaining holders unexercised options including employees itt industries retirees certain former employees company number shares subject options increased option exercise price decreased immediately following distribution preserve closely possible economic value options existed prior distribution itt industries inc subsidiaries notes consolidated financial statements continued following table summarizes information companys stock options december 31 1997 shares thousands december 31 1997 3125000 shares available future grants effective january 1 1998 option shares available future grants increased 5302000 result allotment formula established 1994 incentive stock plan incentive stock plans also provide awarding restricted stock subject restriction period stock cannot sold exchanged pledged 1997 pursuant itt industries inc 1996 restricted stock plan nonemployee directors company awarded 9248 restricted shares fiveyear restriction periods lieu annual retainer directors note 19 commitments contingencies company subsidiaries involved various legal actions including related government contracts environmental matters actions include claims substantial amounts reserves established outcome probable reasonably estimated ultimate results legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies itt industries subject extensive changing federal state local foreign environmental laws regulations december 31 1997 itt industries subsidiaries responsible alleged responsible environmental investigation remediation sites north america europe itt industries received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla super fund state equivalent many proceedings itt industries liability considered de minimis glendale california itt industries involved epa administrative proceeding relating san fernando valley aquifer itt industries one numerous prps alleged epa contributed contamination aquifer currently itt industries involved allocation among prps fund cleanup required epa itt industries filed suit insurers recovery costs incurred connection environmental matters company accrued environmental remediation costs associated identified sites consistent policy set forth accounting policies managements opinion total amounts accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites prps uncertainty regarding extent contamination itt industries share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company itt industries inc subsidiaries notes consolidated financial statements continued note 20 business segment information automotive itt automotive one largest independent suppliers systems components vehicle manufacturers worldwide also supplies related products aftermarket operations located europe north america south america joint ventures licensees asia itt automotive designs engineers manufactures broad range automotive systems components three major worldwide product groupings brake chassis systems group produces antilock brake systems abs traction control systems tcs chassis systems foundation brake components electrical systems group produces automotive products wiper module assemblies air management systems switches fractional horsepower direct current motors automotive components group produces fluid handling systems friction material konir shock absorbers sales two customers general motors corporation ford motor company accounted approximately 34 40 42 1997 1996 1995 sales respectively defense electronics itt defense electronics companies develop manufacture support high technology electronic systems components defense commercial markets worldwide basis operations north america europe asia defense market products include tactical communications equipment electronic warfare systems night vision devices radar space payloads operations maintenance services approximately 66 64 65 1997 1996 1995 defense electronics sales respectively governmental entities approximately 85 86 90 respectively us government commercial products include interconnect products connectors switches cable assemblies night vision devices space launch services itt industries inc subsidiaries notes consolidated financial statements continued companies electronics sector segment operate several european countries japan north america produce wide variety electronic connectors switches test accessories cable assemblies used information systems industrial professional telecommunications equipment well consumer appliances automobiles fluid technology itt fluid technology worldwide enterprise engaged design development production sale products systems services used move handle transfer control contain fluids itt fluid technology leading supplier pumps valves heat exchangers mixers controls management fluids sales 135 countries majority itt fluid technologys sales north america western europe principal markets water wastewater treatment industrial process construction dispositions includes operating results units discontinued operations including itt community development corporation itt semiconductors noncore businesses sold operating income line primarily includes service charges affiliated companies corporate charges identifiable assets line consists primarily corporate assets intercompany sales priced armslength basis eliminated consolidation material note 21 geographical information country origin total segments itt industries inc subsidiaries notes consolidated financial statements continued note 22 export sales serving global markets itt industries generates significant export sales benefit local economies sales products including intercompany manufactured various countries shipment countries consist following itt industries inc subsidiaries notes consolidated financial statements continued note 23 quarterly results 1997 1996 includes research development engineering expenses b income continuing operations quarter ended september 30 includes special charge 1458 tax restructuring items described note 5 c quarterly full year earnings per share amounts calculated independently based average common shares potentially dilutive shares applicable period issuance common stock upon exercise stock options 1996 sum four quarters equal calculation full year 1996 table reflects range market prices itt industries common stock 1997 1996 prices reported consolidated transaction reporting system new york stock exchange principal market itt industries common stock traded symbol iin itt industries common stock listed following exchanges frankfurt london midwest new york pacific paris itt industries inc subsidiaries notes consolidated financial statements continued period january 1 1998 february 28 1998 high low reported market prices itt industries common stock 3444 2813 itt industries declared dividends 15 per common share first quarter 1998 approximately 51830 holders record itt industries common stock february 28 1998 valuation qualifying accounts millions principally retirements well companies sold year s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc richard j townsend richard j townsend vice president controller director strategy principal accounting officer march 26 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b october 13 1998 itt industries inc filed form 8k current report closing sales automotive brake chassis business automotive electrical systems business index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance generally accepted accounting principles necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities travis engen travis engen chairman chief executive heidi kunz heidi kunz executive vice president chief financial officer itt industries inc subsidiaries report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 1998 1997 three years period ended december 31 1998 described accompanying index consolidated financial statements schedule consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles discussed note 2 consolidated financial statements 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force issue 9713 audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 27 1999 itt industries inc subsidiaries consolidated income statements millions except per share amounts accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income millions accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets millions except per share amounts accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows millions accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity millions except per share amounts accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated 1 accounting policies consolidation principles consolidated financial statements prepared accordance generally accepted accounting principles include accounts majorityowned subsidiaries significant intercompany transactions eliminated sales revenue recognition itt industries inc company recognizes revenues services rendered recognizes sales products shipped customers sales longterm contracts defense business recognized percentage completion method generally based ratio units delivered total units losses longterm contracts recognized events circumstances indicate loss incurred research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 674 684 584 total rde costs expended pursuant customer contracts three years ended december 31 1998 1997 1996 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption procedure employed using standard cost techniques customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided identified goulds domestic inventories valued using lastin firstout lifo method represent 123 total 1998 inventories would material difference value inventories fifo method used company value inventories asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income goodwill excess cost fair value net assets acquired amortized straightline basis generally 40 year period accumulated amortization 508 406 december 31 1998 1997 respectively foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains losses foreign currency transactions reported currently operating expenses income 22 55 31 1998 1997 1996 respectively derivative financial instruments company used variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties itt industries inc subsidiaries notes consolidated financial statements continued interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swap terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included balance sheet liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties recorded assets probable claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options however potential common shares included computation diluted per share amount loss continuing operations exists even company reports net income use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation restatements prior years financial statements restated reflect discontinued status itt automotive businesses sold 1998 itt automotive businesses sold previous years new segment structure resulting sales itt automotive businesses implementation statement financial accounting standards sfas 131 disclosures segments enterprise related information 2 changes accounting policies january 1998 company adopted sfas 130 reporting comprehensive income sfas 130 requires disclosure comprehensive income includes addition net income comprehensive income consisting unrealized gains losses bypass traditional income statement recorded directly separate section shareholders equity balance sheet components comprehensive income company consist unrealized gains losses relating translation foreign currency financial statements hedges net foreign investments certain investment securities june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities sfas 133 establishes accounting reporting standards requiring every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 also requires changes derivatives fair value itt industries inc subsidiaries notes consolidated financial statements continued recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires companies formally document designate assess effectiveness transactions receive hedge accounting statement shall effective fiscal quarters fiscal years beginning june 15 1999 company would calendar year beginning january 1 2000 company yet quantified impacts adopting sfas 133 reported financial results determined timing method adoption however given current level companys derivative hedging activities impact expected material december 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force eitf issue 9713 eitf issue 9713 requires reengineering costs previously could deferred amortized expensed incurred costs previously capitalized written current year 3 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows stock options 3291544 end 1998 included computation diluted earnings per share company loss continuing operations inclusion options would antidilutive b options purchase 205900 1924300 shares common stock 3194 2538 per share outstanding december 31 1997 1996 respectively included computation diluted eps options exercise price greater annual average market price common shares options expire 2007 2006 outstanding end respective periods 4 acquisitions june 25 1998 company acquired rule industries inc rulefrom kennametal inc 626 purchase price exceeded fair value net assets acquired 531 recorded goodwill amortized 40 years rule itt industries inc subsidiaries notes consolidated financial statements continued manufactures marine products including submersible pumps anchors compasses annual sales approximately 25 company also made three small acquisitions 1998 ag johansons metallfabrik ab sinton engineering co limited sinton uk limited specialty products segment great american gumball company connectors switches segment acquisitions accounted using purchase method results businesses rule material relation companys consolidated results operations may 23 1997 company acquired goulds pumps incorporated goulds purchase price 8652 complementing companys existing pump businesses goulds leader manufacture marketing high quality pumps residential chemical sewage drainage pulp paper agricultural mining variety applications acquisition funded shortterm borrowings accounted using purchase method purchase price allocated assets acquired liabilities assumed excess purchase price plus assumed liabilities 442 fair value assets acquired 688 recorded goodwill amortized generally period 40 years operating results goulds included consolidated income statements date acquisition following unaudited pro forma financial information presents results acquisition occurred beginning respective periods pro forma results prepared comparative purposes include certain adjustments additional depreciation expense result stepup basis fixed assets additional amortization expense result goodwill arising purchase increased interest expense acquisition debt pro forma results necessarily indicative results operations actually would resulted purchase effect beginning respective periods future results december 30 1997 company acquired kaman sciences corporation renamed itt systems sciences corporation purchase price approximately 135 itt systems sciences corporation supplies government high technology services information systems acquisition funded shortterm borrowings accounted using purchase method purchase price plus assumed liabilities 23 exceeded fair value assets acquired approximately 111 amortized 40 year period recorded goodwill 1997 company also acquired several businesses net cost 1037 results operations businesses itt systems sciences corporation material relation companys consolidated results operations 5 restructuring nonrecurring items 1998 company recorded restructuring nonrecurring items 201 first quarter 107 second quarter 3686 fourth quarter majority charges relate structural cost reduction program announced company december 2 1998 anticipation relatively flat economic itt industries inc subsidiaries notes consolidated financial statements continued environment company undertaken program reduce structural cost business increase leverage historical growth trends resume actions taken affect four segments include rationalization operating locations consolidation sales distribution facilities workforce reductions product pruning actions also include writedowns businesses sold increase reserves environmental exposures restructuring nonrecurring items year ended december 31 1998 detailed table projected aggregate cash impact complete actions approximately 1888 projected aggregate future cash savings period 19992003 approximately 3642 projected aggregate future noncash savings period approximately 781 projected future cash savings consist lower facility operating costs lower salary wage expenditures projected future noncash savings consist lower depreciation goodwill amortization actions contemplated plan expected completed within approximately one year december 31 1998 approximately 84 planned cash expenditures incurred except environmental remediation costs extend many years majority remaining cash expenditures incurred 1999 restructuring activities undertaken involve closure facilities sales offices distribution centers worldwide facility consolidations discontinuance product lines reductions workforce reduce costs improve profitability connectors switches several labor intensive operations europe consolidated low wage facility eastern europe site consolidations occur eliminate duplication processes relocate lower cost areas defense products services expects exit two facilities united states pumps complementary products twenty facilities including distribution centers sales offices manufacturing locations closed eight product lines discontinued costs directly related exit activities expected benefit future periods costs relocate train employees expensed incurred estimated severance costs included restructuring 925 company expects reduce workforce aggregate 2422 persons december 31 1998 aggregate headcount reductions 425 persons asset writeoffs taken current events circumstances indicate asset values may impaired using criteria sfas 121 writeoffs connectors switches relate assets become idle expected taken service sales volumes materialized assets deemed impaired net book values exceeded estimated future cash flows generated assets majority idle assets value specialized nature poor condition written impaired assets written estimated fair values writeoffs also include certain capitalized software costs future utility since business chosen implement new software platform goodwill amount 66 related two products substantial decline sales next years anticipated writeoffs defense products services represent writedown itt industries inc subsidiaries notes consolidated financial statements continued fair value net assets expected sold 1999 estimates fair values developed internally based upon anticipated future cash flows generated pumps complementary products undertook review certain operations current events circumstances indicate asset values may impaired determined goodwill 225 related operations venezuela mexico value assets richter business overvalued approximately 91 also included charge writeoffs 111 related information systems longer used due migrations new information system platforms asset writedowns 102 corporate company written fair value net assets three noncore businesses expected divested end 1999 estimated fair values developed internally based upon preliminary discussions potential buyers corporate 302 includes charge 442 net expected future recoveries anticipated costs remediate certain environmental sites gains sale two noncore businesses additional environmental charges 33 recorded specialty products 1997 company recorded restructuring nonrecurring charges 1378 charge recorded third quarter company took several actions strengthen operating performance improve operating efficiencies 1997 restructuring charges break across business segments follows pumps complementary products 441 specialty products 129 corporate 808 charge included 647 writedown fair value net assets two noncore businesses expected divested since sold 570 asset writeoffs severance costs associated closure consolidation facilities related workforce reductions 25 persons 150 increase environmental reserves 11 loss sale noncore business projected cash complete actions 364 cash expenditures contemplated charges except minor litigation issues ongoing environmental remediation efforts incurred end 1998 december 31 1998 1997 reserve balances restructuring activities 1384 222 respectively 6 discontinued operations september 28 1998 company closed sale automotive electrical systems business valeo sa france approximately 1700 transaction followed sale companys brake chassis unit continental ag germany approximately 1930 completed september 25 1998 result sales two units well several small previously sold automotive units accounted discontinued operations revenues expenses discontinued automotive operations removed consolidated income statements periods presented income discontinued operations net tax reflected income continuing operations assets liabilities discontinued automotive operations reclassified net assets discontinued operations consolidated balance sheet december 31 1997 cash used operations discontinued automotive operations consolidated statements cash flows reflected cash used discontinued operations consolidated balance sheet december 31 1998 reflects accrued taxes 4607 resulting gain sale discontinued automotive operations management expects majority taxes paid end 1999 revenues discontinued automotive operations nine months ended september 30 1998 30304 revenues discontinued automotive operations years ended december 31 1997 1996 46271 50316 respectively 1998 company reported operating income net tax discontinued operations 832 amount included 1017 itt industries inc subsidiaries notes consolidated financial statements continued tax income companys discontinued automotive operations partially offset 185 aftertax expense adjustments reserves relating itt financial reflected discontinued operation starting 1994 majority sold 1995 see note 19 commitments contingencies information regarding various claims legal actions relating dispositions businesses including dispositions companys automotive businesses referred herein 7 miscellaneous income expense miscellaneous income expense includes following 8 income taxes income tax data continuing operations follows reconciliation tax provision benefit us statutory rate effective income tax expense benefit rate reported follows itt industries inc subsidiaries notes consolidated financial statements continued deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings approximately 3610 since amounts permanently reinvested shareholders equity december 31 1998 1997 reflects tax benefits related exercise stock options approximately 45 79 respectively 9 receivables net receivables consist following 10 inventories net inventories consist following 11 current assets december 31 1998 1997 current assets consist primarily advance payments contracts prepaid expenses itt industries inc subsidiaries notes consolidated financial statements continued 12 plant property equipment net plant property equipment consist following 13 assets december 31 1998 1997 assets consist primarily prepaid pension employee benefit plan costs equity investments expected recoveries third parties relation environmental claims 14 leases rentals rental expenses operating leases 453 550 494 1998 1997 1996 respectively future minimum operating lease payments longterm operating leases december 31 1998 shown future commitments capital leases significant 15 debt consists following weighted average interest rate bank loans shortterm borrowings 361 498 december 31 1998 1997 respectively fair value companys bank loans shortterm loans approximate carrying value estimated fair value longterm debt december 31 1998 1997 6268 6537 respectively based discounted cash flows using companys incremental borrowing rates similar maturities itt industries inc subsidiaries notes consolidated financial statements continued company maintains revolving credit agreement expires november 2000 61 domestic foreign banks providing aggregate commitments 15 billion commitments unused december 31 1998 interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain certain financial ratios restrict indebtedness commitment fees revolving credit agreements range 060 150 total commitment based companys current debt ratings longterm debt capital lease maturities interest rate percentages december 31 1998 balances december 31 1998 1997 include amortizable debt discounts 422 469 respectively assets pledged secure indebtedness including mortgage loans amount approximately 534 december 31 1998 16 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rates foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains global debt portfolio fund operations company subsidiaries times use interest rate cross currency interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 1998 1997 company interest rate swaps outstanding notional values totaling dm 150 million swaps designed manage interest exposure companys shortterm debt 1997 company effectively terminated interest rate swaps notional values totaling dm 260 million original maturities ranging 1998 2000 entering offsetting swaps identical terms maturities swaps related counterswaps accounted fair market value time termination related gains losses recorded income swaps longer deemed effective hedges companys underlying deutsche mark debt outstanding dm 150 million interest rate swap agreements maturing year 2000 require company pay interest fixed rates averaging 696 receive interest floating rates based frankfurt interbank offered rate averaged 325 december 31 1998 itt industries inc subsidiaries notes consolidated financial statements continued december 31 1997 company held cross currency interest rate swap agreements notional values totaling approximately 212 swaps terminated august 17 1998 foreign currency risk management company subsidiaries significant foreign operations conduct business various foreign currencies company subsidiaries may periodically hedge transactions currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 1998 company held foreign currency forward swap contracts notional amounts totaling approximately 460 hedge foreign currency exposures companys significant foreign currency exposures deutsche mark belgian franc swedish krona majority contracts mature march 31 1999 commodity price risk management company utilized commodity derivatives limited basis hedge anticipated purchases nonferrous metals used production certain pump products december 31 1997 company held two zero cost collars total notional amount 35 weighted average ceiling 2500 whole dollars per metric ton weighted average floor 2034 whole dollars per metric ton contracts matured 1998 december 31 1998 company commodity derivatives fair value derivative financial instruments fair values companys derivative financial instruments follows following method assumptions used estimate fair value derivative financial instruments currency commodity contracts interest rate swap agreements fair value commodity contracts currency interest rate swap agreements estimated based quotes market makers instruments represents estimated amounts company would expect receive pay terminate agreements reporting date foreign currency exchange contracts fair values associated foreign currency contracts estimated valuing net position contracts using applicable spot rates forward rates reporting date 17 employee benefit plans pension plans company subsidiaries sponsor numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 11 39 years ended 1998 1997 1996 respectively postretirement health life company subsidiaries provide health itt industries inc subsidiaries notes consolidated financial statements continued care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 179 146 139 years ended 1998 1997 1996 respectively first table contains reconciliation changes benefit obligations changes plan assets weighted average assumptions periods ending december 31 1998 1997 respectively second table contains components net periodic benefit cost years ended 1998 1997 1996 respectively itt industries inc subsidiaries notes consolidated financial statements continued assumed rate future increases per capita cost health care health care trend rate 78 1998 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing benefit obligation 252 aggregate service interest cost components 21 decrease one percent trend rate would reduce benefit obligation 221 aggregate service interest cost components 18 extent actual experience differs inherent assumptions effect amortized average future service covered active employees 18 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including one affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 1998 1997 49180032 shares 26702181 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant remaining options become exercisable threeyear period commencing date grant exercise price per share fair itt industries inc subsidiaries notes consolidated financial statements continued market value date option granted 1998 1997 company made shares available exercise stock options purchasing shares open market 1996 company made shares available shares held company treasury purchasing shares open market summary status companys stock option incentive plans december 31 1998 1997 1996 changes years ended presented shares thousands company accounts plans pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts method accounting prescribed sfas 123 required applied options granted prior january 1 1995 resulting pro forma effect may representative expected future years fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 1998 1997 1996 dividend yield 214 235 240 respectively expected volatility 38 31 23 respectively expected life six years riskfree interest rate 566 645 615 respectively itt industries inc subsidiaries notes consolidated financial statements continued following table summarizes information companys stock options december 31 1998 shares thousands december 31 1998 3275000 shares available future grants effective january 1 1999 option shares available future grants increased 5452000 result annual limitation formula established itt industries inc 1994 incentive stock plan incentive stock plan also provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged 1998 pursuant itt industries inc 1996 restricted stock plan nonemployee directors company awarded 10688 restricted shares fiveyear restriction periods payment annual retainer directors 19 commitments contingencies company subsidiaries involved various claims legal actions including related government contracts environmental issues dispositions businesses matters claims actions include claims substantial amounts reserves established outcome probable reasonably estimated ultimate results legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations december 31 1998 company subsidiaries responsible alleged responsible environmental investigation remediation sites north america europe company received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent many proceedings companys liability considered de minimis glendale california company involved epa proceeding relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer currently company involved prps funding cleanup required epa company filed suit insurers recovery costs incurred connection environmental matters company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amounts accrued related receivables appropriately based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess itt industries inc subsidiaries notes consolidated financial statements continued amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company 20 business segment information itt industries inc subsidiaries notes consolidated financial statements continued excludes earnings companies equity basis b includes net assets discontinued operations 1997 9314 1996 10473 itt industries inc subsidiaries notes consolidated financial statements continued combined defense products services sales revenues united states government 10086 9252 8699 1998 1997 1996 respectively apart united states government commercial customer accounted 10 sales revenues company connectors switches business formerly included within defense electronics segment consists companys products marketed cannonr brand products include connectors switches cabling used telecommunications computing aerospace industrial applications well network services connectors switches segment represents 12 companys sales revenues 16 operating income restructuring nonrecurring items defense products services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 33 sales revenues segment generated contracts technical support services company provides military government agencies approximately 78 85 86 1998 1997 1996 defense products services sales revenues respectively us government defense products services segment represents 29 companys sales revenues 30 operating income restructuring nonrecurring items pumps complementary products segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr making company worlds largest pump producer businesses within segment also supply mixers heat exchangers related products brands mcdonnell millerr itt standardr brand names addition mentioned segment represents approximately 39 companys sales revenues approximately 45 operating income restructuring nonrecurring items specialty products businesses specialty products segment produce engineered valves switches industrial aerospace applications products marine leisure markets fluid handling materials stainless steel flexible tubing various industrial markets specialty shock absorbers brake friction materials transportation industry specialty products segment accounts approximately 19 companys sales revenues approximately 28 operating income restructuring nonrecurring items dispositions includes operating results assets units discontinued operations including itt community development corporation itt semiconductors noncore businesses sold corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued 21 quarterly results 1998 1997 includes research development engineering expenses b income continuing operations 1998 quarters ended march 31 june 30 dec 31 include charges 123 65 2248 aftertax restructuring nonrecurring items described note 5 c quarterly full year earnings per share amounts calculated independently based average common shares potentially dilutive shares applicable period repurchase common stock 1998 sum four quarters equal calculation full year 1998 income continuing operations 1997 quarters ended june 30 sept 30 include charges 07 833 aftertax restructuring nonrecurring items described note 5 table reflects range market prices companys common stock 1998 1997 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol iin companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 1999 february 28 1999 high low reported market prices companys common stock 4088 3750 company declared dividends 15 per common share first quarter 1999 approximately 52371 holders record companys common stock february 28 1999 schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc edward w williams edward w williams vice president controller principal accounting officer march 29 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries last quarter period covered report index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance accounting principles generally accepted united states necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities travis engen travis engen chairman chief executive david j anderson david j anderson senior vice president chief financial officer itt industries inc subsidiaries report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 1999 1998 three years period ended december 31 1999 set forth accompanying index consolidated financial statements schedule consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states discussed note 2 consolidated financial statements 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force issue 9713 audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 24 2000 itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated 1 accounting policies consolidation principles consolidated financial statements include accounts itt industries inc company majority owned subsidiaries investments unconsolidated companies management exercises significant influence accounted using equity method significant intercompany transactions eliminated sales revenue recognition company recognizes revenues services rendered recognizes sales products shipped customers defense business recognizes revenues based unit delivery milestone achievements completion contract based costs incurred cost reimbursable contracts depending type contract terms conditions expected losses longterm contracts recognized events circumstances indicate loss incurred research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 578 674 684 total rde costs expended pursuant customer contracts three years ended december 31 1999 1998 1997 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption procedure employed using standard cost techniques customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided identified domestic inventories valued lastin firstout lifo method represent 113 total 1999 inventories would material difference value inventories fifo method used company value inventories asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income goodwill excess cost fair value net assets acquired amortized straightline basis periods exceeding 40 years goodwill reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains losses foreign currency transactions reported currently selling general administrative expenses 28 22 55 1999 1998 1997 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment itt industries inc subsidiaries notes consolidated financial statements continued foreign subsidiary reflected cumulative translation adjustment component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swap terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included balance sheet liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties recorded assets probable claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options however potential common shares included computation diluted per share amount loss continuing operations exists even company reports net income use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation 2 changes accounting policies june 1999 financial accounting standards board issued statement financial accounting standards 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 consequently sfas 133 effective fiscal quarters fiscal years beginning june 15 2000 company would calendar year beginning january 1 2001 sfas 133 establishes accounting reporting standards require every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 also requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires companies formally document designate assess effectiveness transactions receive hedge accounting company yet quantified impacts adopting sfas 133 reported financial results determined timing method adoption however given current itt industries inc subsidiaries notes consolidated financial statements continued level companys derivative hedging activities impact expected material companys financial position results operations cash flows january 1998 company adopted sfas 130 reporting comprehensive income sfas 130 requires disclosure comprehensive income includes addition net income comprehensive income consisting unrealized gains losses bypass traditional income statement recorded directly separate section shareholders equity balance sheet components comprehensive income company consist unrealized gains losses relating translation foreign currency financial statements adjusted hedges net foreign investments certain investment securities december 1997 company changed method accounting reengineering costs incurred connection development installation software internal use accordance emerging issues task force eitf issue 97 13 eitf issue 97 13 requires reengineering costs previously could deferred amortized expensed incurred costs previously capitalized written current year 3 acquisitions december 14 1999 company completed purchase stanford telecommunications incs space defense communications businesses 1927 purchase price exceeded fair value net assets acquired 1606 excess recorded goodwill amortized 40 year period units stanford telecommunications annual sales approximately 142 leading designers manufacturers marketers advanced digital communication products systems september 10 1999 company acquired flojet corporation flojet privately held company 1410 consisting 1310 cash 100 notes payable purchase price exceeded fair value net assets acquired 1033 excess recorded goodwill amortized 40 year period flojet manufactures air electric driven pumps motors dispensing equipment variety industries including beverage general industrial equipment agriculturallawn garden recreational vehicle leisure marine water purification flojet annual sales approximately 50 october 29 1999 company completed purchase stx pte ltd stx singaporebased san teh ltd 1194 purchase price exceeded fair value net assets acquired 821 excess recorded goodwill amortized 40 year period stx manufactures conductive rubber switches used keypads mobile telephones highend remote control units keyless entry systems stx annual sales approximately 64 company also acquired sanitaire corporation hydro air industries k electronics inc assets energy machine service inc made equity investment earthwatch combined total 1017 acquisitions accounted using purchase method purchase price allocations prepared preliminary basis changes expected evaluations assets liabilities completed additional information becomes available june 25 1998 company acquired rule industries inc rule kennametal inc 626 purchase price exceeded fair value net assets acquired 531 excess recorded goodwill amortized 40 year period rule manufactures marine products including submersible pumps anchors compasses annual sales approximately 25 company also made three small acquisitions 1998 ag johansons metallfabrik ab sinton engineering co limited sinton uk limited great american gumball corporation 4 restructuring special items 1998 company recorded restructuring special items 201 itt industries inc subsidiaries notes consolidated financial statements continued first quarter 107 second quarter 3686 fourth quarter actions taken affected four segments restructuring special items year ended december 31 1998 detailed following table 1998 charges related restructuring activities involved closure facilities sales offices distribution centers worldwide facility consolidations discontinuance product lines reductions workforce reduce cost improve profitability connectors switches several labor intensive operations europe consolidated low wage facility eastern europe site consolidations occurred eliminate duplication process relocate lower cost areas defense products services exited two facilities united states pumps complementary products twenty facilities including distribution centers sales offices manufacturing locations closed eight product lines discontinued costs directly related exit activities expected benefit future periods costs relocate train employees expensed incurred estimated severance costs included restructuring 925 asset writeoffs taken current events circumstances indicated asset values impaired using criteria sfas 121 writeoffs connectors switches related assets idle taken service sales volumes materialize assets deemed impaired net book values exceeded estimated future cash flows generated assets majority idle assets value specialized nature poor condition written impaired assets written estimated fair values writeoffs also include certain capitalized software costs future utility since business chose implement new software platform goodwill amount 66 related two products also written assets defense products services expected sold written fair value pumps complementary products undertook review certain operations current events circumstances indicated asset values may impaired determined goodwill 225 related operations venezuela mexico value assets richter business overvalued approximately 91 also included charge writeoffs 111 related information systems longer used due migrations new information system platforms asset writedowns 102 corporate company wrote net assets three noncore businesses fair value corporate 302 included charge 442 net expected future recoveries anticipated costs remediate certain environmental sites gains sale two noncore businesses additional environmental charges 33 recorded specialty products december 31 1999 company closed 16 planned 25 facilities discontinued 18 planned 19 product lines reduced workforce 1680 approximately 70 planned aggregate reduction approximately 2400 persons fourth quarter 1999 company assessed 1998 restructuring reserves determined activities related reserves completed 448 less originally estimated reversed related reserve income 448 excess primarily result favorable experience employee separations asset disposal costs itt industries inc subsidiaries notes consolidated financial statements continued required remaining 1998 restructuring programs completed 2000 early 2001 1999 connection carrying aforementioned restructuring programs company identified facilities shutdown relocated lower cost areas consolidated existing facilities fourth quarter 1999 company also identified asset impairments two facilities restructuring special items year ended december 31 1999 detailed following table projected cash impact complete 1999 actions approximately 148 projected aggregate future cash savings period 2000 2004 approximately 406 consist decreased facility operating costs lower salary wage expenditures projected future noncash savings period 61 consist decreased depreciation goodwill amortization actions contemplated 1999 plans completed 2000 residual payments occurring 2001 1999 restructuring activities involve closure facilities sales offices reduction workforce connectors switches factory closed portion business relocated defense products services several positions two divisions eliminated pumps complementary products close two facilities related service offices also consolidate operations one warehouse existing facilities specialty products workforce reduction occur one facility among business segments estimated severance costs 121 represent costs reduce workforce aggregate 326 persons itt industries inc subsidiaries notes consolidated financial statements continued pumps complementary products wrote 156 goodwill unprofitable far east operation based managements future cash flow projections business defense products services wrote 44 goodwill related product line sold january 2000 december 31 1999 1998 reserve balances restructuring activities 447 1384 respectively 1999 payments restructuring totaled 600 following table displays rollforward restructuring reserves 1999 1997 company recorded charges restructuring special items 1378 1997 restructuring charges taken across business segments follows pumps complementary products 441 specialty products 129 corporate 808 charges comprised 647 writedown fair value net assets two noncore businesses expected divested since sold 570 asset writeoffs severance costs associated closure consolidation facilities related workforce reductions 25 persons 150 increase environmental reserves 11 recognize loss sale non core business activities associated 1997 charges completed according plan 5 discontinued operations september 28 1998 company closed sale automotive electrical systems business valeo sa france approximately 1700 transaction followed sale companys brake chassis unit continental ag germany approximately 1930 completed september 25 1998 result sales two units well several small previously sold automotive units accounted discontinued operations company received notifications claims valeo sa continental ag requesting postclosing adjustments purchase price provisions sales contracts based upon number accounting issues relating calculation net worth businesses sold claims submitted arbitration thorough review company believes claims little merit intends vigorously dispute although cannot determined time whether extent postclosing adjustments purchase price result arbitration management believe adjustments would material adverse effect cash flow results operations financial condition company subsidiaries consolidated basis itt industries inc subsidiaries notes consolidated financial statements continued 6 income taxes income tax data continuing operations follows itt industries inc subsidiaries notes consolidated financial statements continued reconciliation tax provision benefit us statutory rate effective income tax expense benefit rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 2584 since amounts permanently reinvested shareholders equity december 31 1999 1998 reflects tax benefits related exercise stock options approximately 115 45 respectively 7 earnings per share reconciliation data used calculation basic diluted earnings per itt industries inc subsidiaries notes consolidated financial statements continued share computations income continuing operations follows 1 options purchase 1559201 shares common stock average price 3954 per share outstanding december 31 1999 included computation diluted eps options exercise price greater annual average market price common shares options expire 2009 outstanding end 1999 2 stock options 3291544 end 1998 included computation diluted earnings per share company loss continuing operations inclusion options would antidilutive 3 options purchase 205900 shares common stock 3194 per share outstanding december 31 1997 included computation diluted eps options exercise price greater annual average market price common shares options expire 2007 outstanding end 1997 8 receivables net receivables consist following 9 inventories net inventories consist following 10 current assets december 31 1999 1998 current assets consist primarily advance payments contracts prepaid expenses itt industries inc subsidiaries notes consolidated financial statements continued 11 plant property equipment net plant property equipment consists following 12 goodwill net goodwill consists following 13 assets december 31 1999 1998 assets primarily consists prepaid pension employee benefit plan costs equity investments expected recoveries third parties relation environmental claims 14 leases rentals company leases certain offices manufacturing buildings land machinery automobiles computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 518 453 550 1999 1998 1997 respectively future minimum operating lease payments longterm operating leases december 31 1999 shown itt industries inc subsidiaries notes consolidated financial statements continued 15 debt consists following 1 weighted average rate principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 670 361 december 31 1999 1998 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based current rates indicated company debt similar remaining maturities december 31 1999 fair value longterm debt 4849 compared fair value 6268 december 31 1998 year decline fair value reflects increase interest rates experienced 1999 august 1 1999 company redeemed outstanding 9 14 senior debentures maturity date july 15 2001 value maturity 189 redeemed 8 34 senior debentures maturity date march 1 2006 value maturity 78 company maintains revolving credit agreement expires november 2000 61 domestic foreign banks providing aggregate commitments 15 billion commitments unused december 31 1999 interest rate borrowings agreements generally based london interbank offered rate libor plus itt industries inc subsidiaries notes consolidated financial statements continued spread reflects companys debt rating provisions agreements require company maintain certain financial ratios restrict indebtedness commitment fees revolving credit agreements range 060 150 total commitment based companys current debt ratings assets pledged secure indebtedness including mortgage loans amount approximately 489 december 31 1999 16 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company subsidiaries times use interest rate swaps manage companys debt portfolio related financing costs interest rate structure 1997 company effectively terminated interest rate swaps notional values totaling 260 million deutsche marks original maturities ranging 1998 2000 entering offsetting swaps identical terms maturities swaps related counterswaps accounted fair market value time termination related gains losses recorded income swaps longer deemed effective hedges companys underlying deutsche mark debt december 31 1999 1998 company interest rate swaps outstanding notional values totaling 150 million deutsche marks swaps designed manage interest exposure companys shortterm debt outstanding 150 million deutsche mark interest rate swap agreements maturing march april 2000 require company pay interest fixed rates averaging 696 receive interest floating rates based frankfurt interbank offered rate fibor averaged 340 december 31 1999 foreign currency risk management company subsidiaries significant foreign operations conduct business various foreign currencies company subsidiaries may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 1999 company held foreign currency forward contracts notional amounts totaling approximately 790 million hedge european asian currency exposures contracts mature 2000 itt industries inc subsidiaries notes consolidated financial statements continued fair value derivative financial instruments fair values companys derivative financial instruments follows following method assumptions used estimate fair value derivative financial instruments interest rate swap agreements fair value interest rate swap agreements estimated based quotes market makers instruments represents estimated amounts company would expect receive pay terminate agreements reporting date foreign currency exchange contracts fair values associated foreign currency contracts estimated valuing net position contracts using applicable spot rates forward rates reporting date 17 employee benefit plans pension plans company subsidiaries sponsor numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 13 11 39 years ended 1999 1998 1997 respectively postretirement health life company subsidiaries provide health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 182 179 146 years ended 1999 1998 1997 respectively itt industries inc subsidiaries notes consolidated financial statements continued first table contains reconciliation changes benefit obligations changes plan assets weighted average assumptions periods ending december 31 1999 1998 respectively second table contains components net periodic benefit cost years ended 1999 1998 1997 respectively assumed rate future increases per capita cost health care health care trend rate 71 1999 decreasing ratably 60 year 2001 increasing table health care trend rates one percent per year would effect increasing benefit obligation 240 aggregate service interest cost components 23 decrease one percent trend rate would reduce benefit obligation 212 aggregate service interest cost components 20 extent actual experience differs inherent assumptions effect amortized average future service covered active employees 18 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating itt industries inc subsidiaries notes consolidated financial statements continued cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 1999 1998 57243719 49180032 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted 1999 1998 1997 company made shares available exercise stock options purchasing shares open market itt industries inc subsidiaries notes consolidated financial statements continued summary status companys stock option incentive plans december 31 1999 1998 1997 changes years ended presented shares thousands company accounts plans using intrinsic value method pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts method accounting prescribed sfas 123 required applied options granted prior january 1 1995 resulting pro forma effect may representative expected future years fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 1999 1998 1997 dividend yield 201 214 235 respectively expected volatility 51 38 31 respectively expected life six years riskfree interest rates 482 566 645 respectively itt industries inc subsidiaries notes consolidated financial statements continued following table summarizes information companys stock options december 31 1999 shares thousands december 31 1999 3647495 shares available future grants effective january 1 2000 option shares available future grants increased 5824845 result annual limitation formula established itt industries inc 1994 incentive stock plan incentive stock plan also provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged 1999 30000 shares restricted stock awarded plan 1999 pursuant itt industries inc 1996 restricted stock plan nonemployee directors company awarded 10248 restricted shares fiveyear restriction periods payment annual retainer directors 19 commitments contingencies company subsidiaries involved various legal actions including related government contracts environmental matters actions include claims substantial amounts reserves established outcome probable reasonably estimated ultimate results legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations december 31 1999 company subsidiaries responsible alleged responsible environmental investigation remediation sites various countries company received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent many proceedings companys liability considered de minimis glendale california company involved environmental proceeding relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached agreement principle consent decree settling case consent decree awaiting approval epa suit filed several years ago company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental matters april 1999 superior court granted partial summary judgment california law dismissing certain claims itt industries inc subsidiaries notes consolidated financial statements continued california action california court appeals accepted companys petition review superior courts order argument scheduled august 1999 however continued indefinite date pending developments similar cases california company party april 1999 company initiated new coverage action new jersey itt industries inc et al v federal ins co et al middlesex county l191999 involving new environmental insurance claims well claims pending dormant court california companys insurers challenged convenience new jersey forum action ruling motion court dismissed nonnew jersey claims deferred action certain new jersey claims retained jurisdiction one new jersey claim company negotiated settlements certain defendant insurance companies engaged negotiations others prepared pursue legal remedies reasonable negotiations productive company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amounts accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company 20 business segment information excludes earnings companies equity basis b includes net assets discontinued operations 1997 9314 itt industries inc subsidiaries notes consolidated financial statements continued excludes earnings companies equity basis b includes net assets discontinued operations 1997 9314 itt industries inc subsidiaries notes consolidated financial statements continued excludes earnings companies equity basis b includes net assets discontinued operations 1997 9314 combined defense products services sales revenues united states government 10540 10086 9252 1999 1998 1997 respectively apart united states government commercial customer accounted 10 sales revenues company connectors switches business consists companys products marketed cannonr brand products include connectors switches cabling used telecommunications computing aerospace industrial applications well network services connectors switches segment represents 11 companys sales revenues 15 operating income restructuring items 1999 defense products services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 39 sales revenues segment generated contracts technical support services company provides military government agencies approximately 75 78 85 1999 1998 1997 defense products services sales itt industries inc subsidiaries notes consolidated financial statements continued revenues respectively us government defense products services segment represents 31 companys sales revenues 27 operating income restructuring items 1999 pumps complementary products segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr making company worlds largest pump producer businesses within segment also supply mixers heat exchangers related products brand names mcdonnell millerr itt standardr addition mentioned segment represents approximately 37 companys sales revenues approximately 40 operating income restructuring items 1999 specialty products businesses specialty products segment produce engineered valves switches industrial aerospace applications products marine leisure markets fluid handling materials tubing systems connectors various automotive industrial markets specialty shock absorbers brake friction materials transportation industry specialty products segment accounts approximately 21 companys sales revenues approximately 32 operating income restructuring items 1999 dispositions includes operating results assets units discontinued operations including noncore businesses sold corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued 21 quarterly results 1999 1998 includes research development engineering expenses b 1999 income continuing operations includes restructuring special income 29 aftertax income continuing operations 1998 quarters ended march 31 june 30 december 31 includes restructuring special items 123 65 2248 respectively described note 4 c quarterly full year earnings per share amounts calculated independently based average common shares potentially dilutive shares applicable period repurchase common stock first quarter 1999 1998 sum four quarters equal calculation full years 1999 1998 table reflects range market prices companys common stock 1999 1998 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol iin companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2000 february 29 2000 high low reported market prices companys common stock 3494 2238 company declared dividends 15 per common share first quarter 2000 approximately 38871 holders record companys common stock february 29 2000 schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc edward w williams edward w williams vice president corporate controller principal accounting officer march 28 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b november 20 2000 itt industries reported form 8k november 10 2000 entered fiveyear competitive advance revolving credit facility agreement twenty banks aggregate amount 1 billion index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance accounting principles generally accepted united states necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities louis j giuliano louis j giuliano chairman president chief executive officer david j anderson david j anderson senior vice president chief financial officer itt industries inc subsidiaries report independent public accountants shareholders itt industries inc audited consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 2000 1999 three years period ended december 31 2000 set forth accompanying index consolidated financial statements schedule financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 22 2001 itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 accounting policies consolidation principles consolidated financial statements include accounts itt industries inc company majority owned subsidiaries investments unconsolidated companies management exercises significant influence accounted using equity method significant intercompany transactions eliminated sales revenue recognition company recognizes revenues services rendered recognizes sales products shipped customers defense products services business recognizes sales revenues based unit delivery milestone achievement completion contract based costs incurred cost reimbursable contracts depending type contract terms conditions expected losses longterm contracts recognized events circumstances indicate loss incurred research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 746 578 674 total rde costs expended pursuant customer contracts three years ended december 31 2000 1999 1998 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption procedure employed using standard cost techniques customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided identified domestic inventories valued lastin firstout lifo method represent 130 113 total 2000 1999 inventories respectively would material difference value inventories fifo method used company value inventories asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis useful economic lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included income goodwill excess cost fair value net assets acquired amortized straightline basis periods exceeding 40 years goodwill reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year national currencies foreign companies generally functional currencies gains foreign currency transactions reported currently selling general administrative expenses 25 28 22 2000 1999 1998 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks itt industries inc subsidiaries notes consolidated financial statements continued changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swap terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included balance sheet liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties recorded assets probable claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options potential common shares included computation diluted per share amount loss continuing operations exists even company reports net income use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting policies company adopt statement financial accounting standards 133 accounting derivative instruments hedging activities sfas 133 beginning january 1 2001 sfas 133 amended sfas 138 establishes accounting reporting standards require every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet either asset liability measured fair value sfas 133 also requires changes derivatives fair value recognized currently earnings unless specific hedge accounting criteria met special accounting qualifying hedges allows derivatives gains losses offset related results hedged item income statement requires companies formally document designate assess effectiveness transactions receive hedge accounting adoption sfas 133 material impact companys consolidated results operations financial position cash flows effective october 1 2000 company adopted staff accounting bulletin 101 itt industries inc subsidiaries notes consolidated financial statements continued revenue recognition financial statements sab 101 sab 101 provides guidance recognition presentation disclosure revenue financial statements adoption sab 101 material impact companys consolidated results operations financial condition cash flow effective october 1 2000 company adopted emerging issues task force issue 0010 accounting shipping handling fees costs eitf 0010 eitf 0010 requires shipping handling costs billed customers recorded sales cost sales 2000 increased approximately 16 due adoption eitf 0010 adoption eitf 0010 effect operating income net income eps financial condition cash flow company restate sales cost sales years prior 2000 since impractical january 1998 company adopted sfas 130 reporting comprehensive income sfas 130 requires disclosure comprehensive income includes addition net income comprehensive income consisting unrealized gains losses bypass traditional income statement recorded directly separate section shareholders equity balance sheet components comprehensive income company consist unrealized gains losses relating translation foreign currency financial statements adjusted hedges net foreign investments certain investment securities additional minimum pension liability adjustment note 3 acquisitions november 3 2000 company acquired manmachine interface mmi mobile phone switch producer trw inc 619 purchase price exceeded fair value net assets acquired 435 excess recorded goodwill amortized 25 year period mmi technology leader produces wide array latest switches keypads mobile phones annual sales mmi approximate 53 june 26 2000 company acquired ck components incck privately held company 1069 net cash acquired purchase price exceeded fair value net assets acquired 1162 excess recorded goodwill amortized 30 year period ck annual sales approximately 113 worldwide leader design manufacture switches telecommunications computer electronic equipment markets december 14 1999 company completed purchase stanford telecommunications incs stel space defense communications businesses 1927 purchase price exceeded fair value net assets acquired 1606 excess recorded goodwill amortized 40 year period units stel annual sales approximately 142 leading designers manufacturers marketers advanced digital communication products systems october 29 1999 company completed purchase stx pte ltd stx singaporebased san teh ltd 1194 purchase price exceeded fair value net assets acquired 821 excess recorded goodwill amortized 40 year period stx manufactures conductive rubber switches used keypads mobile telephones highend remote control units keyless entry systems stx annual sales approximately 64 september 10 1999 company acquired flojet corporation flojet privately held company 1410 consisting 1310 cash 100 notes payable purchase price exceeded fair value net assets acquired 1033 excess recorded goodwill amortized 40 year period flojet manufactures air electric driven pumps motors dispensing equipment variety industries including beverage general industrial equipment agriculturallawn garden recreational vehicle leisure marine water purification flojet annual sales approximately 50 2000 company also completed several small acquisitions combined total itt industries inc subsidiaries notes consolidated financial statements continued 232 1999 company also acquired sanitaire corporation hydro air industries k electronics inc assets energy machine service inc made equity investment earthwatch total 1017 acquisitions accounted using purchase method purchase price allocations 2000 acquisitions prepared preliminary basis changes expected evaluations assets liabilities completed additional information becomes available pro forma effect companys net income earnings per share acquisitions though acquisitions occurred january 1 year material note 4 restructuring special items 1998 company recorded restructuring special items 201 first quarter 107 second quarter 3686 fourth quarter actions taken affected four segments restructuring special items year ended december 31 1998 detailed following table 1998 charges related restructuring activities involved closure facilities sales offices distribution centers worldwide facility consolidations discontinuance product lines reductions workforce reduce cost improve profitability connectors switches several labor intensive operations europe consolidated low wage facility eastern europe site consolidations occurred eliminate duplication process relocate lower cost areas defense products services exited two facilities united states pumps complementary products twenty facilities including distribution centers sales offices manufacturing locations closed eight product lines discontinued costs directly related exit activities expected benefit future periods costs relocate train employees expensed incurred estimated severance costs included restructuring 925 asset writeoffs taken current events circumstances indicated asset values impaired using criteria sfas 121 writeoffs connectors switches related assets idle taken service sales volumes materialize assets deemed impaired net book values exceeded estimated future cash flows generated assets majority idle assets value specialized nature poor condition written impaired assets written estimated fair values writeoffs also included certain capitalized software costs future utility since business chose implement new software platform goodwill amount 66 related two products also written assets defense products services expected sold written fair value pumps complementary products undertook review certain operations current events circumstances indicated asset values may impaired determined goodwill 225 related operations venezuela mexico value assets richter business overvalued approximately 91 also included charge writeoffs 111 related information systems longer used due migrations new information system platforms asset writedowns 102 corporate itt industries inc subsidiaries notes consolidated financial statements continued company wrote net assets held sale three noncore businesses fair value corporate 302 included charge 442 net expected future recoveries anticipated costs remediate certain environmental sites gains sale two noncore businesses additional environmental charges 33 recorded specialty products fourth quarter 1999 company assessed 1998 restructuring reserves determined activities related reserves would completed 448 less originally estimated reversed related reserve income excess primarily result favorable experience employee separations asset disposal costs required december 31 2000 company closed 19 planned 25 facilities discontinued planned 19 product lines reduced workforce 2136 approximately 93 revised planned aggregate reduction approximately 2300 persons remaining 1998 restructuring activities completed early 2001 1999 connection carrying aforementioned restructuring programs company identified facilities shutdown relocated lower cost areas consolidated existing facilities fourth quarter 1999 company also identified asset impairments two facilities restructuring special items year ended december 31 1999 detailed following table 1999 restructuring activities involved closure facilities sales offices reduction workforce connectors switches factory closed portion business relocated defense products services several positions two divisions eliminated 2000 pumps complementary products closed two facilities related service offices also consolidated operations one warehouse existing facilities specialty products workforce reduction occurred one facility among business segments 87 estimated 121 severance costs incurred december 31 2000 costs associated workforce reduction 226 revised plan 324 persons pumps complementary products wrote 156 goodwill unprofitable far east operation based managements future cash flow projections business defense products services wrote 44 goodwill related product line sold january 2000 following table displays rollforward restructuring reserves itt industries inc subsidiaries notes consolidated financial statements continued note 5 discontinued operations september 28 1998 company closed sale automotive electrical systems business valeo sa france approximately 1700 transaction followed sale companys brake chassis unit continental ag germany approximately 1930 completed september 25 1998 result sales two units well several small previously sold automotive units accounted discontinued operations company received notifications claims valeo sa continental ag requesting postclosing adjustments purchase price provisions sales contracts based upon number accounting issues relating calculation net worth businesses sold claims submitted arbitration thorough review company believes claims little merit vigorously disputing although cannot determined time whether extent postclosing adjustments purchase price result arbitration management believe adjustments would material adverse effect cash flow results operations financial condition company consolidated basis note 6 income taxes income tax data continuing operations follows reconciliation tax provision benefit us statutory rate effective income tax expense benefit rate reported follows itt industries inc subsidiaries notes consolidated financial statements continued deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax purposes deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 1109 since amounts permanently reinvested december 31 2000 company approximately 25 foreign tax credit carryforwards available reduce future tax liabilities credit carryforwards expire follows 10 december 31 2001 12 december 31 2002 03 december 31 2004 shareholders equity december 31 2000 1999 reflects tax benefits related exercise stock options approximately 81 115 respectively note 7 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 options purchase 3429883 shares common stock average price 3634 per share outstanding december 31 2000 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2008 2010 2 options purchase 1559201 shares common stock average price 3954 per share outstanding december 31 1999 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2009 3 stock options 3291544 end 1998 included computation diluted earnings per share company loss continuing operations inclusion options would antidilutive itt industries inc subsidiaries notes consolidated financial statements continued note 8 receivables net receivables consist following note 9 inventories net inventories consist following note 10 current assets december 31 2000 1999 current assets consist primarily advance payments contracts prepaid expenses capitalized tooling costs note 11 plant property equipment net plant property equipment consists following note 12 goodwill net goodwill consists following itt industries inc subsidiaries notes consolidated financial statements continued note 13 assets december 31 2000 1999 assets primarily consists prepaid pension employee benefit plan costs equity investments expected recoveries third parties relation environmental claims note 14 leases rentals company leases certain offices manufacturing buildings land machinery automobiles computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 555 518 453 2000 1999 1998 respectively future minimum operating lease payments longterm operating leases december 31 2000 shown note 15 debt consists following 1 interest rate notedebenture 660 6195 december 31 2000 1999 respectively 2 weighted average interest rate 6797 6974 december 31 2000 1999 respectively itt industries inc subsidiaries notes consolidated financial statements continued principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 710 670 december 31 2000 1999 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based current rates indicated company debt similar remaining maturities december 31 2000 fair value longterm debt 5600 compared fair value 4849 december 31 1999 year increase fair value reflects decline interest rates experienced 2000 november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain certain financial ratios december 31 2000 company compliance financial covenants commitment fee revolving credit agreement 125 total commitment based companys current debt ratings agreement replaced prior revolving credit agreement expired november 2000 revolving credit agreement serves backup commercial paper program august 1 1999 company redeemed outstanding 9 14 senior debentures maturity date july 15 2001 value maturity 189 redeemed 8 34 senior debentures maturity date march 1 2006 value maturity 78 redeemed conformity relevant call provisions assets pledged secure indebtedness including mortgage loans amount approximately 354 december 31 2000 note 16 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 2000 company interest rate swaps outstanding notional values totaling 4217 swaps designed manage interest rate exposure associated certain short longterm debt swaps mature various dates 2025 effectively convert aforementioned debt fixed variable rate borrowings variable interest rates based 3 month libor rates plus spread reflects companys debt rating coupon underlying longterm obligations weighted average variable fixed interest rates 647 735 december 2000 december 31 1999 company interest rate swaps outstanding notional itt industries inc subsidiaries notes consolidated financial statements continued values totaling 150 million deutsche marks swaps designed manage interest exposure companys shortterm debt interest rate swap agreements matured march april 2000 required company pay interest fixed rates averaging 696 receive interest floating rates based frankfurt interbank offered rate fibor averaged 329 terms contracts foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 2000 1999 company held foreign currency forward contracts notional amounts totaling approximately 60 79 respectively hedge various foreign currency exposures contracts outstanding december 31 2000 mature first quarter 2001 fair value derivative financial instruments fair values companys derivative financial instruments follows following methods assumptions used estimate fair value derivative financial instruments interest rate swap agreements fair value interest rate swap agreements estimated based quotes market makers instruments represents estimated amounts company would expect receive pay terminate agreements reporting date receivable payable amounts accrued monthly based interest rate differentials derivatives reflected interest expense hedge interest outstanding debt foreign currency exchange contracts fair values associated foreign currency contracts estimated valuing net position contracts using applicable spot rates forward rates reporting date note 17 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 15 13 11 years ended 2000 1999 1998 respectively postretirement health life company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign itt industries inc subsidiaries notes consolidated financial statements continued securities fixed income investments real estate investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 191 182 179 years ended 2000 1999 1998 respectively first table contains reconciliation changes benefit obligations changes plan assets weighted average assumptions periods ending december 31 2000 1999 respectively second table contains components net periodic benefit cost years ended 2000 1999 1998 respectively assumed rate future increases per capita cost health care health care trend rate 65 2000 assumed rate 80 2001 decreasing ratably 60 2006 increasing table health care trend rates one percent per year would effect increasing benefit obligation 259 itt industries inc subsidiaries notes consolidated financial statements continued aggregate service interest cost components 23 decrease one percent trend rate would reduce benefit obligation 221 aggregate service interest cost components 20 extent actual experience differs inherent assumptions effect amortized average future service covered active employees note 18 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 2000 1999 57243719 shares common stock held treasury stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods certain options become exercisable upon attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted 2000 1999 1998 company made shares available exercise stock options purchasing shares open market summary status companys stock option incentive plans december 31 2000 1999 1998 changes years ended presented shares thousands itt industries inc subsidiaries notes consolidated financial statements continued company accounts plans using intrinsic value method pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts method accounting prescribed sfas 123 required applied options granted prior january 1 1995 resulting pro forma effect may representative expected future years fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 2000 1999 1998 dividend yield 199 201 214 respectively expected volatility 63 51 38 respectively expected life six years riskfree interest rates 673 482 566 respectively following table summarizes information companys stock options december 31 2000 shares thousands december 31 2000 6161146 shares available future grants effective january 1 2001 option shares available future grants increased 2177375 result annual limitation formula established 1994 itt industries incentive stock plan incentive stock plan also provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged 2000 1999 1998 0 30000 44500 shares itt industries inc subsidiaries notes consolidated financial statements continued stricted stock awarded plan respectively 2000 1999 1998 pursuant itt industries 1996 restricted stock plan nonemployee directors company awarded 13626 10248 10688 restricted shares fiveyear restriction periods respectively payment annual retainer directors restrictions may lapse earlier depending certain circumstances note 19 commitments contingencies company involved various legal actions including related government contracts environmental matters actions include claims substantial amounts reserves established outcome probable reasonably estimated ultimate results legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations december 31 2000 company responsible alleged responsible environmental investigation remediation sites various countries company received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent many proceedings companys liability considered de minimis glendale california company involved environmental proceeding relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement consent decree requiring prps perform additional remedial activities entered august 2000 suit filed several years ago company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection glendale case environmental matters april 1999 superior court granted partial summary judgment california law dismissing certain claims california action california court appeals accepted companys petition review superior courts order argument scheduled august 1999 however continued indefinite date pending developments similar cases california company party april 1999 company initiated new coverage action new jersey itt industries inc et al v federal ins co et al middlesex county l191999 involving new environmental insurance claims well claims pending dormant court california companys insurers challenged convenience new jersey forum action ruling motion court dismissed nonnew jersey claims deferred action certain new jersey claims retained jurisdiction one new jersey claim company negotiated settlements certain defendant insurance companies engaged negotiations others prepared pursue legal remedies reasonable negotiations productive company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amounts accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation itt industries inc subsidiaries notes consolidated financial statements continued remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company note 20 business segment information itt industries inc subsidiaries notes consolidated financial statements continued excludes earnings companies equity basis defense products services sales revenues united states government 10236 10540 10086 2000 1999 1998 respectively apart itt industries inc subsidiaries notes consolidated financial statements continued united states government commercial customer accounted 10 sales revenues company connectors switches business consists companys products marketed cannonr brand products include connectors switches cabling used telecommunications computing aerospace industrial applications well network services connectors switches segment represents 160 companys sales revenues 201 operating income 2000 defense products services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 431 sales revenues segment generated contracts technical support services company provides military government agencies approximately 77 75 78 2000 1999 1998 defense products services sales revenues respectively us government defense products services segment represents 276 companys sales revenues 238 operating income 2000 pumps complementary products segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr making company worlds largest pump producer businesses within segment also supply mixers heat exchangers related products brand names mcdonnell millerr itt standardr addition mentioned segment represents approximately 363 companys sales revenues approximately 394 operating income 2000 specialty products businesses specialty products segment produce engineered valves switches industrial aerospace applications products marine leisure markets fluid handling materials tubing systems connectors various automotive industrial markets specialty shock absorbers brake friction materials transportation industry specialty products segment accounts approximately 201 companys sales revenues approximately 276 operating income 2000 dispositions includes operating results assets units discontinued operations including noncore businesses sold corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 21 quarterly results 2000 1999 due adoption eitf 0010 first second third quarters restated increase sales cost sales approximately 4 per quarter prior year amounts restated since impractical b includes research development engineering expenses c 1999 income continuing operations includes restructuring special income 29 aftertax quarterly full year earnings per share amounts calculated independently based average common shares potentially dilutive shares applicable period repurchase common stock first quarter 1999 sum four quarters equal calculation full year 1999 table reflects range market prices companys common stock 2000 1999 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2001 february 28 2001 high low reported market prices companys common stock 4425 3638 company declared dividends 015 per common share first quarter 2001 approximately 36917 holders record companys common stock february 28 2001 schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc edward w williams edward w williams vice president corporate controller principal accounting officer march 26 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries last quarter period covered report index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance accounting principles generally accepted united states necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited arthur andersen llp independent public accountants whose appointment ratified shareholders management made itt industries financial records related data available arthur andersen llp believes representations made independent public accountants valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent public accountants also evaluate internal controls perform tests procedures accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation audit committee board directors composed nonemployee directors meets periodically management also separately privately independent public accountants contracted auditors evaluate effectiveness work performed discharging respective responsibilities louis j giuliano louis j giuliano chairman president chief executive officer david j anderson david j anderson senior vice president chief financial officer itt industries inc subsidiaries report independent public accountants shareholders itt industries inc audited accompanying consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 2001 2000 three years period ended december 31 2001 set forth accompanying index consolidated financial statements schedule financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 23 2002 itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 accounting policies consolidation principles consolidated financial statements include accounts itt industries inc majority owned subsidiaries company consolidates companies owns 50 voting shares unless control likely temporary results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal significant intercompany transactions eliminated see note 20 business segment information description companys segments sales revenue recognition company recognizes revenues services rendered recognizes sales products shipped customers defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeand material contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recognized first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 764 746 578 total rde costs expended pursuant customer contracts three years ended december 31 2001 2000 1999 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption procedure employed using standard cost techniques customarily reviewed adjusted annually potential losses obsolete slowmoving inventories provided identified domestic inventories valued lastin firstout lifo method represent 124 130 total 2001 2000 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount losses recognized 2001 1999 recorded restructuring special items see note 4 restructuring itt industries inc subsidiaries notes consolidated financial statements continued special items discussions losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost company normally claims maximum depreciation deduction allowable tax purposes general financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements 5 40 years machinery equipment 2 10 years 5 40 years gains losses sale retirement assets included selling general administrative expenses goodwill intangible assets excess cost fair value net assets acquired amortized straightline basis periods exceeding 40 years purchased intangible assets including patents trademarks noncompete agreements amortized straightline basis economic useful lives exceed 40 years goodwill intangible assets reviewed impairment whenever events changes circumstances indicate carrying amount may recoverable see note 2 changes accounting pronouncements impact changes accounting pronouncements goodwill amortization investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value yearend investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used companys share net income losses equity investments included miscellaneous expense income consolidated income statements material period presented investments included assets consolidated balance sheets foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year gains losses foreign currency translations reflected cumulative translation adjustments component shareholders equity national currencies foreign companies generally functional currencies gains foreign currency transactions reported currently selling general administrative expenses 29 25 28 2001 2000 1999 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustments component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swaps terminated unrealized gains losses would deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses would reflected net interest expense itt industries inc subsidiaries notes consolidated financial statements continued environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included liabilities consolidated balance sheets undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting pronouncements company adopted statement financial accounting standards 133 accounting derivative instruments hedging activitiessfas 133 amended effective january 1 2001 adoption sfas 133 required company record total fair value interest rate swaps financial statements caused increase assets longterm debt 397 bringing carrying value swaps 425 january 1 2001 carrying value swaps december 31 2001 462 425 included assets longterm debt remaining amount represents accrued interest adoption sfas 133 material impact consolidated results operations cash flows company effective october 1 2000 company adopted staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 provides guidance recognition presentation disclosure revenue financial statements adoption sab 101 material impact companys consolidated results operations financial condition cash flows effective january 1 2000 company adopted emerging issues task force issue 0010 accounting shipping handling fees costs eitf 0010 eitf 0010 requires shipping handling costs billed customers recorded sales cost sales 2000 increased approximately 16 due adoption eitf 0010 adoption eitf 0010 effect operating income net income eps financial condition cash flow company restate sales cost itt industries inc subsidiaries notes consolidated financial statements continued sales years prior 2000 since impracticable june 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 141 sfas 142 goodwill intangible assets sfas 142 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 prohibits use poolingofinterests method addition sfas 141 requires intangible assets goodwill identified intangible assets required amortized economic useful lives adoption sfas 141 2001 significant impact companys results operations financial position sfas 142 changes accounting goodwill amortization method impairment approach accordance sfas 142 goodwill associated acquisitions consummated june 30 2001 amortized amortization goodwill business combinations consummated june 30 2001 totaled approximately 41 2001 cease january 1 2002 connection adoption company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment recognized june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred effective company january 1 2003 company currently reviewing provisions sfas 143 determine standards impact upon adoption august 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 sfas 144 requires one accounting model used longlived assets disposed sale discontinued operations measured similar long lived assets classified held sale lower carrying amount fair value less cost sell future operating losses longer recognized occur sfas 144 also broadens definition discontinued operations include component entity operations cash flows clearly distinguished establishes criteria determine longlived asset held sale provisions statement effective company january 1 2002 transition impact statement note 3 acquisitions 2001 company completed several small acquisitions total 909 none exceeded 50 aggregate acquisition costs exceeded fair value net assets acquired 721 excess recorded goodwill related acquisitions made june 30 2001 amortized periods 40 years goodwill related acquisitions made june 30 2001 amortized accordance sfas 142 2001 company also finalized purchase price allocations related acquisitions made prior 2001 resulted increase goodwill 183 2000 1999 company completed acquisitions combined total 1920 5448 respectively significant acquisitions follows november 3 2000 company acquired manmachine interface mmi mobile phone switch producer trw inc 619 purchase price exceeded fair value net assets acquired 435 excess recorded goodwill amortized period 25 years mmi manufacturer multilayer switch components assemblies wireless mobile handset market annual sales mmi approximated 53 2000 itt industries inc subsidiaries notes consolidated financial statements continued june 26 2000 company acquired ck components inc ck privately held company 1069 net cash acquired purchase price exceeded fair value net assets acquired 1162 excess recorded goodwill amortized period 30 years ck annual sales approximately 113 2000 worldwide leader design manufacture switches communications computer electronic equipment markets december 14 1999 company completed purchase stanford telecommunications incs stel space defense communication businesses 1927 purchase price exceeded fair value net assets acquired 1606 excess recorded goodwill amortized period 40 years units stel annual sales approximately 142 1999 leading designers manufacturers marketers advanced digital communication products systems october 29 1999 company completed purchase stx pte ltd stx singapore based santeh ltd 1194 purchase price exceeded fair value net assets acquired 821 excess recorded goodwill amortized period 40 years stx manufactures conductive rubber switches used keypads mobile telephones high end remote control units keyless entry systems stx annual sales approximately 64 1999 september 10 1999 company acquired flojet corporation flojet privately held company 141 purchase price exceeded fair value net assets acquired 1033 excess recorded goodwill amortized period 40 years flojet manufactures air electric driven pumps motors dispensing equipment variety industries including beverage general industrial equipment agriculturallawn garden recreational vehicle leisure marine water purification flojet annual sales approximately 50 1999 acquisitions accounted using purchase method purchase price allocations 2001 acquisitions prepared preliminary basis changes expected evaluations assets liabilities completed additional information becomes available pro forma effect companys net income earnings per share acquisitions though acquisitions occurred january 1 year material therefore disclosed herein note 4 restructuring special items restructuring special items year ended december 31 2001 detailed following table december 14 2001 company announced restructuring program reduce structural costs improve profitability actions primarily occurred electronic components segment significant decline sales volume occurred 2000 2001 management expects sales decline 2002 actions locations primarily related process improvements restructuring activities involve closure five facilities discontinuance 21 products termination approximately 3400 persons electronic components segment two facilities closed 21 older products discontinued workforce reduced 2753 persons itt industries inc subsidiaries notes consolidated financial statements continued consolidation outsourcing functions fluid technology segment one facility closed workforce reduced 436 persons consolidation outsourcing functions motion flow control segment two facilities closed workforce reduced 183 consolidation functions addition 28 corporate shared services positions eliminated also fourth quarter 2001 company recorded asset impairments amounting 144 machinery equipment cost based investment assets written fair values based managements projections individual future cash flows generated assets reviewed impairment fourth quarter 2001 time business events indicated carrying amounts assets may recovered management deemed market decline experienced 2001 certain products temporary recognized exists significant pricing pressure electronic components segment expected continue cash portion charge includes approximately 52 severance 9 primarily facility carrying costs incurred operations cease facilities noncash portion restructuring charge represents asset impairments recorded based managements projection cash flows generated assets operations cease projected aggregate future cash savings period 2002 2006 approximately 360 consist decreased facility operating costs lower salary wage expenditures projected future noncash savings period approximately 36 primarily consist decreased depreciation amortization expense actions contemplated 2001 plans completed 2002 severance runoff payments occur 2003 closed facility expenditures continue incurred 2002 2006 restructuring special items year ended december 31 1999 detailed following table 1999 company identified facilities shut relocated lower cost areas consolidated existing facilities fourth quarter 1999 company also identified asset impairments two facilities 1999 restructuring activities involved closure facilities sales offices reduction workforce electronic components segment factory closed portion business relocated defense electronics services segment several positions two divisions eliminated fluid technology segment closed two facilities related service offices also consolidated operations one warehouse existing facilities motion flow control segment workforce reduction occurred one facility certain assets deemed impaired goodwill writeoff fluid technology segment related unprofitable far east operation calculated based managements future cash flow projections business goodwill writeoff defense electronics services segment related product line sold january 2000 fourth quarter 1999 company also assessed 1998 restructuring accruals determined activities related accruals would completed 448 less originally estimated reversed related accruals income excess primarily result favorable experience employee separations asset disposal costs required itt industries inc subsidiaries notes consolidated financial statements continued following table displays rollforward restructuring accruals december 31 2001 restructuring actions announced 1998 1999 substantially complete remaining accruals 25 relate contractual commitments severance runoff europe remaining lease payments note 5 discontinued operations september 1998 company closed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 businesses treated discontinued operations connection sale businesses company established accruals pending litigation retained obligations 1998 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration late 2001 early 2002 claims favorably resolved fourth quarter 2001 company reassessed accruals discontinued operations determined activities related accruals would completed 600 less originally estimated reversed related accruals income excess primarily related favorable experience resolution automotive arbitration claims including income tax related claims legal environmental warranty claims income tax issues company believes remaining accruals discontinued operations adequate itt industries inc subsidiaries notes consolidated financial statements continued note 6 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 424 since amounts permanently reinvested december 31 2001 company approximately 132 foreign tax credit carryforwards available reduce future tax liabilities credit carryforwards expire follows 03 december 31 2003 02 december 31 2004 02 december 31 2005 125 december 31 2006 company expects fully utilize credits generated december 31 2001 income taxes paid foreign jurisdictions shareholders equity december 31 2001 2000 reflects tax benefits related stock options exercised 2001 2000 approximately 308 81 respectively note 7 earnings per share reconciliation data used calculation basic diluted earnings per itt industries inc subsidiaries notes consolidated financial statements continued share computations income continuing operations follows 1 options purchase 12923 shares common stock average price 4587 per share outstanding december 31 2001 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2011 2 options purchase 3429883 shares common stock average price 3634 per share outstanding december 31 2000 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2008 2010 3 options purchase 1559201 shares common stock average price 3954 per share outstanding december 31 1999 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2009 note 8 receivables net receivables consist following note 9 inventories net inventories consist following defense electronics services segment work process includes recoverable direct costs allocable overhead including general administrative expenses appropriate work process also includes unbilled receivables representing accumulated recoverable costs earned profits contracts process recorded sales yet billed customers unbilled balances approximately 33 27 december 31 2001 2000 respectively advances customers representing amounts excess costs incurred included accounts payable reporting purposes management estimates work process substantially realized within one year itt industries inc subsidiaries notes consolidated financial statements continued note 10 current assets december 31 2001 2000 current assets consist primarily advance payments contracts prepaid expenses capitalized tooling costs note 11 plant property equipment net plant property equipment consists following note 12 goodwill net goodwill consists following note 13 assets december 31 2001 2000 assets primarily consist prepaid pension employee benefit plan costs investments unconsolidated companies assets held trusts receivables intangible assets held trusts restricted specified reasons primarily environmental remediation costs employee benefits totaled 571 678 december 31 2001 2000 respectively investments unconsolidated companies consist following 2001 2000 1999 company recorded sales unconsolidated affiliates totaling 226 234 204 respectively addition company provided services unconsolidated affiliate companies 2001 2000 1999 received 04 05 respectively exchange services investments unconsolidated companies companys exposure limited amount investment investments accounted cost method represent voting right interests less 20 hisan joint venture brake fuel line supplier japanese transplant oems united states annual sales hisan approximately 100 digitalglobe inc formerly known earthwatch inc developmental stage company recently launched satellite capable collecting highresolution digital imagery earths surface well comprehensive image collection enhancement digital archive system note 14 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment itt industries inc subsidiaries notes consolidated financial statements continued leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 501 555 518 2001 2000 1999 respectively future minimum operating lease payments longterm operating leases december 31 2001 shown note 15 debt consists following 1 interest rate notedebenture 204 660 december 31 2001 2000 respectively 2 weighted average interest rate 550 680 december 31 2001 2000 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 269 710 december 31 2001 2000 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2001 fair value longterm debt 4931 compared fair value 5600 december 31 2000 year decrease fair value reflects repayment two notes notional amounts totaling 722 partially itt industries inc subsidiaries notes consolidated financial statements continued offset impact decline interest rates experienced 2001 november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2001 companys coverage ratio well excess minimum requirement commitment fee revolving credit agreement 125 total commitment based companys current debt ratings revolving credit agreement serves backup commercial paper program otherwise restricted assets pledged secure indebtedness including mortgage loans amounted approximately 370 december 31 2001 note 16 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 2001 company interest rate swaps outstanding notional values totaling 3494 carrying value swaps december 31 2001 462 including 37 accrued interest swaps designed manage interest rate exposure associated certain longterm debt swaps mature various dates 2025 effectively convert much longterm debt mentioned note 15 fixed variable rate borrowings variable interest rates based 3month libor rates plus spread reflects companys debt rating coupon underlying longterm obligations weighted average variable fixed interest rates 201 745 december 2001 ineffective portions interest rate swaps amounts excluded assessment effectiveness foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 2001 company one foreign currency cash flow hedge appreciation less 01 2001 appreciation hedge expected reclassified earnings itt industries inc subsidiaries notes consolidated financial statements continued 2002 may vary 2001 results due changes market conditions changes forecasted transactions 2001 regarding probability occurring would require amounts reclassified earnings notional amounts foreign currency forward contract utilized hedge cash flow exposures 11 december 31 2001 foreign currency forward contracts utilized hedge cash flow exposures december 31 2000 applicable fair value 2001 contract december 31 2001 11 contract mature first quarter 2002 ineffective portion changes fair values cash flow hedge positions reported earnings twelve months ended december 31 2001 amounts excluded measure effectiveness reported earnings twelve months ended december 31 2001 december 31 2001 2000 company foreign forward contracts notional amounts 503 600 respectively hedge value recognized assets liabilities firm commitments fair values contracts net short positions 115 06 december 31 2001 2000 respectively ineffective portion changes fair values hedge positions reported operating income 2001 amounted 06 amounts excluded measure effectiveness fair values associated foreign currency contracts valued using net position contracts applicable spot rates forward rates reporting date note 17 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 04 15 13 years ended 2001 2000 1999 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 239 191 182 years ended 2001 2000 1999 respectively itt industries inc subsidiaries notes consolidated financial statements continued changes benefit obligations changes plan assets weighted average assumptions components net periodic benefit cost years ended 2001 2000 1999 follows assumed rate future increases per capita cost health care health care trend rate 80 2001 rate assumed 100 2002 decreasing itt industries inc subsidiaries notes consolidated financial statements continued ratably 50 2007 increasing table health care trend rates one percent per year would effect increasing benefit obligation 269 aggregate service interest cost components 24 decrease one percent trend rate would reduce benefit obligation 230 aggregate service interest cost components 20 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable financial accounting standards review various indexes discussion consulting actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company note 18 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 2001 2000 56361307 57243719 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted company makes shares available exercise stock options purchasing shares open market issuing shares treasury itt industries inc subsidiaries notes consolidated financial statements continued summary status companys stock option incentive plans december 31 2001 2000 1999 changes years ended presented shares thousands company accounts plans using intrinsic value method pursuant accounting principles board opinion 25 accounting stock issued employees compensation cost recognized compensation cost plans determined based fair value grant dates consistent sfas 123 accounting stockbased compensation sfas 123 companys net income earnings per share would reduced following pro forma amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 2001 2000 1999 dividend yield 189 199 201 respectively expected volatility 2761 2679 2106 respectively expected life six years riskfree interest rates 491 673 482 respectively itt industries inc subsidiaries notes consolidated financial statements continued following table summarizes information companys stock options december 31 2001 shares thousands december 31 2001 4175776 shares available future grants effective january 1 2002 option shares available future grants increased 2177220 result annual limitation formula established 1994 itt industries incentive stock plan incentive stock plan also provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged restricted stock amounts 2001 2000 1999 30000 shares restricted stock awarded plan 2001 2000 1999 pursuant itt industries 1996 restricted stock plan nonemployee directors company awarded 7469 13626 10248 restricted shares fiveyear restriction periods respectively payment annual retainer directors restrictions may lapse earlier depending certain circumstances note 19 commitments contingencies company involved various legal actions including among things related government contracts environmental matters actions include claims substantial amounts accruals established outcome probable reasonably estimated ultimate results legal actions related claims cannot determined company expect material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations december 31 2001 company responsible alleged responsible environmental investigation remediation sites various countries company received notice considered potentially responsible party prp number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent many proceedings companys liability considered de minimis glendale california company involved environmental proceeding relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement consent decree requiring prps perform additional remedial activities entered august 2000 suit filed several years ago company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers itt industries inc subsidiaries notes consolidated financial statements continued company seeking recovery costs incurred connection glendale case environmental matters april 1999 california superior court granted partial summary judgment california law dismissing certain claims california action california court appeals accepted companys petition review california superior courts order march 2001 dismissed petition without prejudice allowing company reassert two arguments california superior court itt presented arguments court january 2002 court dismissed number sites california case company considering whether appeal company negotiated settlements certain defendant insurance companies engaged negotiations others prepared pursue legal remedies reasonable negotiations productive company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amounts accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities including toxic tort property damage remediation intellectual property matters including patent trademark copyright infringement licensing disputes personal injury claims including injuries due product failure design warnings issues asbestos exposure product liability related matters employment pension matters commercial contractual disputes sometimes related acquisitions divestitures company continue vigorously defend claims although ultimate outcome legal matter cannot predicted certainty based present information including companys assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future itt industries inc subsidiaries notes consolidated financial statements continued note 20 business segment information excludes earnings companies equity basis itt industries inc subsidiaries notes consolidated financial statements continued sales revenue product category net intercompany balances follows defense electronics services sales revenues united states government 11049 10236 10540 2001 2000 1999 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr richtertm making company worlds largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products brand names mcdonnell millerr itt standardr addition mentioned segment represents approximately 39 companys sales revenues approximately 40 segment operating income 2001 excluding restructuring special items defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 44 sales revenues segment generated contracts technical support services company provides military government agencies approximately 85 77 75 2001 2000 1999 defense electronics services sales revenues respectively us government defense electronics services segment represents 28 companys sales revenues 23 segment operating income 2001 excluding restructuring special items motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabscor ruler danforthr fluid handling materials tubing systems connectors various automotive industrial markets specialty shock absorbers brand konir brake friction materials transportation industry motion flow control segment accounts approximately 19 companys sales revenues approximately 21 segment operating income 2001 excluding restructuring special items itt industries inc subsidiaries notes consolidated financial statements continued electronic components business consists companys products marketed cannonr brand products include connectors switches cabling used communications computing aerospace industrial applications well network services segment represents 14 companys sales revenues 16 segment operating income 2001 excluding restructuring special items corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 21 quarterly results 2001 2000 includes research development engineering expenses b sum quarters earnings per share equal full year amounts due rounding table reflects range market prices companys common stock 2001 2000 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2002 february 28 2002 high low reported market prices companys common stock 5985 4580 respectively company declared dividends 015 per common share first quarter 2002 approximately 34869 holders record companys common stock february 28 2002 schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc edward w williams edward w williams senior vice president corporate controller principal accounting officer march 26 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption independent auditor fees part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption independent auditor fees part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption “independent auditor fees” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption “independent auditor fees” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption “independent auditor fees” part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption “independent auditor fees” part iv item 15nannannannannannannanitem 14 controls procedures chief executive officer chief financial officer company evaluated effectiveness disclosure controls procedures defined rules 13a14c 15d14c exchange act date within 90 days prior filing date annual report evaluation date based evaluation officers concluded evaluation date companys disclosure controls procedures effective identifying timely basis material information required disclosed reports filed submitted exchange act b significant changes internal controls factors could significantly affect controls since evaluation date part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption independent auditor fees part iv item 15item 14 principal accounting fees services information called item 14 incorporated herein reference portions definitive proxy statement referred item 10 set forth caption “independent auditor fees” part iv item 15nan item 7 managements discussion analysis financial condition results operations dollar amounts millions unless otherwise stated task repositioning corporations businesses began 1992 intensified 1993 number strategic transactions expected corporations goals improved shareholder value cash generation return equity major study designed improve effectiveness productivity corporations headquarters functions completed last fall result reduced overhead costs 1994 future years itt hartford revenues operating income reached record levels 1993 life insurance operations continued grow internal expansion assumption policies insurers improved underwriting results property casualty business also significant contributor itt hartfords performance worldwide combined ratio improved 1073 percent itt automotives sales fourwheel antilock brake traction control systems exceeded 1 billion first time 1993 making first automotive parts supplier world reach level june sale itt consumer financial corporations domestic unsecured consumer small loan portfolio completed resulting pretax gain 95 63 tax proceeds sale allowed itt financial retire higher cost fixedrate debt return capital corporation extraordinary pretax loss 75 50 tax recorded debt retirement september corporation announced signing preliminary agreement acquire motors actuators business unit general motors automotive components group acquisition expected contribute annual revenues 900 add strength itts position global leader automotive components systems market transaction expected close first half 1994 november corporation entered us gaming industry acquisition desert inn properties las vegas expected developed major gaming resort acquisition fullservice resort las vegas countrys number one destination resort one largest convention cities us afforded corporation opportunity immediately enter north american landbased gaming industry itt sheraton also plans open dockside casino near memphis summer 1994 spinoff itt rayonier corporations shareholders announced december completed february 1994 spinoff allows rayonier better fulfill longterm strategies objectives furthering corporations strategic goals rayonier expects pay dividend 72 per share 1994 equivalent 18 per share corporations shareholders rayonier reflected discontinued operation periods presented important actions corporations commitment improving returns shareholder value end additional steps taken 1994 including strategic acquisitions continuation repurchase corporations common shares sales revenues income worldwide sales revenues 228 billion 1993 compared restated 230 billion 215 billion 1992 1991 respectively sales revenues decrease 1993 primarily reflects sale itt financials domestic unsecured consumer small loan business june well reduced defense business several major programs completed excluding sales companies included dispositions sales revenues increased 2 1993 8 1992 sales revenues periods modified include 100 percent revenues partiallyowned hotel properties hotel properties longterm management agreements corporation believes presentation better reflects breadth control hotel operations increased sales revenues impact operating income 24 23 21 billion 1993 1992 1991 respectively net income 1993 913 690 per fully diluted share compared net loss 885 690 per fully diluted share 1992 due primarily several significant nonrecurring items accounting changes 1992 compared net income 1991 749 549 per fully diluted share primary earnings loss per share 732 1993 793 1992 584 1991 1993 number onetime items included net income 1993 including gain sale domestic unsecured consumer small loan portfolio itt financial 63 tax 48 per fully diluted share related retirement fixedrate debt premium 50 tax 38 per fully diluted share addition results included 33 tax 25 per fully diluted share provision relating program aimed increasing effectiveness productivity itt headquarters business segments 22 17 per fully diluted share favorable impact changes united states tax law income future periods negatively impacted 1 increase us federal tax rate year impacted 19 tax 15 per fully diluted share accelerated writeoff capitalized development expenses itt sheraton 7 06 per fully diluted share tax gain itt sheraton investment ballys las vegas 10 tax 08 per fully diluted share tax gain sale itt components distribution year also included prior period tax associated interest charges related separate decisions canadian california state taxing authorities 16 tax 12 per fully diluted share 10 08 per fully diluted share extraordinary catastrophe losses itt hartford early year negatively impacted earnings 41 tax 32 per fully diluted share catastrophes included world trade center bombing new york excessive damage storms northeastern united states portfolio gains itt hartford itt financial 1993 totalled 98 tax 76 per fully diluted share excluding gains along onetime items net income 882 665 per fully diluted share 1992 net loss 1992 included effects corporations adoption statement financial accounting standards sfas 106 employers accounting postretirement benefits pensions sfas 112 employers accounting postemployment benefits recorded effective january 1 1992 using immediate recognition method accounting changes resulted cumulative catchup adjustment 625 tax 471 per fully diluted share standards required accrual postretirement postemployment health care life insurance benefit costs years employee provides services corporation rather payasyougo basis previously effect cash flow impact accounting changes july 1992 corporation completed sale 30 stake alcatel nv joint venture partner alcatel alsthom resulting tax gain 622 471 per fully diluted share see alcatel nv notes financial statements corporation also recorded several onetime items year realign restructure certain businesses including 594 tax charge itt hartford fund expected loss developments surplus lines reinsurance business cameron colby unit 165 tax expected legal defense costs associated environmentalrelated claims total result charge 759 575 per fully diluted share extraordinary catastrophe losses itt hartford 1992 negatively impacted earnings 131 tax 99 per fully diluted share catastrophes included hurricanes andrew iniki along los angeles riots chicago flood 612 tax charge 466 per fully diluted share itt financial primarily strategically transform consumer finance business significantly reducing domestic unsecured consumer small loan business result itt financial established reserves 693 cover future unsecured loan losses runoff existing portfolio 103 restructuring including consolidation loan offices 132 anticipated losses commercial real estate portfolio domestic unsecured consumer small loan business reflected dispositions discussed previously sold june 1993 provisions reserves 115 tax 87 per fully diluted share cover loss disposal assets closure expenses itt rayoniers grays harbor pulp paper complex addition 34 tax 25 per fully diluted share provision write hotel investments itt sheraton 33 tax 25 per fully diluted share charge restructuring components operations itt defense electronics recorded portfolio gains itt hartford itt financial 1992 totalled 337 tax 256 per fully diluted share excluding gains well onetime items accounting changes net income 465 331 per fully diluted share 1991 significant items unusual nonrecurring nature 1991 net income 749 549 per fully diluted share portfolio gains itt hartford itt financial 1991 totalled 137 104 per fully diluted share excluding gains net income 612 445 per fully diluted share cash flow corporation generated 17 billion cash operating activities 1993 17 billion 1992 21 billion 1991 additional funds 24 billion also raised 1993 sale companies including itt financials domestic unsecured consumer small loan business 15 billion collection note 8 billion 1992 sale alcatel nv proceeds 1992 alcatel nv sale totalled 10 billion growth investment life contracts provided 17 billion compared 16 billion 18 billion prior two years cash generated used fund internal growth pay dividends repay debt 1993 repurchase redeem itt common preferred shares 1993 1992 cash also reinvested securities itt hartford itt financial additional information investment portfolio included insurance finance investments notes financial statements pursuant corporations share repurchase program announced may 1992 36 million common shares repurchased 1993 average price 8652 per share total 310 december 31 1993 december 31 1992 approximately 17 million common shares repurchased average price 6563 per share total 109 addition corporation called redemption outstanding 400 convertible series k 500 convertible series cumulative preferred stock 100 per share plus accrued dividends june 1992 redemptions totalled 106 reduced common equivalent shares additional 16 million balance converted 58 million shares common stock since corporations stock repurchase programs began 1987 nearly 40 million equivalent shares repurchased redeemed approximately 23 billion dividend payments 277 270 267 1993 1992 1991 including 48 1993 1992 49 1991 related esop preferred stock cash expenditures plant property equipment 505 1993 549 1992 658 1991 expected approximate 800 1994 acquisitions 1993 included desert inn properties las vegas 160 planned acquisitions 1994 automotive hotels segments expected total approximately 10 billion corporation sufficient cash available along debt equity financing alternatives fulfill commitments may undertaken year depreciation 1993 463 compared 483 1992 426 1991 accumulated depreciation amounted 47 gross plant property equipment yearend 1993 1992 expenditures research development engineering totalled 460 1993 502 1992 530 1991 approximately 53 pursuant customer contracts expenditures funded numerous product developments antilock brake systems integrated circuits multimedia applications digital television well electronic countermeasures tactical radio communications technology corporation remains financially strong flexible given level cash generated operations well proceeds received expected received 1994 sale investments cash december 31 1993 totalled 11 billion debt percentage total capital 33 percent insurance finance subsidiaries carried equity basis excluding discontinued operations business segments following discussion important factors affecting sales revenues operating income business segment insurance revenues operating income achieved record levels 1993 revenues increased 5 percent despite portfolio gains 288 lower 1992 portfolio gains included revenues totalled 155 443 144 1993 1992 1991 respectively life operations provided much revenue growth contributed 29 percent segment revenues 1993 compared 24 percent 21 percent 1992 1991 increase 25 percent 1993 reflects dramatic improvement account charge revenues corporate owned life insurance contracts coli combined continued growth individual life annuity lines business assumption reinsurance coli annuity policies mutual benefit fidelity bankers instrumental continued growth operating income life operations contributed 31 percent insurance segment 1993 increased 30 percent compared 1992 turn increased 26 percent 1991 revenues effects mutual benefit fidelity bankers transactions largest contributors improvement north american property casualty underwriting revenues also increased modestly revenues international property casualty operations flat compared 1992 dramatically improved income performance reflects improved property casualty underwriting results reflected worldwide combined ratio 1073 percent 1993 worldwide combined ratios 1337 percent 1992 1113 percent 1991 reserves established 1992 expected loss developments surplus lines reinsurance cameron colby 900 well projected legal defense costs associated environmentalrelated claims 250 excluding effects cameron colby loss developments surplus lines reinsurance worldwide combined ratios 1059 percent 1993 1148 percent 1992 1091 percent 1991 addition catastrophe losses 1993 significantly record setting levels 1992 adjusted unusual items portfolio gains 1993 operating income increased significantly improvements partially offset reduced investment income result lower interest rates lower portfolio gains 1993 adjusted basis 1992 operating income approximated 1991 reflecting similar trend domestic property casualty results offset difficult market conditions international property casualty business operating results projected continue improve 1994 due improvements worldwide property casualty underwriting results combined effect growing life insurance operations projections include benefits recent restructuring actions designed increase itt hartfords efficiency competitiveness finance 1993 itt financial completed strategic repositioning company aimed toward emphasizing origination servicing secured lending assets actions 1993 included sale domestic unsecured consumer small loan portfolio start itt residential capital corp fully integrated residential mortgage company repositioning domestic home equity business yearend 1993 secured funded receivables constituted 88 total funded receivables compared 69 yearend 1992 revenues operating income data restated exclude results domestic unsecured consumer small loan business reported dispositions benefits strategic shift reduced operating expenses dramatically improved credit quality improved asset liquidity itt financial plans leverage benefits improved capital efficiency primarily securitization 1993 itt financial completed securitization 24 billion assets finance revenues ongoing businesses increased 1993 1992 due increased finance charges servicing income higher levels owned serviced receivables operating income improvement 1993 reflects absence last years provision 132 anticipated losses commercial real estate portfolio adjusting provision along portfolio gains significantly lower 1993 compared prior years operating income 1993 improved 1992 approximated 1991 levels emphasis secured lending asset securitization remain focus 1994 nature strategy enhance companys risk profile improve asset quality although operating income somewhat lower communications information services sales revenues operating income rose 5 percent 1993 1992 adjusting impact unfavorable foreign exchange increase periods reflected improvements telephone directory operations western europe well increase number itt technical institutes student enrollment institutes itt educational services itt world directories operating margins pressure due lower advertising volume number units modest price increases coupled reduced operating costs resulted margins generally meet exceed prior year levels itt world directories operations united kingdom sold british telecom 1993 prior expiration directory sales contract operations turkey shut december 1992 result continuing losses difficult economic environment operating results units reported dispositions years presented shift regulatory competitive structures european community may limit growth existing operations 1994 company continues pursue program product diversification geographic expansion itt educational services 20000 students enrolled 48 schools five new schools opened 1993 operating results itt educational services projected continue improve 1994 due additional school openings continuing expansion curricula degree offerings period strong growth expected result ongoing demand increased technical education us work force automotive sales continued increase 1993 1992 result increased market penetration itt antilock brake systems abs higher light vehicle production north america continued shift consumer preference toward light trucks itt automotive maintains strong product offering tempering growth 1993 deepening recession western europe resulted decline western european car production western european sales comprised 57 percent total 1993 compared 68 percent 1992 70 percent 1991 higher operating income 1993 largely result continued cost reduction efforts partially offset lower sales prices higher labor costs compared 1991 increased operating income largely attributable sales growth addition cost reduction efforts partially offset higher labor costs restructuring actions itt automotive continue benefit 1994 anticipated increase north american light vehicle production particularly light trucks well continued cost reduction efforts additionally western european passenger car production anticipated stabilize antilock brake systems remains largest product line offered itt automotive comprising 30 27 22 percent total sales 1993 1992 1991 respectively acquisition general motors actuators business unit expected strengthen itt automotives position number product lines particularly motors wiper systems north american market defense electronics 13 percent sales reduction 1993 anticipated related primarily defense units impact completion several major programs reduced us government defense spending resulted lower shipments decline operations maintenance contracts sales decrease 1992 related primarily electronics units due worldwide decline television market softness connector product line especially due lower military related demand sales operating income restated periods reflect december 1993 sale itt components distribution gain sale 13 pretax operating results reflected dispositions operating income improved substantially 1993 reflecting current year cost improvements several units favorable margin adjustments mature military programs along absence 1992 restructuring charge operating loss 1992 resulted 53 million restructuring charge reduced volume downward pricing pressures commercial products order backlog 22 23 22 billion december 31 1993 1992 1991 respectively sales operating income 1994 expected approximate 1993 levels new product development expanded markets including international defense opportunities benefits ongoing restructuring activities provide basis future growth fluid technology sales remained relatively level past several years decrease 1993 due primarily stronger us dollar versus many european currencies fluid technology operates past two years growth markets including water wastewater treatment power generation exports well new products largely offset weak market conditions industries construction industrial process oil gas mining leisure marine operating income 1993 benefited impact cost improvement actions taken 1992 including consolidation facilities reduce excess capacity 1992 provisions restructuring along devaluation swedish krona adversely impacted operating income slow steady economic improvement expected served markets 1994 itt fluid technologys position market leadership customeroriented marketing programs new products together lower cost structure allow company resume profitable growth hotels sales revenues modified periods include 100 percent revenues hotels sheratons management corporation believes presentation better reflects breadth control hotel operations increased sales revenues impact operating income 24 23 21 billion 1993 1992 1991 respectively sales revenues increased 1993 largely due improvements north american region along contribution desert inn acquired late 1993 increase 1992 1991 also attributable north american region room inventory levels fully restored renovations completed several owned hotels higher revenues among sheratons managed properties 1993 itt sheraton continued focus upgrading properties enhancing image completion renovation work elimination properties meet required standards 302 million room nights sold 1993 increase 17 million room nights 1992 comparable hotels operating income 1993 reflected accelerated writeoff capitalized development expenses totalling 29 along 11 gain sale investment ballys las vegas operations 1992 provision 45 write hotel investments resulted reported operating loss excluding impacts onetime items operating income rose dramatically 1993 total sales revenues hotels segment including 100 unconsolidated revenue generated franchised hotels billions 48 1993 1992 44 1991 room rates owned managed leased properties averaged 10548 10714 10419 1993 1992 1991 respectively occupancy rates 685 664 649 1993 room rate reduction reflects stronger us dollar numerous foreign currencies particularly europe total properties numbered 407 1993 compared 426 423 1992 1991 respectively including franchised properties 230 252 259 years operating income expected continue improve 1994 existing hotels well acquisitions gaming division include full years results desert inn anticipated contribution casino near memphis opening midyear significant focal point anticipated acquisitions expected provide sheraton enhanced presence markets previously represented alcatel nv corporation sold 30 percent interest alcatel nv joint venture partner alcatel alsthom july 1992 proceeds sale included 1 billion cash two notes payable 1993 1994 totalling 16 billion including interest 91 million shares alcatel alsthom shares net book value 8 billion fair market value 11 billion february 28 1994 corporation recognized pretax gain 942 622 tax 1992 transaction dispositions includes sales operating results gain loss sale closedown units discontinued operations along sales operating results noncore businesses results years presented include sales operating results corporations community development subsidiary domestic unsecured consumer small loan portfolio previously included finance segment largest business included dispositions operating losses included years presented along provision 1992 cover future domestic unsecured consumer small loan losses restructure business including consolidation consumer loan offices 95 pretax gain 63 tax sale portfolio included 1993 operating results periods associated gains sale 1993 relate itt components distribution world directories united kingdom operations also included 1992 included provisions closedown world directories unit turkey 41 pretax offset tax benefits similar amount included income taxes along respective operating losses 1992 1991 sales operating results 1991 included certain italian automotive operations sold 1991 discontinued operations december 1993 corporation announced plans spinoff itt rayonier corporations forest products segment common preferred shareholders spinoff completed february 1994 accordingly results itt rayonier reported discontinued operations onelined tax basis income loss discontinued operations net taxes 53 72 54 1993 1992 1991 respectively 1992 results included tax provision 115 loss disposal estimated closure costs itt rayoniers grays harbor pulp paper complex interest taxes net interest expense 1993 decreased due lower average debt levels higher average cash invested net interest expense 1992 approximated 1991 levels interest income earned second half year proceeds alcatel sale offset higher expense higher average debt levels incurred support investments capital programs working capital requirements income taxes 345 1993 provided pretax income 13 billion representing 27 percent effective tax rate tax exempt interest earned invested assets insurance finance caused effective rate lower us statutory rate additionally 1993 changes united states tax law resulted onetime benefit 32 representing increase corporations deferred tax assets beginning year necessitated 1 percent increase statutory rate partly offsetting benefit 10 increase current year tax provision discontinued operations extraordinary item cumulative effect accounting changes presented net tax basis accordingly associated tax benefits included provision increase income taxes 1992 1991 related primarily increase pretax income 1992 large provisions insurance finance segments resulted pretax loss corresponding tax benefit income taxes paid 1993 1992 1991 337 202 157 respectively consists primarily corporate expenses minority equity nonoperating income expense 1993 provision 50 pretax included estimated severance costs associated program aimed increasing effectiveness productivity corporations headquarters locations expenses increased 1992 primarily due higher corporate provisions divested company exposures environmental issues debt liquidity outstanding debt including insurance finance debt 139 billion december 31 1993 20 billion decrease 1992 primarily due application proceeds sale itt financials domestic unsecured consumer small loan portfolio itt financials receivable securitization december 31 1993 1992 debt 64 68 total capitalization including finance insurance subsidiaries debt 104 billion 121 billion respectively insurance finance subsidiaries carried equity basis excluding discontinued operations debt 33 total capitalization end 1993 compared 37 end 1992 corporation remains strong flexible well positioned future debt needs met required traditional emerging channels certain subsidiaries subject restrictions transfer funds corporation restrictions affected corporations ability meet cash obligations change condition anticipated stockholders equity increased 403 1993 77 billion mainly result earnings partly offset dividends share repurchases redemptions reduction cumulative translation account corporation cash 11 billion december 31 1993 compared 882 end 1992 increase largely result cash generated operations proceeds collection alcatel note partly offset share repurchases acquisitions collection remaining note received alcatel sale supplement corporations available cash 817 1994 cash along debt equity financing alternatives available share repurchases acquisitions debt repayment 1994 future periods february 1994 corporation entered new revolving credit agreement terms ranging one five years 65 domestic foreign banks providing credit commitments 7 billion commitments made itt parent company certain subsidiaries 3 billion itt financial totalling 4 billion credit commitments itt parent company used assure working capital needs support commercial paper commercial paper borrowings totalled 268 december 31 1993 itts insurance finance subsidiaries foreign units certain major domestic subsidiaries usually meet funding requirements direct basis time supplemented corporateestablished financing vehicles itt financial direct issuer commercial paper december 31 1993 20 billion commercial paper outstanding corporation operates multinational environment minimal exposures hyperinflationary countries thus inflation significant impact financial position corporation results operations recent periods expected near future multinational operations corporation also create exposure foreign currency fluctuation corporation enters foreign exchange contracts major financial institutions reduce exposure agreements meant either hedge exchange exposure corporations net investment foreign country corporations foreign denominated debt meant hedge specific transaction 1993 consolidated net assets decreased 114 reflecting effect translated local currencies corporations net foreign investments primarily result strengthening us dollar european currencies foreign currency transaction gains losses significant item 8item 7 managements discussion analysis financial condition results operations dollar amounts millions unless otherwise stated year 1994 milestone year culminated record earnings corporation well insurance automotive businesses itt hartford 1994 marked second consecutive year record revenues record profits improved results life operations property casualty businesses worldwide combined ratio pertaining ongoing property casualty operations improved 1028 1994 1007 fourth quarter markedly better industry averages itt automotive sales 48 billion operating income 328 never previously attained 12 million shares corporations common stock approximately 10 shares outstanding beginning year repurchased 1994 average price 8217 per share actions aimed strategically transforming corporation three industryleading business groups continued 1994 spinoff rayonier inc completed february march acquisition motors actuators business unit general motors 374 added strong operating margins geographic balance corporations automotive business segment also march corporation announced plans sell portion itt educational services provider postsecondary technical education initial public offering sale completed late year approximately 17 company itt educational services traded new york stock exchange symbol esi number geographically strategic acquisitions hospitality entertainment segment completed year enhance itt sheratons position premier hospitality organization april acquisition phoenician golf tennis resort scottsdale arizona nearby crescent business hotel phoenix completed properties add 900 rooms sheratons north american division provide sheraton strong highprofile presence american southwest june october 1994 corporation purchased approximately 70 shares italian luxury hotel chain ciga spa 523 ciga owns operates 33 properties throughout europe includes landmarks danieli venice palace madrid principe di savoia milan excelsior rome october corporation acquired park grand hotel adjacent tattersalls building sydney 235 strengthening sheratons presence eastern australia joint venture agreements peoples republic china signed corporations manufactured products business segments year allow corporation share one worlds fastest growing economies modest capital investment itt automotive produce foundation brakes chinese market shanghai itt cannon unit itt defense electronics begun manufacturing connectors zhenjiang province also local market itt flygt unit fluid technology produce pumps facility shenyang corporation partnership cablevision systems corporation agreed august purchase madison square garden corporation msg approximately 1 billion cash msg includes world renowned sports arena adjacent theater new york knickerbockers basketball franchise new york rangers hockey franchise msg cable television network acquisition msg affords corporation entry sports entertainment arena instant brand recognition corporations gaming operations significantly strengthened announcement december offer acquire caesars world inc approximately 17 billion cash tender offer outstanding shares caesars completed january 1995 preeminent name gaming caesars owns casino resorts las vegas stateline nevada atlantic city new jersey well nongaming resorts pennsylvanias pocono mountains caesars also partner gaming venture windsor ontario finally corporation announced intention september sell operations comprising finance business segment primarily itt financial corporation agreements signed sales assets two largest units within segment 37 billion cash preliminary agreement signed sale three additional units 18 billion negotiations continue sales remaining finance businesses itt financial reflected discontinued operation periods presented sales revenues income worldwide sales revenues 236 billion 1994 compared restated 211 billion 210 billion 1993 1992 respectively sales revenues exclude finance segment reflected discontinued operation periods presented 12 increase 1994 reflects improvements corporations ongoing business segments largest increases insurance automotive hospitality entertainment sales revenues relatively flat 1993 completion several major programs defense business offset growth segments particularly insurance net income 1994 1022 billion 802 per fully diluted share compared 913 690 per fully diluted share 1993 net loss 885 690 per fully diluted share 1992 net loss 1992 due primarily several significant nonrecurring items accounting changes year primary earnings loss per share 857 1994 732 1993 793 1992 1994 reported net income adversely impacted net effect three accounting changes whose cumulative effect totaled 11 tax 09 per fully diluted share january 1 1994 corporation adopted statement financial accounting standards sfas 115 related pronouncements required adjustments fair value mortgagebacked interestonly securities statement income cumulative effect accounting change 36 tax charge 29 per fully diluted share unrelated change basis discounting certain workers compensation liabilities insurance segment changed insurance guidelinebased method estimated riskfree rate return appropriately reflect current market conditions cumulative effect accounting change benefit 42 tax 33 per fully diluted share finally corporation changed accounting certain marketing startup costs itt educational services costs previously deferred amortized expensed incurred cumulative effect accounting change tax charge 17 13 per fully diluted share excess catastrophe losses itt hartford totaling 40 tax 31 per fully diluted share due california earthquake winter freezes 1994 first quarter addition portfolio gains year totaled 52 tax 42 per fully diluted share excluding aforementioned items accounting changes net income 1021 billion 800 per fully diluted share net income 1994 also included results corporations discontinued finance segment two months prior spinoff discontinued forest products segment earnings discontinued operations totaled 181 145 per fully diluted share 1993 number onetime items impacted net income 1993 including 33 tax 25 per fully diluted share provision consisting primarily severance related expenses program increased effectiveness productivity itt headquarters business segments addition year includes 22 17 per fully diluted share favorable impact changes united states tax law income future periods negatively impacted 1 increase us federal tax rate year impacted 19 tax 15 per fully diluted share accelerated writeoff capitalized development expenses itt sheraton 7 06 per fully diluted share tax gain itt sheraton sale investment ballys las vegas 10 tax 08 per fully diluted share tax gain sale itt components distribution year also included prior period tax associated interest charges related separate decisions canadian california state taxing authorities 16 tax 12 per fully diluted share 10 08 per fully diluted share record catastrophe losses itt hartford early year negatively impacted earnings 41 tax 32 per fully diluted share catastrophes included world trade center bombing new york excessive damage storms northeastern united states portfolio gains itt hartford 1993 totaled 101 tax 78 per fully diluted share excluding aforementioned items net income 892 673 per fully diluted share net income 1993 also included 302 233 per fully diluted share corporations discontinued finance forest product operations included finance operations favorable impact 1993 tax gain 63 48 per fully diluted share sale itt financials domestic unsecured consumer small loan portfolio year also included extraordinary charge 50 tax 38 per fully diluted share retirement related debt itt financial 1992 net loss 1992 included effects corporations adoption sfas 106 employers accounting postretirement benefits pensions sfas 112 employers accounting postemployment benefits recorded effective january 1 1992 using immediate recognition method accounting changes resulted cumulative catchup adjustment 625 tax 471 per fully diluted share standards required accrual postretirement postemployment health care life insurance benefit costs years employee provides services corporation rather payasyougo basis previously effect cash flow impact accounting changes july 1992 corporation completed sale 30 stake alcatel nv joint venture partner alcatel alsthom resulting tax gain 622 471 per fully diluted share see alcatel nv notes financial statements corporation also recorded several onetime items year realign restructure certain businesses including 594 tax charge itt hartford fund expected loss developments surplus lines reinsurance business cameron colby unit 165 tax expected legal defense costs associated environmentalrelated claims total result charge 759 575 per fully diluted share 34 tax 25 per fully diluted share provision write hotel investments itt sheraton 33 tax 25 per fully diluted share charge restructuring components operations itt defense electronics portfolio gains itt hartford 1992 totaled 292 tax 222 per fully diluted share excess catastrophe losses itt hartford 1992 negatively impacted earnings 131 tax 99 per fully diluted share catastrophes included hurricanes andrew iniki along los angeles riots chicago flood excluding aforementioned items corporations net loss 217 188 per fully diluted share addition net losses corporations discontinued finance forest products operations totaled 576 438 per fully diluted share due principally 612 tax charge 466 per fully diluted share itt financial primarily transform consumer finance business significantly reducing domestic unsecured consumer small loan business mentioned previously business sold june 1993 discontinued operations also included provisions reserves 115 tax 87 per fully diluted share cover loss disposal assets closure expenses itt rayoniers grays harbor pulp paper complex cash flow operating income depreciation amortization 21 billion 1994 34 improvement 16 billion 1993 85 improvement 11 billion generated 1992 noncash charge cameron colby unit itt hartford continuing focus improving operating margins corporations business units primary contributor results corporation reported cash 14 billion continuing operating activities 1994 approximately 15 higher 1993 1992 additional 2 billion discontinued operations cash generated discontinued operations 3 billion 1993 1 billion 1992 additional funds totaling 9 billion generated collection cash sale divested assets related final installment 1992 alcatel nv sale previous payments sale totaled 8 billion 1993 10 billion 1992 addition investment life contracts written itt hartford provided 26 billion 1994 compared 17 billion 1993 16 billion 1992 funds along use cash reserves additional borrowings totaling 21 billion 1994 reinvested securities itt hartford 33 billion used fund strategic acquisitions capital additions totaling 24 billion corporations businesses many discussed previously addition cash used fund repurchase corporations common shares 10 billion redemption itt hartford preferred stock 2 billion payment common preferred dividends 3 billion pursuant corporations current share repurchase program announced may 1992 123 million common shares repurchased 1994 average price 8217 per share total 10 billion 1993 approximately 36 million common shares repurchased average price 8652 per share total 310 since corporations stock repurchase programs began 1987 52 million equivalent shares repurchased redeemed yearend 1994 approximately 33 billion dividend payments 280 277 270 1994 1993 1992 including 47 1994 48 1993 1992 related esop preferred stock cash expenditures plant property equipment 727 1994 486 1993 536 1992 expected approximate 700 1995 increase 1994 largely result next generation antilock brake technology itt automotive strategic investment selected properties itt sheraton depreciation 1994 519 compared 444 1993 462 1992 accumulated depreciation amounted 39 gross plant property equipment yearend 1994 47 yearend 1993 acquisitions 1994 totaled 17 billion significant included motors actuators business general motors 374 70 percent interest italian luxury hotel chain ciga spa 523 phoenician crescent hotel arizona park grand hotel adjacent office building sydney australia 1993 desert inn properties las vegas acquired 160 january 1995 corporation completed cash tender offer outstanding shares caesars world inc 17 billion march 1995 corporation completed acquisition 50 interest msg required initial funding 610 shortterm financing arranged transactions expected repaid largely proceeds sale finance segment assets 1995 see debt liquidity additional discussion expenditures research development engineering totaled 396 1994 460 1993 502 1992 approximately 50 pursuant customer contracts reduction directly attributable reduced customer requirements defense companies research development engineering expenditures funded numerous product developments antilock brake wiper systems integrated circuits multimedia applications digital television well electronic countermeasures tactical radio communications technology business segments following discussion important factors affecting sales revenues operating income business segment insurance second consecutive year revenues operating income achieved record levels revenues increased 7 percent despite lower portfolio gains 1993 portfolio gains included revenues totaled 90 155 443 1994 1993 1992 respectively managing returns insurance investments totaling 325 billion december 31 1994 separate account assets totaling 233 billion integral part insurance operations various strategies including utilization derivatives used manage associated risks portfolios nature extent strategies discussed insurance investment operations property casualty insurance operations north american property casualty underwriting revenues grew 279 5 percent 1994 compared 3 percent prior year reflecting increased business volume personal commercial lines business international property casualty underwriting revenues 4 percent 1993 reflecting premium growth united kingdom worldwide underwriting results improved 32 percent prior year represented primary source operating income growth insurance segment worldwide combined ratio 1040 1994 1028 excluding cameron colby improvement 1073 1993 1337 1992 reflecting combination business growth better market conditions europe effective cost containment 1992 results reflect 900 reserve strengthening expected loss developments surplus lines reinsurance cameron colby 250 legal defense costs associated environmentalrelated claims record setting catastrophe losses improvements 1994 partially offset drop investment income second consecutive year result lower interest rates declines portfolio gains life health operations life operations continued fuel revenue growth itt hartford contributing 33 percent segment revenues 1994 compared 29 percent 1993 24 percent 1992 increase 20 percent 1994 reflects continued dramatic improvement account charge revenues corporateowned life insurance coli combined sustained growth individual life annuity lines business operating income life operations contributed 31 percent insurance segments results reflects average annual growth rate 22 percent since 1991 assumption reinsurance coli annuity policies fidelity bankers 1993 mutual benefit 1992 contributed improvements revenues operating income 1993 itt hartford initiated transfer majority group medical dental benefits business massachusetts mutual life insurance company transfer completed 1994 reflects strategy move away traditional medical health insurance worldwide life health deposit premiums investment type products reported premiums revenues increased 24 percent compared 1993 excluding impact annuity businesses assumed fidelity bankers 1993 growth reflects continued expansion itt hartfords variable annuity line business continuation improving operating performance expected 1995 property casualty underwriting results expected continue enhanced business development cost containment strategies anticipated life operations continue grow particularly area individual annuities automotive sales operating income achieved record levels 1994 sales increased 34 percent part due acquisition motors actuators business unit general motors corp excluding effects acquisition sales improved 14 percent reflecting higher market penetration antilock brake systems abs north america europe well increased vehicle production acquisition motors actuators business improved geographic balance itt automotives north american european sales mix demonstrated north american sales comprising 50 percent total 1994 compared 43 percent 1993 32 percent 1992 operating income doubled 1994 result increased sales volume acquisition motors actuators business continued cost reductions partially offset lower sales prices higher labor costs excluding acquisition operating income increased 60 percent largely result higher volume benefits cost reduction programs successful integration motors actuators business enabled itt automotive improve operating margins despite significant price concessions granted customers increased operating income 1993 largely result cost reduction efforts higher sales volume partially offset lower sales prices higher labor costs operating income expected improve 1995 increased market penetration full year operations motors actuators business well continued cost reduction efforts abs remains largest product line offered itt automotive comprising 26 percent 30 percent 27 percent total sales 1994 1993 1992 respectively defense electronics 1994 electronics companies achieved profitability first time since 1989 defense companies achieved growth international defense market electronics sales increased 10 percent 1994 due growth connector switch product lines following decrease 4 percent 1993 defense sales increased 3 percent 1994 primarily due increased international defense radar radio product sales 1993 defense sales decreased 18 percent impact completion several major programs reduced government spending resulted lower shipments operations maintenance contract revenues declined sales operating income restated periods reflect divestiture several small noncore operating units 1994 operating results units reflected dispositions 1994 electronics units achieved profitability significant operating margin improvements particularly connector business 1993 operating income improvement reflected impact cost reductions absence 1992 restructuring provision 53 defense units operating income declined 1994 due lower margin adjustments mature military programs partly offset higher sales volumes benefits cost reduction programs operating income improved 1993 due continued benefits cost reductions margin adjustments mature military programs order backlog 22 23 billion december 31 1994 1993 1992 respectively new product development benefits ongoing restructuring actions allow company continue profitable growth 1995 fluid technology itt fluid technology reported measured growth solid operating results 1994 sales increased 9 1994 first significant increase since 1990 result new product initiatives global market development activities strong north american heating season caused severe winter weather generally strengthening economic conditions worldwide acquisition german manufacturer plasticlined valves pumps also contributed increase itt flygt increase market share primary contributor itt fluid technologys gains sales decrease 1993 due primarily stronger us dollar versus many european currencies fluid technology operates operating income improved 1994 despite intense competition increases raw material costs improvement achieved higher sales volume price increases benefits cost reduction actions 1993 operating income also benefited cost reduction actions including consolidation facilities reduce excess capacity customerfocused marketing new product programs together reduced cost structure expected allow fluid technology continue profitable growth 1995 hospitality entertainment 1994 strategic acquisitions coupled global expansion hospitality entertainment segment sales revenues increased 1994 due full year results gaming operations improved results north american asia pacific regions acquisitions ciga spa europe phoenician crescent hotels phoenix park grand sydney australia increase 1993 1992 attributable north american region impact desert inn acquired november itt sheraton continued enhancing image upgrading standards renovating properties defranchising nonconforming properties itt sheraton system excluding ciga generated 316 million room nights 1994 14 million room night increase 1993 developing gaming operations corporation opened sheraton casino tunica county mississippi august selected government nova scotia exclusive developer operator 20 years casinos halifax sydney operating income 1994 reflected improvements north american region full year contribution sheraton desert inn benefits cost reductions results include 9 gain sale passive investment well writedown certain underperforming assets similar amount 1993 operating income reflected accelerated writeoff capitalized development expenses totaling 29 partly offset 11 gain sale investment ballys las vegas operations room rates owned managed leased properties averaged 11124 10548 10714 1994 1993 1992 respectively occupancy rates 711 685 664 1994 average room rate occupancy rate increases reflect improvements regions especially north america asia pacific 1993 room rate reduction reflects stronger us dollar numerous foreign currencies particularly europe total properties numbered 425 1994 compared 407 426 1993 1992 respectively including franchised properties 214 230 252 years operating income expected continue improve 1995 existing hotels 1994 acquisitions primary focus itt sheraton successful efficient integration acquisitions ciga spa acquisition new casino operations halifax sydney nova scotia expected significant incremental income sources communications information services communications information services coins business segment comprised itt world directories leading publisher yellow pages directories primarily european markets itt educational services leading proprietary provider technical postsecondary degree programs united states itt world directories 1994 itt world directories prepared compete independent directory publisher belgium began compete netherlands sales revenues approximated 1993 results excluding impacts foreign exchange operating income decreased due additional expenses publishing competitive environments corporations share costs establishing european directory joint venture thomas publishing company excluding costs operating income increased 7 percent comparing 1993 1992 excluding effects foreign exchange sales revenues operating income increased 5 percent reflecting modest price increases coupled reduced operating costs itt world directories continues program product diversification geographic expansion exemplified companys return south africa 1994 significant factor impacting operating performance 1995 relate competitive parameters belgium yet fully known itt educational services esi 1994 corporation completed initial public offering approximately 17 percent esi opened six new schools year raising total number itt technical institutes 54 student census reached 20700 sales revenues increased 11 percent 1994 1993 reflecting years increase number schools student enrollment excluding current year impact change accounting marketing startup costs operating income improved 33 percent 1994 result cost reduction programs ongoing expansion program increase operating income 1993 14 percent also result cost reduction efforts expansion operating results expected improve 1995 due additional school openings continuing expansion curricula degree offerings alcatel nv corporation sold 30 percent interest alcatel nv joint venture partner alcatel alsthom july 1992 proceeds sale included 1 billion cash two notes collected july 1993 1994 totaling 16 billion including interest 91 million shares alcatel alsthom shares net book value fair market value 8 billion february 7 1995 corporation recognized pretax gain 942 622 tax 1992 transaction dispositions includes sales operating results gain loss sale closedown units discontinued operations along sales operating results noncore businesses principally corporations community development subsidiary 1994 dispositions included operating losses loss sale corporations instruments operations along gain sale approximately 17 esi 1993 gains sale itt components distribution itt world directories united kingdom operations significant components 1992 included provisions closedown world directories unit turkey 41 pretax offset tax benefits similar amount included income taxes along respective operating losses discontinued operations extraordinary item february 1994 corporation completed spinoff rayonier inc corporations forest products segment net assets 607 common preferred shareholders september 1994 corporation announced plan seek offers purchase finance business segment principally itt financial corporation believes realize proceeds sale itt financial excess recorded value net assets results itt rayonier itt financial corporation reported discontinued operations oneline tax basis 1994 net income finance segment totaled 169 136 per fully diluted share itt rayonier net income totaled 12 09 per fully diluted share two months prior spinoff 1993 finance segment net income totaled 249 192 per fully diluted share including gain sale domestic unsecured consumer small loan portfolio 63 48 per fully diluted share conjunction sale corporation retired finance segment debt premium resulting extraordinary loss 50 tax 38 per fully diluted share itt rayonier net income totaled 53 41 per fully diluted share 1993 discontinued operations 1992 included tax charge 612 itt financial primarily restructure consumer finance business reducing domestic unsecured consumer small loan business sold june 1993 itt rayoniers 1992 results included tax provision 115 loss disposal estimated closure costs grays harbor pulp paper complex interest taxes net interest expense 1994 increased due higher average debt levels result 1993 1994 acquisitions share repurchases along higher average borrowing rates net interest expense 1993 decreased compared 1992 due lower average debt levels higher average cash invested net interest expense expected increase materially 1995 due higher average borrowing rates income taxes 389 1994 provided pretax income 13 billion representing 31 percent effective tax rate tax exempt interest earned invested assets insurance principal cause lower effective rate us statutory rate increase corporations effective tax rate 26 percent 1993 due primarily absence several onetime benefits largest related change us federal tax rate benefit 22 million resulted remeasurement corporations net deferred tax assets 35 percent discontinued operations extraordinary item cumulative effect accounting changes presented net tax basis accordingly associated taxes included provision income taxes paid 1994 1993 1992 646 538 234 respectively consists primarily corporate expenses minority equity nonoperating income expenses decreased 1994 primarily due absence 1993 provision 50 pretax estimated severance costs associated program aimed increasing effectiveness productivity corporations headquarters locations similarly provision cause increase expenses 1993 addition ongoing headquarters administrative general expenses lower 1994 compared 1993 compared 1992 partially reflecting positive effects cost reduction program debt liquidity corporations outstanding debt insurance segment reflected equity basis excluding discontinued operations 41 total capitalization december 31 1994 recognition unrealized loss investment securities required sfas 115 beginning 1994 compared 33 december 31 1993 basis increase reflected borrowings total 49 billion 1994 compared 35 billion 1993 addition cash equivalents 6 billion yearend 1994 5 billion lower 11 billion yearend 1993 corporation anticipated higher leverage 1994 made strategic acquisitions accelerated share repurchases third fourth quarters share prices attractive insurance debt totaled 15 billion december 31 1994 10 billion december 31 1993 fully consolidating insurance segment debt 47 total capitalization yearend 1994 compared 38 yearend 1993 effective january 1 1994 corporation adopted sfas 115 accounting certain investments debt equity securities requires investments reflected fair value corresponding impact reported separate component stockholders equity situations investments available sale defined accounting standard allow corresponding fair value adjustment corporations liabilities stockholders equity vary significantly reporting periods market interest rates factors change accordingly corporation include unrealized gains losses assessment debt total capitalization future debt needs met required traditional emerging channels certain subsidiaries subject restrictions transfer funds corporation restrictions affected corporations ability meet cash obligations change condition anticipated overall corporations financial position remains strong flexible corporation increased shortterm borrowings approximately 23 billion february march 1995 acquisitions caesars world inc 50 madison square garden corporation addition borrowings discontinued finance segment totaled 116 billion december 31 1994 january 1995 holders 34 billion finance debt asked consent conform certain itt financial indenture provisions corporation proposed merger itt financial corporation result corporation becoming obligor debt issues solicitation successfully completed 31 separate security issues proceeds itt financial sale expected used repay substantial portion finance debt corporations shortterm debt outstanding december 31 1994 incurred first quarter 1995 acquisitions february 1995 corporation also entered two new revolving credit agreements terms ranging one five years 68 domestic foreign banks providing aggregate credit commitments 11 billion commitments made itt parent company certain subsidiaries used assure working capital needs support commercial paper commercial paper borrowings totaled 24 billion december 31 1994 6 billion issued insurance subsidiary corporations insurance subsidiaries foreign units usually meet funding requirements direct basis time supplemented corporateestablished financing vehicles stockholders equity decreased 8 billion 1994 excluding sfas 115 impact mainly result dividends 03 billion share repurchases 10 billion spinoff rayonier inc 06 billion partly offset 1994 net income corporation operates multinational environment minimal exposures hyperinflationary countries thus inflation significant impact financial position corporation results operations recent periods expected near future corporation uses derivative financial instruments extensively life insurance operations part risk management strategy fully discussed insurance investment operations derivative financial instruments also used much lesser degree several segments corporation interest rate risk relative corporations debt portfolios managed interest rate swap agreements primarily discontinued finance segment multinational operations corporation also create exposure foreign currency fluctuation foreign currency risk relative corporations net investment foreign country foreign denominated debt specific foreign denominated transaction managed part currency swaps forward exchange contracts foreign currency transaction gains losses significant corporation enduser derivatives utilize speculative purposes notional amounts derivative contracts represent basis upon pay receive amounts calculated therefore reflective credit risk credit risk limited amounts calculated due owed corporation contracts corporation expects continue use interest rate swaps reduce cost borrowing future although divestment itt financial result reduced activity future insurance investment operations insurance operations represent corporations largest business segment terms assets revenues december 31 1994 policy liabilities accruals totaled 343 billion net ceded reinsurance backed 422 billion total assets including insurance investments 325 billion insurance segment managed two distinct groups property casualty operations life operations investment portfolios property casualty life operations managed based underlying characteristics nature respective policy liabilities investment management strategies differ significantly nature two businesses property casualty operations property casualty policy liabilities totaled 148 billion net ceded reinsurance december 31 1994 backed 202 billion total assets including insurance investments 141 billion property casualty investment strategies developed based variety factors including business needs duration regulatory requirements tax considerations weighted average duration property casualty investments approximates four onehalf years weighted average duration policy obligations approximates three years generally guaranteed interest requirements related property casualty policy liabilities investments comprised primarily intermediate fixed maturity bonds notes taxable nontaxable corporate bonds characteristics investments generally altered use derivative financial instruments life operations policy liability characteristics policy liabilities life operations totaled 195 billion net ceded reinsurance december 31 1994 backed 220 billion total assets including insurance investments 184 billion matching duration life investments respective policyholder obligations explicit objective life management strategy policy liabilities life operations along estimated duration periods summarized based investment needs following 5 categories december 31 1994 billions fixed rate asset accumulation vehicles products category require company pay fixed rate certain period time cash flows interest sensitive products written market value adjustment liabilities protection early withdrawal funds surrender charges primary risk associated products spread investment return credited rate sufficient earn required return product examples include fixed rate guaranteed investment contracts contract duration reflected dependent policyholders choice guarantee period weighted average credited policyholder rate policyholder liabilities 75 percent indexed asset accumulation vehicles products category similar fixed rate asset accumulation vehicles require company pay rate determined external index amount andor timing cash flows therefore vary based level particular index risks inherent products similar fixed rate asset accumulation vehicles additional risk changes index adversely affecting profitability weighted average credited rate contracts 58 percent product examples include indexed guaranteed investment contracts estimated duration 2 years interest credited asset accumulation vehicles products category credit interest policyholders subject market conditions minimum guarantees policyholders may surrender book value subject surrender charges initial period risks vary depending degree insurance element contained product examples include universal life contracts fixed account variable annuity contracts liability duration short intermediate term reflected table average credited rate liabilities 575 percent longterm pay liabilities products category long term nature contain significant actuarial mortality morbidity pricing risks cash flows interest sensitive vary based timing amount benefit payments risks associated products benefits exceed expected actuarial pricing andor investment return lower assumed pricing product examples include structured settlement contracts onbenefit annuities longterm disability contracts contract duration generally 6 10 years times exceeds 30 years policy liabilities contracts interest sensitive asset liability durations matched cash flow characteristics claims shortterm pay liabilities shortterm nature duration less one year substantially risks associated products determined noninvestment contingencies mortality morbidity liquidity greater concern longterm payout liabilities products include individual group term contracts shortterm disability contracts separate account variable products represent products separate investment liability account maintained behalf policyholder bears investment risk subject certain cases minimum guaranteed rates account values investment strategy varies fund choice outlined prospectus separate account plan operations products include variable annuities variable life contracts separate account assets liabilities totaled 233 billion december 31 1994 life operations invested asset characteristics derivative strategies facilitate assetliability management invested assets life operations totaled 184 billion december 31 1994 comprised assetbacked securities 62 billion bonds notes 85 billion inverse floating securities 05 billion investments primarily policy loans 32 billion estimated maturities fixed variable rate investments along respective yields december 31 1994 reflected millions assetbacked securities distributed maturity year based corporations estimate rate future prepayments principal remaining life securities expected maturities differ contractual maturities reflecting borrowers rights call prepay obligations variable rate securities instruments coupon rates move directly index rate included caption companys holdings residuals represent less 1 life operations investment assets residuals cost approximates market average life 48 years earn average yield 122 interestonly securities cost approximates market average life 7 years earn average yield 107 addition investments comprised primarily policy loans totaled 32 billion december 31 1994 loans carry current weighted average interest rate 10 secured cash value life policy loans mature conventional sense expire conjunction supporting actuarial assumptions developments life investments managed conform various liabilitydriven objectives discussed derivatives play important role facilitating management interest rate risk creating opportunities develop asset packages efficiently fund product obligations hedging indexation risks affect value certain liabilities adjusting broad investment risk characteristics dictated significant changes market risks end user derivatives corporation uses variety derivative financial instruments including swaps caps floors exchange traded financial futures options means prudently hedging exposure price foreign currency andor interest rate risk anticipated investment purchases existing assets liabilities notional amounts derivative contracts represent basis upon pay receive amounts calculated reflective credit risk credit risk limited amounts calculated due corporation contracts payment obligations corporation counterparties typically netted quarterly basis corporation strict policies regarding financial stability credit standing major counterparties typically requires credit enhancement requirements limit credit risk notional amounts pertaining derivative financial instruments totaled 94 billion december 31 1994 77 billion related life investments 17 billion liabilities following strategies used manage aforementioned risks associated life obligations anticipatory hedging certain liability types company commits price product advance receipt associated premium deposit hedge companys expected cash flows adverse changes market interest rates company routinely executes anticipatory hedges immunize company asset price changes would result changes market interest rates typically hedges involve taking long position interest rate future swap duration equivalent anticipated investments turn approximate duration associated liabilities notional amount derivatives used anticipatory hedges totaled 11 billion december 31 1994 liability risk adjustments several products obligate company credit return contractholder indexed market rate derivatives typically form swaps extensively used convert specific liability indexation risk common fixed rate floating rate libor swapping liability risk common asset risk broader array assets may effectively matched liabilities strategy permits customization liability indexation meet customer objectives without need identify assets directly match index notional amount derivatives used liability risk adjustment totaled 17 billion december 31 1994 asset hedgessynthetic asset investments selection investment risk characteristics driven liabilityspecific needs obligation investment needs may range short duration long duration floating rate fixed rate callable noncallable meet obligations life policyholders investment managers consider range available investment alternatives order provide greater risk diversification company often invests securities desired investment characteristics met company may choose create synthetic asset combining two instruments achieve desired investment characteristics many times unwanted risks effectively managed use derivatives example currencylinked notes inverse floating rate characteristics converted alternative fixed floating rate notes currency unwanted interest risk eliminated reduced choice derivative instrument hedging depends upon investment risk offset cost efficiency liquidity derivative instrument well ongoing need review overall balance asset liability characteristics life operations notional amount derivatives used hedges physical synthetic assets totaled 30 billion december 31 1994 portfolio duration hedges term duration refers degree change value return asset group assets results external market change level current interest rates market conditions change duration characteristics sometimes require adjustments order preserve appropriate assetliability balance example precipitous drop interest rates may accelerate mortgage prepayments shorten expected maturity portfolio mortgage securities duration hedges compensate risk adjusting average asset duration parameters notional amount derivatives used duration hedges totaled 36 billion december 31 1994 corporation committed maintaining effective risk management discipline approved derivatives usage must support least one following objectives manage risk operation arising price interest rate foreign currency volatility manage liquidity control transaction costs investment activity insurance operations subject regular review approval insurance operations finance committee credit limits diversification standards review procedures credit risk whether borrower issuer counterparty established life operations analyze aggregate interest rate risk use proprietary multiscenario cash flow projection model encompasses liabilities associated investments including derivatives item 8item 7 managements discussion analysis financial condition results operations december 19 1995 itt corporation delaware corporation itt delaware made distribution shareholders consisting shares common stock itt destinations inc nevada corporation held itt delawares interests hospitality entertainment information services businesses shares common stock itt hartford group inc whollyowned subsidiary held itt delawares interests insurance businesses itt hartford effective december 20 1995 pursuant statutory merger itt delaware merged itt industries inc indiana corporation itt industries itt industries surviving corporation company itt destinations changed name itt corporation discussion analysis financial condition results operations itt corporation itt hartford respective subsidiaries affiliated companies assets liabilities transferred companies shall collectively referred discontinued operations background business conditions itt industries engaged directly subsidiaries design manufacture wide range high technology products focused principal business segments automotive defense electronics fluid technology itt automotive one largest independent suppliers systems components vehicle manufacturers worldwide 1995 sales 56 billion 1995 itt automotive maintained position leading global supplier fourwheel antilock braking systems abs tractioncontrol systems tcs sales exceeded 1 billion third consecutive year 1994 itt automotive substantially increased previously established position leading producer electric motors wiper systems acquisition general motors actuators business unit renamed itt automotive electrical systems inc esi future operating income expected affected anticipated increase market penetration continued cost reductions offset declining prices worldwide vehicle production levels itt defense electronics companies 1995 sales 16 billion develop manufacture support high technology electronic systems components defense commercial markets worldwide basis itt defense electronics enjoys leadership position certain products expected critical armed forces 21st century particularly products facilitate communications forward area battlefield night vision devices electronic systems protect allied forces enemy radar controlled missiles key development orders captured 1995 provide possible foundation significant future production orders export sales increased 450 1995 export orders account 170 defense order input electronics sector restructuring repositioning product range resulting improved operating margins itt fluid technology 1995 sales 12 billion worldwide leader design development production sale products systems services used move handle transfer control contain fluids kinds customer focused marketing new products geographic expansion expected contribute growth sales profits results operations year ended december 31 1995 compared year ended december 31 1994 income continuing operations itt industries adjusted eliminate charges associated planned disposal certain noncore units 185 million 157 per fully diluted share compared similarly adjusted amount 1994 220 million 176 per fully diluted share operating income 446 million increase 67 418 million reported prior year operating income improved itt industries three principal business segments reflecting successful cost control efforts smooth integration acquisitions strong product sales however improvement offset substantially higher net interest expense 1995 deducting one time charges costs losses associated planned disposal certain operations reported income continuing operations 1995 21 million 09 per fully diluted share compared 202 million 146 per fully diluted share 1994 charges tax amounted 164 million 1995 principally related itt community development corporation business unit develops real estate itt semiconductors business unit manufactures produces semiconductor devices certain minor automotive product lines tax income discontinued operations totaled 994 million including 403 million reflecting gain sale itt financial 831 million 1995 1994 respectively represents results itt hartford itt corporation itt financial 1994 rayonier partly offset charges related distribution charges net tax included 39 million related restructuring companys headquarters including itt sheraton caesars world headquarters 109 million related distribution including legal advisory fees taxes costs net income also reflects extraordinary charge 307 million early retirement debt prior distribution 708 million 593 per fully diluted share compared 10 billion 802 per fully diluted share 1994 net sales totaling 89 billion rose 145 compared 1994 improvements automotive defense electronics fluid technology gross margin approximated 137 1995 148 1994 due lower sales prices abs systems higher material costs businesses selling general administrative expenses excluding service charges affiliated companies decreased 77 sales 83 1994 due continuing focus cost reduction efficiency programs service charges affiliated companies represent fees advice assistance connection cash management legal accounting tax insurance services provided centralized general administrative functions company distribution charges totaled 80 million 73 million 1995 1994 respectively fees services based upon general relations agreement approximately 1 sales reduction expenses services focus itt industries services developed internally purchased sources operating expenses include gains losses foreign exchange transactions restructuring charges totaled 2 million 1995 compared 17 million 1994 operating margins 50 1995 compared 54 1994 result factors discussed interest expense net interest income increased 135 million 1995 48 million 1994 reflecting absence 32 million interest income note receivable related sale alcatel nv collected 1994 higher borrowings connection march 1994 esi acquisition allocations total corporate interest expense connection distribution miscellaneous income expense net includes provision expected loss disposal itt semiconductors portions itt community development corporation certain noncore business units itt industries effective income tax rate 704 1995 compared 421 1994 largely result lower normal tax benefits certain loss provisions income tax expense decreased 97 million 50 million 1995 due lower pretax earnings business segments sales operating income corporate expenses principally service charges affiliated companies itt industries three major business segments follows millions automotives sales increased 194 reflecting part full year impact march 1994 acquisition esi excluding acquisition sales improved 147 driven increasing dollar content itt industries product per vehicle manufactured foreign exchange translation slight increase european vehicle production growth body electrical sales also reflected new wiper systems business light trucks higher installation rates power seat options sales two customers accounted approximately 42 44 1995 1994 sales respectively operating income improved 24 1995 result increased sales volume continued cost reductions margins declined due lower sales prices costs associated launch new abs mk 20 line products increases engineering expense due major forward programs sales operating income 1994 restated reflect noncore business operations closed divested 1996 defense electronics sales increased 41 1994 due principally improved sales itt cannon connector products mobile communications information systems however defense electronics operating income 1995 marginally 1994 strong improvements profitability connectors largely offset absence 1995 onetime favorable adjustments completed contracts 1994 defense electronics order backlog 20 billion december 31 1995 compared 21 billion year end 1994 export sales increased 450 prior year export orders account 170 defense segment order input approximately 65 66 1995 1994 sales respectively governmental entities approximately 90 us government years sales operating income 1994 restated reflect previously disposed electron technology itt semiconductors planned divestiture 1996 fluid technologys 1995 sales operating income increased units significantly itt flygt due higher volume favorable foreign exchange new product initiatives global business development activities improvements mining pharmaceutical pulp paper chemical industries contributed fluid technologys strong performance operating income 1995 increased 141 prior year operating margins outpaced sales growth due reengineering cost improvement programs volume leverage operating improvement certain underperforming operations year ended december 31 1994 compared year ended december 31 1993 companys net income 1994 10 billion 802 per fully diluted share compared 913 million 690 per fully diluted share 1993 including income discontinued operations totaling 831 million 828 million respectively net income adversely impacted net effect three accounting changes cumulative effect totaled 11 million tax 09 per fully diluted share january 1 1994 company adopted statement financial accounting standards sfas 115 related pronouncements required adjustments fair value mortgagebacked interestonly securities held discontinued businesses cumulative effect accounting change 36 million tax charge 29 per fully diluted share unrelated change basis discounting certain workers compensation liabilities itt hartford changed insurance guidelinebased method estimated riskfree rate return reflect appropriately current market conditions cumulative effect accounting change benefit 42 million tax 33 per fully diluted share finally company changed method accounting expense certain marketing startup costs itt educational services inc unit itt corporation previously deferred amortized cumulative effect accounting change tax charge 17 million 13 per fully diluted share companys 1993 net income adversely impacted extraordi nary loss 50 million tax 38 per fully diluted share resulting retirement fixed rate debt income continuing operations 202 million rose 67 million 496 1993 level 135 million 463 net income growth contributed esi acquired automotive segment march 1994 net income 1994 included 15 million tax loss divestment itt instruments nonstrategic business previously reported within defense electronics business segment net income 1993 included tax gain 10 million divestment itt components distribution also previously within itt defense electronics segment higher volumes automotive fluid technology combined favorable impact ongoing cost reduction programs businesses contributed favorable net income comparison companys net sales 1994 rose 78 billion increase 172 66 billion 1993 without esi net sales existing businesses rose 66 principally higher itt automotive volumes companys gross margins remained steady approximately 15 periods selling general administrative expenses declined 12 million 18 response ongoing efforts reduce costs increase efficiency service charges affiliated companies based percentage sales rose 14 million 73 million operating expenses declined 31 million 17 million due chiefly absence significant restructuring provisions recorded itt automotive fourth quarter 1993 downsizing consolidation european operations operating margins increased 54 compared 35 1993 interest expense net benefited income notes receivable related 1992 alcatel nv sale totaling 32 million 1994 90 million 1993 excluding interest income interest expense decreased 114 million compared 153 million 1993 due principally collection alcatel notes july use proceeds reduce debt share repurchases excess 10 billion resulted higher debt levels year end miscellaneous expense 1994 totaled 21 million due primarily loss sale itt instruments subsidiary results 1993 included gain fourth quarter sale itt components distribution partially offset losses disposition certain itt automotive operations income taxes 147 million provided pretax income 349 million representing 421 effective income tax rate 1993 effective income tax rate 325 rate unusually low reflected onetime remeasurement deferred tax liabilities pursuant changes german statutory tax rates well realization tax benefits disposition certain subsidiaries business segments sales operating income service charges affiliated companies described itt industries three major business segments follows millions sales 1994 automotive increased 350 1993 levels 47 billion approximately 578 increase due march 1994 esi acquisition balance reflecting higher market penetration abs north america europe well increased vehicle production esi acquisition improved geographic balance automotives north american european sales mix 1994 north american sales comprised 508 total compared 412 1993 sales two customers accounted approximately 44 1994 sales three customers accounted 46 1993 sales automotive segments operating income doubled year increased sales volumes including esi acquisition continued cost reductions lower sales prices higher labor costs partially offset growth sales excluding esi higher sales volume resulted operating improvement 640 compared 1993 benefits cost reduction programs successful integration esi enabled automotive improve operating margins despite significant price concessions granted customers operating margins excluding service charges affiliated companies increased 72 47 1993 sales operating income 1994 1993 restated reflect noncore business operations closed divested 1996 sales defense electronics rose 50 compared 1993 due primarily increased international defense radar radio product sales well higher connector volumes operating income increased 247 96 million due principally return profitability connectors business benefited restructuring actions prior years operating income defense businesses declined 1994 due lower margin adjustments mature military programs partially offset higher sales volumes benefits cost reduction programs order backlog end 1994 remained even 21 billion backlog end 1993 approximately 66 68 1994 1993 sales respectively governmental entities approximately 90 94 respectively us government sales operating income 1994 1993 restated reflect previously disposed electron technology itt semiconductors planned divestiture 1996 itt fluid technology reported 92 growth sales 1994 improvement result new product initiatives global market development activities strong north american heating season caused severe winter weather generally strengthening economic conditions worldwide acquisition richter chemietechnik german manufacturer plasticlined valves pumps also contributed increase itt flygt increase market share primary contributor improvements fluid technology operating income improved 1994 despite intense competition increased raw material costs absence favorable 1993 foreign exchange transactions improvement achieved higher sales volume price increases benefits cost reduction efforts liquidity capital resources company generated ebitda defined operating earnings interest taxes depreciation amortization 869 million 1995 compared 791 million full year 1994 99 improvement ebitda 1993 552 million improvements result itt industries earnings growth primarily automotive business segment benefited esi acquisition 1994 cash continuing operating activities defined sfas 95 619 million 1995 compared 637 million 1994 change reflects timing differences respect tax payments receipts working capital requirements sfas definition cash continuing operating activities differs ebitda largely due inclusion interest taxes changes working capital 1995 company realized 127 billion proceeds sale assets itt financial proceeds used mainly repay indebtedness amounted 116 billion december 31 1994 funds 853 million generated 1994 sale divested assets due primarily receipt 817 million final installment 1992 sale alcatel nv previous payments sale totaled 767 million 1993 cash generated used fund strategic acquisitions capital additions along repurchases common stock 1994 many itt industries businesses require substantial investment plant tooling order produce competitively superior products historically itt industries businesses generated sufficient operating cash flow fund investments spending plant additions totaled 450 million 1995 compared 407 million 1994 337 million 1993 approximately 61 1995 total incurred automotive expenditures antilock braking systems including latest variation low cost abs technology continues important overall strategy investments foundation brakes brake actuation technology electrical systems motors facilities developing countries including far east czech republic hungary also integral itt industries investment strategy december 31 1995 contractual commitments made capital expenditures totaling 128 million total spending plant additions future periods expected approximate 1995 levels order support known customer demands addition certain facilities equipment utilized itt industries businesses operating leases rental expenses operating leases 1995 87 million december 31 1995 minimum rental commitments operating leases total 91 million 1996 84 million 1997 total 154 million 1998 2000 commitments discussed expected funded operating cash flows itt industries companys acquisition spending 1995 totaled 15 million small acquisition automotive 418 million 1994 consisting automotives purchase esi 374 million march 1994 fluid technologys acquisition richter chemietechnik companys expenditures research development engineering totaled 422 million 1995 396 million 1994 460 million 1993 approximately 50 pursuant customer contracts itt industries research development expenditure levels excluding pursuant customer contracts expected remain approximately 3 sales foreseeable future although assurance results occur research development engineering expenditures funded numerous product developments antilock brake wiper systems electronic countermeasures tactical radio communications technology itt industries cash flows gross plant additions expected sufficient cover working capital needs interest taxes dividends shareholders cash flows 1996 also expected cover approximately 200 million tax certain liabilities related distribution discontinued operations prior distribution efficiencies use working capital resulted minimal increase cash requirements 1995 1994 despite substantial sales growth itt industries declared dividend 15 per share payable april 1 1996 external borrowings itt industries 16 billion december 31 1995 compared 26 billion december 31 1994 30 billion december 31 1993 1994 1993 amounts include approximately 600 million esop debt repaid 1995 also reflect allocations corporate debt itt industries discontinued operations cash equivalents totaled 94 million december 31 1995 compared 322 million yearend 1994 240 million yearend 1993 effective january 1 1994 company adopted sfas 115 accounting certain investments debt equity securities requires investments reflected fair value corresponding impact reported separate component shareholders equity situations investments available sale defined sfas 115 accounting standard allow corresponding fair value adjustment liabilities shareholders equity vary significantly reporting periods market interest rates factors change following distribution impact accounting standard itt industries shareholders equity material excluding dividend itt hartford itt corporation shareholders equity increased 626 million 1995 due growth retained earnings excluding sfas 115 impact shareholders equity decreased 735 million 1994 mainly result share repurchases 10 billion dividends 264 million spinoff rayonier 621 million partially offset 1994 net income 1995 company terminated esop portion itt investment savings plan salaried employees trustee esop completed sale 53 million unallocated shares itt common stock esop sales proceeds used repay debt associated esop totaled 541 million addition proceeds sale itt financial assets used repay outstanding borrowings 1995 company completed tender offer aggregate 41 billion debt securities 34 billion aggregate principal amount securities tendered premium paid securities tendered resulted tax loss 307 million 472 million pretax company used derivative financial instruments extensively itt hartford part risk management strategy derivative financial instruments also used much lesser degree segments company interest rate risk relative companys debt portfolio managed interest rate swap agreements primarily discontinued finance segment multinational operations itt industries also create exposure foreign currency fluctuation foreign currency risk relative itt industries net investment foreign country foreign denominated debt specific foreign denominated transaction managed part currency swaps forward exchange contracts foreign currency transaction gains losses significant periods discussed itt industries enduser derivatives utilize speculative purposes notional amounts derivative contracts represent basis upon pay receive amounts calculated therefore reflective credit risk credit risk limited amounts calculated due owed itt industries contracts itt industries expects continue use interest rate swaps reduce cost borrowing future although divestment discontinued operations result substantially reduced activity future income taxes global company itt industries provides pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us taxation earnings remitted deemed remitted years presented credits income taxes paid foreign jurisdictions fully utilizable united states consolidated tax return company including discontinued operations result distribution discontinued operations included consolidated federal income tax return itt industries december 19 1995 distribution full utilization credits may achievable future itt industries extent foreign tax credits cannot used reduce us tax obligation higher effective income tax rate incurred tax burdens benefits relate periods distribution shared accordance tax allocation agreement company itt hartford itt corporation valuation allowances provided deferred tax assets expected realized future years environmental matters itt industries subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean water act clean air act resource conservation recovery act comprehensive environmental response compensation liability act management itt industries believes itt industries substantial compliance applicable environmental requirements environmental compliance costs accounted primarily normal operating expenses management itt industries believe environmental compliance costs material adverse effect itt industries financial position results operations cash flows estimating costs environmental investigation remediation itt industries considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination itt industries share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters itt industries establishes reserves accordance generally accepted accounting princi ples outcome itt industries various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect itt industries financial position results operations cash flows effect inflation rate inflation measured changes average consumer price index material effect revenues operating results itt industries three recent fiscal years item 8item 7 managements discussion analysis financial condition results operations december 19 1995 itt corporation delaware corporation itt delaware made distribution shareholders consisting shares common stock itt destinations inc nevada corporation held itt delawares interests hospitality entertainment information services businesses itt destinations shares common stock itt hartford group inc held itt delawares interests insurance businesses itt hartford effective december 20 1995 pursuant statutory merger itt delaware merged itt industries inc indiana corporation itt industries itt industries surviving corporation company itt destinations changed name itt corporation discussion analysis financial condition results operations itt industries itt corporation itt hartford respective subsidiaries affiliated companies assets liabilities transferred companies shall collectively referred discontinued operations results operations 1996 net sales 87 billion 19 less 89 billion 1995 due mainly lower sales companies held disposition among three principal business segments automotive sales decreased 15 defense electronics increased 8 fluid technology increased 43 sales 1995 145 1994 increases 194 automotive 40 defense electronics 110 fluid technology costs expenses earnings percentage net sales follows cost sales percentage net sales 1996 797 compared 805 1995 decrease cost sales reflects cost reductions automotive abs systems lower costs due manufacturing improvements improved cost structure defense electronics cost sales percentage sales increased 805 1995 798 1994 due higher material costs fluid technology defense electronics businesses companys expenditures research development engineering totaled 5352 million 1996 5139 million 1995 4174 million 1994 approximately 50 pursuant customer contracts year itt industries research development expenditure levels excluding pursuant customer contracts expected remain approximately 3 sales foreseeable future although assurance level expenditures occur research development engineering expenditures funded numerous product developments antilock brake wiper systems electronic countermeasures tactical radio communications technology resulted increased market share significant contract awards 1996 gross margin increased 33 three principal business segments decreased 531 companies held disposition total company increase 16 1995 within three principal business segments automotive increased 32 defense electronics increased 43 fluid technology increased 25 gross margin 1995 137 declined 1994 level 148 selling expenses 4300 million 1996 compared 4275 million 1995 increase 6 however within total increases 53 automotive 61 fluid technology offset decreases 27 defense electronics 330 companies held disposition selling expenses total 49 sales 1996 48 1995 selling expenses percentage net sales 4 lower 1995 52 reported 1994 administrative general expenses percentage sales 36 1996 decrease 2 38 1995 decrease due lower headquarters expenses itt industries independent entity 1996 compared apportioned share headquarters expenses itt delaware 1995 administrative general expenses decreased 38 1995 40 1994 due overall cost control efforts operating income expenses includes gains losses foreign exchange transactions restructuring charges 1996 operating income 133 million consisted 58 million foreign exchange gains 75 million gains sales assets partially offset restructuring costs compared loss 15 million 1995 loss 166 million 1994 income continuing operations itt industries 1996 2226 million 185 per fully diluted share compared 1850 million 157 per fully diluted share 1995 adjusted eliminate charges associated planned disposal certain noncore units income continuing operations similarly adjusted 1994 amounted 2193 million 176 per fully diluted share deducting onetime charges costs losses associated planned disposal certain operations reported income continuing operations 1995 207 million 09 per fully diluted share compared 2016 million 146 per fully diluted share 1994 charges tax amounted 1643 million 1995 principally related itt community development corporation business unit develops real estate itt semiconductors business unit manufactures semiconductor devices certain minor automotive product lines operating income 1996 5084 million increase 139 4462 million reported prior year operating income itt industries three principal business segments 5605 million 1996 slightly 5530 million reported 1995 increase operating income attributable improvements defense electronics fluid technology offset slight decrease automotive segment operating income 1995 improved 68 4177 million reported 1994 due successful cost control efforts smooth integration acquisitions strong product sales tax income discontinued operations totaled 9942 million including 4034 million reflecting gain sale itt financial 8314 million 1995 1994 respectively represents results itt hartford itt corporation itt financial 1994 itt rayonier partially offset charges 1995 related distribution charges net tax included 390 million related restructuring companys headquarters including itt sheraton caesars world headquarters 1092 million related distribution including legal advisory fees taxes costs net income 2226 million 1996 compared 7079 million 593 per fully diluted share 1995 also reflects extraordinary charge 3070 million early retirement debt prior distribution 10 billion 802 per fully diluted share 1994 interest expense decreased 1690 million 1996 1752 million 1995 partially reflecting reduction debt levels restructuring debt portfolio interest income decreased 327 million 1996 400 million 1995 generally result maintaining lower cash balances using available cash reduce debt interest expense net interest income increased 1352 million 1995 477 million 1994 reflecting absence 320 million interest income note receivable related sale alcatel nv collected 1994 higher borrowings connection acquisition electrical systems inc esi march 1994 allocations total corporate interest expense connection distribution miscellaneous expense net 11 million 1996 due primarily losses equity investments 1995 1994 miscellaneous expense net includes provision expected loss disposal itt semiconductors portions itt community development corporation certain noncore business units itt industries effective income tax rate 400 1996 compared 396 1995 excluding charges related tax benefit disposition nonstrategic assets including charges related tax benefit effective income tax rate 1995 708 income tax expense excluding 712 million tax benefit charges related disposition nonstrategic assets increased 270 million 1484 million 1996 due higher pretax earnings effective income tax rate 1994 423 business segments sales operating income corporate expenses principally service charges affiliated companies itt industries three major business segments follows millions automotives sales decreased 15 1996 primarily due original equipment manufacturer oem pricing pressures unfavorable foreign exchange translation partially offset slight increase western european vehicle production sales increased 194 1995 reflecting part full year impact march 1994 acquisition esi excluding acquisition sales improved 147 driven increasing dollar content itt industries product per vehicle manufactured foreign exchange translation slight increase european vehicle production sales two customers general motors corporation ford motor corporation accounted approximately 40 42 44 1996 1995 1994 sales respectively operating income declined 19 1996 result lower sales prices costs associated launch abs mk 20 line products effects general motors corporation strikes restructuring costs primarily relocate production facilities lower cost locations increase selling general administrative expenses operating income improved 21 1995 result increased sales volume continued cost reductions margins declined due lower sales prices costs associated launch new abs mk 20 line products increases engineering expense due systems module product development defense electronics sales increased less one percent 1995 order input tenyear high defense business defense electronics operating income 1996 141 1995 strong improvements profitability defense electronics businesses profitability improvement defense operations due continued manufacturing improvements electronics business benefited consolidation production facilities improved cost structure launch new commercial products sales increased 40 1995 1994 due principally improved sales itt cannon connector products mobile communications information systems however defense electronics operating income 1995 marginally 1994 strong improvements profitability connectors largely offset absence 1995 onetime favorable adjustments completed contracts 1994 defense electronics order backlog 23 billion december 31 1996 compared 20 billion yearend 1995 21 billion yearend 1994 export sales defense business increased 150 1995 account 147 defense segment sales 1995 export sales increased 45 1994 approximately 64 65 66 1996 1995 1994 sales respectively governmental entities approximately 86 90 respectively us government fluid technologys 1996 sales increase 43 1995 driven global business development activities sales outside us canada western europe grew rate 277 previous year account 142 fluid technologys sales fluid technology also continued focus several growth segments industry including pharmaceutical biotechnology aerospace controls weak market conditions france germany sale itt general controls product line partially offset higher sales volume units operating income 1996 relatively flat due growth emerging markets cost control actions partially offset loss operating income due sale itt general controls product line increase selling general administrative expenses 1995 sales operating income increased units significantly itt flygt due higher volume favorable foreign exchange new product initiatives global business development activities improvements mining pharmaceutical pulp paper chemical industries contributed strong performance 1995 operating income 1995 increased 137 prior year operating margins outpaced sales growth due reengineering cost improvement programs volume leverage operating improvement certain underperforming operations liquidity capital resources cash continuing operating activities 5967 million 1996 compared 6190 million 1995 change reflects timing differences respect tax payments receipts working capital requirements 1996 cash 2004 million generated sale land assets including portion itt community development corporation itt general controls product line 1995 company realized 127 billion proceeds sale assets itt financial proceeds used mainly repay 116 billion indebtedness many itt industries businesses require substantial investment plant tooling order produce products historically itt industries businesses generated sufficient operating cash flow fund investments spending plant additions totaled 4063 million 1996 compared 4496 million 1995 4070 million 1994 approximately 63 1996 total incurred automotive antilock braking systems including latest variation low cost abs technology foundation brakes brake actuation technology electrical systems motors facilities developing countries including czech republic hungary december 31 1996 contractual commitments made capital expenditures totalling 1990 million total spending plant additions future periods expected approximate 1996 levels addition certain facilities equipment utilized itt industries businesses operating leases rental expenses operating leases 1996 928 million december 31 1996 minimum rental commitments operating leases 1088 million 1997 955 million 1998 total 2093 million 1999 2001 expected funded operating cash flows itt industries itt industries increased investments joint ventures china 167 million 1996 companys acquisition spending 1995 totaled 155 million small acquisition automotive 4180 million 1994 consisting automotives purchase esi general motors corporation fluid technologys acquisition richter chemietechnik itt industries 1997 cash flows gross plant additions expected sufficient cover working capital needs interest taxes dividends shareholders 1996 working capital cash requirements increased due primarily reduction unusually high accounts payable prior year buildup reserve inventory anticipation possible strike occur one automotive production facilities efficiencies use working capital resulted minimal increase cash requirements 1995 1994 despite substantial sales growth external borrowings itt industries 14 billion december 31 1996 compared 16 billion december 31 1995 26 billion december 31 1994 amount includes 5621 million esop debt repaid 1995 also reflects allocations corporate debt itt industries discontinued operations cash equivalents totaled 1219 million december 31 1996 compared 942 million yearend 1995 3221 million yearend 1994 shareholders equity increased 1725 million 1996 due primarily growth retained earnings excluding dividend discontinued operations shareholders equity increased 6256 million 1995 due growth retained earnings 1995 company terminated esop portion itt investment savings plan salaried employees trustee esop completed sale 53 million unallocated shares itt common stock esop sales proceeds used repay debt associated esop totaled 5410 million addition proceeds sale itt financial assets used repay outstanding borrowings 1995 company completed tender offer aggregate 41 billion debt securities 34 billion aggregate principal amount securities tendered premium paid securities tendered resulted tax loss 3070 million 4723 million pretax company uses derivative financial instruments selectively part financing risk management strategies interest rate risk relative companys debt portfolio managed interest rate swap agreements multinational operations itt industries also create exposure foreign currency fluctuation foreign currency risk relative itt industries net investment foreign country foreign denominated debt specific foreign denominated transaction managed part currency swaps forward exchange contracts foreign currency transaction gains losses significant periods discussed notional amounts derivative contracts represent basis upon pay receive amounts calculated therefore reflective credit risk credit risk limited amounts calculated due owed itt industries contracts itt industries expects continue use interest rate currency swaps reduce costs borrowing future forward contracts also used protect revenues inventories adverse currency fluctuations income taxes global company itt industries provides pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit nonus income taxes paid generally available us taxation earnings remitted deemed remitted years 1996 credits income taxes paid foreign jurisdictions fully utilizable united states consolidated tax return company including discontinued operations distribution full utilization foreign tax credits achievable extent foreign tax credits used reduce companys us tax obligation higher effective income tax rate incurred tax burdens benefits relate periods distribution shared accordance tax allocation agreement company itt hartford itt corporation environmental matters itt industries subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean water act clean air act resource conservation recovery act comprehensive environmental response compensation liability act management itt industries believes itt industries substantial compliance applicable environmental requirements environmental compliance costs accounted primarily normal operating expenses management itt industries believe environmental compliance costs material adverse effect itt industries financial position results operations cash flows estimating costs environmental investigation remediation itt industries considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination itt industries share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters itt industries establishes reserves accordance generally accepted accounting principles insurance recoveries recorded reduction environmental charges fixed determinable included assets caption balance sheet although outcome itt industries various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect itt industries financial position results operations cash flows effect inflation rate inflation material effect revenues operating results itt industries three recent fiscal years item 8item 7 managements discussion analysis financial condition results operations significant 1997 events initiatives 1997 itt industries inc businesses undertook following significant actions 1 itt industries purchased goulds pumps incorporated goulds may adding 750 million annual sales making itt industries worlds largest pump manufacturer assimilation goulds operations began immediately sales improvements product rationalization costsavings initiatives well underway 2 december itt industries purchased kaman sciences corporation renamed itt systems sciences corporation high technology services provider annual sales approximately 150 million purchase increased scope services itt industries provide us military accelerates outsourcing 3 itt industries formed joint venture holds 40 share supply stateoftheart tactical communications system british military 4 third quarter itt industries recorded pretax charge 2390 million 1458 million aftertax 121 per diluted share relating series restructuring actions affecting automotive fluid technology segments actions include writing assets businesses divested severance costs associated closure consolidation facilities related workforce reductions charges cash impact approximately 73 million majority incurred 1998 5 addition restructuring actions referred itt industries announced undertaking evaluation automotive businesses involved engineering manufacturing marketing automotive brakes chassis modules electrical systems encompass examination strategic alternatives including possible sale one major businesses include remaining lines business comprising automotive segment account approximately twenty percent overall automotive sales constituting components group produces fluid handling friction shock absorber products automotive switch business results operations year ended december 31 1997 compared year ended december 31 1996 net sales 1997 878 billion increase 590 million 07 compared 1996 automotive sales lower 3256 million 59 sales volume increases 3267 million automotive offset sales price decreases absence sales divested units unfavorable foreign exchange translation 3561 million defense electronics sales increased 966 million 61 due strong order input carryover 1996 improved market conditions 1997 interconnect market fluid technology sales increased 4540 million 349 due acquisition goulds gross margin increased 155 1997 compared 142 1996 primarily due changes companys business portfolio acquisitions dispositions company expanded higher margin fluid technology business disposing lower margin noncore businesses automotive segment selling general administrative expenses 8053 million reflect increase 659 million 1996 acquisition goulds added 851 million prior year however increase partially offset reduced expenses automotive absence expense semiconductors disposition october operating expenses income include gains losses foreign exchange transactions amortization expense restructuring charges 1997 operating expenses 329 million primarily consisted amortization expense 206 million 106 million relocation expense 1996 operating income 133 million principally gains sales assets total operating income 1997 2866 million includes pretax special charge 2390 million charge 1130 million taken automotive losses sale noncore businesses exit facilities reduce headcount action significantly reduce factory overhead selling general administrative expenses fluid technologys portion charge 688 million losses sale noncore businesses plant warehouse office consolidations product rationalization remainder charge primarily disposal semiconductors excluding special charges operating income 5256 million improvement 34 5084 million reported 1996 increase operating income attributable improvements defense electronics fluid technology offset slight decrease automotive segment interest expense decreased 1332 million 1997 1690 million 1996 reflecting restructuring outstanding debt increasing amount floating rate debt interest income decreased 175 million 1997 327 million 1996 primarily result maintaining lower cash balances using available cash reduce debt miscellaneous income 155 million 1997 includes gain sale noncore automotive businesses results equity investments 1996 miscellaneous expense 11 million reflected results equity investments net income 1997 1081 million 89 per diluted share compared 2226 million 185 per diluted share 1996 decline primarily caused aftertax special charges 1458 million 121 per diluted share discussed excluding special charges net income 2539 million diluted earnings per share 210 net income 1997 also adversely impacted result implementation emerging issues task force issue 9713 requires reengineering costs incurred connection software installation efforts expensed incurred costs previously capitalized writtenoff 1997 consequence net income adversely impacted 56 million aftertax 05 per diluted share year ended december 31 1996 compared year ended december 31 1995 1996 net sales 872 billion decrease 166 million 19 less 888 billion reported 1995 due mainly lower sales companies held disposition among three principal business segments automotive sales decreased 15 defense electronics increased 08 fluid technology increased 43 gross margin increased 142 1996 137 1995 due increases three principal business segments significant decrease companies held disposition selling expenses 4300 million 1996 compared 4275 million 1995 increase 06 however within total increases 53 automotive 61 fluid technology offset decreases 27 defense electronics 330 companies held disposition selling expenses total 49 sales 1996 48 1995 operating expenses include gains losses foreign exchange transactions restructuring charges 1996 operating income 133 million consisted 58 million foreign exchange gains 75 million gains sales assets compared loss 15 million 1995 interest expense decreased 1690 million 1996 1752 million 1995 partially reflecting reduction debt levels restructuring outstanding debt interest income decreased 327 million 1996 400 million 1995 generally result maintaining lower cash balances using available cash reduce debt miscellaneous expenses 11 million 1996 due primarily losses equity investments 1995 miscellaneous expenses included provision expected loss disposal itt semiconductors portions itt community development corporation certain noncore business units itt industries business segments sales operating income corporate expenses itt industries three major business segments follows millions automotives sales decreased 59 1997 primarily due divestiture noncore businesses unfavorable foreign exchange translation original equipment manufacturers oem pricing pressures partially offset increase north american european vehicle production volume gains across several product lines especially europe automotives exposure latin american market particularly brazil approximately 30 1996 sales decreased 15 primarily due oem pricing pressures unfavorable foreign exchange translation partially offset increase western europe vehicle production sales two customers accounted approximately 36 40 42 1997 1996 1995 sales respectively operating income excluding special charges declined 78 1997 result lower sales prices unfavorable foreign exchange divestiture noncore businesses declines partially offset volume gains increased vehicle production decline 19 1996 operating income result lower sales prices costs associated launch abs mk 20 line products effect strikes general motors corporations facilities restructuring costs primarily relocate facilities lower cost locations increase selling general administrative expenses sales defense electronics increased 61 1996 due strong order input received 1996 defense improved conditions interconnect market especially information systems portion interconnect market defense electronics operating income 1997 155 1996 operating income 1996 141 1995 profitability improvement defense due continued manufacturing improvements electronics business benefited consolidation production facilities improved cost structure launch new commercial products defense electronics order backlog 226 billion december 31 1997 compared 230 billion yearend 1996 export sales defense portion increased 136 prior year account 154 defense sales approximately 66 64 65 1997 1996 1995 defense electronics sales respectively governmental entities approximately 85 86 90 respectively military space programs us government fluid technologys 1997 sales increased 349 1996 reflecting acquisition goulds may 1997 sales increase partially offset unfavorable foreign exchange translation absence sales general controls product line sold second quarter 1996 1997 fluid technology reorganized international sales organization three operations groups industrial pumps flygt commercial specialty products 1996 sales increase 43 1995 driven global business development activities sales outside us canada western europe grew rate 277 1997 accounted 142 fluid technologys sales fluid technology benefited several growth segments industry including pharmaceutical biotechnology aerospace controls weak market conditions france germany sale general controls product line partially offset higher sales volume units operating income excluding special charges 1567 million 384 1996 primarily due inclusion goulds operations since date acquisition operating income 1996 relatively flat due fast growth emerging markets relatively high selling expenses partially offset cost improvements areas fluid technology also sold general controls product line impacted 1996 profits compared 1995 liquidity capital resources cash flow operations 7831 million net divestiture proceeds 1678 million net borrowings 8003 million used primarily acquisitions 11039 million capital expenditures 4597 million dividend payments 711 million repurchase common stock 678 million cash flows cash continuing operating activities 7831 million 1997 increase 1864 million 31 5967 million generated 1996 1997 working capital cash requirements decreased primarily due timing accounts payable automotive reduction inventory defense electronics increase working capital requirements 1996 result unusually high accounts payable prior yearend buildup inventories anticipation strike one automotive production facilities debt credit facilities external debt december 31 1997 218 billion compared 142 billion december 31 1996 debt increased 1997 fund acquisition goulds kaman sciences maximum amount borrowing available companys revolving credit agreements december 31 1997 15 billion additions plant property equipment capital expenditures 1997 4597 million increase 534 million 4063 million 1996 increase 236 million expended goulds approximately 64 1997 spending incurred automotive primarily related antilock braking systems foundation brakes brake actuation electrical systems motors facilities developing countries czech republic hungary additions plant property equipment future periods expected approximate 1997 levels expected funded operating cash flows company december 31 1997 contractual commitments made future expenditures totaling 2412 million acquisitions 1997 company acquired goulds kaman sciences several smaller businesses paid total 110 billion acquisitions accounted purchases accordingly results operations acquired company included income statement date acquisition 1995 company spent 155 million european fluid handling business automotive segment dispositions number noncore businesses sold 1997 primarily itt semiconductors several automotive product lines sales assets generated 1678 million cash 1996 funds 2004 million generated sale portion itt community development corporations assets general controls product line investments 1997 company increased equity investments 35 million primarily related joint ventures china 1996 companys investments joint ventures china increased 167 million share repurchase 1997 1996 company purchased 2323814 522132 shares common stock respectively connection stock option exercises 1995 377202 shares purchased part share repurchase program market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 16 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company uses interest rate swaps based companys overall exposure interest rate changes 53 basis point change interest rates equivalent 10 companys weighted average worldwide interest rate december 31 1997 companys floating rate debt obligations related interest rate derivatives would 74 million effect companys pretax earnings year ending december 31 1998 similar 53 basis point change interest rates would 252 million effect fair value companys fixed rate debt related interest rate derivatives multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company also utilizes foreign currency denominated derivative instruments selectively hedge net longterm investments foreign countries companys largest exposures foreign exchange rates primarily exist deutsche mark belgian franc swedish krona italian lira us dollar 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 1997 would impact approximately 63 million fair value instruments quantification companys exposure market risk foreign exchange sensitive financial instruments necessarily limited take account offsetting impact companys underlying investment exposures limited operating transactions company purchases various nonferrous metals use production certain products limited basis goulds used commodity based financial instruments hedge cost anticipated purchases nonferrous metals commodity activity material companys consolidated financial position results operations cash flows income taxes foreign tax credits global company itt industries makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted us currently company able fully utilize credits income taxes paid foreign jurisdictions us consolidated tax return deferred tax assets company us deferred tax asset 2588 million december 31 1997 2051 million december 31 1996 increase 537 million substantially due acquisition goulds special charges taken third quarter 1997 managements expectation company sufficient future taxable income continuing operations utilize deductions future periods risks uncertainties environmental matters itt industries subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean water act clean air act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters itt industries establishes reserves accordance generally accepted accounting principles insurance recoveries recorded fixed determinable although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows impact year 2000 issue year 2000 issue arises many computer programs written using two digits rather four define applicable year result many computer applications datesensitive software may recognize date using 00 year 1900 rather year 2000 could result system failures miscalculations causing disruptions normal business activities operations company determined necessary modify upgrade replace portions software computer applications properly utilize dates beyond december 31 1999 developed plan implement modifications upgrades replacements company utilize internal external resources implement plan however guarantee resources available times required costs therefore different companys current estimates based assessment presently available information company expect cost addressing year 2000 issues material adverse effect future financial results company also engaged communications significant suppliers large customers determine extent company vulnerable third parties failure address year 2000 issues companys assessment impact year 2000 issues includes assessment companys vulnerability third parties based information currently available company third parties however guarantee third parties systems companys systems rely converted timely manner effect asian market conditions automotives sales asian market amounted approximately 58 million 11 automotive sales asian sales china korea sales defense electronics segment asian market amounted approximately 77 million 46 total sales fluid technologys sales asian market 104 million 59 total sales compared 1996 fluid technologys sales asian market 536 due addition goulds sales excluding goulds sales asian markets total company sales asian market represented 3 total sales although reduction rate growth sales asian market expected continue 1998 expected material effect operating income effect inflation rate inflation measured changes average consumer price index material effect revenues operating results itt industries three recent calendar years forwardlooking statements certain statements contained document including managements discussion analysis financial condition results operations historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors include among others following general economic business conditions political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales mix pricing levels changes sales identity significant customers changes technology industry capacity production rates competition capacity constraints availability raw materials adequate labor availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs outcome evaluation companys automotive businesses various factors referenced managements discussion analysis itt industries automotive business also could particularly affected factors including consumer debt levels interest rates cyclical nature automotive industry moderation decline global automobile build rate work stoppages consumer perception advantages automotive products regulatory environment regarding automotive safety application rates products per vehicle itt industries defense electronics business also could particularly affected factors including level defense funding domestic foreign governments companys ability receive contract awards ability develop market products services customers outside traditional markets itt industries fluid technology business also could particularly affected factors including governmental funding levels international demand fluid management products ability successfully expand new geographic markets continued demand replacement parts company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations highlights years ended december 31 itt industries inc company reported following millions amounts exclude discontinued operations years 1998 figures adjusted exclude restructuring nonrecurring items 3994 pretax 2436 aftertax b 1997 figures adjusted exclude restructuring nonrecurring items 1378 pretax 840 aftertax sales itt automotive businesses 1998 company sold automotive brake chassis business continental ag germany automotive electrical systems business valeo sa france transactions completed end third quarter total proceeds 37 billion aftertax proceeds approximately 27 billion continue used reduce debt fund acquisitions invest companys remaining businesses repurchase shares open market see risks uncertainties note 19 commitments contingencies notes consolidated financial statements new business segments third quarter 1998 company realigned businesses four new reporting segments highlight diversity balance companys portfolio better define companys continuing businesses four new segments follows connectors switches business formerly included within defense electronics segment consists companys products marketed cannonr brand products include connectors switches cabling used telecommunications computing aerospace industrial applications well network services defense products services businesses segment directly serve military government agencies products services products include air traffic control systems jamming devices guard military planes radarguided weapons digital combat radios night vision devices satellite instruments approximately 33 sales revenues segment generated contracts technical support services provided military government agencies pumps complementary products segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr businesses within segment also supply mixers heat exchangers related products brand names mcdonnell millerr itt standardr addition brand names mentioned specialty products businesses specialty products segment produce engineered valves switches industrial aerospace applications products marine leisure markets specialty shock absorbers brake friction materials fluid handling materials stainless steel flexible tubing transportation industry restatement prior years financial statements restated reflect discontinued status automotive businesses sold 1998 well automotive businesses sold previous years reflect new reporting segments unless otherwise indicated financial data restated reflect continuing operations segment related information restated reflect four new reporting segments acquisitions 1998 company continued make acquisitions intended strengthen market positions present highest potential creating value notably company acquired rule industries inc sinton engineering co limited sinton uk limited ag johansons metallfabrik ab specialty products segment great american gumball company connectors switches segment restructuring nonrecurring items anticipation relatively flat economic environment company announced structural cost reduction program december 2 1998 objective program reduce structural cost business increase leverage historical growth trends resume actions taken affect four segments include rationalization operating locations consolidation sales distribution facilities workforce reductions product pruning actions taken also include write downs assets businesses sold increase environmental reserves total restructuring nonrecurring charges recorded fourth quarter 1998 amounted 3686 million pretax along actions taken earlier 1998 total restructuring nonrecurring items 1998 amounted 3994 million pretax reference made note 5 accompanying notes consolidated financial statements share repurchase july 1998 board directors approved company began 11 billion share repurchase program would use proceeds sales two automotive businesses february 28 1999 approximately 273 million shares repurchased average price approximately 3562 per share aggregate amount approximately 9742 million results operations year ended december 31 1998 compared year ended december 31 1997 net sales revenues 1998 449 billion increase 2851 million 68 compared 1997 defense products services sales revenues increased 1977 million 18 due primarily kaman sciences acquisition end 1997 increases international sales pumps complementary products sales increased 3098 million 212 due primarily inclusion goulds 1997 acquisition additional five months specialty products sales increased 261 million 32 due increased sales volume aerospace controls friction material shock absorber businesses well acquisitions rule sinton ag johansons improvements partly offset impact general motors strike increases offset loss sales due dispositions noncore businesses gross margin increased 236 1998 compared 228 1997 improvement largely due cost reductions implemented early year connectors switches offset weakening market conditions asia decline sales mobile communications products selling general administrative expenses 7300 million reflect increase 663 million 10 1997 primarily due inclusion goulds additional five months kaman sciences yearend 1997 acquisition full year restructuring nonrecurring items totaled 3994 million pretax 1998 1378 million pretax 1997 operating expenses 44 million 1998 155 million 1997 include gains losses foreign exchange transactions gains losses sales assets charges 111 million favorable variance mostly due higher gains sales fixed assets offset partially unfavorable foreign exchange total operating loss 1998 746 million includes aforementioned restructuring nonrecurring items 3994 million excluding restructuring nonrecurring items operating income 3248 million improvement 164 1997 amount 2791 million increase operating income attributable improvements across segments interest expense decreased 1258 million 1998 1332 million 1997 portion proceeds automotive sales used significantly reduce companys debt level debt reduction primarily occurred late third quarter thus entire annualized interest cost savings reflected reduction debt subsequent reduction interest expense towards end 1998 offset increases interest expense earlier year interest income increased 434 million 1998 175 million 1997 primarily due higher marketable securities investments cash equivalents generated remaining proceeds automotive sales miscellaneous expense 30 million 1998 61 million 1997 includes results joint venture investments operating income net tax discontinued operations declined 832 million 1998 1018 million 1997 decline primarily due absence income reflected fourth quarter 1998 automotive businesses sold end third quarter addition aftertax charges 185 million recorded fourth quarter 1998 residual exposures related discontinued businesses sold previous years provided 1995 distribution agreement itt corporation delaware corporation divided three separate unrelated entities net income 1998 153 billion 1355 per diluted share compared 1081 million 89 per diluted share 1997 included 1998 net income discontinued operations 163 billion 1441 per diluted share includes gains sales automotive operations 155 billion excluding income discontinued operations automotive gains restructuring nonrecurring items net income 1460 million addition net income 1997 also negatively impacted result implementation emerging issues task force issue 9713 required reengineering costs incurred connection software installation efforts expensed incurred costs previously capitalized writtenoff consequence net income 1997 adversely impacted 56 million aftertax 05 per diluted share year ended december 31 1997 compared year ended december 31 1996 net sales revenues 1997 421 billion compared net sales revenues 374 billion 1996 increase primarily companys pumps complementary products segment well defense products services segment higher sales pumps complementary products segment result may 1997 acquisition goulds higher sales defense products services segment resulted strong order input increases offset loss sales due divestiture noncore businesses gross margin increased 228 1997 compared 210 1996 improvement mainly due changes companys business portfolio acquisitions dispositions market share gains company improved mix highermargin businesses pumps complementary products segment defense products services segment connectors switches segment addition disposing lowermargin noncore businesses selling general administrative expenses 6637 million 1997 reflect increase 996 million 1996 acquisition goulds may 1997 added 851 million expenses 1997 compared 1996 restructuring nonrecurring items 1378 million 1997 company recognized charges 658 million estimated losses divestitures noncore businesses well charge 150 million increase environmental reserves also 1997 asset writeoffs restructuring charges 570 million recognized specialty products pumps complementary products segments rationalization production capacity related workforce reductions operating expenses 155 million 1997 compared operating income 223 million 1996 unfavorable variance mostly due higher amortization expense resulting acquisition goulds may 1997 larger net gains sales assets 1996 interest expense decreased 1332 million 1997 1690 million 1996 reflecting restructuring outstanding debt increasing amount floating rate debt interest income decreased 175 million 1997 327 million 1996 primarily result maintaining lower cash balances using available cash reduce debt miscellaneous expense 61 million 1997 compared miscellaneous income 10 million 1996 losses joint venture investments reported 1997 compared income 1996 income continuing operations 119 million 10 per diluted share 1997 compared 664 million 55 per diluted share 1996 decline mainly due 840 million aftertax restructuring nonrecurring items 69 per diluted share excluding restructuring nonrecurring items 1997 income continuing operations 959 million 79 per diluted share operating income net tax discontinued operations declined 1018 million 1997 1562 million 1996 decline primarily due aftertax restructuring nonrecurring items 531 million recorded 1997 net income 1997 1081 million 89 per diluted share compared 2226 million 185 per diluted share 1996 business segments sales revenues operating income companys four major business segments follows millions sales revenues connectors switches 18 1997 due lower demand asia decline sales mobile communications products reductions partly offset significant revenue increases network systems switches rf products units excluding restructuring nonrecurring items operating income increased 258 1997 due improved cost structure launch new commercial products 1997 sales increased 73 1996 operating income 1997 increased 233 1996 improvement sales mainly due better conditions interconnect market especially information systems portion market improvement operating income mostly due strong market conditions cost reductions new product launches connectors switches order backlog 1302 million december 31 1998 compared 1317 million yearend 1997 sales revenues defense products services increased 18 1997 due acquisition kaman sciences increase international sales segment experienced six consecutive years doubledigit growth sales outside united states international sales represent 216 sales 154 1997 excluding restructuring nonrecurring items operating income increased 203 1998 due increased sales revenues mentioned continued productivity improvements 1997 sales revenues increased 83 1996 due strong order input received sincgars tactical communication products defense products 1997 operating income increased 112 1996 resulting primarily higher sales defense products defense products services order backlog 222 billion december 31 1998 compared 211 billion yearend 1997 approximately 98 1998 1997 1996 defense products services sales revenues governmental entities 74 83 78 respectively military space programs us government pumps complementary products sales year increased 212 sales 1997 primarily due inclusion goulds additional five months 1998 addition slower industrial markets offset stronger waterwaste water activity sales north america due increase us market share nearly two percentage points well favorable weather conditions including dry southwest wet northeast excluding restructuring nonrecurring items operating income increased 118 due inclusion goulds additional five months continued cost control activities consolidation efforts segment sales 1997 increased 434 sales 1996 increase mainly due acquisition goulds may 1997 also accounted 387 million increase operating profit restructuring nonrecurring items specialty products sales year 8493 million 261 million 32 due increased sales volume aerospace controls friction material shock absorber businesses acquisitions rule sinton ag johansons also contributed improvement segment unfavorably impacted general motors strike excluding restructuring nonrecurring items operating income 15 1997 sales 54 higher 1996 sales increase mainly due higher sales friction materials fluid handling products offset unfavorable pricing pressures operating profit 1997 restructuring nonrecurring items declined 64 million decline mainly due unfavorable pricing pressures foreign exchange restructuring nonrecurring items 1998 company recorded restructuring nonrecurring items 201 million first quarter 107 million second quarter 3686 million fourth quarter majority charges relate structural cost reduction program announced company december 2 1998 anticipation relatively flat economic environment company undertaken program reduce structural cost business increase leverage historical growth trends resume actions taken affect four segments include rationalization operating locations consolidation sales distribution facilities workforce reductions product pruning actions taken also include writedowns businesses sold increase environmental reserves total restructuring charges 1856 million writeoffs 1803 million 335 million recorded total 3994 million pretax charges expected cash 1888 million used complete various actions included plan actions contemplated plan expected completed within approximately one year including divestitures noncore businesses restructuring charges include severance related costs gross headcount reductions 2422 since majority charges recorded late fourth quarter relatively small amount expected cash complete actions spent end december 31 1998 except environmental remediation costs extend many years majority cash expenditures complete plan expected incurred 1999 restructuring nonrecurring charges recorded 1998 expected generate future cash savings period 19992003 amount 3642 million savings due lower costs facilities lower salaries wages restructuring nonrecurring charges recorded 1998 expected generate noncash savings period 19992003 amount 781 million savings due lower depreciation expense lower goodwill amortization 1997 company recorded restructuring nonrecurring items 1378 million charge recorded third quarter company took several actions strengthen operating performance improve operating efficiencies 1997 restructuring charges break across business segments follows pumps complementary products 441 million specialty products 129 million headquarters 808 million charge consists 647 million writedown fair value net assets two noncore businesses expected divested 570 million asset writeoffs severance costs associated closure consolidation facilities related workforce reductions 150 million increase environmental reserves 11 million loss sale noncore business projected cash complete actions 364 million cash expenditures contemplated charges except minor litigation issues ongoing environmental remediation efforts incurred end 1998 details restructuring nonrecurring items recorded 1998 1997 see note 5 notes consolidated financial statements liquidity capital resources cash operating activities 1885 million total divestiture proceeds 37 billion used primarily debt repayment approximately 148 billion repurchases common stock 8308 million capital expenditures 2129 million acquisitions 796 million dividend payments 705 million 6247 million fund companys discontinued automotive operations pay salesrelated costs divestitures third quarter 1998 company sold automotive brake chassis electrical systems businesses combined proceeds 37 billion december 31 1998 taxes paid gains approximately 4391 million additional taxes relating gains sales paid 1999 addition taxes approximately 1060 million costs associated sales paid end 1998 current year company also divested barton fluid measurement pomona electronics units total proceeds divestitures amounted 375 billion year share repurchase 1998 company repurchased 22477283 shares part share repurchase program announced july 29 1998 total cost share repurchases 8308 million 1998 addition 1262422 2323814 522132 shares 1998 1997 1996 respectively repurchased connection stock option exercises cash flows cash flows operating activities 1885 million 1998 decrease 2092 million 526 3977 million generated 1997 1998 working capital cash requirements increased primarily due higher inventory levels timing accounts receivable collections lower payables throughout segments decrease net operating activities mainly due timing pension related payments larger reclassification gains asset sales compared prior years resulting primarily sales barton pomona units proceeds sale assets debt credit facilities external debt december 31 1998 7671 million compared 217 billion december 31 1997 proceeds divestiture companys automotive businesses used significantly reduce debt level maximum amount borrowing available companys revolving credit agreement december 31 1998 150 billion additions plant property equipment capital expenditures 1998 2129 million slight increase 2125 million 1997 approximately 353 1998 spending incurred pumps complementary products related expansion production capacity distribution submersible pumps new product lines expansion developing countries approximately 251 incurred specialty products related expansion production capacity friction materials plants installation assembly equipment shock fluid handling plants cover new models shocks facility expanded house new assembly equipment additions plant property equipment future periods expected somewhat higher levels expected funded internal cash flows company december 31 1998 contractual commitments made future expenditures totaling 351 million acquisitions 1998 company acquired rule sinton ag johansons great american gumball company paid total 796 million acquisitions accounted purchases accordingly results operations acquired company included income statement date acquisition company expects use portion proceeds sales automotive brake chassis electrical systems businesses finance additional acquisitions 1997 company acquired goulds kaman sciences several smaller businesses paid total 103 billion market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 16 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources used interest rate swaps december 31 1998 companys cash equivalents exceeded shortterm longterm debt obligations based position company expect continue 1999 companys overall exposure interest rate changes 42 basis point increase interest rates equivalent 10 companys weighted average shortterm interest rate december 31 1998 companys cash equivalents floating rate debt obligations related interest rate derivatives would 30 million positive effect companys pretax earnings year ending december 31 1999 similar 42 basis point change interest rates would 171 million effect fair value companys fixed rate debt related interest rate derivatives multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company also utilized foreign currency denominated debt instruments selectively hedge net longterm investments foreign countries companys largest exposures foreign exchange rates primarily exist deutsche mark belgian franc swedish krona italian lira us dollar 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 1998 would impact approximately 416 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions company purchases various nonferrous metals use production certain products limited basis 1997 used commodity based financial instruments hedge cost anticipated purchases nonferrous metals contracts expired 1998 commodity derivative activity material companys consolidated financial position results operations cash flows income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted us end 1998 company able fully utilize credits income taxes paid foreign jurisdictions us consolidated tax return however future years company may able fully utilize credits deferred tax assets company deferred tax asset 3674 million december 31 1998 2953 million december 31 1997 deferred tax asset periods composed us foreign state local deferred tax assets increase 721 million substantially due restructuring nonrecurring items recorded 1998 certain expenses related automotive sales deductible tax returns 1998 managements expectation company sufficient future taxable income continuing operations utilize deductions future periods risks uncertainties sales businesses company time made dispositions various businesses including dispositions automotive businesses referred highlights sales itt automotive businesses herein certain dispositions resulted various claims legal actions although cannot determined time whether extent company face obligations respect claims legal actions management believe obligation would material adverse effect cash flows results operations financial condition company subsidiaries consolidated basis see note 19 commitments contingencies notes consolidated financial statements environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes reserves accordance generally accepted accounting principles insurance recoveries recorded fixed determinable although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows year 2000 readiness disclosure year 2000 y2k issue arises many computer systems equipment embedded technology use two digits define applicable year may recognize date using 00 year 1900 rather year 2000 could result failures miscalculations causing disruptions normal business activities operations company undertaken initiatives developed processes intended ensure computer systems equipment embedded technology state y2k readiness failures miscalculations avoided effects mitigated occur company efforts information technology manufacturing purchasing engineering quality assurance professionals conducted comprehensive inventory assessment software equipment determine state y2k readiness professionals determined would necessary modify upgrade replace portions software equipment process modifying upgrading replacing software equipment way since early 1997 december 31 1998 company estimates approximately 80 software equipment essential operations business 75 software equipment modified upgraded replaced tested confirm y2k compliance based upon number items company identified require remediation company believes software equipment essential operations business made y2k compliant early third quarter 1999 software equipment deemed require modification upgrading replacement completed end third quarter 1999 company also engaged communications vendors service providers third parties business relationships determine extent third parties engaged activities assure y2k readiness determine extent company would vulnerable third partys failure address issues company continuing process determining third party y2k readiness december 31 1998 communicated critical suppliers vendors supply products services critical operations companys businesses company utilized questionnaires telephone interviews site visits audits effort assess preparedness suppliers vendors based results efforts believes approximately 30 suppliers vendors y2k ready december 31 1998 company hopes able complete assessment suppliervendor y2k readiness early april 1999 alternative supply arrangements contingency plans considered critical suppliersvendors assessed y2k ready company developing contingency plans estimates costs implementing plans event company certain third parties fail complete y2k readiness initiatives timely basis contingency plans may include stockpiling raw materials increasing inventory levels qualifying alternate sources supply considering alternative power sources scheduling factory holiday shutdown new year similar measures company expects continue risk analysis contingency planning throughout 1999 additional information regarding y2k readiness third parties becomes known company derives approximately 34 consolidated revenues outside united states primarily western europe united kingdom canada company also developing contingency plans cost estimates implementing plans believes time may necessary mitigate effect possible business operating disruptions countries resulting lack y2k readiness third parties countries company anticipates reasonably likely worst case scenario associated y2k issue would result disruptions supply chain respect materials used manufacturing process products services provided third parties essential companys operations however company believe disruption material effect companys financial condition currently company estimates aggregate cost y2k initiatives total approximately 20 million december 31 1998 approximately 106 million costs related y2k initiatives incurred approximately 80 expensed company separately track cost internal professionals involved y2k readiness activities however costs principally related payroll costs company believe costs y2k initiatives material companys consolidated financial condition results operations cash flows however failure company complete necessary modifications upgrades replacements testing timely basis develop implement appropriate contingency plans could result lost delayed sales revenue addition third parties including countries outside united states fail complete y2k readiness programs timely basis companys results could negatively affected costs companys y2k readiness initiatives dates company believes operating segments complete activities estimates subject change actual results could differ currently anticipated specific factors could cause differences include limited availability cost personnel trained y2k issues ability identify assess modify upgrade replace test relevant software equipment failure third parties satisfactorily address y2k issues timely basis failure countries outside united states company conducts business satisfactorily address y2k issues similar uncertainties euro conversion issue company addressing issues raised conversion euro assessing whether crossborder price transparency affect price structures similar products adapting information technology systems companys efforts adapt systems differ various european operations able accommodate eurodenominated invoicing purchasing transactions companys european operations formulating plans accommodate eurodenominated transactions triangulation conventions january 1 2002 operations already implemented utilization euro transactional currency company anticipates costs connection euro conversion material company anticipate conversion legacy currencies euro would material adverse impact consolidated financial condition results operations cash flows forwardlooking statements certain statements contained document including managements discussion analysis financial condition results operations particularly material presented restructuring nonrecurring items liquidity capital resources market risk exposures risks uncertainties historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors include among others following general economic business conditions political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis connectors switches business could affected economic conditions foreign markets currently participate trying enter level defense funding domestic foreign governments cyclical nature industry defense products services business could affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets pumps complementary products business could affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts specialty products business could affected cyclical nature transportation industries strikes major auto producers international demand fluid management products company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations highlights years ended december 31 itt industries inc company reported following millions 1999 figures adjusted exclude restructuring special items 46 pretax 29 aftertax b 1998 figures adjusted exclude restructuring special items 3994 pretax 2436 aftertax c 1997 figures adjusted exclude restructuring special items 1378 pretax 840 aftertax acquisitions 1999 company continued make acquisitions intended strengthen market positions present highest potential creating value notably company acquired six significant businesses combined annualized revenues approximately 325 million acquisitions include space defense communications businesses stanford telecommunications inc flojet corporation stx pte ltd water pollution control corporation renamed sanitaire corporation hydro air industries k electronics inc share repurchase completed first quarter 1999 company completed 11 billion stock repurchase instituted conjunction sale automotive businesses 1998 entire course program company repurchased 305 million shares open market reduced number shares outstanding approximately 25 enabled company contain eps dilution 1998 sale automotive businesses 10 results operations year ended december 31 1999 compared year ended december 31 1998 sales revenues 1999 46 billion increase 1395 million 31 1998 specialty products sales increased 1102 million 13 primarily due strong 1999 vehicle build rates north america europe factors contributed increase specialty products impact general motors strike 1998 benefit acquisitions include full year impact rule industries inc acquired june 1998 well impact hydro air industries flojet corporation acquired 1999 defense products services sales revenues increased 1205 million 93 primarily due increased domestic sincgars sales increased night vision sales increases offset decrease 119 million connectors switches segment caused weak first half 1999 demand within european connector market total year softness within north american military aerospace market decrease 350 million pumps complementary products segment due weakness industrial endusers markets lost revenue due discontinued product lines higher selectivity products customers lower sales 443 million companies held disposition gross margin 238 improved slightly 236 1998 reflecting improvements restructuring actions selling general administrative expenses decreased 430 million 1998 due cost reductions reduction improved ratio selling general administrative expenses sales 163 1998 149 1999 operating income 1999 4152 million included 46 million credit related restructuring special items 1998 operating loss 746 million included restructuring special items 3994 million excluding restructuring special items years comparative operating income 4106 million 1999 3248 million 1998 related operating margin improved 89 1999 72 1998 yeartoyear increases operating income margin result higher sales volumes cost reductions contribution acquisitions net interest expense 468 million represented 432 reduction prior years net expense 824 million decrease due using portion proceeds automotive sales significantly lower companys debt level net income continuing operations excluding restructuring special items 1999 2300 million 250 per diluted share compared 1460 million 129 per diluted share 1998 increase due higher sales volume benefits restructuring cost reduction initiatives significant reduction interest expense lower effective tax rate year ended december 31 1998 compared year ended december 31 1997 net sales revenues 1998 45 billion increase 2851 million 68 1997 defense products services sales revenues increased 1977 million 18 primarily due kaman sciences acquisition end 1997 increases international sales pumps complementary products sales increased 3098 million 212 due primarily inclusion goulds 1997 acquisition additional five months specialty products sales increased 261 million 32 due increased sales volume aerospace controls friction material shock absorber businesses well acquisitions rule sinton ag johansons improvements partially offset impact 1998 general motors strike increases offset loss sales due dispositions noncore businesses gross margin increased 236 1998 compared 228 1997 improvement largely due cost reductions implemented early year connectors switches offset weakening market conditions asia decline sales mobile communications products selling general administrative expenses 7344 million reflected increase 552 million 81 1997 increased ratio sales 161 1997 163 1998 increase selling general administrative expense primarily due inclusion goulds additional five months kaman sciences yearend 1997 acquisition full year operating expenses 44 million 1998 155 million 1997 included selling general administrative expenses included gains losses foreign exchange transactions gains losses sales assets charges 111 million favorable variance mostly due higher gains sales fixed assets offset partially unfavorable foreign exchange effects total operating loss 1998 746 million included restructuring special items 3994 million excluding restructuring special items operating income 3248 million improvement 164 1997 amount 2791 million restructuring special items excluded 1997 figures 1378 million increase operating income attributable improvements across segments net interest expense decreased 333 million 1998 compared 1997 portion proceeds automotive sales used significantly reduce companys debt level debt reduction primarily occurred late third quarter thus entire annualized interest cost savings realized 1999 reduction debt subsequent reduction interest expense toward end 1998 offset increases interest expense earlier year operating income discontinued operations net tax declined 832 million 1998 1018 million 1997 decline primarily due absence income reflected fourth quarter 1998 automotive businesses sold end third quarter addition aftertax charges 185 million recorded fourth quarter 1998 residual exposures related discontinued businesses sold previous years provided 1995 distribution agreement itt corporation delaware corporation divided three separate unrelated entities net income 1998 15 billion 1355 per diluted share compared 1081 million 89 per diluted share 1997 included 1998 net income discontinued operations 16 billion 1441 per diluted share included gain sales automotive operations 16 billion 1997 company implemented emerging issues task force issue 9713 required reengineering costs incurred connection software installation efforts expensed incurred costs previously capitalized written consequence net income 1997 adversely impacted 56 million aftertax 05 per diluted share business segments sales revenues operating income companys business segments follows millions connectors switches sales revenues decreased 119 million 23 compared 1998 first half 1999 weak demand european connector market total year softness within north american military aerospace market partially offset strong demand companys communications connectors switches acquisition keypad business san teh ltd stx pte ltd fourth quarter operating income restructuring special items 621 million 94 million 178 1998 operating margin restructuring special items expanded 21 percentage points 1999 new products together ongoing cost control efforts contributed operating income increase 1998 sales revenues 98 million 18 1997 due lower demand asia decline sales mobile communications products operating income excluding restructuring special items increased 108 million 258 1997 due improved cost structure launch new commercial products defense products services sales revenues 141 billion 93 1205 million 1998 higher domestic sincgars sales higher export sales particularly large radar sale korea fourth quarter higher sales volume night vision unit well 256 million claim settlement prior year project itt aerospacecommunications division drove revenue increase segment operating margin remained flat year operating income excluding restructuring special items 1088 million increase 109 million 111 1998 mainly due higher sales volume receipt 53 million settlement second quarter 1999 company recorded 283 million charges loss contracts warranty provisions matters 1998 sales revenues increased 1977 million 18 1997 due acquisition kaman sciences increase international sales excluding restructuring special items operating income increased 165 million 203 1997 due increased sales revenues continued productivity improvements pumps complementary products sales 174 billion decreased 350 million 20 1998 acquisition sanitaire strength water wastewater markets offset continued weakness industrial enduser markets lost revenue due discontinued product lines higher selectivity products customers operating income restructuring special items 1644 million 189 million 130 prior year sales 1998 increased 3098 million 212 1997 primarily due inclusion goulds additional five months 1998 excluding restructuring special items operating income increased 153 million 118 1997 due inclusion goulds additional five months continued cost controls consolidation efforts segment specialty products recorded revenues 9595 million year representing increase 13 prior year strong sales oem automotive customers resulting high north american european vehicle build rates impact 1998 general motors strike higher sales pharmaceutical industry along impact acquisitions fueled revenue growth operating income restructuring special items year rose 462 420 million 1998 1329 million operating margins restructuring special items 31 percentage points 1998 sales 261 million 32 higher 1997 due increased sales volume aerospace controls friction material shock absorber businesses excluding restructuring special items 1998 operating income increased 13 million 15 compared 1997 restructuring special items company undertaken number actions recent years improve operating efficiencies reduce structural costs following brief summary activity recorded 1999 1998 see note 4 restructuring special items notes consolidated financial statements detailed discussion 1998 company recorded restructuring special items 201 million first quarter 107 million second quarter 3686 million fourth quarter actions taken affected four business segments included rationalization operating locations consolidations sales distribution facilities workforce reductions product pruning items included writedowns businesses sold increase reserves environmental exposure december 31 1999 company closed 16 planned 25 facilities discontinued 18 planned 19 product lines reduced workforce 1680 approximately 70 planned aggregate reduction approximately 2400 persons remaining activities completed 2000 early 2001 fourth quarter 1999 company recorded 202 million charges related new restructuring activities primarily closure four facilities severance 326 persons expected large majority costs expended 2000 also fourth quarter company recorded 200 million goodwill writeoffs fourth quarter 1999 company assessed restructuring reserves established 1998 determined activities related reserves completed 448 million less originally estimated reversed related reserves income net effect reversal 1998 reserves 1999 restructuring asset writeoffs increase 1999 operating income 46 million eps 03 1997 company recorded charges restructuring special items 1378 million 1997 restructuring charges taken across business segments follows pumps complementary products 441 million specialty products 129 million corporate 808 million charges comprised 647 million writedown fair value net assets two noncore businesses expected divested since sold 570 million asset writeoffs severance costs associated closure consolidation facilities related workforce reductions 25 persons 150 million increase environmental reserves 11 million recognize loss sale noncore business activities associated 1997 charges completed according plan liquidity capital resources cash equivalents beginning year 8809 million year cash operating activities 3432 million net borrowings 3453 million divestiture proceeds 1077 million used primarily repurchases common stock 4026 million capital expenditures 2279 million acquisitions 5448 million dividend payments 555 million 2844 million costs primarily related taxes resulting discontinued operations divestitures 1999 company made three significant divestitures palm coast utility corporation carbon industries inc assets community development corporation aggregate generated 965 million cash remaining 112 million proceeds sale assets 1999 represented plant property equipment sales across businesses 1998 company sold automotive brake chassis electrical systems businesses barton fluid measurement pomona electronics units total 375 billion share repurchase 1999 company repurchased 81 million shares part share repurchase program announced july 29 1998 total cost share repurchases 3183 million 1999 addition 22 million 13 million 23 million shares 1999 1998 1997 respectively repurchased offset dilutive effect stock option exercises cash flows cash flows operating activities 3432 million 1999 increase 1547 million 82 1885 million generated 1998 1999 company maintained investment working capital despite making several large acquisitions 1998 working capital requirements increased due higher inventory levels timing accounts receivable collection lower payables throughout business segments slight improvement net operating activities mainly due reduction longterm third party receivables debt credit facilities external debt december 31 1999 109 billion compared 7671 million december 31 1998 increase mainly due acquisitions 1999 maximum amount borrowing available companys revolving credit agreement december 31 1999 15 billion additions plant property equipment capital expenditures 1999 2279 million increase 2129 million 1998 approximately 31 1999 spending incurred pumps complementary products primarily related expansion existing product lines new product lines custodial replacements approximately 20 incurred specialty products related product line changes resulting product improvements expansion capacity established products well new products approximately 24 spent connectors switches key capital investment programs included manufacturing cost reduction initiatives implementation enterprise resource planning system spending new product introductions defense products services expended approximately 24 1999 total primarily related purchase avionics division major facility completion expanded production facility night vision division december 31 1999 contractual commitments made future expenditures totaling 374 million acquisitions 1999 company acquired stanford telecommunications incs space defense communications businesses flojet corporation stx pte ltd sanitaire corporation hydro air industries k electronics assets energy machine service inc made equity investment earthwatch company paid total 5448 million acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition excess purchase prices fair values net assets acquired liabilities assumed 4161 million recorded goodwill amortized periods exceed 40 years 1998 company acquired rule industries inc sinton engineering co limited sinton uk limited ag johansons metallfabrik ab great american gumball corporation paid total 796 million market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 16 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources used interest rate swaps december 31 1999 companys shortterm longterm debt obligations net cash 9064 million based position companys overall exposure interest rate changes 67 basis point change interest rates equivalent 10 companys weighted average shortterm interest rate december 31 1999 companys cash marketable securities floating rate debt obligations related interest rate derivatives would 28 million effect companys pretax earnings year ending december 31 1999 74 basis point increase longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 1999 would 35 million effect fair value companys fixed rate debt related interest rate derivatives multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company also utilized foreign currency denominated derivative instruments selectively hedge net longterm investments foreign countries companys largest exposures foreign exchange rates exist primarily deutsche mark belgian franc swedish krona italian lira us dollar 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 1999 would impact approximately 20 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted us end 1999 company able fully utilize credits income taxes paid foreign jurisdictions us consolidated tax return deferred tax assets company net deferred tax assets 3736 million december 31 1999 3674 million december 31 1998 deferred tax assets periods composed us foreign state local deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate reserves employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductions future periods risks uncertainties sales automotive businesses company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase price provisions sales agreements claims submitted arbitration thorough review company believes claims little merit intends vigorously dispute although cannot determined time whether extent postclosing adjustment purchase prices result arbitration company believe adjustments would material adverse effect cash flow results operations financial condition company subsidiaries consolidated basis environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability clean past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes reserves accordance generally accepted accounting principles insurance recoveries recorded probable received although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows year 2000 readiness disclosure company completed year 2000 y2k program successfully transitioned information systems new year company major customers suppliers financial institutions yet experienced significant systems y2k related problems addition discernable effects date change companys operations costs incurred y2k readiness efforts amounted 203 million material deferral expenditures related development companys regular information technology systems due spending y2k readiness efforts since transition year 2000 known trends problems related y2k readiness identified euro conversion issue company addressing issues raised conversion euro assessing whether crossborder price transparency affect price structures similar products adapting information technology systems companys efforts adapt systems differ various european operations able accommodate eurodenominated invoicing purchasing transactions companys european operations formulating plans accommodate eurodenominated transactions triangulation conventions january 1 2002 operations already implemented utilization euro transactional currency company anticipates costs connection euro conversion material company anticipate conversion legacy currencies euro would material adverse impact consolidated financial position results operations cash flows pension plan effective january 1 2000 companys primary salaried pension plan revised allow employees choice future accruals existing pension formula pension equity formula provides enhanced portability benefits based nature change effect liabilities accrued date expected material change cost plan respect future expense accruals addition company revised plans formula respect employees first became eligible membership plan january 1 2000 reducing basic formula accrual rate expected future costs decrease time result effect currently measurable forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented restructuring special items liquidity capital resources market risk exposures risks uncertainties historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis addition factors business segments may affected specific factors referred connectors switches business affected economic conditions foreign markets currently participate trying enter level defense funding domestic foreign governments cyclical nature industry defense products services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets pumps complementary products business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing specialty products business affected cyclical nature transportation industries application rates products per vehicle strikes major auto producers international demand fluid management products company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations highlights years ended december 31 itt industries inc company reported following millions 1999 figures adjusted exclude restructuring special items 46 pretax 29 aftertax b 1998 figures adjusted exclude restructuring special items 3994 pretax 2436 aftertax acquisitions 2000 company continued make acquisitions intended strengthen market positions present highest potential creating value notably company acquired ck components inc ck leader design manufacture switches telecommunications computer electronic equipment markets man machine interface mmi manufacturer multilayer switch components assemblies wireless mobile handset market companies combined annualized revenue approximately 166 million defense award companys defense products services segment awarded contract modernize us air force spacelift range system slrs november 2000 worth estimated 13 billion ten years slrs contract provide department defense nasa commercial customers integrated system support space missions including spacecraft launch ballistic missile aeronautical testing valuebased six sigma 2000 valuebased six sigma vbss program launched 180 people trained vbss structured process identification prioritization deployment improvement projects vbss overarching discipline company drive toward operational excellence improve efficiencies accelerate new product introductions another 150 people scheduled training 2001 margin improvement 2000 segment operating margins increased 100 basis points 101 1999 113 2000 total operating margin increased 89 102 gain due introduction new profitable products higher volume lower pension expense higher productivity cash flow 2000 companys free cash flow doubled 1153 million 1999 2340 million 2000 improvement due companys ongoing effort maximize operating cash flow connectors switches growth 2000 connectors switches business sales grew 2586 million 296 represents organic growth increase driven robust expansion telecommunications industrial transportation markets commercialization technology company acquired 15 equity interest meshnetworks inc meshnetworks exchange licensing portion companys wireless technology new venture well cash meshnetworks startup company focuses commercialization mobile communications technology change ticker symbol effective september 5 2000 company changed ticker symbol new york stock exchange itt results operations year ended december 31 2000 compared year ended december 31 1999 sales revenues 2000 48 billion increase 1972 million 43 1999 3599 million 78 constant currencies increase attributable several acquisitions made 2000 second half 1999 well organic growth partially offset absence defense settlement received 1999 scheduled wind certain defense contracts operating income 4931 million 2000 779 million higher prior year operating income 1999 4152 million included 46 million credit related restructuring special items excluding restructuring special items 1999 operating income 825 million higher 1999 comparative operating income 4106 million related operating margin improved 102 89 1999 increases operating income margin result higher sales volumes significant improvement productivity lower pension expense introduction new profitable products interest expense 752 million net interest income 179 million increased 284 million higher average debt levels due 1999 share repurchase program completed first quarter 1999 several acquisitions made 2000 second half 1999 well higher average interest rates net income continuing operations 2000 2645 million 294 per diluted share compared 2329 million 253 per diluted share 1999 2300 million 250 per share excluding restructuring special items companys effective tax rate 370 2000 1999 company expects effective tax rate reduced 350 2001 due several tax initiatives undertaken 2000 reduce structural rate year ended december 31 1999 compared year ended december 31 1998 sales revenues 1999 46 billion increase 1395 million 31 1998 increase attributable several acquisitions made 1999 1998 well organic growth partially offset lost revenue due discontinued product lines higher selectivity products customers lower sales companies held disposition operating income 1999 4152 million included 46 million credit related restructuring special items 1998 operating loss 746 million included restructuring special items 3994 million excluding restructuring special items years comparative operating income 4106 million 1999 3248 million 1998 related operating margin improved 89 1999 72 1998 yeartoyear increases operating income margin result higher sales volumes cost reductions contribution acquisitions interest expense 468 million net interest income 380 million represented 432 reduction 1998 interest expense 824 million net interest income 434 million decrease due using portion proceeds automotive disposition significantly lower companys debt level net income continuing operations excluding restructuring special items 1999 2300 million 250 per diluted share compared 1460 million 129 per diluted share 1998 increase due higher sales volume benefits restructuring cost reduction initiatives significant reduction interest expense lower effective tax rate business segments sales revenues operating income companys business segments follows millions pumps complementary products sales revenues 17 billion increased 172 million 1999 increase reflects higher volume within construction water wastewater businesses partially offset impact foreign exchange rates softness industrial pumps addition adoption eitf issue 0010 accounting shipping handling fees costs eitf 0010 refer section entitled accounting pronouncements discussion eitf 0010 resulted increase revenues cost sales approximately 16 million comparison 1999 revenues cost sales years prior 2000 restated reflect provisions eitf 0010 impractical operating income 2000 301 million compared 1999 operating income excluding restructuring due higher prices higher productivity liquidation foreign businesses benefits restructuring cost initiatives sales 1999 decreased 350 million 20 1998 weakness industrial enduser markets lost revenue due discontinued product lines higher selectivity products customers offset acquisition sanitaire corporation strength water wastewater markets addition 1999 operating income restructuring special items 1644 million 189 million 130 prior year defense products services sales revenues decreased 793 million 56 compared 1999 decrease due scheduled wind certain large contracts absence 256 million claim settlement received 1999 lost revenue sale gaastek partially offset entire year revenues 1999 acquisition stanford telecommunications incs stel space defense communications businesses added approximately 120 million sales revenues operating income 2000 85 million greater 1999 operating income excluding restructuring primarily due margin improvements productprogram mix sales revenues 1999 93 1205 million 1998 higher domestic sincgars sales higher export sales particularly large radar sale korea fourth quarter higher sales volume night vision unit well 256 million claim settlement prior year project drove revenue increase segment operating margin remained flat year operating income excluding restructuring special items 1088 million increase 109 million 111 1998 mainly due higher sales volume receipt 53 million settlement second quarter 1999 company recorded 283 million charges loss contracts warranty provisions matters specialty products recorded sales revenues 9724 million year representing increase 13 1999 inclusion 1999 acquisitions flojet corporation hydroair industries entire year combined add approximately 46 million sales revenues partially offset impact foreign exchange rates primary reasons change revenues 9595 million 1999 represent increase 130 1998 strong sales oem automotive customers resulting high north american european vehicle build rates impact 1998 general motors strike higher sales pharmaceutical industry along impact acquisitions fueled revenue growth operating income restructuring special items 1999 rose 462 420 million 1998 1329 million operating margins restructuring special items 31 percentage points connectors switches sales revenues 7746 million 2000 representing increase 2586 million 501 compared 1999 increase reflects robust growth telecommunications industrial transportation markets partially offset negative impact foreign exchange rates 1999 acquisition stx pte ltd stx 2000 acquisitions ck mmi incremental sales revenues three acquisitions combined add approximately 143 million also favorable impact operating income 369 million 594 prior year operating income excluding restructuring due higher volume greater contributions new products higher margins improvements manufacturing processes 1999 sales revenues decreased 119 million 23 compared 1998 weak demand european connector market first half 1999 total year softness within north american military aerospace market partially offset strong demand companys communications connectors switches acquisition stx fourth quarter 1999 operating income restructuring special items 621 million 94 million 178 1998 operating margin restructuring special items expanded 21 percentage points 1999 new products together ongoing cost control efforts contributed operating income increase liquidity capital resources cash flows cash flows operating activities 4146 million 2000 increase 714 million 208 3432 million generated 1999 increase largely attributable higher earnings lower tax restructuring payments partially offset higher working capital levels operating activities higher accounts receivable balances due increased sales timing collections primary drivers behind increase working capital additions plant property equipment capital expenditures 2000 1806 million decrease 2279 million 1999 approximately 29 2000 spending occurred pumps complementary products primarily related expansion existing product lines new product lines custodial replacement approximately 26 incurred specialty products related product line changes resulting product improvements expansion capacity established well new products approximately 25 spent connectors switches new product introductions manufacturing cost reduction initiatives defense products services expended approximately 20 2000 total primarily related expansion new existing product lines well custodial replacements december 31 2000 contractual commitments made future expenditures totaling 516 million acquisitions 2000 company acquired ck mmi several small companies approximately 192 million acquisitions accounted purchases accordingly results operations entity included consolidated income statement commencing date acquisition goodwill 1739 million representing excess purchase price fair value net assets acquired recorded company amortized 25 30 years 1999 company acquired stels space defense communications businesses flojet corporation stx sanitaire corporation hydro air industries k electronics assets energy machine service inc made equity investment earthwatch incorporated company paid total 5448 million acquisitions accounted purchases accord ingly results operations acquired company included consolidated income statement date acquisition excess purchase prices fair values net assets acquired liabilities assumed 4161 million recorded goodwill amortized periods exceeding 40 years status restructuring activities company undertaken number actions recent years improve operating efficiencies reduce structural costs following brief summary activity past three years see note 4 restructuring special items notes consolidated financial statements detailed discussion 1998 company recorded restructuring special items 201 million first quarter 107 million second quarter 3686 million fourth quarter actions taken affected four business segments included rationalization operating locations consolidations sales distribution facilities workforce reductions product pruning items included writedowns businesses sold increase reserves environmental exposures fourth quarter 1999 company recorded 202 million charges related additional restructuring activities primarily closure four facilities severance 324 persons company also recorded 200 million goodwill writeoffs december 31 2000 company closed three four facilities reduced workforce 226 expected majority remaining actions completed 2001 fourth quarter 1999 company assessed restructuring reserves established 1998 determined activities related reserves completed 448 million less originally estimated reversed related reserves income net effect reversal 1998 reserves 1999 restructuring asset writeoffs increase 1999 operating income 46 million eps 003 december 31 2000 company closed 19 planned 25 facilities discontinued planned 19 product lines reduced workforce 2136 approximately 93 revised planned aggregate reduction approximately 2300 persons remaining activities completed 2001 divestitures 2000 company generated divestiture proceeds 476 million first quarter 2000 company sold net assets gaastek business defense products services segment 283 million remaining 193 million cash proceeds sale assets represents plant property equipment sales across businesses 1999 company made three significant divestitures palm coast utility corporation carbon industries inc assets community development corporation aggregate generated 965 million cash addition company generated 112 million proceeds property equipment sales across businesses 1998 company sold automotive brake chassis electrical systems businesses barton fluid measurement pomona electronics units total 375 billion share repurchase 1999 1998 company repurchased 81 million 224 million shares respectively part share repurchase program announced july 29 1998 total cost share repurchases 3183 million 7871 million 1999 1998 respectively 2000 1999 1998 17 million 22 million 13 million shares respectively repurchased offset dilutive effect exercised stock options debt credit facilities debt december 31 2000 104 billion compared 109 billion december 31 1999 cash equivalents 887 million december 31 2000 compared 1817 million december 31 1999 november 2000 company entered revolving credit agreement 20 domestic foreign banks expires november 2005 provides aggregate commitments 10 billion borrowings facility december 31 2000 interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain certain financial ratios december 31 2000 company compliance financial covenants commitment fee revolving credit agreement 125 total commitment based companys current debt rating agreement entered november 2000 replaced companys previous 15 billion credit agreement expired november 2000 revolving credit agreement provides backup companys commercial paper program market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 16 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources used interest rate swaps may 2000 company entered several fixed floating interest rate swap agreements notional amount 4217 million interest expense substantially companys long term debt calculated variable rather fixed rate basis terms agreements match terms fixed debt reference 3 month libor december 31 2000 companys shortterm longterm debt obligations net cash 9496 million based position companys overall exposure interest rate changes 71 basis point change interest rates equivalent 10 companys weighted average shortterm interest rate december 31 2000 companys cash marketable securities floating rate debt obligations related interest rate derivatives would 64 million effect companys pretax earnings year ended december 31 2000 85 basis point increase longterm interest rates equivalent 10 companys weighted average longterm interest rate december 31 2000 would 36 million effect fair value companys fixed rate debt multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company also utilized foreign currency denominated derivative instruments selectively hedge net longterm investments foreign countries companys largest exposures foreign exchange rates exist primarily deutsche mark belgian franc swedish krona italian lira us dollar 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 2000 would impact approximately 04 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted us company expects fully utilize credits generated december 31 2000 income taxes paid foreign jurisdictions deferred tax assets company net deferred tax assets 3676 million december 31 2000 3568 million december 31 1999 deferred tax assets periods composed us foreign state local deferred tax assets net deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate reserves employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductions future periods accounting pronouncements company adopt statement financial accounting standards sfas 133 accounting derivative instruments hedging activities sfas 133 first quarter 2001 sfas 133 amended sfas 138 material impact companys combined results operations financial position cash flows effective october 1 2000 company adopted sab 101 revenue recognition financial statements sab 101 eitf issue 0010 accounting shipping handling fees costs eitf 0010 sab 101 provides guidance recognition presentation disclosure revenue financial statements eitf 0010 requires shipping handling costs billed customers recorded sales adoption sab 101 material impact companys consolidated results operations financial condition cash flow adoption eitf 0010 caused increase 2000 annual sales cost sales approximately 16 million adoption eitf 0010 effect operating income net income eps financial condition cash flow company risks uncertainties sales automotive businesses 1998 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase price provisions sales agreements 1999 claims submitted arbitration thorough review company believes claims little merit vigorously disputing although cannot determined time whether extent postclosing adjustment purchase prices result arbitration company believe adjustments would material adverse effect cash flow results operations financial condition company consolidated basis environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability clean past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes reserves accordance generally accepted accounting principles insurance recoveries recorded probable received although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows euro conversion issue company addressing issues raised conversion euro assessing whether crossborder price transparency affect price structures similar products adapting information technology systems companys efforts adapt systems differ various european operations able accommodate eurodenominated invoicing purchasing transactions companys european operations formulating plans accommodate eurodenominated transactions triangulation conventions january 1 2002 operations already implemented utilization euro transactional currency company anticipates costs connection euro conversion material company anticipate conversion legacy currencies euro material adverse impact consolidated financial position results operations cash flows forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented liquidity capital resources market risk exposures risks uncertainties historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred pumps complementary products business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense products services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets specialty products business affected cyclical nature transportation industries strikes major auto producers international demand marine leisure products connectors switches business affected economic conditions foreign markets currently participate trying enter cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations highlights years ended december 31 itt industries inc company itt reported following millions 2001 figures adjusted exclude restructuring special items 977 pretax 635 aftertax reported operating income continuing operations 3968 reported income continuing operations aftertax 2167 b 1999 figures adjusted exclude restructuring special items 46 pretax 29 aftertax reported operating income continuing operations 4152 reported income continuing operations aftertax 2329 fluid technologys water wastewater business water wastewater business companys fluid technology segment grew 5 impact foreign exchange translation 2 impact foreign exchange recorded number multimillion dollar international contracts related water treatment projects united kingdom china singapore defense electronics services contract wins companys defense electronics services segment realized several significant contract wins 2001 including contract provide new digital communications equipment federal aviation administrations air traffic control estimated 580 million 143 million contract build land based radar systems egypt network communications system contract us military community estimated 125 million 77 million contract provide operations maintenance support us military command control 39 million contract upgrade global positioning satellite system motion flow control companys fluid handling systems business grew 3 despite 5 decrease north american european build rates electronic components new products companys electronic components segment continued pattern innovation increased proportion revenues new products 36 total sales supported increase operating margin year despite global downturn primary endmarkets itt defines new products year introduction plus three years cash flow working capital initiatives resulted continued reduction operating working capital defined accounts receivable plus inventory less accounts payable yearend percentage annualized sales 195 2000 185 2001 reduction contributed record free cash flow defined net cash operating activities less capital expenditures 3026 million valuebased six sigma itt expanded valuebased six sigma vbss initiative year 280 black belts 40 champions trained worldwide vbss key component itt management system overarching discipline company drive toward operational excellence improve efficiencies accelerate new product introductions new chairman president chief executive officer march 2001 louis j giuliano assumed role chairman president chief executive officer company new segment names realignment engineered valves company renamed segments better reflect nature businesses former pumps complementary products segment renamed fluid technology former defense products services segment renamed defense electronics ser vices former specialty products segment renamed motion flow control former connectors switches segment renamed electronic components addition change made companys internal management reporting structure engineered valve business ev reports fluid technology segment company believes markets served ev closely aligned fluid technology businesses ev previously part former specialty products segment structure company conformed segment reporting accordingly reclassified comparative prior period information reflect change results operations year ended december 31 2001 compared year ended december 31 2000 sales revenues 2001 468 billion decrease 1537 million 32 2000 930 million 19 excluding impact foreign exchange decrease primarily attributable downturn communications industrial connectors markets electronic components scheduled wind certain defense electronics services contracts declines partially offset new contract revenue defense electronics services revenues acquisitions made 2000 operating income 3968 million 2001 963 million lower prior year due 977 million restructuring special items taken 2001 see status restructuring activities liquidity capital resources excluding restructuring special items 2001 operating income 14 million higher prior year operating margin 106 adjusted exclude restructuring special items 40 basis points higher margin 2000 increase primarily due process improvement efforts cost control actions taken address slowing economic environment improved product mix interest expense 620 million net interest income 68 million decreased 132 million 2000 due favorable change average interest rates increased cash operations partially offset higher average debt first half 2001 associated several acquisitions made 2000 effective income tax rate 2001 35 compared rate 37 2000 decrease effective tax rate due several initiatives taken 2001 2000 reduce structural rate company expects effective tax rate 2002 32 driven initiatives adoption statement financial accounting standards 142 goodwill intangible assets sfas 142 eliminates goodwill amortization expense see accounting pronouncements discussion sfas 142 net income continuing operations 2001 2167 million 239 per diluted share excluding 977 million 635 million aftertax restructuring special items 2001 net income continuing operations 2802 million 309 per diluted share compared 2645 million 294 per diluted share 2000 increase net income adjusted restructuring special items primarily due decrease interest expense lower effective tax rate fourth quarter 2001 company reassessed accruals discontinued operations determined activities related accruals would completed 600 million less originally estimated reversed related accruals income excess primarily related favorable experience resolution two automotive arbitration claims late 2001 early 2002 including income tax related claims legal environmental warranty claims income tax issues see sales automotive businesses risks uncertainties year ended december 31 2000 compared year ended december 31 1999 sales revenues 2000 483 billion increase 1972 million 43 1999 3599 million 78 excluding impact foreign exchange increase attributable several acquisitions made 2000 second half 1999 well organic growth partially offset absence defense settlement received 1999 scheduled wind certain defense contracts operating income 4931 million 2000 779 million higher prior year operating income 1999 4152 million included 46 million credit related restruc turing special items excluding restructuring special items 1999 operating income 825 million higher 1999 comparative operating income 4106 million related operating margin improved 102 89 1999 excluding restructuring special items increases operating income margin result higher sales volumes significant improvement productivity lower pension expense introduction new profitable products interest expense 752 million net interest income 179 million increased 284 million higher average debt levels due repurchase shares first quarter 1999 several acquisitions made 2000 second half 1999 higher average interest rates net income continuing operations 2000 2645 million 294 per diluted share compared 2329 million 253 per diluted share 1999 2300 million 250 per share excluding restructuring special items recorded 1999 companys effective tax rate 37 2000 1999 business segments sales revenues operating income companys business segments follows millions fluid technologys sales revenues 183 billion declined 45 million 02 2000 decrease reflects impact foreign exchange translation continued weakness industrial pump markets partially offset higher volume within water wastewater markets 2001 operating income restructuring special items 122 million compared 2000 operating income due improved product mix continued process improvements cost reduction initiatives sales 2000 increased 199 million 11 1999 adoption emerging issues task force eitf issue 0010 accounting shipping handling fees costs eitf 0010 resulted increase revenues cost sales approximately 16 million 2000 compared 1999 company restate 1999 sales eitf 0010 restatement impracticable addition higher volume within construction water wastewater businesses partially offset impact foreign exchange translation softness industrial pumps markets operating income 2000 326 million compared 1999 operating income excluding restructuring special items due higher prices higher productivity foreign exchange gain recognized upon liquidation foreign businesses benefits restructuring cost initiatives defense electronics services sales revenues 130 billion decreased 298 million 22 compared 2000 decline primarily due scheduled wind certain large contracts partially offset contribution new contract revenue operating income 2001 63 million greater 2000 operating income due improved margins certain mature contracts higher profitability new contracts cost control actions sales revenues 2000 declined 793 million 56 compared 1999 decrease due scheduled wind certain large contracts absence 256 million claim settlement received 1999 lost revenue sale gaastek business sold first quarter 2000 partially offset entire year revenues december 1999 acquisition stanford telecommunications incs space defense communications businesses contributed incremental sales revenue approximately 120 million 2000 operating income 2000 85 million greater 1999 operating income excluding restructuring special items primarily due margin improvements productprogram mix motion flow control recorded sales revenues 8987 million year representing increase 98 million 11 2000 increase due automotive market share gains europe north america sales growth aerospace controls business partially offset softness leisure marine market impact decline north american automotive build rates impact foreign exchange translation operating income restructuring special items 66 million 53 lower 2000 operating income due softness leisure marine market startup costs associated new european programs fluid handling systems partially offset process improvements north american fluid handling systems higher sales volume aerospace controls revenues 2000 represent increase 110 million 13 1999 inclusion 1999 acquisitions flojet corporation hydroair industries entire year combined added approximately 46 million sales revenues 2000 partially offset impact foreign exchange translation operating income 2000 flat 1999 operating income excluding restructuring special items electronic components sales revenues 6470 million 2001 representing decrease 1276 million 165 2000 decrease reflects downturn communications industrial markets negative impact foreign exchange translation partially offset revenues acquisitions made 2000 combined added approximately 64 million incremental sales operating income restructuring special items 131 million 132 2000 due declines volume partially offset cost reduction actions continued process improvements 2000 sales revenues increased 2586 million 501 compared 1999 primarily due 1999 acquisition stx pte ltd stx 2000 acquisitions ck components inc ck man machine interface mmi incremental sales revenues three acquisitions combined added approximately 143 million 2000 increase also reflects robust growth communications industrial transportation markets partially offset negative impact foreign exchange translation operating income 2000 369 million 594 1999 excluding restructuring special items higher volume greater contributions new products higher margins improvements manufacturing processes contributed increase liquidity capital resources company continues generate substantial cash operations remains strong financial position resources available reinvestment existing businesses strategic acquisitions managing capital structure short long term basis company plans fund anticipated 2002 cash requirements future cash operations supplemented required commercial paper borrowings company revolving credit agreement 20 domestic foreign banks provides aggregate commitments 10 billion expires november 2005 revolving credit agreement provides backup companys commercial paper program commercial paper borrowings december 31 2001 4413 million borrowings credit agreement december 31 2001 provisions facility require company maintain interest coverage ratio defined excess 375 times december 31 2001 companys interest coverage ratio well excess minimum requirement cash flows cash flows operating activities 4766 million 2001 increase 620 million 15 4146 million generated 2000 increase largely attributable higher cash earnings lower operating working capital levels liquidation nonoperating assets resulting several management initiatives items partially offset lower accrual levels due various operating payments use cash advances received prior years additions plant property equipment capital expenditures 2001 1740 million decrease 1806 million 2000 approximately 32 2001 spending occurred fluid technology primarily related expansion existing product lines new product lines custodial replacement approximately 25 incurred motion flow control process improvements expansion capacity support new business awards approximately 25 spent electronic components new product introductions manufacturing cost reduction initiatives defense electronics services expended approximately 18 2001 total primarily related expansion new existing product lines well custodial replacements december 31 2001 contractual commitments made future expenditures totaling approximately 27 million company targeting 2002 capital expenditures approximately 10 less amount spent 2001 acquisitions 2001 company spent approximately 91 million several small acquisitions investments acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition excess purchase prices fair values net assets acquired 721 million recorded goodwill associated acquisitions made first half year amortized periods 40 years acquisitions made second half year goodwill amortization accordance sfas 142 company also finalized purchase price allocations related acquisitions made prior 2001 resulted increase goodwill 183 million 2000 company acquired ck mmi several small companies approximately 192 million acquisitions accounted purchases goodwill 1739 million recorded company 2000 amortized period 25 30 years 1999 company acquired stanford telecommunications incs space defense communications businesses flojet corporation stx sanitaire corporation hydroair industries k electronics assets energy machine service inc made equity investment digitalglobe inc company paid total approximately 545 million acquisitions accounted purchases excess purchase prices fair values net assets acquired liabilities assumed 4161 million recorded goodwill amortized periods 40 years effective january 1 2002 company cease recording goodwill amortization accordance adoption sfas 142 see accounting pronouncements discussion impact sfas 142 status restructuring activities december 14 2001 company announced restructuring program reduce structural costs improve profitability company recorded charge 977 million 635 million aftertax 070 per diluted share related closure five facilities discontinuance 21 products severance approximately 3400 persons asset impairments charge primarily attributable electronic components segment downturn communications market significantly reduced sales volume charge also impacts fluid technology segment motion flow control segment corporate headquarters cash portion charge 610 million primarily relates severance lease termination costs noncash portion charge 367 million primarily relates machinery equipment impaired result announced plans due downturn connector switches market actions expected result savings net period expenses 654 million 2002 822 million 2003 december 31 2001 1200 persons 35 planned reductions taken place actions expected complete december 31 2002 fourth quarter 1999 company recorded 202 million charges related restructuring activities primarily closure four facilities severance 324 persons company also recorded 200 million goodwill writeoffs additionally fourth quarter 1999 company assessed restructuring accruals established 1998 determined activities related accruals would completed 448 million less originally estimated reversed related accruals income excess primarily result favorable experience employee separations asset disposal costs required net effect reversal 1998 accruals 1999 restructuring asset writeoffs increase 1999 operating income 46 million diluted earnings per share 003 december 31 2001 prior years restructuring actions substantially complete 25 million remaining primarily associated severance runoff europe remaining lease payments see note 4 restructuring special items notes consolidated financial statements detailed discussion sale assets businesses second quarter 2001 company sold two corporate planes 307 million plant property equipment across businesses 118 million planes leased company form operating leases 2000 company generated divestiture proceeds 476 million first quarter 2000 company sold net assets gaastek business defense electronics services segment 283 million remaining 193 million cash proceeds sale assets represents plant property equipment sales across businesses 1999 company made three significant divestitures palm coast utility corporation carbon industries inc assets community development corporation aggregate generated 965 million cash addition company generated 112 million proceeds plant property equipment sales across businesses share repurchase 2001 2000 1999 35 million 17 million 22 million shares respectively repurchased offset dilutive effect exercised stock options 1999 company repurchased additional 81 million shares debt credit facilities debt december 31 2001 9734 million compared 104 billion december 31 2000 cash equivalents 1213 million december 31 2001 compared 887 million december 31 2000 decrease net debt defined total debt less cash equivalents 975 million due strong free cash flow partially offset adoption sfas 133 accounting derivative instruments hedging activities sfas 133 raised longterm debt 425 million value interest rate swaps december 31 2001 contractual obligations disclosure companys contractual obligations commercial commitments including longterm debt capital operating lease obligations lines credit see note 14 leases rentals note 15 debt notes consolidated financial statements market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant com panys policies procedures see note 1 accounting policies note 16 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources uses interest rate swaps company several fixed floating interest rate swap agreements notional amount 3494 million result swaps interest expense substantially companys longterm debt calculated variable rather fixed rate basis terms agreements match terms fixed debt reference 3month libor carrying value swaps december 31 2001 462 million including 37 million accrued interest december 31 2001 2000 companys shortterm longterm debt obligations net cash 8521 million 9496 million respectively based positions companys overall exposure interest rates changes 21 71 basis points equivalent 10 companys weighted average shortterm interest rates december 31 2001 2000 respectively companys cash marketable securities floating rate debt obligations related interest rate derivatives would 17 million 64 million effect companys pretax earnings years ended december 31 2001 2000 respectively increases 79 85 basis points longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 2001 2000 respectively would 36 million effect fair value companys fixed rate debt years ended december 31 2001 2000 multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge net longterm investments foreign countries 2001 companys largest exposures foreign exchange rates exist primarily euro swedish krona british pound us dollar december 31 2001 company seven foreign currency derivatives outstanding total notional amount 503 million 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 2001 would impact approximately 12 million fair value instruments 2000 companys largest exposures foreign exchange rates existed primarily deutsche mark belgian franc swedish krona italian lira us dollar december 31 2000 company nine foreign currency derivatives outstanding total notional value 600 million 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 2000 would impact approximately 04 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted united states company expects fully utilize credits generated december 31 2001 income taxes paid foreign jurisdictions deferred tax assets company net deferred tax assets 2976 million 3676 million december 31 2001 2000 respectively deferred tax assets periods composed us foreign state local deferred tax assets net deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate nondeductible accruals employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductions future periods accounting pronouncements june 2001 financial accounting standards board fasb issued sfas 142 changes accounting goodwill amortization method impairment approach amortization goodwill past business combinations cease upon adoption statement january 1 2002 connection adoption sfas 142 company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment recognized due elimination goodwill amortization expense adoption sfas 142 expected increase operating income approximately 41 million decrease effective tax rate approximately 200 basis points increase earnings per share estimated 039 2002 june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred effective company january 1 2003 company currently reviewing provisions sfas 143 determine standards impact upon adoption company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 effective january 1 2002 sfas 144 outlines accounting financial reporting guidelines sale disposal longlived assets discontinued operations adoption pronouncement material impact companys results operations financial position risks uncertainties sales automotive businesses 1998 company received notifications claims buyers automotive businesses itt sold september 1998 requesting postclosing adjustments purchase price provisions sales agreements 1999 claims submitted arbitration late 2001 early 2002 claims favorably resolved see note 5 discounted operations notes consolidated financial statements detailed discussion defense backlog defense electronics services segments total backlog 26 billion december 31 2001 company generally records new contract awards backlog funding authorized appropriated customer environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes accruals accordance generally accepted accounting principles insurance recoveries recorded probable received although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows disclosure companys commitments contingencies see note 19 euro conversion issue company successfully implemented euro conversion plans experienced problems related conversion 2002 outlook overall company expects 2002 challenging year expect significant economic recovery company believes low growth coupled overcapacity continue dampen capital spending translate continued pricing pressure restrain discretionary consumer spending conversely company believes defense spending united states increase overall company expects 2002 revenue flat 3 2001 revenue operating margin improvements driven process improvements benefits fourth quarter 2001 restructuring program cost control actions lower interest expense result modest eps growth company expects free cash flow defined least 265 million fluid technology business company expects slower growth rate water wastewater businesses recovery industrial pumps translate revenue growth 2 2001 defense electronics services business company believes record backlog program rampup electronic warfare space communications translate revenue growth 4 6 2001 motion flow control business company expects declines worldwide automotive airplane build rates weakness leisure marine market translate revenue decline 3 5 2001 electronic components business company believes stabilization wireless handset market nearterm declines communications market industrial commercial aircraft markets translate revenue decline 10 15 2001 forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented liquidity capital resources market risk exposures risks uncertainties historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred fluid technology business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense electronics services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets motion flow control business affected cyclical nature transportation industries strikes major auto producers international demand marine leisure products electronic components business affected economic conditions foreign markets currently participate trying enter cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements change independent public accountants march 22 2002 upon recommendation audit committee board directors company approved dismissal arthur andersen llp arthur andersen companys independent auditors following 2001 audit selection deloitte touche llp independent auditors 2002 order ensure orderly transition auditors company intends continue use arthur andersen certain services remainder 2002 connection audits two recent fiscal years march 22 2002 disagreements arthur andersen matter accounting principles practices financial statement disclosure auditing scope procedure disagreements resolved satisfaction arthur andersen would caused arthur andersen make reference thereto report financial statements company time periods also time periods reportable events term used item 304 a1v regulation sk arthur andersens reports financial statements company last two years neither contained adverse opinion disclaimer opinion qualified modified uncertainty audit scope accounting principles provided arthur andersen copy companys form 8k prior filing securities exchange commission arthur andersen provided us letter addressed commission filed exhibit companys form 8k filed commission companys two recent fiscal years ended december 31 2001 subsequent interim period march 22 2002 company consult deloitte touche llp regarding matters events set forth item 304a2i ii regulation sk item 7aitem 7 managements discussion analysis financial condition results operations results operations company adopted statement financial accounting standards 142 discontinued amortization goodwill january 1 2002 see note 2 changes accounting pronouncements notes consolidated financial statements additional information total costs expenses 2001 exclude goodwill amortization expense comparative purposes executive summary consolidated results 2003 year company met exceeded financial goals companys revenues grew almost 13 prior year results contribution acquisitions accounted growth 3 effects foreign currency translation contributed growth almost 5 improvement remaining increase 5 generated companys existing businesses outpaced initial company expectations especially given mixed end market conditions company also reported strong operating income performance 5285 million amount decreased 91 million prior year due increased spending corporate initiatives increased restructuring expense 2003 340 million increased investment corporate initiatives include valuebased six sigma vbss program allows continuous process improvement drives operational excellence throughout organization valuebased leadership development vbld process develops companys leadership every level allows effective strategic operational decision making organized decisive manner upgrade companys information technology infrastructure including increased bandwith across itts wide area network enhanced security strategic positioning global data centers 2003 company reported diluted earnings per share eps 429 increased 023 57 prior year important note periods contained special items management considers separately core operations items clude restructuring tax settlements related interest items results discontinued operations net effect items accounted 007 per share increase prior year results cash operating activities 5756 million dramatically exceeded company expectations 2003 amount decreased 192 million prior year decrease largely due 2000 million pension prefunding 2003 versus 500 million 2002 company contributed additional 1000 million pension prefunding first quarter 2004 determined prefunding strategy allow company avoid substantial mandatory contributions 2004 2005 current irs contribution rules business segment highlights fluid technology fluid technology segment strong year revenues 225 billion 150 2002 revenues acquisitions contributed growth 60 foreign currency translation provided growth 67 remaining revenue growth 23 represented contributions existing businesses waterwastewater businesses largest contributor organic growth reported results reflect companys focus grow existing businesses new product introductions perform strategic acquisitions build core competencies company anticipates trend revenue growth continue strong performances waterwastewater businesses impact wedeco ag water technology wedeco first quarter 2004 acquisition wedeco projected add 125 million 140 million revenue segment 2004 total segment revenue projected 245 billion 251 billion 2004 operating income increased 79 2003 2714 million primarily reflecting increased volume operating income projected 304 million 317 million 2004 defense electronics services defense electronics services segment increased sales 183 2003 179 billion increase reflects increased revenues businesses particularly service sectors includes revenues middle east support classified programs segments backlog management regards important indicator future performance increased 285 billion 2002 319 billion 2003 revenue projected grow approximately 20 24 2004 resulting revenue 215 billion 223 billion largest contributing factor forecast increase acquisition eastman kodak companys remote sensing systems business expected provide revenues 250 million 275 million closing transaction forecast 2004 revenue growth excluding perspective 2004 acquisition expected line segments historical performance ie approximately 69 growth led increased services revenue reflecting broader range offerings operating income 1871 million 2003 215 higher 2002 increase reflects increased volume operating income projected 213 million 229 million 2004 motion flow control motion flow control revenues 9923 61 greater 2002 improvement mainly due increased revenues marine friction material businesses well positive contribution foreign currency translation decreased volume automotive fluid handling business reflecting certain platform losses partially offset mentioned items platform losses expected impact 2004 performance resulting revenue 935 million 975 million segment new product revenue marine friction material shock absorber businesses expected partially offset 2004 revenue decline fluid handling business operating income increased 10 1347 million increase reflects increased volume change product mix operating income projected 136 million 146 million 2004 electronic components electronic components segments revenue increased 29 6003 million primarily due contribution acquisition impact foreign currency translation factors partially offset weakness telecommunications aerospace markets segment also impacted delays introduction new products management believes end markets serviced electronic components segment showing signs modest growth segments 2004 performance reflect industry performance belief supported book bill ratios 102 105 third fourth quarters 2003 respectively additionally new products introduced late fourth quarter 2003 expected 2004 introductions forecasted add segments positive momentum revenues 2004 projected 600 million 640 million operating income 100 million 2003 operating margin 17 104 decline 2002 due changes product mix pricing pressures 2003 restructuring initiatives higher marketing administrative costs operating margin 2004 forecast increase approximately 430 basis points due benefit 2003 restructuring initiatives process improvement initiatives introduction new products operating income projected 36 million 45 million 2004 year ended december 31 2003 compared year ended december 31 2002 sales revenues year ended december 31 2003 563 billion increase 6413 million 129 2002 costs sales revenues 368 billion 2003 increased 4716 million 147 comparable 2002 period increases sales revenues costs sales revenues primarily attributable higher volume defense electronics services fluid technology segments contributions acquisitions made fluid technology electronic components segments impact foreign currency translation product mix changes defense electronic services electronic components segments also contributed increase costs sales revenues selling general administrative sga expenses 2003 8247 million increase 1045 million 145 comparable prior year period increase sga expenses primarily due increased marketing expense segments reflecting expenditures newly acquired companies additional employee benefit costs process improvement initiatives increased administrative expenses research development engineering rde expenses 2003 increased 403 million 78 compared 2002 increase attributable increased spending segments 2003 company recorded 338 million restructuring charge reduce operating costs streamline structure charge primarily reflects planned reduction 986 persons additionally management reviewed companys remaining restructuring actions determined certain 2003 2001 actions would completed 47 million less planned electronic components segment accordingly restructuring accruals totaling 47 million reversed income 2003 company also recorded asset impairment charge 14 million primarily writeoff technology license utilized foreseeable future due projected market conditions 2002 company reversed 131 million restructuring accruals income determined certain 2001 actions would completed less planned also fourth quarter 2002 company recorded 96 million restructuring charge related planned termination 292 persons planned closure two facilities see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 5285 million compared 5376 million 2002 decrease primarily due increased sga rde expenses increased net restructuring asset impairment charges 340 million partially offset increased sales revenues segments segment operating margin 2003 107 13 segment operating margin comparable 2002 period decrease reflects changes product mix defense electronics services electronic components segments increased sga expenses 2003 restructuring asset impairment charges interest income 101 million net interest expense 209 million 2003 company recognized 324 million interest expense net interest income 110 million 2002 variance years primarily due interest income 323 million related two 2003 tax settlements collection interest income cost based investment management previously believed would received upon collection company reversed related valuation allowance income additionally lower average debt levels also contributed variance interest expense miscellaneous expense 79 million 2003 compared 36 million income 2002 115 million increase expense primarily due higher employee benefit costs disposed companies income tax expense 1398 million 2003 increase 109 million 2002 increase primarily due 101 million interest income 2003 versus 324 million interest expense 2002 higher effective tax rate 2003 partially offset lower operating income 2003 effective income tax rate 2003 263 compared 253 2002 increase primarily due 612 million tax refund received 2002 306 million reflected reduction tax expense several favorable 2003 tax settlements partially offset impact 2002 refund income continuing operations 2003 3909 million 415 per diluted share compared 3799 million 406 per diluted share 2002 increase reflects results discussed company recognized 130 million income discontinued operations 2003 income primarily relates collection disputed receivable related companys disposed automotive businesses upon collection company reversed related valuation allowances previously established assets resulting mentioned income year ended december 31 2002 compared year ended december 31 2001 sales revenues 2002 499 billion increase 3096 million 66 2001 costs sales revenues year ended december 31 2002 increased 1674 55 2001 increases primarily attributable increased sales defense electronics services fluid technology motion flow control segments partially offset volume declines electronic components segment sga expenses 2002 7202 million increase 489 million 73 2001 increase primarily attributable increased marketing expenses fluid technology segment costs associated process improvement initiatives increased information technology spending increased administrative expenses across businesses rde expenses increased 944 million 222 2002 compared 2001 primarily due increased spending defense electronics services segment 2002 management conducted quarterly progress reviews companys remaining restructuring actions determined 131 million planned cash expenditures would incurred accordingly 131 million restructuring accruals primarily relating 2001 restructuring plan reversed income also fourth quarter 2002 company recorded restructuring charge 96 million related termination 292 persons closure two facilities 2001 company recorded 977 million restructuring asset impairment charge reduce structural costs improve profitability see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information regarding matters operating income 5376 million 2002 1408 million 355 higher prior year excluding goodwill amortization expense increase 1001 million 229 operating margin 108 230 basis points higher margin 2001 approximately 140 basis points higher 2001 excluding goodwill amortization expense excluding goodwill amortization expense increases primarily due 977 million restructuring asset impairment charge recorded 2001 increased segment volume items partially offset lower operating margins electronic components segment reflecting higher sga expenses increased corporate expenditures reflecting cost process improvement initiatives increased information technology spending increased administrative expenses also offset improved margin interest expense 324 million net interest income 110 million decreased 296 million 2001 primarily due favorable change average interest rates lower average debt levels result increased cash operations effective income tax rate 2002 253 compared 350 2001 decrease 2002 effective tax rate due approximately 31 million tax gains related capital loss carryback benefit several foreign tax planning initiatives initiated 2002 2001 reduce structural rate elimination goodwill expense pursuant adoption statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 also contributed decline effective tax rate income continuing operations 2002 3799 million 406 per diluted share compared 2167 million 239 per diluted share 2001 increase due higher operating income lower interest expense items partially offset higher income tax expense fourth quarter 2001 company reassessed accruals discontinued operations determined activities related accruals would completed 600 million less originally estimated reversed related accruals income excess primarily related favorable foreign tax rulings see section entitled discontinued operations note 5 discontinued operations notes consolidated financial statements additional information business segment information year ended december 31 2003 compared year ended december 31 2002 fluid technology sales revenues 225 billion increased 2936 million 150 2002 costs sales revenues increased 2096 million 163 2002 higher volume waterwastewater markets acquisition revenue waterwastewater engineered process solutions businesses impact foreign currency translation primary factors increases sga expenses 2003 increased 516 million 138 compared 2002 mainly due increased marketing expenses reflecting expenditures newly acquired companies increased administrative costs markets 2003 segment recorded 138 million restructuring charge mainly related planned reduction headcount restructuring charges recorded 2002 totaled 60 million workforce reductions additionally segment reversed 15 million restructuring accruals 2002 management deemed unnecessary see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 199 million 79 compared 2002 due activity discussed defense electronics services sales revenues costs sales revenues 2003 increased 2770 million 183 1998 million 236 respectively prior year increases due increased revenue businesses including higher service revenue reflecting middle east support classified programs product mix issues also contributed increase costs sales revenues sga expenses increased 129 million 129 primarily due higher marketing expenses increased employee benefit administrative costs businesses 2003 segment recorded 10 million restructuring charge related reduction headcount see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information rde expenses 2003 increased 292 million 70 due increased spending businesses operating income 2003 1871 million increase 331 million 215 compared 2002 increase reflects results discussed motion flow control recorded sales revenues costs sales revenues 9923 million 7216 million respectively 2003 reflecting increases 568 million 61 288 million 42 2002 increases mainly due increased sales marine friction material businesses impact foreign currency translation partially offset volume declines automotive fluid handling business sga expenses increased 92 million 107 reflecting higher marketing costs marine business increased administrative costs businesses rde expenses 36 million 110 higher comparable 2002 period spending increased businesses 2003 segment recorded net restructuring charge 44 million mainly related planned reduction headcount closure one facility restructuring charges recorded 2002 totaled 30 million primarily reduction headcount closure one facility additionally segment reversed 15 million restructuring accruals 2002 management deemed unnecessary see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 1347 million 123 million 100 higher 2003 compared 2002 primarily due items mentioned electronic components sales revenues 6003 million costs sales revenues 4299 million 2003 increased 168 million 29 363 million 92 respectively comparable prior year period increases reflect contribution acquisition impact foreign currency translation partially offset weaknesses telecommunication commercial aerospace markets product mix issues also contributed increase costs sales revenues sga expenses increased 185 million due increased marketing reflecting expenditures newly acquired company employee benefit administrative expenses including impact 2003 first quarter acquisition 2003 segment recorded 132 million restructuring charge primarily relating planned headcount reductions reversed 46 million restructuring accruals income management deemed certain 2003 2001 actions would completed less originally planned additionally 2003 segment recorded 14 million asset impairment charge mainly writeoff license agreement technology utilized foreseeable future due projected market conditions restructuring charges recorded segment 2002 totaled 06 million refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 decreased 604 million 858 2002 decline due factors discussed corporate expenses increased 140 million 2003 primarily due costs related process improvement initiatives 13 million restructuring charge planned headcount reductions refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information increased administrative expenses year ended december 31 2002 compared year ended december 31 2001 fluid technology sales revenues 196 billion increased 1266 million 69 2001 costs sales revenues increased 826 million 69 increases reflect increased volume waterwastewater engineered process solutions group businesses contribution 2002 acquisitions partially offset volume declines industrial pump business sga expenses increased 203 million 58 2002 primarily due increased marketing costs 2002 management conducted quarterly progress reviews remaining restructuring actions reversed 15 million segments restructuring accruals deemed unnecessary additionally fourth quarter 2002 fluid technology segment recorded restructuring charge 60 million primarily reduction 147 employees closure one facility fourth quarter 2001 segment recorded 160 million restructuring charge see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income 2002 excluding goodwill amortization expense increased 309 million 140 due factors discussed defense electronics services sales revenues 151 billion increased 2091 million 160 compared 2001 costs sales revenues increased 998 million 134 2001 increases primarily attributable increased volume across businesses sga expenses flat prior year rde costs increased 868 million 265 2002 due fulfillment increased expenditures related customer contracts across businesses fourth quarter 2002 management reviewed remaining restructuring actions reversed 10 million segments restructuring accruals deemed unnecessary see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income 2002 219 million 166 greater 2001 operating income excluding goodwill amortization due factors mentioned defense electronics services segments total backlog 28 billion 26 billion december 31 2002 2001 respectively company generally records new contract awards backlog funding authorized appropriated customer management utilizes backlog measurement analyzing operations defense electronics services segment believes good indicator future performance defense businesses motion flow control recorded sales revenues 9355 million costs sales revenues 6928 million year representing increases 368 million 41 265 million 40 respectively 2001 increases primarily due increased volume automotive fluid handling systems business due higher north american build rates 2002 market share gains friction materials business market growth leisure marine business partially offset declines aerospace controls sga expenses increased 49 million 60 due higher marketing expense fixed asset losses 2002 partially offset decreased administrative expenses second half 2002 management reviewed remaining restructuring actions reversed 15 million segments restructuring accruals deemed unnecessary additionally fourth quarter 2002 motion flow control segment recorded restructuring charge 30 million primarily reduction 140 employees closure one facility consolidation selected functions fourth quarter 2001 segment recorded restructuring charge 81 million see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic excluding goodwill amortization expense operating income 1224 million 2002 increased 83 million 73 2001 due mentioned factors electronic components sales revenues costs sales revenues declined 635 million 98 418 million 96 respectively 2001 declines reflect general softness segments markets sga expenses increased 118 million 135 2002 due increased general administrative costs second half 2002 management reviewed remaining restructuring actions reversed 87 million segments restructuring accruals related favorable completion planned actions determination certain planned actions economically feasible additionally fourth quarter 2002 segment recorded restructuring charge 06 million 2001 segment recorded restructuring asset impairment charges 552 million 144 million respectively see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topics excluding goodwill amortization expense operating income 704 million 2002 446 million 2001 due mentioned factors status restructuring asset impairments 2003 restructuring activities discussed accounting pronouncements section managements discussion analysis financial condition results operations company recorded restructuring charges related 2003 actions accordance statement financial accounting standards sfas 146 accounting costs associated exit disposal activities restructuring actions initiated prior january 1 2003 recorded accordance guidelines emerging issues task force issue 94 3 liability recognition certain employee benefits including certain costs incurred restructuring fourth quarter 2003 company announced actions reduce operating costs primarily reduction headcount new 154 million restructuring charge primarily reflects severance 301 employees actions segment follows electronic components segment recorded 15 million charge termination 132 employees including 113 factory workers 14 office workers five management employees fluid technology segment recognized 124 million charge severance 134 employees including 39 factory workers 90 office workers five management employees lease costs represent 03 million charge segment also recorded 02 million charge associated disposal machinery equipment defense electronics services segment recorded 10 million charge severance 35 employees including seven factory workers 19 office workers nine management employees projected future cash savings restructuring actions announced fourth quarter 2003 approximately 13 million 2004 53 million 2005 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses december 31 2003 company made 47 million payments attributable 2003 fourth quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition new restructuring actions announced fourth quarter motion flow control segment recognized 05 million severance employee benefit costs related actions announced first quarter electronic components segment recognized 02 million outplacement related actions announced earlier 2003 third quarter 2003 company announced additional actions reduce operating costs primarily reduction headcount new 26 million restructuring charge primarily reflects planned severance 72 employees actions segment follows electronic components segment recorded 12 million charge planned termination 40 employees including 15 factory workers 25 office workers segment also recorded 01 million charge associated disposal machinery equipment fluid technology segment recognized 05 million charge planned severance 13 factory workers 14 office workers lease costs represent 04 million charge motion flow control segment recorded 04 million charge planned severance one management employee four factory workers projected future cash savings restructuring actions announced third quarter 2003 approximately 4 million 2004 16 million 2005 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses december 31 2003 company made 10 million payments attributable 2003 third quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition new restructuring actions announced third quarter motion flow control segment recognized 02 million severance employee benefit costs related actions announced first quarter second quarter 2003 company continued program reduce structural costs increase profitability new restructuring actions totaling 47 million announced period charge primarily reflected planned severance 148 employees cancellation operating lease actions segment follows electronic components segment comprises 27 million charge actions taken segment include planned termination six management employees 19 factory workers 71 office workers motion flow control segment recognized 10 million planned severance 50 employees including six management employees 31 factory workers 13 office workers lease termination fees 07 million asset disposal costs 01 million also reflected charge corporate headquarters charge 02 million recorded planned termination one management employee one office worker projected future cash savings restructuring actions announced second quarter 2003 approximately 8 million 2004 33 million 2005 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses december 31 2003 company made 26 million payments attributable 2003 second quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition new restructuring actions announced second quarter motion flow control segment recognized 12 million severance employee benefit costs related actions announced first quarter first quarter 2003 company recorded 90 million restructuring charge primarily planned severance 465 persons severance 83 million represents majority charge actions segment follows electronic components segment recorded 68 million charge planned termination 226 persons comprised 101 office workers 116 factory workers nine management employees idle facility costs 03 million asset disposal costs 04 million also reflected charge actions prompted managements projections continued weakness certain businesses corporate headquarters recorded 11 million charge consolidation administrative tasks including planned termination two management employees motion flow control segment recorded 04 million charge planned termination 237 employees comprised 21 office workers 216 factory workers charge relates closure manufacturing facility arkansas actions completed 2003 2004 total estimated charge approximately 26 million recognized ratably restructuring period terminations become effective management deemed restructuring actions necessary address anticipated loss certain platforms second half 2003 december 31 2003 company made 51 million payments attributable 2003 first quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future cash savings restructuring actions announced first quarter 2003 approximately 8 million 2004 38 million 2005 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses following table displays rollforward restructuring accruals 2003 restructuring programs millions second half 2003 35 million restructuring accruals related current year programs reversed income result quarterly reviews companys remaining restructuring actions reversals primarily reflect lower anticipated severance costs completed actions favorable employee attrition electronic components segment additionally certain actions completed longer deemed feasible company also reversed noncash charges totaling 02 million 2003 headcount reduced 690 persons company experienced employee attrition leaving balance 192 planned reductions related 2003 restructuring plans addition one facility remains closed related 2003 restructuring plans actions announced 2003 substantially completed end third quarter 2004 company anticipates approximately 15 million restructuring payments associated 2003 restructuring plans balance restructuring payments approximately 1 million planned 2005 future restructuring payments funded cash operations supplemented required commercial paper borrowings 2003 asset impairments 2003 company recorded 14 million asset impairment charge primarily writeoff technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities 2002 restructuring activities fourth quarter 2002 company recorded 96 million restructuring charge primarily closure two facilities planned severance 292 persons severance 85 million represents majority charge lease payments costs represent remainder listed business segment background information 2002 restructuring plan millions actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure one facility fairfield nj termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain platforms automotive fluid handling systems business 2003 resulting excess capacity planned actions include closure one facility rochester ny consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions required continuing difficult market conditions actions include termination five employees comprised three office workers two management employees following table displays rollforward restructuring accruals 2002 restructuring program millions 2003 company closed two facilities reduced headcount 205 experienced employee attrition leaving balance 16 planned headcount reductions severance runoff payments occur 2004 closed facility costs continue 2007 future restructuring expenditures funded cash operations supplemented required commercial paper borrowings remaining projected future cash savings 2002 restructuring plan approximately 12 million 2004 approximately 34 million 2005 2007 savings represents lower salary wage expenditures decreased facility operating costs impact reflected costs sales revenues selling general administrative expenses actual savings approximated plan 2003 2002 2004 company anticipates 20 million restructuring payments associated 2002 restructuring plan future restructuring payments funded cash operations supplemented required commercial paper borrowings 2001 restructuring activities december 14 2001 company announced restructuring program reduce structural costs improve profitability whereby company recorded charge 833 million related closure five facilities discontinuance 21 products 10 switch product group 11 connectors group severance 3400 persons asset impairments cash portion charge 610 million primarily relates severance lease termination costs noncash portion charge 223 million primarily relates machinery equipment became impaired result announced plans listed business segment background information 2001 restructuring plan millions 2001 sales electronic components segment decreased 1276 million 165 operating income excluding restructuring decreased 131 million 132 excluding contribution acquisitions made 2001 sales decreased approximately 192 million decrease primarily due downturn communication industrial markets addition management expected sales declines 2002 specifically communications industrial commercial aircraft markets combination downturn markets businesses acquired 2000 late 1999 resulted excess capacity prompted management seek opportunities reduce costs result review management decided consolidate manufacturing functions well administrative tasks throughout segment planned actions included outsourcing production operations weinstadt germany third party suppliers poland hungary transfer ten product lines five locations north america europe loveland colorado santa ana california weinstadt germany basingstoke uk dole france two locations china shenzhen tianjin consolidation european administrative functions transfer production operations santa ana california nogales mexico closure manufacturing facilities eden prairie minnesota watertown massachusetts smaller actions consisting primarily elimination administrative functions addition management also decided discontinue 21 older connector switch products revenue 2001 products totaled 293 million planned actions included termination 2753 persons comprised 2395 factory workers 348 office workers 10 management employees resulted cash charge 370 million included 330 million severance asset impairment charge 182 million primarily machinery equipment disposed result restructuring activities actions within fluid technology segment motion flow control segment corporate headquarters identified cost improvement opportunities processes functions identified could outsourced performed existing facilities eliminated redundant measures prompted primarily managements efforts reduce costs projections recovery industrial pumps businesses anticipated declines worldwide automotive build rates planned actions within fluid technology segment included outsourcing manufacturing functions city industry california seneca falls new york ashland pennsylvania third party suppliers united states mexico china consolidation tasks throughout segment closure foundry nanjing china actions incorporated termination 436 persons comprised 236 factory workers 189 office workers 11 management employees resulted cash charge 131 million included 105 million severance asset impairment charges 29 million primarily machinery equipment scrapped planned actions motion flow control segment included closure manufacturing facility costa mesa california operations consolidated three existing facilities closure manufacturing facility saffron walden england operations consolidated facility denmark closure sales office germany consolidation administrative tasks actions included projected termination 183 persons comprised 144 factory workers 28 office workers 11 management employees resulted cash charge 73 million included 49 million severance asset impairment charges 08 million primarily machinery equipment discarded planned actions companys corporate headquarters shared service facilities consisted consolidation administrative tasks included termination 28 persons comprised 26 office workers two management employees resulted cash charge 36 million included 35 million severance asset impairment charge 04 million 2004 company anticipates 13 million restructuring payments associated 2001 restructuring plan remaining 05 million payments expected incurred evenly 2005 2006 future restructuring payments funded cash operations supplemented required commercial paper borrowings following table displays rollforward restructuring accruals 2001 restructuring program millions second half 2003 09 million restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions reversals primarily reflect less anticipated severance costs completed actions electronic components segment third fourth quarters 2002 17 million 101 million restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions respectively reversals primarily reflect less anticipated severance costs completed actions segments decision transfer five product lines santa ana california weinstadt germany dole france basingstoke uk shenzhen tianjin china supply chain issues eliminated financial viability transfers decision continue partial operations one electronic components facilities addition management determined one facility within fluid technology segment would remain operational suitable outsource supplier could identified 2003 company reduced headcount 24 persons closed one facility effectively completing remaining actions contemplated 2001 restructuring program severance runoff payments occur 2004 closed facility expenditures continue incurred 2004 remaining future cash noncash savings projected approximately 211 million 16 million respectively period 2004 2006 asset impairments fourth quarter 2001 company initiated full review longlived assets electronic components segment significant volume declines pricing pressures business management expected volume declines 2002 specifically communications market industrial commercial aircraft markets result review company recorded impairments machinery equipment 139 million impairment 05 million cost based investment applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities summary 2001 restructuring activities asset impairments total impact restructuring initiative asset impairment review charge 977 million 635 million aftertax recorded 2001 remaining projected aggregate future cash noncash savings mentioned actions approximately 211 million 16 million respectively period 2004 2006 figures include total savings approximately 78 million 2004 savings reflected primarily costs sales revenues selling general administrative expenses actual savings approximated plan 2003 2002 result quarterly reviews progress companys remaining restructuring actions second half 2003 2002 management determined 09 million 118 million cash expenditures would incurred respectively accordingly 09 million 118 million restructuring accruals relating 2001 restructuring plan reversed restructuring asset impairments line consolidated income statements 2003 2002 respectively connection restructuring activities asset impairment charge company identified assets total book value 262 million primarily machinery equipment disposal electronic components segment identified 220 million fluid technology segment identified 34 million motion flow control segment identified 08 million disposal assets disposed end 2003 discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 million brake chassis unit continental ag germany approximately 1930 million dispositions treated discontinued operations connection sale businesses company established accruals taxes 9727 million representation warranty contract purchase price adjustments 1488 million direct costs accruals 1020 million environmental obligations 161 million 1998 1999 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration following tables display rollforward automotive discontinued operations accruals january 1 2001 december 31 2003 thousands 2001 company disbursed approximately 10 million primarily legal defense costs related claims filed buyers second quarter 2001 company settled continental ag claim fourth quarter 2001 arbitration hearing valeo sa concluded company also reassessed obligations related disposal automotive businesses determined would spend 633 million less disposition primarily due favorable foreign tax rulings based assessment 633 million reversed 2001 consolidated income statement income discontinued operations first quarter 2002 arbitrator ruled valeo sa must pay company monies settle claim related sale electrical systems business 2003 company reassessed obligations related disposal automotive businesses determined would spend 22 million less disposition related favorable spending professional fees adjustments environmental exposures based assessment 22 million reversed 2003 consolidated income statement income discontinued operations december 31 2003 company automotive discontinued operations accruals 1861 million primarily relate following taxes 1542 million related original transaction recorded accrued taxes product recalls 78 million related nine potential product recall issues recorded accrued expenses environmental obligations 143 million remediation investigation groundwater soil contamination thirteen sites recorded liabilities employee benefits 99 million workers compensation issues recorded accrued expenses 2003 company spent approximately 18 million automotive discontinued operations accruals company expects cash settle 1542 million tax obligations 2004 2005 company projects spend 30 million 40 million 2004 related remaining automotive obligations liquidity capital resources cash flow overview company generated 5756 million cash operating activities 2003 income continuing operations plus depreciation amortization contributed approximately 5790 million cash flow liquidation approximately 870 million working capital deferral 1672 million tax payments also positive contributors cash operating activities 2003 also reflects 2000 million prefunding pension obligations company utilized cash generated operating activities 1536 million capital expenditures 462 million strategic acquisitions reduction debt 1868 million additionally dividend payments totaled 580 million 697 million utilized purchase companys common stock company made additional 100 million prefunding pension obligations first quarter 2004 anticipates significant tax payments 2004 consideration items cash operating activities 2004 projected 460 million 510 million 2004 cash requirements funded future cash operations supplemented required commercial paper borrowings cash flows comparison 2003 2002 cash flows operating activities 2003 decreased 192 million 32 comparable 2002 period decrease primarily attributable 1500 million incremental prefunding pension obligations 2000 million 2003 vs 500 million 2002 partially offset lower tax payments increased payable levels reduction inventory levels contractual obligations companys commitment make future payments longterm contractual obligations follows december 31 2003 1 see note 16 debt notes consolidated financial statements discussion use availability debt revolving credit agreements 2 refer note 15 leases rentals notes consolidated financial statements discussion lease rental agreements 3 unconditional purchase commitments principally take pay obligations related purchase certain raw materials subcontract work 4 longterm liabilities primarily consists estimated environmental payments company estimates based historical experience spend 80 million 110 million per year environmental investigation remediation 104 sites company contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2003 itt calculated best estimate remediate ground water soil 1080 million recorded accrual approximates estimate additions plant property equipment capital expenditures 1536 million 2003 flat comparable prior year period acquisitions 2003 company spent 462 million primarily acquisition two entities one electronic components segment one fluid technology segment excess purchase price fair values net assets acquired 305 million recorded goodwill acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows veamtec division northrop grumman corporation designer manufacturer cylindrical filter fiber optic connectors militaryaerospace industrial transit entertainment nuclear markets uniservice wellpoint srl manufacturer high quality diesel electric powered vacuum primed centrifugal pumps along spear well point dewatering systems rental market sale purchase price allocations 2003 acquisitions based preliminary data changes expected evaluations finalized additional information becomes available additionally company also finalized purchase price allocations related 2002 acquisitions resulted decrease goodwill 51 million 2002 company spent 1592 million primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition excess purchase prices fair values net assets acquired 1172 million recorded goodwill additionally company also finalized purchase price allocations related 2001 acquisitions resulted decrease goodwill 92 million 2001 company spent approximately 91 million several small acquisitions investments considered material individually aggregate acquisitions accounted purchases excess purchase price fair values net assets acquired 721 million recorded goodwill additionally 2001 company completed purchase price allocations related acquisitions made 2000 resulted increase goodwill 183 million effective january 1 2002 company ceased recording goodwill amortization accordance adoption sfas 142 goodwill intangible assets sfas 142 acquisitions made second half 2001 goodwill amortization accordance sfas 142 goodwill associated acquisitions made first half 2001 amortized periods 40 years see accounting pronouncements discussion impact sfas 142 refer note 2 changes accounting pronouncements notes consolidated financial statements discussion impacts statement sale investment 2003 company sold substantially investment defense related business 435 million divestitures 2003 company generated 170 million cash proceeds sale plant property equipment primarily due sale land 73 million defense electronics services sale building electronic components 28 million remaining 69 million cash proceeds sale assets represents plant property equipment sales across businesses 2002 company sold interest defenserelated joint venture approximately 6 million property equipment 56 million second quarter 2001 company sold two corporate planes 307 million plant property equipment across businesses 118 million share repurchase 2003 2002 2001 10 million 07 million 35 million shares respectively repurchased offset dilutive effect exercised stock options debt credit facilities debt december 31 2003 6024 million compared 7918 million december 31 2002 change debt levels primarily reflects companys utilization cash operating activities pay debt cash equivalents 4142 million december 31 2003 compared 2022 million december 31 2002 company maintains revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2003 companys coverage ratio well excess minimum require ment commitment fee revolving credit agreement 125 total commitment based companys current debt ratings revolving credit agreement serves backup commercial paper program borrowing commercial paper revolving credit agreement may exceed 10 billion aggregate outstanding time december 31 2003 commercial paper borrowings 1200 million status automotive discontinued operations 2003 company spent 18 million matters attributable automotive discontinued operations tax obligations 1542 million expected resolved 2004 2005 addition company projects 30 million 40 million annual spending related remaining automotive obligations payments paid future cash operations supplemented required commercial paper borrowings offbalance sheet arrangements guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 million part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 6800 million however lapse time fact parties resolved certain issues december 31 2003 company accrual 78 million best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 million part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 9500 million however lapse time fact parties resolved certain issues december 31 2003 company accrual 143 million best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last eight years company provided three guarantees respect real estate development activities flagler county florida two guarantee bonds issued dunes community development district bond issuances used primarily construction infrastructure water sewage utilities bridge company would required perform guarantees district failed provide interest payments principal payments due bond holders maximum amount undiscounted future payments guarantees equals 289 million december 31 2003 company believe loss contingency probable guarantees therefore accrual recorded financial statements third guaranty performance bond amount 100 million favor flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 million december 31 2003 company accrual related expansion bridge amount 100 million december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 million maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2003 company believe loss contingency probable therefore accrual recorded financial statements market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 18 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources company several fixed floating interest rate swap agreements notional amount 3368 million result swaps interest expense substantially companys longterm debt calculated variable rather fixed rate basis terms agreements match terms fixed debt reference threemonth libor carrying value swaps december 31 2003 2002 816 million 970 million including 40 million accrued interest period december 31 2003 2002 companys shortterm longterm debt obligations 6024 million 7918 million respectively addition companys cash balances december 31 2003 2002 4142 million 2022 million respectively based positions companys overall exposure interest rates changes 13 15 basis points equivalent 10 companys weighted average shortterm interest rates including rates associated companys interest rate swaps december 31 2003 2002 respectively companys cash marketable securities floating rate debt obligations related interest rate derivatives would 01 million 08 million effect companys pretax earnings years ended december 31 2003 2002 respectively increases 74 78 basis points longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 2003 2002 respectively would 06 million 05 million reduction fair value companys fixed rate debt years ended december 31 2003 2002 respectively multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge certain transactions foreign countries 2003 companys largest exposures foreign exchange rates existed primarily euro swedish krona british pound us dollar december 31 2003 company seven foreign currency derivative contracts outstanding total notional amount 811 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2003 would cause net reduction 25 million fair value instruments 2002 companys largest exposures foreign exchange rates existed primarily euro swedish krona british pound us dollar december 31 2002 company nine foreign currency derivatives outstanding total notional amount 1091 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2002 would cause net reduction 43 million fair value instruments 2001 companys largest exposures foreign exchange rates exist primarily euro swedish krona british pound us dollar december 31 2001 company seven foreign currency derivatives outstanding total notional amount 503 million 10 depreciation euro currencies related companys foreign currency derivatives contracts held december 31 2001 would cause net reduction 12 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted united states company expects utilize credits generated december 31 2003 income taxes paid foreign jurisdictions currently valuation allowance deferred tax assets company net deferred tax assets 3351 million 5329 million december 31 2003 2002 respectively deferred tax assets periods composed us foreign state local deferred tax assets net deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate timing accrual payments employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductions future periods december 31 2003 valuation allowance approximately 407 million exists deferred income tax benefits related certain us subsidiary loss carryforwards certain foreign tax credits may realized critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported value assets liabilities disclosure contingent assets liabilities company identified three accounting policies estimates used require assumptions factors uncertain nature different estimate could reasonably utilized changes estimate reasonably likely occur period environmental accruals environmental matters recorded site basis probable liability incurred amount reasonably estimated company calculates liability utilizing cost estimating weighting matrix separates costs recurring nonrecurring categories company uses internal external experts assign confidence levels based sites development stage type contaminant found applicable laws existing technologies identification potentially responsible parties methodology produces range estimates including best estimate december 31 2003 companys best estimate 1080 million approximates accrual related remediation ground water soil low range estimate environmental liabilities 800 million high range estimate 1710 million annual basis company spends 80 million 110 million environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company currently involved environmental investigation remediation 104 sites including certain instances considered potentially responsible party epa similar state agency present company involved litigation insurers reimbursement environmental response costs recoveries insurance companies third parties recognized financial statements probable realized event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company see note 21 commitments contingencies notes consolidated financial statements additional details environmental matters employee benefit plans company sponsors numerous employee pension welfare benefit plans utilize various assumptions determination projected benefit obligations expense recognition related pension postretirement obligations assumptions include discount rates expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates disclosed note 19 employee benefit plans within notes consolidated financial statements key pension assumptions company determines expected return plan assets assumption evaluating historical returns estimates future returns specifically company analyzes plans actual historical annual return assets past 10 15 20 25 years makes estimates future returns using capital asset pricing model evaluates historical broad market returns past 75 years based companys strategic asset allocation detailed note 19 employee benefit plans notes consolidated financial statements based approach described company estimates longterm annual rate return assets domestic pension plans 90 reference companys actual geometric average annual return plan assets domestic pension plans stood 101 112 118 126 past 10 15 20 25 year periods respectively companys weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2003 886 company utilizes assistance plan actuaries determining discount rate assumption service clients plan actuaries developed published interest rate yield curve enable companies make judgments pursuant eitf topic d36 selection discount rates used measuring defined benefit pension obligations post retirement benefit plans pensions yield curve comprised aaaaa bonds maturities zero thirty years plan actuaries discount annual benefit cash flows companys pension plan using yield curve develop singlepoint discount rate matching plans characteristics december 31 2003 company lowered discount rate domestic pension plans represent 90 companys total pension obligations 650 625 companys weighted average discount rate pension plans including foreign affiliate plans december 31 2003 618 december 31 2003 company also lowered expected rate future compensation increases domestic plan participants 45 50 based recent historical experience expectations future economic conditions management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary pension plan accounting information companys strategic asset allocation target us domestic plans apportions 70 assets equity instruments remaining 30 fixed income instruments december 31 2003 companys actual asset allocation 685 equity instruments 216 fixed income instruments 97 hedge funds remainder cash annual basis companys longterm expected return plan assets often differ actual return plan assets chart shows actual returns versus expected longterm returns companys domestic pension plans utilized calculation net periodic benefit cost please see note 19 employee benefit plans notes consolidated financial statements information companys defense electronics services segment represents approximately 50 active us salaried plan participants result company sought continue seek reimbursement department defense portion pension costs accordance government regulations us government cost accounting standards cas govern extent pension costs allocable recoverable contracts us government reimbursements pension costs made time pricing companys products services us government contracts funding requirements irs rules major consideration making contributions pension plan company contributed 2063 million us master trust 2003 additional 1000 million first quarter 2004 result company face material minimum required contributions us salaried plan 2004 2005 current irs contribution rules furthermore currently estimate make significant additional contributions companys us salaried pension plan remainder 2004 depending market conditions assuming current irs contribution rules continue apply future company estimates may required contribute additional zero 400 million 2005 2006 timeframe funded status funded status derived subtracting value projected benefit obligations december 31 2003 end year fair value plan assets companys us salaried pension plan represents approximately 80 companys total pension obligation therefore funded status us salaried pension plan considerable impact overall funded status companys pension plans 2003 companys us salaried pension plan assets grew 6470 million 29892 million end 2003 increase primarily reflected return assets 6590 million company contributions 2000 million offset payments plan beneficiaries 2068 million also 2003 projected benefit obligation us salaried pension plan increased 1520 million 34488 million increase included 1043 million impact 25 basis point decline discount rate yearend well 283 million impact 50 basis point decrease expected rate future compensation increases result funded status companys us salaried plan improved 4954 million 4596 million end 2003 funded status companys total pension obligations including foreign affiliate plans improved 4526 million 8713 million end 2003 funded status end 2004 depend primarily actual return assets year discount rate end year company estimates every 25 basis points change discount rate impacts funded status us salaried pension plan represents 80 companys pension obligations approximately 104 million similarly every five per centage point change actual 2004 rate return assets impacts plan approximately 150 million minimum pension liability sfas 87 employers accounting pensions sfas 87 requires minimum pension liability recorded plans market value assets falls plans accumulated benefit obligation 2002 combination decline discount rate decline assets caused several companys plans deficit position accordingly 2002 company recorded total aftertax reduction 7655 million total shareholders equity result improved financial markets 2003 company recorded total aftertax increase 1825 shareholders equity yearend 2003 important note actions cause default companys debt covenants future recognition additional minimum pension liabilities depend primarily rate return assets prevailing discount rate pension expense company uses marketrelated value assets method described paragraph 30 sfas 87 calculation pension expense method recognizes investment gains losses fiveyear period year occur addition accordance paragraph 32 sfas 87 portion companys unrecognized net actuarial loss amortized cost included net periodic benefit cost company recorded 330 million net periodic pension cost 354 million considering effects curtailment losses consolidated income statement 2003 compared pension income 104 million 2002 2003 net periodic pension cost reflected benefit service cost 733 million interest cost accrued benefits 2565 million offset expected return plan assets 3270 million addition 2003 pension expense included 235 million amortization past losses 32 million 2002 primary drivers behind increase net periodic pension cost effect change discount rate effect lowered assumption expected return assets increase amortization past losses 2003 2004 company expects incur approximately 650 million pension expense recorded consolidated income statement increase pension expense primarily due effect change discount rate higher amortization past losses revenue recognition company recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority companys sales title transfers products shipped certain circumstances title passes products delivered defense electronics services segment certain contracts require delivery installation testing certification customer acceptance revenue recorded sales recognized customer picks product defense electronics services segment typically recognizes revenue anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract costs resulting margins recorded proportion recorded sales performance contracts estimated final contract prices costs design manufacturing engineering development costs periodically reviewed revisions made necessary effect revisions estimates included earnings period revisions made material revisions estimates covered periods accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims estimates future costs management believes warranty accruals adequate however actual warranty expenses could differ estimated amounts accrual product warranties december 31 2003 2002 345 million 404 million respectively see note 22 guarantees indemnities warranties notes consolidated financial statements additional details accounting pronouncements december 2003 financial accounting standards board fasb issued sfas 132 revised december 2003 employers disclosures pensions post retirement benefits revised sfas retains disclosure requirements sfas 132 additionally pronouncement requires additional disclosures regarding types plan assets investment strategy measurement dates plan obligations cash flows components net periodic benefit cost recognized interim periods defined benefit pension plans defined benefit post retirement plans company adopted pronouncement effective december 31 2003 adoption material impact financial statements company adopted sfas 141 business combinations sfas 141 effective july 1 2001 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 prohibits use poolingofinterests method addition sfas 141 requires intangible assets goodwill identified intangibles required amortized economic useful lives adoption sfas 141 2001 material impact companys financial statements june 2001 fasb issued sfas 142 changes accounting goodwill amortization method impairment approach amortization goodwill past business combinations ceased upon adoption statement january 1 2002 connection adoption sfas 142 company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed tests conducted first quarter 2002 june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys financial statements company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 effective january 1 2002 sfas 144 outlines accounting financial reporting guidelines sale disposal longlived assets discontinued operations adoption pronouncement material impact companys financial statements june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 adoption standard material effect companys financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation statement also requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issues employees april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 accounting derivative instruments hedging activities sfas 149 clarifies circumstances contract initial net investment meets characteristics derivative discussed sfas 133 addition sfas 149 clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption interpretation material effect companys financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 requires certain financial instruments embody obligations issuer characteristics liabilities equity classified liabilities provisions sfas 150 effective financial instruments entered modified may 31 2003 instruments exist beginning first interim financial reporting period beginning june 15 2003 company financial instruments met provisions sfas 150 therefore adoption standard material effect companys financial statements november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur interpretation also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties notes consolidated financial statements additional information adoption interpretation material effect companys financial statements january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created january 31 2003 provisions effective december 31 2003 company create obtain variable interest entities 2003 company elected early adoption provisions fin 46 related variable interest entities created prior january 31 2003 july 1 2003 adoption interpretation material effect companys financial statements december 2003 fasb issued revision interpretation 46 however impact itts adoption january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued fsp 1061 permits deferral recognizing effects medicare prescription drug improvement modernization act 2003 act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 deferral accounting act continues apply authoritative guidance issued accounting federal subsidiary provided act certain events requiring plan remeasurement company elected deferral provided fsp evaluating magnitude potential favorable impact fsp financial statements authoritative guidance issued could require change previously reported information see note 19 employee benefits notes consolidated financial statements discussion postretirement benefits risks uncertainties environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environ mental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes accruals accordance accounting principles generally accepted within united states insurance recoveries included assets probable claim realized although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows disclosure companys commitments contingencies see note 21 commitments contingencies notes consolidated financial statements euro conversion company successfully implemented euro conversion plans experienced problems related conversion 2004 outlook company expects 2004 revenues earnings exceed financial results reported 2003 overall revenues projected grow 9 13 2003 anticipated financial performance defense electronics services fluid technology segments primary factors increase growth defense electronics services segment expected 20 24 2003 driven higher service revenue reflecting broader range offeringscapabilities acquisition revenue related second quarter 2004 acquisition expected revenue growth 9 11 2003 fluid technology segment due continued growth waterwastewater business acquisition revenue associated first quarter 2004 acquisition revenue introduction new products expected increase results electronic components segment platform losses automotive tubing business drive revenue decline 2 6 2003 motion flow control segment sales growth leisure marine business resulting new products partially offset decline operating income projected increase 15 24 2004 due revenue growth discussed segment operating margin projected increase approximately 50 100 basis points 2003 due benefits 2003 restructuring actions companys shift manufacturing footprint new products also increase operating margins forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented executive summary liquidity capital resources market risk exposures critical accounting policies risks uncertainties 2004 outlook historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forward looking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred fluid technology business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense electronics services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets motion flow control business affected cyclical nature transportation industries strikes major auto producers international demand marine leisure products electronic components business affected economic conditions major markets success new products cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations results operations executive summary consolidated results companys revenues grew almost 21 prior year results contribution acquisitions accounted growth approximately 6 effects foreign currency translation contributed growth approximately 3 remaining increase approximately 12 generated companys existing businesses outpaced initial company expectations especially given mixed end market conditions company also reported strong operating income performance 6349 million amount increased 1017 million prior year due higher volume four segments contributed performance reflects operating income growth approximately 191 2004 company reported diluted earnings per share 458 increased 029 68 prior year important note periods contained special items management considers separately core operations items include restructuring tax settlements related interest sale investments items results discontinued operations impact special items represents 002 040 increase diluted earnings per share 2004 2003 respectively business segment highlights fluid technology fluid technology segment revenues 259 billion increase 153 2003 revenues acquisitions contributed growth 62 foreign currency translation provided growth 47 remaining revenue growth 44 represented organic contributions existing businesses waterwastewater business largest contributor reported results reflect companys focus grow existing businesses new product introductions strategic acquisitions build core competencies company anticipates trend revenue growth continue strong performances waterwastewater businesses forecasted 2005 segment revenues 265 billion 275 billion operating income increased 53 2004 2859 million reflecting increased volume partially offset impact acquisition costs operating income forecasted 328 million 352 million 2005 defense electronics services defense electronics services segment increased revenues 348 2004 241 billion increase reflects increased revenues businesses particularly service sectors well contributions acquisition remote sensing systems business rss third quarter segments backlog management regards important indicator future performance increased 319 billion december 31 2003 346 billion december 31 2004 revenue projected grow 140 180 2005 resulting revenue 275 billion 285 billion operating income 2541 million 2004 358 higher 2003 increase reflects increased volume well contributions rss operating income projected 275 million 291 million 2005 motion flow control motion flow control revenues 107 billion 79 greater 2003 improvement mainly due increased revenues friction products aerospace controls spawhirlpool businesses well positive contribution foreign currency translation decreased volume automotive fluid handling business reflecting certain platform losses partially offset mentioned items continued share gains expansion us market friction products new products leisure marine expected offset impact continued platform losses auto tubing revenue expected 105 billion 11 billion 2005 operating income increased 97 1478 million performance reflects increased volume favorable product mix operating income projected 155 million 168 million 2005 electronic components electronic components segments revenue increased 190 6969 million primarily due higher volume businesses particularly transportation industrial military aerospace businesses impact foreign currency translation revenues 2005 projected 700 million 725 million operating income 295 million 2004 increase 148 million operating margin 42 increase 2003 due inventory pricing environment pruning low margin products 2004 operating margin 2005 forecast increase approximately 330 basis points due benefit 2004 restructuring initiatives process improvement initiatives continued pruning low margin products operating income projected 49 million 58 million 2005 year ended december 31 2004 compared year ended december 31 2003 sales revenues year ended december 31 2004 676 billion increase 115 billion 206 2003 costs sales revenues 447 billion 2004 increased 7944 million 216 comparable 2003 period increases sales revenues costs sales revenues primarily attributable higher volume segments contributions acquisitions made fluid technology defense electronics services segments impact foreign currency translation additionally costs sales revenues increased due change product mix selling general administrative sga expenses 2004 9911 million increase 1739 million 213 2003 increase sga expenses primarily due impact foreign currency translation increased marketing expense segments including expenses five acquisitions higher general administrative expenses higher general administrative costs reflect additional employee benefit costs cost process improvement initiatives administrative expenses related four acquisitions increased administrative expenses research development engineering rde expenses 2004 6340 million increased 757 million 136 compared 2003 increase attributable increased spending segments 2004 company recorded 388 million restructuring charge streamline operating structure charge primarily reflected planned reduction 1319 per sons closure two facilities lease cancellation costs additionally 11 million restructuring accruals related prior periods reversed income management determined certain cash expenditures would incurred 2003 company recorded 333 million restructuring charge reduce operating costs streamline operating structure charge primarily reflected planned reduction 971 persons additionally 2003 company recorded asset impairment charge 14 million primarily writeoff technology license utilized foreseeable future due projected market conditions also 2003 company reversed 46 million restructuring accruals income determined certain 2003 2001 actions would completed less planned see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2004 6349 million increase 1017 million 191 compared 5332 million 2003 increase primarily due improved sales revenues segments offset increased sga rde expenses segment operating margin 2004 106 relatively flat segment operating margin comparable 2003 period interest expense 504 million compared 432 million 2003 interest income 225 million 2004 compared 533 million comparable prior year period variance interest expense primarily attributable higher average debt balances reflecting impact 2004 acquisitions reduction interest income 2004 compared 2003 primarily due interest income 323 million related two 2003 tax settlements gain sale assets primarily reflects companys sale interest mesh networks technology company wireless telecommunications market 312 million miscellaneous expense 178 million 2004 compared 79 million 2003 99 million increase primarily due higher employee benefit costs disposed companies income tax expense 1725 million 2004 increase 311 million comparable prior year period increase primarily attributable higher pretax income increase companys effective tax rate increase effective tax rate 264 2003 283 2004 predominantly due occurrence magnitude onetime items years 2003 onetime items included tax benefits realized filing amended returns foreign sales corporation redeterminations effects closing 1996 1997 irs audit cycle settlement irs refund claims years 19861995 onetime items occurring 2004 included filing foreign sales corporation redeterminations favorable foreign tax credit utilizations settlement claim tax benefits produced onetime items realized 2003 exceeded generated 2004 income continuing operations 4375 million 463 per diluted share 2004 compared 3940 million 418 per diluted share 2003 increase reflects results discussed 2004 company recognized 52 million loss discontinued operations 2004 loss primarily relates discontinued operations companys network systems services business 2003 company recognized 99 million income discontinued operations 2003 income related collection disputed receivable related companys disposed automotive businesses upon collection company reversed related valuation allowances previously established assets resulting income 80 million year ended december 31 2003 compared year ended december 31 2002 sales revenues year ended december 31 2003 561 billion increase 6481 million 131 2002 costs sales revenues 367 billion 2003 increased 4762 million 149 comparable 2002 period increases sales revenues costs sales revenues primarily attributable higher volume defense electronics services fluid technology segments contributions acquisitions made fluid technology electronic components segments impact foreign currency translation product mix changes defense electronic services electronic components segments also contributed increase costs sales revenues sga expenses 2003 8172 million increase 1045 million 147 comparable prior year period increase sga expenses primarily due increased marketing expense segments reflecting expenditures newly acquired companies additional employee benefit costs process improvement initiatives increased administrative expenses rde expenses 2003 increased 403 million 78 compared 2002 increase attributable increased spending segments 2003 company recorded 333 million restructuring charge reduce operating costs streamline structure charge primarily reflects planned reduction 971 persons additionally management reviewed companys remaining restructuring actions determined certain 2003 2001 actions would completed 46 million less planned electronic components segment accordingly restructuring accruals totaling 46 million reversed income 2003 company also recorded asset impairment charge 14 million primarily writeoff technology license utilized foreseeable future due projected market conditions 2002 company reversed 131 million restructuring accruals income determined certain 2001 actions would completed less planned also fourth quarter 2002 company recorded 96 million restructuring charge related planned termination 292 persons planned closure two facilities see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 5332 million compared 5397 million 2002 decrease primarily due increased sga rde expenses increased net restructuring asset impairment charges 336 million partially offset increased sales revenues segments segment operating margin 2003 108 13 segment operating margin comparable 2002 period decrease reflects changes product mix defense electronics services electronic components segments increased sga expenses 2003 restructuring asset impairment charges interest income 533 million interest expense 432 million 2003 company recognized 565 million interest expense 241 million interest income 2002 variance interest income years primarily due income related two 2003 tax settlements lower average debt levels lower interest rates contributed variance interest expense 2003 2002 miscellaneous expense 79 million 2003 compared 36 million income 2002 115 million increase expense primarily due higher employee benefit costs disposed companies income tax expense 1414 million 2003 increase 118 million 2002 increase primarily due 101 million net interest income 2003 versus 324 million net interest expense 2002 higher effective tax rate 2003 partially offset lower operating income 2003 effective income tax rate 2003 264 compared 254 2002 increase primarily due 612 million tax refund received 2002 306 million reflected reduction tax expense several favorable 2003 tax settlements partially offset impact 2002 refund income continuing operations 2003 3940 million 418 per diluted share compared 3813 million 407 per diluted share 2002 increase reflects results discussed company recognized 99 million income discontinued operations 2003 income primarily relates collection disputed receivable related companys disposed automotive businesses upon collection company reversed related valuation allowances previously established assets resulting mentioned income loss companys network systems services business partially offset income business segment information year ended december 31 2004 compared year ended december 31 2003 fluid technologys sales revenues costs sales revenues increased 3442 million 153 2213 million 148 respectively 2004 compared 2003 higher sales waterwastewater markets industrial products fluid handling businesses acquisition revenue water treatment business impact foreign currency translation primary factors increases items partially offset lower volume engineered process solutions business sga expenses 2004 increased 961 million 226 compared 2003 mainly due impact foreign currency translation increased advertising costs sales commissions employee benefits administrative costs businesses costs attributable 2004 acquisitions 2004 segment recorded 197 million restructuring charge mainly related planned reduction headcount closure two facilities 2003 company recorded 138 million restructuring charge primarily planned reduction headcount see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2004 increased 145 million 53 compared 2003 due activities discussed defense electronics services sales revenues costs sales revenues 2004 increased 6231 million 348 4463 million 427 respectively comparable prior year period increases primarily due higher volume businesses acquisition revenue rss additionally change product mix contributed increase costs sales revenues sga expenses increased 525 million 466 comparable prior year period primarily due increased employee benefit administrative costs higher marketing costs attributable acquisition rss rde expenses increased 583 million 131 comparable prior year period due increased spending businesses impact rss operating income 2004 2541 million increase 670 million 358 compared period 2003 increase reflects results discussed motion flow control recorded sales revenues costs sales revenues 107 billion 7768 million respectively 2004 reflecting increases 782 million 79 552 million 76 2003 increases mainly due higher volume friction products aerospace controls spawhirlpool businesses impact foreign currency translation partially offset scheduled platform rolloffs auto tubing business sga expenses increased 18 million 19 comparable prior year period reflecting impact foreign currency translation higher marketing costs 2004 2003 segment recorded 63 million 45 million restructuring charges respectively mainly related planned reductions headcount see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 1478 million 131 million 97 higher 2004 compared 2003 primarily due items mentioned electronic components sales revenues 6969 million costs sales revenues 4932 million 2004 increased 1112 million 190 736 million 175 respectively comparable prior year period increases reflect higher volume businesses impact foreign currency translation product pruning process improvements partially offset increase costs sales revenues sga expenses increased 176 million 159 comparable prior year period due impact foreign currency translation increased marketing employee benefit administrative expenses 2004 segment recorded 110 million restructuring charge primarily relating planned headcount reductions lease cancellation costs 2003 segment recorded 127 million restructuring charge primarily relating planned headcount reductions reversed 45 million restructuring accruals income management deemed certain 2003 2001 actions would completed less originally planned additionally segment recorded 14 million asset impairment charge mainly writeoff license agreement technology utilized foreseeable future due projected market conditions see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2004 increased 148 million 2003 increase due factors discussed corporate expenses increased 77 million 103 2004 primarily due costs associated process improvements increase administrative costs additionally 2004 2003 18 million 13 million restructuring costs respectively recognized primarily headcount reductions see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information year ended december 31 2003 compared year ended december 31 2002 fluid technology sales revenues 225 billion increased 2936 million 150 2002 costs sales revenues increased 2096 million 163 2002 higher volume waterwastewater markets acquisition revenue waterwastewater engineered process solutions businesses impact foreign currency translation primary factors increases sga expenses 2003 increased 516 million 138 compared 2002 mainly due increased marketing expenses reflecting expenditures newly acquired companies increased administrative costs markets 2003 segment recorded 138 million restructuring charge mainly related planned reduction headcount restructuring charges recorded 2002 totaled 60 million workforce reductions additionally segment reversed 15 million restructuring accruals 2002 management deemed unnecessary see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 199 million 79 compared 2002 due activity discussed defense electronics services sales revenues costs sales revenues 2003 increased 2770 million 183 1998 million 236 respectively prior year increases due increased revenue businesses including higher service revenue reflecting middle east support classified programs product mix issues also contributed increase costs sales revenues sga expenses increased 129 million 129 primarily due higher marketing expenses increased employee benefit administrative costs businesses 2003 segment recorded 10 million restructuring charge related reduction headcount see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information rde expenses 2003 increased 292 million 70 due increased spending businesses operating income 2003 1871 million increase 331 million 215 compared 2002 increase reflects results discussed motion flow control recorded sales revenues costs sales revenues 9923 million 7216 million respectively 2003 reflecting increases 568 million 61 288 million 42 2002 increases mainly due increased sales marine friction products businesses impact foreign currency translation partially offset volume declines auto tubing business sga expenses increased 92 million 107 reflecting higher marketing costs marine business increased administrative costs businesses rde expenses 36 million 110 higher comparable 2002 period spending increased businesses 2003 segment recorded net restructuring charge 44 million mainly related planned reduction headcount closure one facility restructuring charges recorded 2002 totaled 30 million primarily reduction headcount closure one facility additionally segment reversed 15 million restructuring accruals 2002 management deemed unnecessary see section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 1347 million 123 million 100 higher 2003 compared 2002 primarily due items mentioned electronic components sales revenues 5857 million costs sales revenues 4196 million 2003 increased 225 million 40 395 million 104 respectively comparable prior year period increases reflect contribution acquisition impact foreign currency translation partially offset weaknesses telecommunication commercial aerospace markets product mix issues also contributed increase costs sales revenues sga expenses increased 186 million due increased marketing reflecting expenditures newly acquired company employee benefit administrative expenses including impact 2003 first quarter acquisition 2003 segment recorded 127 million restructuring charge primarily relating planned headcount reductions reversed 45 million restructuring accruals income management deemed certain 2003 2001 actions would completed less originally planned additionally 2003 segment recorded 14 million asset impairment charge mainly writeoff license agreement technology utilized foreseeable future due projected market conditions restructuring charges recorded segment 2002 totaled 06 million additionally segment reversed 87 million restructuring accruals 2002 related 2001 plan restructuring actions refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income 2003 decreased 576 million 797 2002 decline due factors discussed corporate expenses increased 142 million 2003 primarily due costs related process improvement initiatives 13 million restructuring charge planned headcount reductions refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information increased administrative expenses status restructuring asset impairments 2004 restructuring activities fourth quarter 2004 company recognized 124 million charge primarily planned severance 727 employees actions segment follows fluid technology segment recorded 93 million planned termination 80 employees including 20 factory workers 60 office workers costs totaling 03 million also recognized quarter motion flow control segment recognized 18 million planned termination 43 employees including 14 factory workers 25 office workers four management employees segment also recorded 01 million outplacement electronic components segment recorded 09 million planned termination 604 employees terminations include 17 office workers 587 factory workers december 31 2004 company made 25 million payments attributable 2004 fourth quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future cash savings restructuring actions announced fourth quarter 2004 approximately 12 million 2005 approximately 57 million 2006 2009 savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses addition restructuring actions announced fourth quarter motion flow control segment recognized 05 million severance employee benefit costs related actions announced first quarter 2003 01 million outplacement related actions announced 2002 electronic components recognized additional 05 million severance related actions announced first quarter 2004 additional 01 million moving costs related actions announced third quarter 2004 third quarter 2004 company recognized 55 million charge primarily planned severance 71 employees movement production actions segment follows fluid technology segment recorded 33 million planned termination 36 employees including nine factory workers 23 office workers four management employees costs totaling 02 million also recognized quarter motion flow control segment recognized 05 million planned termination 30 employees including 23 factory workers seven office workers segment also recorded 06 million relocation moving costs electronic components segment recorded 02 million planned termination five employees terminations include four office workers one management employee segment also recorded 07 million charge primarily costs associated moving two product lines weinstadt germany shenzhen china one product line santa ana ca nogales mexico december 31 2004 company made 45 million payments attributable 2004 third quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future cash savings restructuring actions announced third quarter 2004 approximately 5 million 2005 approximately 22 million 2006 2009 savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses addition restructuring actions announced third quarter motion flow control segment recognized 01 million severance employee benefit costs related actions announced first quarter 2003 second quarter 2004 company recognized 136 million charge primarily planned severance 418 employees recognition lease cancellation costs actions segment follows electronic components segment recorded 45 million charge recognition lease cancellation costs severance 09 million recorded reduction 328 employees terminations include 273 factory workers 52 office workers three management employees segment also recorded 11 million charge disposal machinery equipment fluid technology segment recorded 24 million termination 45 employees including eight factory workers 37 office workers lease commitments totaling 07 million recognized related closure two facilities one sweden one florida asset writeoffs costs totaling 02 million 01 million respectively also recognized quarter motion flow control segment recognized 21 million termination 44 employees including seven factory workers 32 office workers five management employees corporate headquarters recorded 16 million severance one management employee december 31 2004 company made 45 million payments attributable 2004 second quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future savings restructuring actions announced second quarter 2004 approximately 8 million 2005 including 03 million noncash savings approximately 29 million 2006 2009 including 06 million noncash savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses addition restructuring actions announced second quarter motion flow control segment recognized 03 million severance employee benefit costs related actions announced first quarter 2003 electronic compo nents segment recognized 03 million severance employee benefit costs related actions announced first quarter 2004 01 million outplacement related actions announced 2003 first quarter 2004 company recognized 53 million charge primarily planned severance 103 employees actions segment follows fluid technology segment recorded 27 million planned termination 50 employees including 15 factory workers 35 office workers asset writeoffs costs totaling 04 million 01 million respectively also recognized quarter electronic components segment recorded 17 million charge primarily planned reduction 35 employees including 23 factory workers 11 office workers one management employee motion flow control segment recognized 02 million planned termination 16 employees including three factory workers 13 office workers corporate headquarters recorded 02 million planned severance one office worker one management employee december 31 2004 company made 55 million payments attributable 2004 first quarter restructuring actions including costs recognized subsequent quarters related first quarter 2004 actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future savings restructuring actions announced first quarter 2004 approximately 6 million 2005 including 01 million noncash savings 21 million 2006 2009 including 04 million noncash savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses following table displays rollforward restructuring accruals 2004 restructuring programs millions third fourth quarters 2004 total 02 million restructuring accruals related 2004 restructuring actions reversed income result quarterly reviews companys remaining restructuring actions 2004 two facilities closed headcount reduced 632 persons company experienced employee attrition leaving balance 684 planned headcount reductions related 2004 restructuring plans 2003 restructuring activities fourth quarter 2003 company announced actions reduce operating costs primarily reduction headcount 153 million restructuring charge primarily reflects planned severance 296 employees actions segment follows electronic components segment recorded 14 million charge planned termination 127 employees including 113 factory workers ten office workers four management employees fluid technology segment recognized 124 million charge planned severance 134 employees including 39 factory workers 90 office workers five management employees lease costs represent 03 million charge segment also recorded 02 million charge associated disposal machinery equipment defense electronics services segment recorded 10 million charge planned severance 35 employees including seven factory workers 19 office workers nine management employees projected future cash savings restructuring actions announced fourth quarter 2003 approximately 13 million 2005 39 million 2006 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2004 company made 99 million payments attributable 2003 fourth quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition restructuring actions announced fourth quarter motion flow control segment recognized 05 million severance employee benefit costs related actions announced first quarter electronic components segment recognized 02 million outplacement related actions announced earlier 2003 third quarter 2003 company announced additional actions reduce operating costs primarily reduction headcount 26 million restructuring charge primarily reflects planned severance 71 employees actions segment follows electronic components segment recorded 12 million charge planned termination 39 employees including 15 factory workers 24 office workers segment also recorded 01 million charge associated disposal machinery equipment fluid technology segment recognized 05 million charge planned severance 13 factory workers 14 office workers lease costs represent 04 million charge motion flow control segment recorded 04 million charge planned severance one management employee four office workers projected future cash savings restructuring actions announced third quarter 2003 approximately 4 million 2005 11 million 2006 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2004 company made 06 million payments attributable 2003 third quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition restructuring actions announced third quarter motion flow control segment recognized 02 million severance employee benefit costs related actions announced first quarter second quarter 2003 company continued program reduce structural costs increase profitability restructuring actions totaling 44 million announced period charge primarily reflected planned severance 143 employees cancellation operating lease actions segment follows electronic components segment comprises 24 million charge actions taken segment include planned termination five management employees 19 factory workers 67 office workers motion flow control segment recognized 10 million planned severance 50 employees including six management employees 31 factory workers 13 office workers lease termination fees 07 million asset disposal costs 01 million also reflected charge corporate headquarters charge 02 million recorded planned termination one management employee one office worker projected future cash savings restructuring actions announced second quarter 2003 approximately 7 million 2005 22 million 2006 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2004 company made 06 million payments attributable 2003 second quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings addition restructuring actions announced second quarter motion flow control segment recognized 12 million severance employee benefit costs related actions announced first quarter first quarter 2003 company recorded 89 million restructuring charge primarily planned severance 461 persons severance 82 million represents majority charge actions segment follows electronic components segment recorded 67 million charge planned termination 222 persons comprised 98 office workers 116 factory workers eight management employees idle facility costs 03 million asset disposal costs 04 million also reflected charge actions prompted managements projections continued weakness certain businesses corporate headquarters recorded 11 million charge consolidation administrative tasks including planned termination two management employees motion flow control segment recorded 04 million charge planned termination 237 employees comprised 21 office workers 216 factory workers charge relates closure manufacturing facility arkansas actions completed 2003 2004 total estimated charge approximately 26 million recognized ratably restructuring period terminations became effective management deemed restructuring actions necessary address anticipated loss certain platforms second half 2003 2004 company made 29 million payments attributable 2003 first quarter restructuring actions future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future cash savings restructuring actions announced first quarter 2003 approximately 9 million 2005 28 million 2006 2008 savings primarily represents lower salary wage expenditures reflected costs sales revenues selling general administrative expenses following table displays rollforward restructuring accruals 2003 restructuring programs millions 2004 03 million restructuring accruals related 2003 programs reversed income result quarterly reviews companys remaining restructuring actions reversals primarily reflect lower anticipated severance costs completed actions due favorable employee attrition electronic components segment second half 2003 34 million restructuring accruals related 2003 programs reversed income result quarterly reviews companys remaining restructuring actions reversals primarily reflect lower anticipated severance costs completed actions favorable employee attrition electronic components segment additionally certain actions completed longer deemed feasible company also reversed noncash charges totaling 02 million 2004 headcount reduced 189 persons company experienced employee attrition completing planned reductions related 2003 restructuring plans addition final facility related 2003 restructuring plans closed 2004 2003 asset impairments 2003 company recorded 14 million asset impairment charge primarily writeoff technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities 2002 restructuring activities fourth quarter 2002 company recorded 96 million restructuring charge primarily closure two facilities planned severance 292 persons severance 85 million represents majority charge lease payments costs represent remainder listed business segment background information 2002 restructuring plan millions actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure one facility fairfield nj termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain platforms automotive fluid handling systems business 2003 resulting excess capacity planned actions include closure one facility rochester ny consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions required continuing difficult market conditions actions include termination five employees comprised three office workers two management employees following table displays rollforward restructuring accruals 2002 restructuring program millions 2004 company reduced headcount 12 experienced employee attrition leaving balance one planned headcount reduction severance runoff payments occur 2005 future restructuring expenditures funded cash operations supplemented required commercial paper borrowings remaining projected future cash savings 2002 restructuring plan approximately 12 million 2005 approximately 23 million 2006 2007 savings represents lower salary wage expenditures decreased facility operating costs impact reflected costs sales revenues selling general administrative expenses actual savings approximated plan 2004 2003 2002 2001 restructuring activities december 14 2001 company announced restructuring program reduce structural costs improve profitability whereby company recorded charge 829 million related closure five facilities discontinuance 21 products 10 switch product group 11 connectors group severance 3386 persons asset impairments cash portion charge 606 million primarily relates severance lease termination costs noncash portion charge 223 million primarily relates machinery equipment became impaired result announced plans actions contemplated 2001 plan substantially completed 2003 also fourth quarter 2001 company recorded asset impairments amounting 144 million machinery equipment cost based investment assets written fair values based managements projections individual future cash flows generated assets reviewed impairment fourth quarter 2001 time business events indicated carrying amounts assets may recovered management deemed market decline experienced 2001 certain products temporary recognized exists significant pricing pressure electronic components segment expected continue discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 million brake chassis unit continental ag germany approximately 1930 million dispositions treated discontinued operations connection sale businesses company established accruals taxes 9727 million representation warranty contract purchase price adjustments 1488 million direct costs accruals 1020 million environmental obligations 161 million 1998 1999 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved following tables display rollforward automotive discontinued operations accruals january 1 2002 december 31 2004 thousands 2003 company reassessed obligations related disposal automotive businesses determined would spend 22 million less disposition related favorable spending professional fees adjustments environmental exposures based assessment 22 million reversed 2003 consolidated income statement income discontinued operations december 31 2004 company automotive discontinued operations accruals 1887 million primarily relate following taxes 1541 million related original transaction recorded accrued taxes product recalls 78 million related nine potential product recall issues recorded accrued expenses environmental obligations 142 million remediation investigation groundwater soil contamination thirteen sites recorded liabilities employee benefits 126 million workers compensation issues recorded accrued expenses 2004 company made immaterial payments matters attributable automotive discontinued operations company expects settle 1541 million tax obligations late 2005 company projects spend 10 million 40 million 2005 related remaining automotive obligations liquidity capital resources cash flow overview company generated 5286 million cash operating activities 2004 net income generated continuing operations plus depreciation amortization contributed approximately 6361 million cash flow deferral tax payments 1024 million increases accounts payable accrued expenses 169 million also positive contributors cash increases accounts receivable inventory 218 million 803 million respectively reflecting increased sales volume partially offset cash generated operations cash operating activities 2004 also reflects 1000 million prefunding pension obligations company used cash generated operating activities additional debt financing 6745 million cash received exercised stock options 768 million cash hand fund 10100 million strategic acquisitions 1651 million capital expenditures reduction debt 687 million additionally 1596 million used repurchase companys common stock 618 million used dividend payments company projects cash operating activities 5750 million 6250 million 2005 cash flows comparison 2004 2003 cash provided operating activities 2004 5286 million 511 million decrease 2003 decrease primarily attributable tax payments 701 million 2004 versus 266 million tax receipts 2003 increased inventory levels 1000 million prepaid pension contribution 2004 compared 2000 million prepaid pension contribution 2003 reduced cash outflows accounts receivable partially offset declines cash provided operations contractual obligations companys commitment make future payments longterm contractual obligations follows december 31 2004 millions 1 see note 16 debt notes consolidated financial statements discussion use availability debt revolving credit agreements 2 refer note 15 leases rentals notes consolidated financial statements discussion lease rental agreements 3 unconditional purchase commitments principally take pay obligations related purchase certain raw materials subcontract work 4 longterm liabilities primarily consists estimated environmental payments company estimates based historical experience spend 80 million 110 million per year environmental investigation remediation approximately 80 sites company contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2004 company calculated best estimate remediate ground water soil 980 million recorded accrual approximates estimate status restructuring activities restructuring payments 2004 totaled 336 million comprised 170 million expenditures 2004 plans 166 million expenditures 2003 2002 2001 restructuring plans future payments projected paid future cash operating activities supplemented required commercial paper borrowings additions plant property equipment capital expenditures 2004 1651 million increase 118 million 2003 increase primarily reflects increased investments defense electronic services motion flow control segments acquisitions 2004 acquisitions august 13 2004 company purchased remote sensing systems business rss 7369 million cash rss business leading supplier high resolution satellite imaging systems information services management believes acquisition rss enhance companys competitive position space payload service product offering industry create full spectrum provider latest visible infrared satellite imaging technology remote sensing market excess purchase price rss fair value net assets acquired 5976 million recorded goodwill deductible tax purposes entire goodwill balance reflected defense electronics services segment company preliminarily assigned values assets liabilities rss however allocation subject refinement following table summarizes fair value assets acquired liabilities assumed date acquisition purchase price allocations based preliminary data changes expected evaluations items employee benefit obligations finalized additional data becomes available 1249 million intangible assets comprised 1200 million customer relationships amortized 16 years 34 million maintenance contracts amortized 15 years 15 million product software amortized 12 years company also spent 2731 million additional 2004 acquisitions believe material individually aggregate results operations financial condition acquisitions include wedeco ag water technology wedeco worlds largest manufacturer uv disinfection ozone oxidation systems alternatives chlorine treatment allen osborne associates inc aoa leader development global positioning system receivers portable fixed sites shanghai hengtong purified water development co ltd shanghai hengtong water treatment engineering co ltd hengtong shanghaibased producer reverseosmosis membrane water treatment systems power pharmaceutical chemical manufacturing markets china cleghorn waring co pumps limited distributor pumps marine products excess purchase price fair value net assets acquired transactions 2470 million recorded goodwill 2401 million 35 million 34 million reflected fluid technology defense electronics services motion flow control segments respectively additionally purchase price allocations 2004 acquisitions based preliminary data changes expected evaluations finalized additional information becomes available intangibles assets relating acquisitions wedeco aoa totaled 562 million amount includes 254 million proprietary technology amortized 15 years 188 million customer relationships amortized 10 years 12 million tradenames company also finalized purchase price allocations related 2003 acquisitions resulted increase goodwill 15 million pro forma results following unaudited pro forma financial information presents combined results operations company rss acquired january 1 2004 2003 pro forma results presented 2004 combine results company 2004 historical results rss january 1 2004 august 12 2004 pro forma results presented 2003 combine results company 2003 historical results rss comparable period unaudited pro forma financial information intended represent indicative companys consolidated results operations would reported rss acquired beginning periods presented taken indicative companys future consolidated results operations pro forma adjustments tax effected companys effective tax rate 2003 acquisitions 2003 company spent 462 million primarily acquisition two entities one electronic components segment one fluid technology segment excess purchase price fair values net assets acquired 305 million recorded goodwill 56 million tax deductible electronic components segment assigned 240 million goodwill balance fluid technology motion flow control segments assigned 54 million 11 million respectively acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows veamtec division northrop grumman corporation designer manufacturer cylindrical filter fiber optic connectors militaryaerospace industrial transit entertainment nuclear markets uniservice wellpoint srl manufacturer high quality diesel electric powered vacuum primed centrifugal pumps along spear well point dewatering systems rental market sale additionally 2003 company finalized purchase price allocations related 2002 acquisitions resulted decrease goodwill 51 million 2002 acquisitions 2002 company spent 1592 million primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operations financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry company recognized 1172 million goodwill acquisitions approximately 69 million tax deductible fluid technology segment assigned 1166 million goodwill defense electronics services segment assigned remaining 06 million addition 2002 company finalized purchase price allocations associated 2001 acquisition reduced goodwill 92 million sale investments december 2004 company sold interest mesh networks inc technology company wireless telecommunications market 312 million 249 million received cash 63 million placed escrow 2003 company sold substantially investment defense related business digitalglobe inc 435 million divestitures 2004 company generated 74 million sale plant property equipment primarily electronic components fluid technology segments 2003 company generated 170 million cash proceeds sale plant property equipment primarily due sale land 73 million defense electronics services sale building electronic components 28 million remaining 69 million cash proceeds sale assets represents plant property equipment sales across businesses 2002 company sold interest defenserelated joint venture approximately 6 million property equipment 56 million share repurchase 2004 2003 2002 20 million 10 million 07 million shares respectively repurchased offset dilutive effect exercised stock options debt credit facilities debt december 31 2004 13 billion compared 6024 million december 31 2003 change debt levels primarily reflects companys utilization debt partially fund 2004 acquisitions cash equivalents 2629 million december 31 2004 compared 4142 million december 31 2003 december 2004 company recorded 1200 million obligation associated ten year agreement major financial institution involving sale subsequent leasing back certain properties terms agreement company required make annual payments principal interest end agreement company option repurchase applicable properties nominal fee transaction reflected debt march 2004 company entered revolving credit agreement expires march 2005 five domestic foreign banks providing aggregate commitments 400 million company also maintains revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2004 companys coverage ratio well excess minimum requirements commitment fee revolving credit agreements 125 total commitment revolving credit agreements serve backup commercial paper program borrowing commercial paper revolving credit agreements may exceed 14 billion aggregate outstanding time december 31 2004 commercial paper borrowings 6963 million status automotive discontinued operations 2004 company made immaterial payments matters attributable automotive discontinued operations tax obligations 1541 million expected resolved 2005 addition company projects 10 million 40 million annual spending related remaining automotive obligations payments forecast paid future cash operations supplemented required commercial paper borrowings offbalance sheet arrangements guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 million part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 6800 million however lapse time fact parties resolved certain issues december 31 2004 company accrual 78 million best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 million part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 9500 million however lapse time fact parties resolved certain issues december 31 2004 company accrual 142 million best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last nine years company provided three guarantees respect real estate development activities flagler county florida two guarantee bonds issued dunes community development district bond issuances used primarily construction infrastructure water sewage utilities bridge company released obligation perform guarantees third quarter 2004 third guarantee performance bond amount 100 million favor flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 million december 31 2004 company accrual related expansion bridge amount 100 million december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 million maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2004 company believe loss contingency probable therefore accrual recorded financial statements company number individually immaterial guarantees outstanding december 31 2004 may affected various conditions external forces could require payments made guarantees company believe payments material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 18 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources company several fixed floating interest rate swap agreements notional amount 3358 million result swaps interest expense substantially companys longterm debt calculated variable rather fixed rate basis terms agreements match terms fixed debt reference threemonth libor carrying value swaps december 31 2004 2003 849 million 816 million respectively including 33 million 40 million accrued interest respectively december 31 2004 2003 companys shortterm longterm debt obligations totaled 12720 million 6024 million respectively addition companys cash balances december 31 2004 2003 2629 million 4142 million respectively based positions companys overall exposure interest rates changes 24 13 basis points equivalent 10 companys weighted average shortterm interest rates including rates associated companys interest rate swaps december 31 2004 2003 respectively companys cash marketable securities floating rate debt obligations related interest rate derivatives would 19 million 01 million effect companys pretax earnings years ended december 31 2004 2003 respectively increases 48 74 basis points longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 2004 2003 respectively would 34 million 06 million reduction fair value companys fixed rate debt december 31 2004 2003 respectively multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge certain transactions foreign countries 2004 companys largest exposures foreign exchange rates existed primarily euro swedish krona british pound us dollar december 31 2004 company eight foreign currency derivative contracts outstanding total notional amount 933 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2004 would cause net reduction 05 million fair value instruments 2003 companys largest exposures foreign exchange rates existed primarily euro swedish krona british pound us dollar december 31 2003 company seven foreign currency derivative contracts outstanding total notional amount 811 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2003 would cause net reduction 25 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted united states company expects utilize credits generated december 31 2004 income taxes paid foreign jurisdictions currently valuation allowance deferred tax assets company net deferred tax assets 2160 million 3349 million december 31 2004 2003 respectively deferred tax assets periods composed us foreign state local deferred tax assets net deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate timing accrual payments employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductible temporary differences valuation allowance established december 31 2004 valuation allowance approximately 439 million exists deferred income tax benefits related certain us subsidiary loss carryforwards certain foreign tax credits may realized company expects settle 1541 million tax obligations relate reorganization disposition automotive businesses 1998 part current irs examination companys federal consolidated tax returns years ended december 31 1998 december 31 2000 december 31 2004 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations addition company contingent tax obligations jurisdictions related 1998 dispositions reorganizations approximately 850 million company determined payment amount unlikely critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported value assets liabilities disclosure contingent assets liabilities company identified three accounting policies estimates used require assumptions factors uncertain nature different estimate could reasonably utilized changes estimate reasonably likely occur period environmental accruals environmental matters recorded site basis probable liability incurred amount reasonably estimated company calculates liability utilizing cost estimating weighting matrix separates costs recurring nonrecurring categories company uses internal external experts assign confidence levels based sites development stage type contaminant found applicable laws existing technologies identification potentially responsible parties methodology produces range estimates including best estimate december 31 2004 companys best estimate 980 million approximates accrual related remediation ground water soil low range estimate environmental liabilities 729 million high range estimate 1608 million annual basis company spends 80 million 110 million environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company currently involved environmental investigation remediation approximately 80 sites including certain instances considered potentially responsible party epa similar state agency present company involved litigation insurers reimbursement environmental response costs recoveries insurance companies third parties recognized financial statements probable realized event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company see note 21 commitments contingencies notes consolidated financial statements additional details environmental matters employee benefit plans company sponsors numerous employee pension welfare benefit plans determination projected benefit obligations recognition expenses related pension postretirement obligations dependent assumptions used calculating amounts assumptions include discount rates expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates disclosed note 19 employee benefit plans within notes consolidated financial statements factors key assumptions company determines expected return plan assets assumption evaluating historical returns estimates future returns specifically company analyzes plans actual historical annual return assets past 10 15 20 25 years makes estimates future returns using capital asset pricing model evaluates historical broad market returns past 75 years based companys strategic asset allocation detailed note 19 employee benefit plans notes consolidated financial statements based approach described company estimates longterm annual rate return assets domestic pension plans 90 reference companys actual geometric average annual return plan assets domestic pension plans stood 121112 126 127 past 10 15 20 25 year periods respectively companys weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2004 889 company utilizes assistance plan actuaries determining discount rate assumption service clients plan actuaries developed published interest rate yield curve enable companies make judgments pursuant eitf topic d36 selection discount rates used measuring defined benefit pension obligations post retirement benefit plans pensions yield curve comprised aaaaa bonds maturities zero thirty years plan actuaries discount annual benefit cash flows companys pension plan using yield curve develop singlepoint discount rate matching plans characteristics december 31 2004 company lowered discount rate domestic pension plans represent 90 companys total pension obligations 625 600 companys weighted average discount rate pension plans including foreign affiliate plans december 31 2004 594 also december 31 2004 company lowered discount rate postretirement welfare plans 625 575 increased medical trend rate 2005 10 decreasing ratably 5 2010 december 31 2003 company also lowered expected rate future compensation increases domestic plan participants 45 50 based recent historical experience expectations future economic conditions management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary pension plan accounting information respect qualified us defined benefit pension plans one retiree medical plans company set us master trust pay future benefits eligible retirees dependents companys strategic asset allocation target us domestic plans apportions 70 assets equity instruments remaining 30 fixed income instruments december 31 2004 companys actual asset allocation 662 equity instruments 164 fixed income instruments 99 hedge funds remainder cash annual basis companys longterm expected return plan assets often differ actual return plan assets chart shows actual returns versus expected longterm returns companys domestic pension plans utilized calculation net periodic benefit cost please see note 19 employee benefit plans notes consolidated financial statements information companys defense electronics services segment represents approximately 60 active us salaried plan participants result company sought continue seek reimbursement department defense portion pension costs accordance government regulations us government cost accounting standards cas govern extent pension costs allocable recoverable contracts us government reimbursements pension costs made time pricing companys products services us government contracts therefore recognized defense electronics services segments net sales funding requirements irs rules major consideration making contributions pension plan respect qualified pension plans company intends contribute annually less minimum required applicable law regulations company contributed 1201 million us master trust 2004 additional 1024 million first quarter 2005 result company face material minimum required contributions us salaried plan 2005 2006 current irs contribution rules furthermore currently estimate make significant additional contributions companys us salaried pension plan remainder 2005 assuming current irs contribution rules continue apply future barring major disruptions equity bond markets company estimates required make mandatory contributions 2006 2007 timeframe funded status funded status derived subtracting value projected benefit obligations december 31 2004 end year fair value plan assets companys us salaried pension plan represents approximately 80 companys total pension obligation therefore funded status us salaried pension plan considerable impact overall funded status companys pension plans 2004 companys us salaried pension plan assets grew 5754 million 35646 million end 2004 increase primarily reflected return assets 4743 million company contributions 1000 million addition 2350 million assets result acquisition rss offset payments plan beneficiaries 2336 million also 2004 projected benefit obligation us salaried pension plan increased 4582 million 39076 million increase included 1264 million impact 25 basis point decline discount rate yearend assumption 2600 million liabilities part acquisition rss result funded status companys us salaried plan improved 1166 million 3430 million end 2004 funded status companys total pension obligations including foreign affiliate plans improved 1055 million 7549 million end 2004 funded status end 2005 depend primarily actual return assets year discount rate end year company estimates every 25 basis point change discount rate impacts funded status us salaried pension plan represents 80 companys pension obligations approximately 126 million similarly every five percentage point change actual 2005 rate return assets impacts plan approximately 178 million minimum pension liability sfas 87 employers accounting pensions sfas 87 requires minimum pension liability recorded plans market value assets falls plans accumulated benefit obligation 2002 combination decline discount rate decline assets caused several companys plans deficit position accordingly 2002 company recorded total aftertax reduction 7655 million shareholders equity result improved financial markets 2003 2004 company recorded total aftertax increases shareholders equity 1825 818 million yearend 2003 2004 respectively important note actions cause default companys debt covenants future recognition reversal additional minimum pension liabilities depend primarily rate return assets prevailing discount rate pension expense company uses marketrelated value assets method described paragraph 30 sfas 87 calculation pension expense method recognizes investment gains losses fiveyear period year occur addition accordance paragraph 32 sfas 87 portion companys unrecognized net actuarial loss amortized cost included net periodic benefit cost company recorded 621 million net periodic pension cost 654 million considering effects curtailment losses settlements consolidated income statement 2004 compared pension cost 330 million 354 million including curtailments 2003 2004 net periodic pension cost reflected benefit service cost 879 million interest cost accrued benefits 2679 million offset expected return plan assets 3442 million addition 2004 pension expense included 433 million amortization past losses 235 million 2003 primary drivers behind increase net periodic pension cost effect change discount rate increase amortization past losses 2004 inclusion rss cost date acquisition 2005 company expects incur approximately 930 million pension expense recorded consolidated income statement increase pension expense primarily due effect change discount rate higher amortization past losses full year impact rss acquisition revenue recognition company recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority companys sales title transfers products shipped certain circumstances title passes products delivered defense electronics services segment certain contracts require delivery installation testing certification customer acceptance revenue recorded sales recognized customer picks product defense electronics services segment typically recognizes revenue anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract costs resulting margins recorded proportion recorded sales performance contracts estimated final contract prices costs design manufacturing engineering development costs periodically reviewed revisions made necessary effect revisions estimates included earnings period revisions made material revisions estimates covered periods accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims estimates future costs management believes warranty accruals adequate however actual warranty expenses could differ estimated amounts accrual product warranties december 31 2004 2003 403 million 343 million respectively see note 22 guarantees indemnities warranties notes consolidated financial statements additional details accounting pronouncements december 2004 financial accounting standards board fasb issued statement financial accounting standards sfas 123 revised 2004 sharebased payment sfas 123r revision sfas 123 accounting stockbased compensation statement eliminates option using intrinsic value method accounting employee stock options historically utilized company generally resulted recognition compensation cost provisions sfas 123r require recognition employee services received exchange awards equity instruments based grantdate fair value awards determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award sfas 123r effective company july 1 2005 adoption statement material impact companys financial statements december 2003 fasb issued sfas 132 revised december 2003 employers disclosures pensions post retirement benefits sfas 132 revised pronouncement retains disclosure requirements sfas 132 additionally pronouncement requires additional disclosures regarding types plan assets investment strategy measurement dates plan obligations cash flows components net periodic benefit cost recognized interim periods defined benefit pension plans defined benefit post retirement plans company adopted pronouncement effective december 31 2003 adoption material impact financial statements company june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys financial statements june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 adoption standard material effect companys financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issued employees april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 149 clarifies circumstances contract initial net investment meets characteristics derivative discussed sfas 133 addition sfas 149 clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption statement material effect companys financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 requires certain financial instruments embody obligations issuer characteristics liabilities equity classified liabilities provisions sfas 150 effective financial instruments entered modified may 31 2003 instruments exist beginning first interim financial reporting period beginning june 15 2003 company financial instruments met provisions sfas 150 therefore adoption statement material effect companys financial statements november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 statement clarifies criteria abnormal amounts freight handling costs spoilage required expensed current period charges rather deferred inventory addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective company july 1 2005 company currently process determining impact statement companys financial statements november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur interpretation also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties notes consolidated financial statements additional information adoption interpretation material effect companys financial statements january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created january 31 2003 provisions effective december 31 2003 company create obtain variable interest entities 2003 company elected early adoption provisions fin 46 related variable interest entities created prior january 31 2003 july 1 2003 adoption interpretation material effect companys financial statements december 2003 fasb issued revision fin 46 however impact companys adoption january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued subsequently fsp 1062 issued amends fsp 1061 discusses recognition effects medicare prescription drug improvement modernization act 2003 medicare modernization act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 company adopted pronouncement effective july 1 2004 unable conclude whether benefits plans actuarially equivalent based proposed regulations released august 2004 currently company analyzing effect medicare modernization act companys plans based final regulations issued end january 2005 taken action time reflect medicare changes addition assumed adoption pronouncement affect demographic factors used determine plan assets obligations december 31 2004 companys measurement date see note 19 employee benefit plans notes consolidated financial statements discussion postretirement benefits december 2004 fasb issued fsp 1091 application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004 fsp 1091 american jobs creation act 2004 ajca provides tax relief us domestic manufacturers fsp 1091 states tax benefit recorded year taken companys tax return rather reflecting deferred tax asset period ajca enacted fsp 1091 effective upon issuance adoption fsp material effect companys financial statements december 2004 fasb issued fsp 1092 accounting disclosures guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1092 foreign earnings repatriation provision within act provision provides special limitedtime dividends received deduction repatriation certain foreign earnings us taxpayer fsp 1092 states company recognize income tax effect related provision decides plan reinvestment repatriation foreign earnings time company expect elect apply provision ajca risks uncertainties environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes accruals accordance accounting principles generally accepted within united states insurance recoveries included assets probable claim realized although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows disclosure companys commitments contingencies see note 21 commitments contingencies notes consolidated financial statements 2005 outlook revenue growth defense electronics services segment expected improve 14 18 2004 revenues driven higher service revenue reflecting broader range offeringscapabilities acquisition rss fluid technology segment expects revenue growth 2 6 2004 revenue levels due continued growth waterwastewater business contributions wedeco revenue introduction new products expected increase results electronic components segment revenue growth motion flow controls leisure marine business resulting new products expansion us friction products expected partially offset platform losses automotive tubing business operating income projected increase 12 22 2005 due revenue growth discussed segment operating margin projected increase approximately 70 110 basis points 2004 due benefits 2004 process improvement initiatives pruning lower margin products forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented executive summary liquidity capital resources market risk exposures critical accounting policies risks uncertainties 2005 outlook historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forward looking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred fluid technology business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense electronics services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets motion flow control business affected cyclical nature transportation industries strikes major auto producers international demand marine leisure products electronic components business affected economic conditions major markets success new products cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7ananitem 7 management’s discussion analysis financial condition results operations millions except per share amounts unless otherwise stated business overview itt global multiindustry leader hightechnology engineering manufacturing engaged directly subsidiaries generate revenue cash design manufacture sale wide range engineered products provision related services financial reporting purposes businesses aggregated organized three principal business segments defense electronics services fluid technology motion flow control growth strategy centered organic acquisition growth ability grow organically stems valuebased product development process new existing technologies distribution capabilities customer relationships strong market positions addition growth initiatives number strategic initiatives within framework itt management system aimed enhancing operational performance include global sourcing footprint rationalization realignment six sigma lean fulfillment key performance indicators nongaap measures management reviews key performance metrics including sales revenues segment operating income margins earnings per share orders growth backlog among others addition consider following nongaap measures key performance indicators n “organic sales revenues” “organic orders” “organic operating income” defined sales revenues orders operating income respectively excluding impact foreign currency fluctuations contributions acquisitions divestitures n “free cash flow” defined cash flow operations less capital expenditures management believes metrics useful investors evaluating operating performance periods presented provide tool evaluating ongoing operations management assets held period metrics however measures financial performance accounting principles generally accepted united states “gaap” considered substitute sales revenue growth decline cash flows operating investing financing activities determined accordance gaap may comparable similarly titled measures reported companies executive summary despite challenging market conditions fourth quarter achieved record revenue earnings 2008 sales revenues full year ended december 31 2008 117 billion increase 299 2007 income continuing operations increased 225 2008 2007 423 per diluted share reflecting net cost productivity contributions acquisitions edo imc organic revenue growth lower pension expense offset additional restructuring realignment costs strategic growth investments financial highlights year ended december 31 2008 include n sales revenues defense electronics services business segment 63 billion increase 504 2007 attributable organic revenue growth successful integration edo acquisition operating income segment 7270 446 increase yearoveryear n sales revenue growth fluid technology business segment 94 yearoveryear 38 billion primarily driven organic revenue growth operating income 4687 increased 83 yearoveryear n sales revenues motion flow control business segment 16 billion 188 2007 primarily attributable imc acquisition year operating income grew 23 comparable basis 1917 n generation 8709 free cash flow 1123 conversion income continuing operations significant highlights year ended december 31 2008 include n successful integration edo imc acquisitions contributed 2 billion sales revenues 2008 n investments attractive markets served motion flow control fluid technology business segments opening new plants including plants china india czech republic n participation development next generation joint tactical radio system defense electronics services business segment also became sole provider enhanced night vision goggles us army commenced delivery faa’s next generation air traffic control program n investment approximately 940 restructuring asset impairment realignment actions including facility consolidations headcount reductions fourth quarter 2008 better position certain businesses 2009 n combination certain motion flow control businesses improve strategic alignment endmarkets better leverage production capabilities cost structures details related results contained following consolidated financial results segment review sections outlook recent changes global economic environment including disruptions global financial markets global currency fluctuations create difficult 2009 market conditions environment strategy focus current needs customers deploy capital disciplined manner focus cost controls execute operational initiatives going focus customers aligning activities including vital service maintenance offerings needs plan improve product life cycle costs making products energy efficient reducing total cost ownership focused protecting financial position continued high free cash flow generation coupled balanced capital deployment approach including preservation liquidity dividend increase elimination expiration date share repurchase program proactively reducing costs leveraging business functional strength achieve competitive advantages continue strategic initiatives within framework itt management system aimed enhancing operational performance planning approximately 50 new restructuring actions 2009 developing contingency plans reactive volume declines beyond expectations 2009 cost productivity actions include discretionary cost controls driving incremental supply chain savings integrated global strategic sourcing group continue plan longterm supporting strategic growth investments including research development activities significant capital investments support strategic initiatives including position faa next generation air traffic control program emerging market expansion investing new information technology systems current global economic conditions could negative impact 2009 performance particularly within fluid technology motion flow control business segments however expect defense electronics services business segment provide stable base 2009 due part strong funded backlog position winning program track record factors impacting 2009 performance compared 2008 include revenue declines fluid technology motion flow control business segments higher pension employee benefitrelated costs lower restructuring actions benefits productivity cost containment initiatives also anticipate foreign currency fluctuations negative impact 2009 results operations known trends uncertainties following list represents summary trends uncertainties could significant impact results operations financial position andor cash flows operating investing financing activities n organic revenues grew 49 fourth quarter 2008 compared prior year lower full year 2008 growth rate 72 additionally organic orders declined 220 52 fourth quarter 2008 motion flow control fluid technology business segments respectively reflects part impact recent economic downturn difficult determine breadth duration recent economic financial market decline many ways may affect suppliers customers business general continuation worsening difficult financial macroeconomic conditions could significant adverse effect sales profitability results operations n real estate market suffered greatly last year particularly within united states europe continued decline demand would result negative impacts portions fluid technology business segment sell products residential commercial market applications n recent declines economic conditions could cause certain municipalities cancel certain projects delay related funding could adverse effect results fluid technology business segment portion fluid technology business segment provides products end markets oil gas power chemical mining expect see level order delays andor cancellations 2009 result declining economic conditions impact end markets n international air transport association recently reported cargo traffic passenger traffic declines approximately 23 5 respectively continued declines could negatively impact portion motion flow control businesses segment n portion motion flow control business segment sensitive trends within connector industry recent bishop report publication connector industry forecasts 2009 decline sales approximately 15 n global automotive marine markets declined significantly last year oem production contracted period markets expected challenged 2009 result portions motion flow control business segment could adversely impacted n us defense programs could impacted result program evaluations conducted 2009 changes portion us defense budget devoted programs could adversely impact business addition anticipated overall performance benefit certain international markets variability timing size key orders could negatively impact future results n expect incur approximately 406 net periodic pension cost 2009 changes overall pension employeerelated benefit plans including material declines fair value pension plan assets among others could adversely affect results operations beyond 2009 well require us make significant funding contributions n recent distress financial markets adverse impact availability credit liquidity resources shortterm longterm interest rates increased significantly fourth quarter 2008 including rates commercial paper volatility markets impact interest rates somewhat less predictable years past higher rates would negatively impact results operations information provided represent complete list trends uncertainties could impact business either near longterm however considered along risk factors identified item 1a annual report form 10k disclosure caption “forwardlooking statements” end section business segment overview summarized information three business segments including markets served goods services provided relevant factors could impact results business challenges areas focus defense electronics services defence electronics services business segment designed serve future needs around safety security intelligence communication management believes defense electronics services business segment well positioned products services support customers’ needs addition expect new product development continue contribute future growth following provides summary defense electronics services businesses goods services provides respective endmarkets advanced engineering services data analysis research homeland defense telecommunications systems information technology communications systems voice data systems battlefield communication technology electronic systems force protection integrated electronic warfare systems reconnaissance surveillance radar undersea systems aircraft armament suspensionandrelease systems advanced composite structures intelligence information warfare intelligence systems analysis information warfare solutions data acquisition storage night vision image intensifier technology military commercial night vision equipment space systems satellite imaging systems meteorological navigation payloads related information solutions systems division systems integration communications engineering technical support solutions factors could impact defense electronics services’ financial results include level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets ability obtain appropriate export licenses international sales business primary areas business focus include new improved product offerings new contract wins successful program execution fluid technology fluid technology business segment provides critical products services markets driven population growth increasing environmental regulation global security global infrastructure trends fluid technology products include water wastewater treatment systems pumps related technologies water fluid control products residential commercial industrial applications following provides summary fluid technology businesses goods services provides respective endmarkets water wastewater submersible pump systems water wastewater control biological filtration disinfection treatment systems municipal industrial commercial applications residential commercial water pumps systems accessories water wells pressure boosters agricultural irrigation applications heating ventilation air conditioning systems boiler controls flood control fire protection pumps residential commercial light industrial agriculture turf irrigation applications industrial process pumps valves industrial mining pulp paper chemical petroleum processing highpurity systems biopharmaceutical applications factors could impact fluid technology’s financial results include broad economic conditions markets served ability municipalities fund projects raw material prices continued demand replacement parts servicing primary areas business focus include new product development geographic expansion new markets facility rationalization global sourcing direct material purchases motion flow control motion flow control business segment provides highly engineered critical components serve highend markets it’s group businesses provide products services areas defense aerospace industrial transportation computer telecom rvmarine revenue opportunities balanced oem aftermarket customers addition traditional markets us western europe opportunities emerging markets asia increasing following provides summary motion flow control businesses goods services provides respective endmarkets motion technologies friction pads back plates serving global automotive railway customers koni® shocks premier adjustable shocks car bus truck trailer rail applications interconnect solutions connectors interconnects cable assemblies multifunction grips inputoutput card kits smart card systems serving defense aerospace industrial transportation computer telecom markets flow control pumps related products marine leisure market pumps components beverage applications pumps specialty industrial fluid dispensing applications valve actuation control systems harsh environments including oil gas pipelines well solenoid valves control technologies valves actuators pumps switches commercial military regional business general aviation markets switches regulators oil gas fluid power generation chemical markets electromechanical actuators servo motors computer numerical control systems motion controller components medical imaging semiconductor machine tool industrial automation metal fabrication aircraft seating applications pressure regulators diaphragm seals industrial applications natural gas vehicles energy absorption wide range standard custom energy absorption vibration isolation solutions including shock absorbers buffers tow bar snubbers rate controls dampers vibration isolators related products serving industrial oil gas rail aviation defense markets motion flow control businesses’ financial results driven economic conditions major markets cyclical nature transportation industry production levels major auto producers demand marine leisure products raw material prices success new product development platform life changes technology primary areas business focus include expansion adjacent markets new product development manufacturing footprint optimization global sourcing direct material purchases lean fulfillment consolidated financial results sales revenues sales revenues year ended december 31 2008 116948 representing 299 increase 2007 increase reflects contributions acquisitions 19487 including edo imc benefit 985 foreign currency exchange fluctuations despite global economic environment deteriorated year progressed organic revenues grew 72 prior year primarily driven higher volumes price increases contributions new products programs fourth quarter 2008 organic revenues grew 49 portions business impacted recent economic downturn sales revenues year ended december 31 2007 90033 representing 153 increase 2006 organic revenue growth 109 period primarily driven higher volumes price increases following table illustrates impact organic growth acquisitions completed period foreign currency translation fluctuations sales revenues periods orders received 2008 totaled 117261 increase 26283 prior year including orders attributable acquisitions favorable benefit foreign currency exchange translation organic orders increased 85 overall including growth 148 56 defense electronics services fluid technology business segments respectively motion flow control business segment reported full year organic orders decline 30 organic orders declined business segments fourth quarter 2008 compared prior year period including 220 52 decreases motion flow control fluid technology business segments respectively believe order declines taken consideration current level backlog attributable commercial businesses indicate 2009 sales revenues could substantially lower reported 2008 2007 received orders 90978 increase 7061 84 prior year period order growth 2007 attributable fluid technology motion flow control business segments including contributions existing businesses acquisitions costs sales revenues gross profit costs sales revenues 84394 64350 years ended december 31 2008 2007 respectively results represent increases 311 145 respective prior year primarily reflecting impact acquisitions including edo imc 2008 higher organic sales volume periods negative impact foreign currency exchange translation gross profit year ended december 31 2008 32554 268 increase 2007 gross margin 278 decreased 70 basis points 2008 due higher production costs impact edo acquisition partially offset price increases benefits productivity strategic initiatives including efforts improve supply chain productivity control material costs gross profit year ended december 31 2007 25683 173 increase 2006 gross margin improved 50 basis points 285 2007 increase driven productivity cost savings initiatives including continued efforts improve supply chain productivity control material costs partially offset unfavorable mix foreign currency transaction costs selling general administrative expenses selling general administrative expenses “sga” increased 284 17235 year ended december 31 2008 yearoveryear increase primarily attributable acquisitions edo imc negative impact foreign currency exchange translation addition recognized certain loss reserves result realignment actions taken fourth quarter 2008 fluid technology motion flow control business segments sga increased 1668 142 2007 yearoveryear increase primarily attributable higher levels marketing expense business segments support product campaigns new sales proposals addition general administrative expense increased due higher compensationrelated costs investments growth process improvement initiatives impact foreign currency translation sga percentage sales 147 149 151 three years ended december 31 2008 2007 2006 respectively research development expenses research development expenses “rd” increased 620 214 2008 2007 respectively prior year period 2008 increase reflects impact recent acquisitions including edo imc rd percentage sales relatively consistent 21 20 21 three years ended december 31 2008 2007 2006 respectively continued efforts within business segments support product development restructuring asset impairment charges net 2008 2007 2006 recorded 775 661 517 respectively restructuring charges asset impairment charges net restructuring accruals reversed charges primarily include facility consolidations headcount reductions reflect efforts streamline operating structure result declining global economic environment accelerated restructuring activities fourth quarter 2008 result better position businesses 2009 see section entitled “restructuring asset impairment charges” note 4 “restructuring asset impairment charges” notes consolidated financial statements additional information operating income operating income 12101 2008 reflects 238 increase prior year increase largely due impact edo imc acquisitions addition realized organic operating income growth 188 70 defense electronics services fluid technology business segments respectively contributions primarily attributable higher sales volumes new programs defense electronics services business segment price increases fluid technology business segment operating income increased 43 motion flow control business segment primarily due contributions acquisitions imc benefit foreign currency exchange translation partially offset higher production costs operating margin decreased 60 basis points yearoveryear 103 year ended december 31 2008 decrease reflects increased sga including impact acquisitions higher amortization intangible assets costs incurred connection fourth quarter realignment actions higher restructuring expense unfavorable foreign currency transaction costs partially offset benefits operating efficiencies cost savings initiatives lower pension expense operating income 9772 2007 reflects 220 increase prior year increase driven organic growth attributable business segments benefit foreign currency exchange translation higher volumes coupled price increases benefits operating efficiencies costsaving initiatives offset higher production costs higher sga expense interest expense interest income 2008 2007 2006 recognized interest expense 1408 1149 862 respectively interest expense increased 225 2008 due higher levels debt primarily reflecting funding acquisitions capital expenditures periods taxrelated charges higher interest rates fourth quarter 2008 partially offset lower interest rates first nine months 2008 interest expense increased 333 2007 primarily due higher average debt levels year reflecting funding acquisitions stock repurchases capital expenditures pension plan contributions partially offsetting 2007 yearoveryear increase decrease 70 interest expense related income taxes result settlement tax examination second quarter 2007 recorded interest income 313 496 254 years ended december 31 2008 2007 2006 yearoveryear 2008 decrease 2007 increase interest income driven average balance cash equivalents held respective period income tax expense income tax expense 3123 287 income continuing operations year ended december 31 2008 compared 2655 295 prior year yearoveryear decrease effective tax rate primarily attributable tax account validation adjustment benefit mix earnings countries differing statutory rates partially offset benefit recognized 2007 associated settlement tax examination income tax expense 2655 295 income continuing operations year ended december 31 2007 compared 2276 313 prior year yearoveryear decrease effective tax rate primarily attributable benefit recognized 2007 associated settlement tax examination partially offset impact penalty recognized 2006 associated night vision compliance matter see note 6 “income taxes” notes consolidated financial statements additional information income discontinued operations net tax 2007 sold majority switches businesses private equity firm net proceeds 2232 aftertax gain 844 third quarter 2008 completed sale remaining component switches businesses buyer net proceeds 51 result recorded aftertax gain sale 54 year ended december 31 2008 first quarter 2006 completed sale fhs automotive brake fueling tubing components business privately held company net proceeds 1877 gain 190 business component motion flow control business segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry first quarter 2006 also completed sale richter industrial nonmetallic lined pumps valves business private equity investor net proceeds 248 gain 222 business component fluid technology business segment manufacturer pumps valves selected segments chemical fine chemical pharmaceutical industries see note 5 “discontinued operations” notes consolidated financial statements additional information segment review defense electronics services sales revenues year ended december 31 2008 increased 504 prior year 62823 2007 sales revenues 41762 increase 141 2006 following table illustrates impact organic growth acquisitions completed period sales revenues 2008 versus acquisitions including edo shipments crew contributed 17664 sales revenues year ended december 31 2008 organic sales increased 3419 82 primarily due contributions advanced engineering sciences division driven existing new contracts including classified research programs data analysis contracts federal aviation administration’s contract build next generation airtraffic control system organic revenue growth also attributable contributions communications systems division driven strength international single channel ground airborne radio sales systems division primarily driven nonconflict related programs sensor missile defense space control programs positive contributions gps navigation geoeye projects offset declines remote sensing classified government programs space systems division night vision division organic sales increased result contributions new products higher international sales revenues electronic systems division relatively flat yearoveryear decreases radar systems offset contributions avionics operating income increased 2243 446 2008 acquisitions including edo contributed 1298 2008 remaining increase 945 attributable organic growth yearoveryear organic growth increase primarily attributable previously mentioned sales drivers operating margins decreased 40 basis points 116 reflecting higher production costs higher amortization intangible assets recognized result edo acquisition partially offset benefits productivity improvements supply chain initiatives 2007 versus benefit new programs sales growth existing contracts particularly advanced engineering services systems divisions drove 2007 increase sales revenues addition volume declines within space systems business due lower content certain platforms partially offset segment’s overall performance results attributable acquisitions 2007 related primarily edo operating income increased 984 243 2007 excluding impact acquisitions operating income increased 1020 252 increase primarily attributable previously mentioned sales drivers operating margins 120 2007 reflect 100 basis point improvement 2006 increase attributable increased operating efficiencies partially offset estimated costs settle compliance issues defense electronics services business segment orders backlog level order activity related programs within defense electronics services business segment affected timing government funding authorizations project evaluation cycles yearoveryear comparisons could times impacted factors among others received orders 62329 2008 increase 21590 prior year primarily attributable contributions acquisitions 15551 including edo organic orders grew 148 prior year funded order backlog 52 billion december 31 2008 2007 received orders 40739 2007 decrease 441 compared prior year funded order backlog 52 billion december 31 2007 compared 39 billion december 31 2006 fluid technology sales revenues year ended december 31 2008 38406 reflecting 94 increase 2007 sales revenues grew 143 2006 35091 following table illustrates impact organic growth acquisitions completed period foreign currency translation fluctuations sales revenues periods 2008 versus sales revenues increased 3315 prior year increase primarily attributable organic growth 77 driven higher volume price benefit foreign exchange translation factors driving organic sales growth follows water wastewater organic sales increased 1045 63 year ended december 31 2008 due strength waterwastewater transport particularly within municipal market dewatering primarily attributable mining market residential commercial water organic sales increased 554 47 year ended december 31 2008 respectively due strength global commercial markets strength north american agricultureirrigation market offset weakness north american residential market industrial process organic sales increased 1219 173 year ended december 31 2008 due strength industrial operations particularly within chemical oil gas power mining markets operating income year ended december 31 2008 increased 360 83 prior year benefit 13 attributable foreign currency exchange translation organic operating income growth 70 primarily attributable previously mentioned sales drivers operating margins decreased 10 basis points 122 2008 reflecting higher production costs well costs associated disposition manufacturing facility partially offset benefits productivity improvements supply chain initiatives lower pension expense 2008 received orders 39387 increase 2816 77 prior year primarily due organic order growth 2047 56 increase primarily attributable industrial process resulting strength large project orders strength international markets order backlog 8901 december 31 2008 compared 8871 december 31 2007 versus 2007 recognized sales revenues 35091 increase 4390 143 2006 including 1383 benefit foreign currency exchange translation organic revenues grew 89 yearoveryear due higher prices increased sales volume international markets europe middle east africa central south america asiapacific water wastewater organic sales grew 83 strength large pump sales dewatering business partially offset softness us water treatment business residential commercial water organic sales grew 57 strength commercial applications partially offset softness residential market industrial process organic sales increased 173 resulting strength large project sales particularly mining oil gas markets operating income year ended december 31 2007 increased 621 168 prior year benefit 52 attributable foreign currency exchange translation 2007 yearoveryear organic income growth primarily attributable previously mentioned sales drivers operating margins increased 20 basis points 123 2007 reflecting higher prices favorable sales mix lower restructuring expense benefits productivity improvements supply chain initiatives partially offset increased production costs selling general administrative expense 2007 received orders 36571 increase 5130 163 prior year increase primarily attributable strength water transport particularly within mining public utilitymunicipal markets continued strength industrial project orders order backlog 8871 december 31 2007 compared 7022 december 31 2006 motion flow control sales revenues year ended december 31 2008 15834 reflecting 188 increase 2007 sales revenues grew 219 2006 13325 following table illustrates impact organic growth acquisitions completed period foreign currency translation fluctuations sales revenues periods 2008 versus sales revenues increased 2509 prior year primarily attributable contributions imc benefit foreign currency exchange translation organic sales revenues grew 274 21 factors driving increase follows motion technologies organic sales increased 269 54 increases attributable higher volumes oem components new platform wins aftermarket brake pad sales contributions partially offset general slowdown second half 2008 global automotive markets interconnect solutions organic sales increased higher volumes 161 38 primarily attributable americas asia markets strength medical defense aerospace rail industrial markets particularly within oil gas industry flow control organic sales decreased 250 99 decrease primarily attributable overall decline bath spa whirlpool markets partially offset positive contributions domestic beverage market control technologies organic sales increased 129 110 primarily driven strength commercialaerospace aftermarket products energy absorption organic sales decreased 20 48 primarily reflecting decline global industrial market operating income increased 43 23 including contributions acquisitions benefit foreign currency exchange translation operating income declined 280 149 organic basis primarily due costs associated planned sale spa whirlpool european industrial distribution business higher restructuring expense production costs partially offset increased sales volume benefits productivity improvements supply chain initiatives lower pension expense operating margins decreased 200 basis points 121 2008 primarily reflecting factors described 2008 received orders 15633 increase 1843 134 prior year increase driven contributions acquisitions including imc benefit foreign currency exchange translation partially offset decline organic orders 30 order backlog 4171 december 31 2008 compared 4404 december 31 2007 versus sales revenues increased 2396 219 prior year attributable organic sales growth 1117 102 contributions acquisitions including imc 692 benefit foreign currency exchange translation 587 significant factors attributable organic sales growth illustrated table motion technologies organic sales increased 511 126 increase attributable higher volumes new european platforms existing programs interconnect solutions organic sales increased 344 90 due higher volumes electronic components sales particularly asia americas flow control organic sales increased 102 45 increase primarily attributable higher volumes marine industrial beverage markets partially offset declines bath spa whirlpool markets control technologies organic sales increased 156 189 primarily due higher sales commercial military lesser extent industrial markets operating income increased 377 252 2007 compared 2006 organic operating income increased 269 180 period yearoveryear increase primarily driven higher sales volumes cost reduction initiatives operating efficiencies benefits partially offset higher material costs unfavorable mix higher sga expense including increased marketing expense higher compensation costs impact foreign currency translation operating margin 141 137 2007 2006 respectively yearoveryear increase primarily reflects factors discussed received orders 13790 reflecting increase 2376 208 prior year period order growth attributable business within segment including motion technologies driven previously mentioned new platforms europe control technologies order backlog 4404 december 31 2007 compared 4093 december 31 2006 corporate expenses 1773 year ended december 31 2008 increased 317 compared prior year period primarily reflecting higher bonus restructuring costs well corporate initiatives including expanded resources review procedures tax accounting function corporate expenses 1456 2007 increased 220 compared prior year primarily reflecting higher bonus stockbased compensation pension postemployment benefits compensationrelated expenses restructuring asset impairment charges fourth quarter 2008 restructuring activities asset impairment charges response current anticipated market conditions accelerated restructuring activities across businesses fourth quarter 2008 restructuring actions resulted net restructuring charge 563 related payments 95 anticipate additional 62 restructuring charges incurred payments 477 occur 2009 related actions components charges associated actions announced fourth quarter 2008 primarily represent reduction structural costs business segments planned closure facility within motion flow control business segment planned position eliminations total 1258 including 601 factory workers 629 office workers 28 management employees projected future savings fiveyear horizon restructuring actions announced fourth quarter 2008 approximately 63 2009 267 2010 2013 additionally fourth quarter 2008 recorded net restructuring asset impairment charge 53 reflecting costs 39 related prior actions reversal 04 restructuring accruals management determined would required well asset impairment charge 18 related writedown software due decision cancel project result organizational realignment restructuring activities 2008 recorded net restructuring charge 746 reflecting costs 669 related new actions 93 related prior years’ plans well reversal 16 restructuring accruals management determined would required components charges associated actions announced 2008 primarily represent reduction structural costs business segments planned closure facility motion flow control business segment facility defense electronics services business segment planned position eliminations total 1360 including 614 factory workers 704 office workers 42 management employees costs associated prior years’ plans primarily reflect severance lease cancellation related costs payments 161 made 2008 related actions announced 2008 projected future savings five year horizon restructuring actions announced 2008 approximately 73 2009 69 incremental savings realized 2008 308 2010 2013 2008 asset impairment charges 2008 recognized 29 charges related impairment longlived assets fourth quarter 2008 recognized asset impairment charge 18 related writedown software due decision cancel project result organizational realignment third quarter 2008 recognized impairment charge 11 related one motion flow control businesses reflecting reduction expected future earnings business restructuring activities 2007 recorded net restructuring charge 611 reflecting costs 579 related new actions 74 related prior year plans well reversal 42 restructuring accruals management determined would required components charges associated actions announced 2007 represent reduction structural costs business segments planned closure four facilities fluid technology business segment one facility motion flow control business segment two facilities defense electronics services business segment planned position eliminations total 729 including 341 factory workers 345 office workers 43 management employees costs associated prior years’ plans primarily reflect additional costs related adjustment writeoff leased space well asset writeoffs severance costs payments 268 made 2007 related actions announced 2007 projected future savings fouryear horizon restructuring actions announced 2007 approximately 57 2009 173 2010 2012 2007 asset impairment charges fourth quarter 2007 recognized 50 charges related impairment longlived assets impairment result determination two businesses one within motion flow control business segment one within fluid technology business segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecasts businesses reflect current business conditions asset impairment charges 42 08 recorded within motion flow control fluid technology business segments respectively restructuring activities 2006 recorded net restructuring charge 517 reflecting costs 527 related new actions 38 related prior year plans well reversal 48 restructuring accruals management determined would required components charges associated actions announced 2006 represent reduction structural costs business segments closure three facilities fluid technology business segment two motion flow control business segment one defense electronics services business segment planned position eliminations total 816 including 427 factory workers 360 office workers 29 management employees costs associated prior years’ plans primarily reflect additional severance costs payments 205 made 2006 related actions announced 2006 projected future savings threeyear horizon restructuring actions announced 2006 approximately 49 2009 97 2010 2011 employee benefit plans pension expense recorded 03 net periodic pension income consolidated income statement 2008 compared net periodic pension cost 617 2007 fully described note 16 “employee benefit plans” notes consolidated financial statements primary drivers behind decrease net periodic pension cost effect higher expected return plan assets decrease amortization deferred losses 2009 expect incur approximately 406 net periodic pension cost recorded consolidated income statement increase net periodic pension cost primarily due effect increase amortization deferred losses partially offset increase discount rate foreign plans funded status plan contributions fourth quarter 2008 recognized substantial decline fair market value employee pension plan assets contributing pretax charge comprehensive loss 21 billion decrease 13 billion shareholders’ equity decline also contributed reduction funded status us salaried pension plan represents approximately 78 total pension obligation december 31 2008 us salaried pension plan unfunded deficit 11 billion balance funded pension plans including foreign affiliate plans aggregate funded status decreased 2744 resulting net unfunded balance december 31 2008 2222 addition 3592 pension plans funding permitted foreign environments funding feasible funding requirements irs rules major consideration making contributions pension plans respect qualified pension plans intend contribute annually less minimum required applicable law regulations 2008 contributed 241 pension plans currently anticipate making contributions pension plans range 20 25 2009 pension protection act 2006 “pension act” contains funding requirements defined benefit pension plans pension act establishes 100 funding target 7 years plan years beginning december 31 2007 shortfall amortization payments required pension plan meets following targets 92 funded 2008 94 funded 2009 96 funded 2010 worker retiree employer recovery act 2008 “wrera” passed december 2008 wrera provides shortfall amortization charge based transition percentages 92 2008 94 2009 96 2010 100 thereafter opposed original ppa language 100 funding target ii clarification averaging method used value assets adjusted expected earnings results “asset smoothing” iii relief restriction benefit accruals 2009 allowing plan sponsor use greater adjusted funding target attainment percentage january 1 2008 january 1 2009 required make mandatory contributions us salaried plan satisfy minimum statutory funding requirements assuming actual plan returns consistent expected plan return nine percent 2009 interest rates remain constant additional changes us pension funding legislation would required make mandatory contributions 2010 may however make voluntary contributions next two years improve funded status us salaried plan funded status end 2009 future required contributions depend primarily actual return assets year discount rate end year depending factors resulting funded status pension plans level future contributions could material recoverable pension costs plan contributions us government cost accounting standards govern extent pension costs plan contributions allocable recoverable contracts us government defense electronics services business segment represents approximately 70 active us salaried plan participants result sought would seek reimbursement department defense portion pension costs plan contributions cash flow summary operating activities cash provided operating activities 2008 increased 3215 prior year significant increase partially due 2351 increase income continuing operations excluding noncash increases depreciation amortization combined reduction contributions us salaried pension plan reflected within change current noncurrent assets contributions us salaried pension plan made 2008 compared 500 2007 working capital provided modest increase cash last year 1238 reduction use cash accounts receivable primarily driven improved cash collections within fluid technology business segment largely offset reduced sources cash 759 accounts payable accrued expenses 414 inventories business segments contributed accounts payable accrued expenses impact led lower volumes timing payments change inventories primarily attributable defense electronics services business segment due ramp crew units coupled delayed international shipments additionally edo businesses significant contribution underlying overall operating cash flow performance cash provided operating activities 2007 increased 174 prior year increase due 1333 increase income continuing operations combined 2132 improvement cash inventories across three business segments increases cash partially offset 1755 increased use cash accounts receivable mainly due fluid technology business segment reflecting higher volumes overall including increased sales europe longer payment terms defense electronics services business segment primarily due higher overall volumes increase edo receivables since acquisition date also accounts payable accrued expenses reduced source cash totaling 1092 primarily due contract reserve adjustments well payment 300 towards 500 fines forfeitures penalties agreed conjunction settlement us government relating night vision division compliance matter see note 19 “commitments contingencies” notes consolidated financial statements discussion night vision matter additionally accrued deferred taxes mitigated increase cash 644 primarily related increased tax payments 1163 partially offset increased accrued deferred tax liabilities investing activities additions plant property equipment capital expenditures 2008 2487 increase 94 compared 2007 increase driven higher spending 303 defense electronics services business segment primarily due acquisition edo end 2007 185 increase motion flow control business segment result purchase manufacturing facility mexico combined timing investments compared last year increases offset net reductions 394 largely reflecting absence prior year cash payment 448 related renewal sale leaseback arrangement itt’s corporate aircraft whose term expired december 2007 see note 20 “guarantees indemnities warranties” notes consolidated financial statements discussion partially offset payments related leasehold improvements itt’s new headquarters consolidates corporate headquarters operations fluid technology motion flow control business segments capital expenditures 2007 2393 increase 622 2006 fluid technology business segment increased capital expenditures 214 largely related incremental investments facilities asia eastern europe also reflected 2007 capital expenditures cash payment 448 related renewal sale leaseback arrangement itt’s corporate aircraft whose term expired december 2007 see note 20 “guarantees indemnities warranties” notes consolidated financial statements discussion acquisitions 2008 spent 2265 related additional costs 2007 acquisitions including edo acquisition within defense electronics services business segment largely repayment debt acquired also spent 492 acquisitions several smaller companies including two companies motion flow control two companies fluid technology well acquisitionrelated costs acquisitions 2007 spent 20092 acquisition six companies acquisitions edo 15987 within defense electronics services business segment imc 3905 within motion flow control business segment comprised total spending acquisitions one defense electronics services business segment three fluid technology business segment acquisitions 2006 spent 895 primarily acquisition three entities one within fluid technology business segment one defense electronics services business segment one motion flow control business segment proceeds sale assets businesses 2008 completed sale remaining component switches businesses net proceeds 51 2007 sold substantial part switches businesses net proceeds 2232 buyer acquire remainder asset transfer issues resolved additionally part itt’s renewal corporate aircraft sale leaseback 2007 received cash payment 502 sale aircraft lessor see note 20 “guarantees indemnities warranties” notes consolidated financial statements discussion first quarter 2006 completed sale fluid handling systems richter net proceeds 2125 financing activities shortterm debt 2008 use cash related shortterm debt increased 35409 prior year reflecting net payments 12290 2008 primarily related financing edo acquisition compared net shortterm borrowings 23119 2007 net shortterm borrowings provided 24675 increased source cash compared prior year largely due debt used finance edo acquisition share repurchases 2008 spent 750 including commission fees repurchase common stock december 31 2008 repurchased 71 shares 4308 including commission fees 1 billion share repurchase program 2007 spent 2991 including commission fees repurchase common stock amount 486 relates 09 shares acquired end 2006 settled january 2007 remaining 2505 relates 41 shares repurchased 2007 december 2006 purchased 19 shares 1053 including commission fees activity 09 shares acquired end 2006 settled january 2007 486 activity part 1 billion share repurchase program announced fourth quarter 2006 replaces previous practice covering shares granted exercised context itt’s performance incentive plans additionally 2006 repurchased 28 shares 1534 offset dilutive effect exercised stock options restricted stock issuances dividends 2008 made 1209 dividend payments shareholders 25 increase 2007 made 966 dividend payments shareholders 25 increase 2006 discontinued operations operating activities 2008 cash used operating activities discontinued operations declined 71 prior year primarily due decrease cash used switches businesses result disposition substantially businesses third quarter 2007 cash operating activities discontinued operations declined 964 due use cash 162 current year compared 802 source prior year primary driver decrease cash flow absence operating cash flows switches businesses sold third quarter 2007 fhs richter businesses sold first quarter 2006 liquidity capital resources principal source liquidity operating cash flows demonstrated ability meet additional funding requirements issuance commercial paper funding needs monitored strategies executed meet overall cash requirements including management capital structure short longterm basis significant factors affect overall management liquidity include adequacy commercial paper bank lines credit ability attract longterm capital satisfactory terms assess factors along current market conditions continuous basis result may alter mix short longterm financing advantageous manage worldwide cash requirements considering available funds among many subsidiaries conduct business cost effectiveness funds accessed continue transfer cash subsidiaries us international subsidiaries cost effective believe available cash committed credit facilities access public debt markets provide adequate shortterm longterm liquidity recent declines worldwide debt equity markets adverse impact market participants including among things volatility security prices diminished liquidity limited access funding assessed implications factors current business determined significant impact financial position results operations liquidity 2008 access commercial paper market adversely affected believe alternative sources liquidity including available cash existing committed credit facilities would sufficient meet shortterm funding requirements current debt ratios positioned us grow business investments organic growth strategic acquisitions providing ability return value shareholders increased dividends share repurchases shortterm debt including current maturities longterm debt 16790 30830 december 31 2008 2007 respectively net debt december 31 2008 11820 compared 17260 december 31 2007 decrease primarily reflects pay debt 2008 subsequent funding acquisition edo expect cash flows operations access commercial paper market sufficient meet shortterm funding requirements anticipate cash flows operations utilized decrease net debt balance 2009 credit facilities commercial paper program november 2005 itt entered fiveyear revolving credit agreement “november 2005 credit facility” aggregate principal amount 125 billion effective november 8 2007 itt exercised option increase principal amount revolving credit agreement 175 billion march 2008 itt entered new 364day revolving credit agreement “march 2008 credit facility” providing additional 10 billion principal amount available borrowings result maximum amount available borrowings facilities 275 billion provisions agreement require maintain minimum interest coverage ratio december 31 2008 compliance financial covenants prior december 2007 borrowing commercial paper revolving credit agreements could exceed 125 billion aggregate outstanding december 2007 march 2008 itt board directors approved commercial paper borrowings increase 175 billion 275 billion respectively december 31 2008 commercial paper borrowings 16187 revolving credit agreements intended provide additional liquidity source funding commercial paper program needed policy maintain unused committed bank lines credit amount greater outstanding commercial paper balances march 2008 credit facility expire first quarter 2009 believe funds available us november 2005 credit facility sufficient cover level expected commercial paper borrowings 2009 satisfy remaining cash requirements contractual obligations itt’s commitment make future payments longterm contractual obligations follows december 31 2008 1 see note 14 “debt” notes consolidated financial statements discussion use availability debt revolving credit agreements amounts represent total longterm debt including current maturities unamortized discount exclude deferred gain interest rate swaps 2 amounts represent estimate future interest payments longterm debt outstanding december 31 2008 utilizing year end interest rates 3 refer note 13 “leases rentals” notes consolidated financial statements discussion lease rental agreements 4 unconditional purchase commitments principally take pay obligations related purchase certain raw materials subcontract work 5 purchase obligations include threeyear obligation amount 92 would require termination penalty based number remaining months december 31 2008 fee would 23 6 december 31 2008 liability connection financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” 1449 itt unable reasonably estimate timing fin 48 liability payments individual years beyond 12 months due uncertainties timing effective settlement tax positions see section entitled “critical accounting estimates income taxes” 7 longterm obligations include estimated environmental payments estimate based historical experience spend 80 120 per year environmental investigation remediation contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2008 best estimate environmental liabilities 1350 addition longterm obligations include letters credit payments connection settlement compliance issues defense electronics services business segment offbalance sheet arrangements guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities december 2007 entered sale leaseback type agreement corporate aircraft leased back fiveyear operating lease provided lease residual value guarantee counterparty amount 502 maximum amount undiscounted future payments would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2008 projected fair value aircraft end lease estimated 24 less residual value guarantee since estimated loss exceed 54 gain realized sale aircraft deferred loss contingency residual value guarantee recorded additional accrual financial statements itt number individually immaterial guarantees outstanding december 31 2008 may affected various conditions external forces could require payments made guarantees believe payments material adverse impact financial position results operations cash flow consolidated basis foreseeable future critical accounting estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses significant accounting policies used preparation consolidated financial statements discussed note 1 “summary significant accounting policies“ notes consolidated financial statements accounting estimates assumptions discussed section consider critical understanding financial statements inherently involve significant judgments uncertainties actual results areas could differ management’s estimates contingent liabilities time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities product liabilities including asbestos employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures accruals anticipated settlements established outcome matter probable reasonably estimated addition accruals legal fees various matters established fees probable payment reasonably estimated based present information including assessment merits claims well current reserves insurance coverage expect legal proceedings material adverse impact financial position results operations cash flows consolidated basis however uncertainties related matters record accruals based currently available information additional information becomes available reassess potential liability related pending claims litigation may revise estimates revisions estimates potential liabilities could material impact consolidated financial position results operations cash flows discussion contingencies including management’s judgment applied recognition measurement specific liabilities refer note 19 “commitments contingencies” notes consolidated financial statements employee benefit plans itt sponsors numerous employee pension welfare benefit plans determination projected benefit obligations recognition expenses related pension postretirement obligations dependent assumptions used calculating amounts assumptions include discount rates expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates disclosed note 16 “employee benefit plans” notes consolidated financial statements factors key assumptions summary significant assumptions used pension benefit plans follows management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary determine expected return plan assets assumption evaluating historical returns estimates future returns specifically analyze plan’s actual historical annual return assets past 10 15 20 25 years make estimates future returns using capital asset pricing model evaluate historical broad market returns past 75 years based strategic asset allocation detailed note 16 “employee benefit plans” notes consolidated financial statements based approach described estimate longterm annual rate return assets domestic pension plans 90 reference actual geometric average annual return plan assets domestic pension plans stood 99 118 120 124 past 10 15 20 25 year periods respectively chart shows actual versus expected longterm returns domestic pension plans utilized calculation net periodic benefit cost see note 16 “employee benefit plans” notes consolidated financial statements information weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2008 89 utilize assistance plan actuaries determining discount rate assumption service clients plan actuaries developed published interest rate yield curve comprising aaaaa bonds maturities zero thirty years plan actuaries discount annual benefit cash flows itt’s pension plan using yield curve develop singlepoint discount rate matching plan’s characteristics weighted average discount rate pension plans including foreign affiliate plans december 31 2008 624 also december 31 2008 raised discount rate postretirement welfare plans 625 60 december 31 2008 lowered expected rate future compensation increases domestic plan participants 40 45 based recent historical experience expectations future economic conditions pension expense 25 basis point change expected rate return plan assets discount rate future compensation increases would following effect 2009 pension expense scenario eliminates amortization deferred losses since amount subject amortization must exceed 10 percent greater projected benefit obligation marketrelated value plan assets funded status funded status derived subtracting respective yearend values projected benefit obligations fair value plan assets itt’s us salaried pension plan represents approximately 78 total pension obligation therefore funded status us salaried pension plan considerable impact overall funded status pension plans estimate every 25 basis point change discount rate impacts funded status us salaried pension plan approximately 110 similarly every five percentage point change actual 2009 rate return assets impacts plan approximately 150 fair value plan assets pension welfare benefit plans’ assets comprised broad range investments including domestic foreign securities private equity fixed income investments hedge funds commodities cash equivalents available valued investments based observable market inputs observable inputs market participants would use pricing investment based market data obtained independent sources include inputs quoted prices active markets inputs quoted prices active markets either directly indirectly observable unobservable inputs reflect company’s assumptions estimates market participants would use pricing investment based best information available circumstances extent valuation based inputs less observable unobservable market determination fair value requires judgment substantial portion pension welfare benefit plan assets portfolio comprised hedge fund private equity investments private equity portion hedge fund investments directly observable inputs require significant judgment determine fair value plan assets based yearend fair market values absent timely availability audited yearend financial statements investments derive allocable portion investment’s fair value management incorporated judgment set assumptions value investments yearend see note 16 “employee benefit plans” notes consolidated financial statements information revenue recognition itt recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority product sales title transfers products shipped certain circumstances title passes products delivered sales recognized customer picks product defense electronics services business segment certain contracts require delivery installation testing certification customer acceptance revenue recorded defense electronics services business segment certain businesses fluid technology business segment generally recognize sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones percentage costs incurred total costs estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified itt revenue arising claims process recognized either income offset potential loss reliably estimated realization probable income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expect effect year expect differences reverse based evaluation available evidence recognize future tax benefits net operating loss carryfowards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates calculation tax liabilities involves dealing uncertainties application complex tax regulations multitude jurisdictions across global operations recognize potential liabilities record tax liabilities anticipated tax audit issues us tax jurisdictions based estimate whether extent additional taxes due furthermore accordance fin 48 recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater 50 likelihood realized upon ultimate settlement adjust reserves light changing facts circumstances however due complexity uncertainties ultimate resolution may result payment materially different current estimate tax liabilities estimate tax liabilities proves less ultimate assessment additional charge expense would result payment amounts ultimately proves less recorded amounts reversal liabilities would result tax benefits recognized period determine liabilities longer necessary goodwill intangible assets account goodwill indefinitelived intangibles accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” sfas 142 states goodwill indefinitelived intangible assets amortized instead reviewed impairment annually frequently impairment indicators arise conduct annual impairment testing october 1 determine able recover portion carrying value goodwill indefinitelived intangibles application impairment test requires judgment including identification reporting units assignments assets liabilities reporting units determination fair value reporting unit impairment test involves use accounting estimates assumptions related future operating results consistent requirements sfas 142 fair values reporting units generally based discounted cash flow projections believed reasonable current forecasted circumstances results form basis making judgments carrying values reported net assets reporting units conducted annual goodwill impairment test october 1 2008 determined impairment subsequently updated forecast assumptions reflect declining economic conditions result reassessed goodwill impairment reporting units significantly affected changes initial projections despite declines estimated fair value certain reporting units since annual impairment test concluded impairments interim test dates continue closely monitor 2009 results projections units economic conditions product endmarkets significant change market conditions estimates judgments could give rise impairment period change becomes known intangible assets prior performing goodwill impairment testing process reporting unit sfas 142 reason believe nongoodwill related intangible assets may impaired intangible assets must first tested impairment sfas 142 sfas 144 “accounting impairment disposal longlived assets” “sfas 144” assets governed sfas 144 require recoverability test impairment whereby gross undiscounted cash flows determined specific asset nongoodwill related indefinitelived assets fair value determination made carrying value asset exceeds fair value impairment occurs carrying values assets impaired necessary provide appropriate carrying value goodwill impairment calculation impairment tests also involve use accounting estimates assumptions believed reasonable results form basis conclusions significant changes estimates assumptions could adversely impact conclusion impairment tests new accounting pronouncements see note 2 “new accounting pronouncements” notes consolidated financial statements complete discussion recent accounting pronouncements new pronouncements expect material impact financial condition results operations future periods forwardlooking statements certain statements contained document including within management’s discussion analysis financial condition results operations particularly material presented “executive summary” “2009 outlook” “known trends uncertainties” “restructuring asset impairment charges” “employee benefit plans” “liquidity capital resources” “critical accounting estimates” historical facts constitute “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance itt businesses materially different expressed implied forwardlooking statements factors may described referred time filings made itt securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries itt conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise projected savings restructuring actions potential future employee benefit plan contributions availability liquidity sufficient meet itt’s needs ability adapt changes resulting acquisitions divestitures affect cost reduction programs various factors referenced management’s discussion analysis caption “risk factors” areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred included item 1a defense electronics services business segment affected factors including level defense funding domestic foreign governments changes portion us defense budget devoted products services types products provide ability receive contract awards government investigations government contracts subject security facility clearances ability obtain maintain export licenses ability sell international markets ability develop market products services customers outside traditional markets fluid technology business segment affected factors including broad economic conditions markets served governmental funding levels raw material prices international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing motion flow control business segment affected cyclical nature transportation industry economic conditions major markets weather conditions production levels major auto producers demand replacement parts itt assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 management’s discussion analysis financial condition results operations millions except per share amounts unless otherwise stated business overview itt global multiindustry hightechnology engineering manufacturing organization engaged directly subsidiaries generate revenue cash design manufacture sale wide range engineered products provision related services business comprised three principal business segments aligned markets serve defense electronics services defense segment fluid technology fluid segment motion flow control motion flow segment strategy centered organic acquisitive growth ability grow organically stems valuebased product development process new existing technologies distribution capabilities customer relationships strong market positions acquisitive growth strategy focuses identifying acquiring businesses align provide adjacencies current core portfolio businesses addition growth initiatives number strategic initiatives within framework itt management system aimed enhancing operational performance include global sourcing footprint rationalization realignment six sigma lean fulfillment january 2010 strategic realignment defense segment announced better align emerging needs expanding global customer base increasingly integrated networkcentric realignment scheduled completed year end 2010 enable better product portfolio integration encouraging coordinated market approach reduce operational redundancies defense segment renamed itt defense information solutions current organizational structure consisting seven divisions consolidated three larger ones key performance indicators nongaap measures management reviews key performance metrics including revenue segment operating income margins earnings per share orders growth backlog among others addition consider certain measures useful management investors evaluating operating performance periods presented provide tool evaluating ongoing operations management assets held period metrics however measures financial performance accounting principles generally accepted united states gaap considered substitute revenue growth decline operating income cash flows operating investing financing activities determined accordance gaap may comparable similarly titled measures reported companies consider following nongaap measures key performance indicators n “organic revenue” “organic orders” “organic operating income” defined revenue orders operating income respectively excluding impact foreign currency fluctuations contributions acquisitions divestitures n “adjusted net income continuing operations” “adjusted earnings per diluted share” defined reported gaap income continuing operations reported gaap diluted earnings per share adjusted exclude special items may include limited unusual infrequent nonoperating items nonoperating tax settlements adjustments related prior periods special items represent significant charges credits impact current results may related company’s ongoing operations performance n “free cash flow” defined gaap cash flow operations less capital expenditures reconciliation adjusted income continuing operations including adjusted earnings per diluted share provided executive summary 2009 worked proactively address economic downturn aggressively focusing productivity cost reductions global sourcing footprint rationalization realignment six sigma lean fulfillment initiatives generated significant productivity cost savings continued focus customers aligning needs investing new technologies consolidating aspects motion flow segment around customer solutions improved manufacturing footprint consolidating 10 locations growing lowcost region manufacturing sourcing presence approximately 25 yearoveryear managed liquidity debt structure issuance 10 billion favorable fixedrate longterm debt deploying capital disciplined manner resulting reduction outstanding commercial paper balance 16 billion accomplishments positioned us continued strong growth future itt reported revenue 109 billion year ended december 31 2009 decrease 68 117 billion reported 2008 reflecting challenging market conditions fluid motion flow segments income continuing operations 2009 6507 decrease 1245 161 compared 2008 decrease primarily driven lower sales volumes establishment accrual future asbestos claims partially offset savings significant productivity initiatives discussed adjusted income continuing operations 6957 decrease 454 61 comparable prior year adjusted amount additional financial highlights 2009 include following n despite difficult market conditions revenue declined 47 organic basis reflecting enduring nature demand products n adjusted diluted earnings per share 378 declined 62 versus prior year n generated free cash flow 9981 included fourth quarter voluntary cash contribution us salaried retirement plan 1000 620 net taxes n selling general administrative sga expenses decreased 78 2009 reflecting productivity gains various costsaving initiatives well lower sales volumes related costsaving initiatives recognized restructuring expenses 793 775 2009 2008 respectively sga percentage revenue declined 10 basis points 145 n third quarter 2009 recognized aftertax charge 1307 income continuing operations related establishment accrual future asbestos claims filed next ten years net estimate related insurance recoveries see note 19 “commitments contingencies” notes consolidated financial statements additional information n segment working capital percentage sales improved 70 basis points 124 net debt net capital ratio declined 279 70 yearoveryear addition issued 10 billion senior unsecured notes may 2009 reduced yearoveryear outstanding commercial paper balance 16 billion 550 details related results contained following consolidated financial results segment review sections outlook continued volatility uncertainty global economic environment including disruptions global financial markets global currency fluctuations make difficult accurately project businesses various markets industries serve affected 2010 environment strategy remain focused needs customers execute three key elements driving productivity market growth differentiating organic growth product diversification advancement customer solutions aligning portfolio macro trends aging infrastructure growing middle class resource scarcity global security successful execution 2009 objectives placed company position aggressively focus strategic actions grow topline revenue 2010 actions also focused generating solid free cash flow leveraging recent investments driving operating margin expansion realization planned incremental productivity benefits cost productivity actions include discretionary cost controls driving incremental supply chain savings integrated global strategic sourcing group recently announced planned strategic realignment defense segment realignment enable stronger portfolio positioning accelerate new technology development systems solutions achieve coordinated market approach reduce operational redundancies defense segment renamed itt defense information solutions continue plan longterm increasing growth investments including research development activities significant capital investments support strategic initiatives including position faa next generation air traffic control program well nondod areas emerging market expansion investing new information technology systems continuing focus customers aligning activities including vital service maintenance offerings needs plan improve product life cycle costs making products energy efficient reducing total cost ownership well launching valuebased commercial excellence initiative focused fully utilizing commercial resources efficiently effectively strengthen current position around growing global macro trends pursuing adjacencies within fluid segment emerging market opportunities nondod growth like airtraffic control cyber security well responsibly deploying capital manner fully realize benefits trends continue identify areas cost reduction leverage business functional strength achieve competitive advantages known trends uncertainties following list represents summary known trends uncertainties could significant impact results operations financial position andor cash flows operating investing financing activities n global economic environment remains relative state uncertainty although slight upturn seen financial trading markets last nine months 2009 expect overall global economic recovery longterm process potential unforeseen adverse macroeconomic events remains concern occurrence events could significant unfavorable effect business n programs supported defense segment generally line fiscal year 2010 budget recently signed president obama however future impact business us defense programs influenced quadrennial defense review development 2011 department defense budget changes portion us defense budget allocated programs supported defense segment could materially impact business addition variability timing size key orders could negatively impact future results n associated recent declines real estate markets around world particularly within united states europe experienced reduction demand portions fluid segment sell products residential commercial market applications trend could continue adversely affect business future periods n 2009 position municipal markets area strength compared majority markets industries serviced fluid segment benefited significant international contract wins however relative strength municipal market remains uncertain potential delays cancellations projects continues exist events could significant adverse affect fluid segment n portion fluid segment provides products end markets oil gas power chemical mining economic conditions negatively impacted portion business 2009 changes economic conditions could impact results future periods n commercial airline industry significantly impacted decline passenger cargo traffic volume past year according international air transport association losses expected continue 2010 commercial airline carriers responded spending cuts including postponement new aircraft purchases delayed aircraft maintenance activities negatively impacted motion flow segment throughout 2009 worsening slow recovery industry could continue adversely affect business future periods n connectors industry experienced declines approximately 25 2009 orders sales compared 2008 levels recent data provided connectors industry report suggests however improvement may occurring 2010 approximately 27 motion flow segment sensitive trends within connector industry n global automotive marine markets declined significantly 2008 throughout 2009 significant contraction oem production period government automotive stimulus packages introduced second third quarters 2009 encouraged moderate recovery within global automotive markets stability market still uncertain declines either global automotive marine markets could negatively impact portions motion flow segment n expect incur 1400 net periodic postretirement cost 2010 changes postretirement benefit plans including material declines fair value postretirement benefit plan assets adverse changes macroeconomic factors could affect results operations well require us make significant funding contributions information provided represent complete list trends uncertainties could impact business either near longterm however considered along risk factors identified item 1a annual report form 10k disclosure caption “forwardlooking statements” end section consolidated financial results revenue orders revenue 2009 109045 representing 68 7903 decrease 2008 volume declines primarily driven global economic conditions continued negatively impact commercial business segments revenue defense segment relatively flat yearoveryear fluid segment represented approximately 60 decrease yearoveryear declines divisions primarily residential commercial water division motion flow segment accounted approximately 40 decrease included total revenue decline 7903 impact unfavorable foreign currency fluctuations 2237 revenue 2008 116948 representing 299 increase 2007 increase reflects contributions acquisitions 19487 including edo corporation edo international motion control inc imc benefit 985 foreign currency exchange fluctuations despite global economic environment deteriorated year progressed organic revenue grew 72 prior year primarily driven higher volumes price increases contributions new products programs following table illustrates impact organic growth acquisitions completed period foreign currency translation fluctuations revenue periods orders received 2009 totaled 106897 representing decrease 88 10370 prior year organic basis orders declined 7749 66 primarily driven impact challenging global economic conditions majority industries markets served commercial business segments well difficult comparisons strong 2008 orders within industrial commercial aerospace markets improvement orders seen fourth quarter 2009 growth 26 prior year sequential growth third quarter 2009 primarily driven defense segment orders received 2008 totaled 117261 increase 26283 prior year including orders attributable acquisitions favorable benefit foreign currency exchange translation organic orders increased 85 overall including growth 148 56 defense fluid segments respectively motion flow segment reported fullyear organic orders decline 30 gross profit gross profit 2009 30607 60 decrease 2008 decrease attributable decline revenue unfavorable foreign currency fluctuations partially offset benefits productivity gains including efforts improve supply chain productivity control material costs gross margin increased 30 basis points 281 2009 30 basis point improvement primarily due benefits productivity improvements various costsaving initiatives offset impacts reductions sales volumes gross profit 2008 32554 268 increase 2007 gross margin 278 decreased 70 basis points 2008 due higher production costs impact edo acquisition partially offset price increases benefits productivity strategic initiatives including efforts improve supply chain productivity control material costs selling general administrative expenses sga decreased 78 15764 2009 yearoveryear decrease primarily attributable costsaving initiatives response declining global economic conditions lower sales volumes favorable foreign currency exchange translation lower stock compensation expense partially offset higher postretirement plan costs sga increased 286 17092 2008 yearoveryear increase primarily attributable acquisitions edo imc negative impact foreign currency exchange translation addition recognized certain loss contingencies result realignment actions taken fourth quarter 2008 fluid motion flow segments research development expenses research development expenses rd increased 138 620 2009 2008 respectively prior year period 2009 increase primarily due increased spending development materials key growth platforms across defense segment 2008 increase reflects impact acquisitions including edo imc rd percentage revenue 24 21 20 years ended december 31 2009 2008 2007 respectively continued efforts within business segments support product development asbestosrelated costs net 2009 recorded asbestosrelated costs 2375 primarily related estimated liability net expected recoveries insurance coverage former itt entities claims projected filed company next 10 years see section entitled “asbestos matters” note 19 “commitments contingencies” notes consolidated financial statements additional information restructuring asset impairment charges net 2009 2008 2007 recorded 793 775 661 respectively restructuring asset impairment charges net restructuring accruals reversed response uncertainty present global economic environment initiated significant restructuring activities fourth quarter 2008 throughout 2009 result better position businesses 2010 charges primarily include facility consolidations headcount reductions reflect efforts streamline operating structure see section entitled “restructuring asset impairment charges” note 4 “restructuring asset impairment charges” notes consolidated financial statements additional information operating income generated operating income 9094 2009 248 decrease prior year primarily reflecting volume declines increased asbestosrelated costs negative impacts partially offset benefits implementation extensive costsaving initiatives productivity improvements structural changes made optimize sourcing reduce cycle times addition completed strategic realignment motion flow segment better leverage production capabilities cost structures well reduce operational redundancies operating margin decreased 83 2009 yearoveryear decline 200 basis points primarily attributable reductions sales volumes impact asbestosrelated costs negative impacts partially offset benefits productivity improvements various costsaving initiatives operating income 12101 2008 reflects 238 increase prior year increase largely due impact edo imc acquisitions addition realized organic operating income growth 188 70 defense fluid segments respectively contributions primarily attributable higher sales volumes new programs defense segment price increases fluid segment operating income increased 43 motion flow segment primarily due contributions acquisitions imc benefit foreign currency exchange translation partially offset higher production costs operating margin decreased 60 basis points yearoveryear 103 2008 decrease reflects increased sga including impact acquisitions higher amortization intangible assets costs incurred connection fourth quarter realignment actions higher restructuring expense unfavorable foreign currency transaction costs partially offset benefits operating efficiencies cost savings initiatives lower pension expense interest expense interest income interest expense decreased 293 2009 due interest rate declines commercial paper variable rate debt well lower yearoveryear levels outstanding commercial paper decrease interest related taxes partially offset interest expense incurred related 10 billion debt issuance may 2009 interest expense increased 225 2008 due higher levels debt primarily reflecting funding acquisitions capital expenditures periods taxrelated charges higher interest rates fourth quarter 2008 partially offset lower interest rates first nine months 2008 2009 yearoveryear decrease interest income 224 primarily due lower average interest rates 2009 periods compared prior year partially offset recognition interest refunds 132 received conjunction irs tax settlement 2008 yearoveryear decrease interest income 369 driven lower average balance cash equivalents compared prior year income tax expense income tax expense 1745 211 income continuing operations income taxes 2009 compared 3123 287 prior year yearoveryear decrease effective tax rate primarily attributable completion onetime restructuring certain international legal entities resulted reduction income tax provision amount 577 addition reversals valuation allowances 171 coupled tax credits allowable deductions 120 largely offset prior year benefit tax account validation adjustment 367 income tax expense 3123 287 income continuing operations income taxes 2008 compared 2655 295 prior year yearoveryear decrease effective tax rate primarily attributable tax account validation adjustment 367 benefit mix earnings countries differing statutory rates partially offset benefit recognized 2007 associated settlement tax examination 442 see note 6 “income taxes” notes consolidated financial statements additional information income discontinued operations net tax 2007 sold majority switches businesses private equity firm net proceeds 2232 aftertax gain 844 third quarter 2008 completed sale remaining component switches businesses buyer net proceeds 51 result recorded aftertax gain sale 54 2008 see note 5 “divestitures’’ notes consolidated financial statements additional information segment review defense electronics services defense segment designed serve future needs around safety security intelligence communication development manufacture support hightechnology electronic systems components worldwide defense commercial markets provides communications systems engineering applied research defense segment sells products wide variety governmental nongovernmental entities located throughout world defense segment comprised seven divisions advanced engineering sciences communication systems electronic systems intelligence information warfare night vision space systems divisions 2009 versus 2009 yearoveryear revenue growth 02 due number positive negative impacts various divisions comprising defense segment communication systems division revenue decreased 139 due decline domestic single channel ground airborne radio sincgars volume well reduced deliveries c4 command control communications computers business space systems division revenue growth 79 driven positive contributions gps navigation project well classified programs night vision division revenue growth 63 driven increased international sales advanced engineering sciences division revenue growth 46 related positive contributions federal aviation administration’s faa next generation airtraffic control program increased activity contracts systems division revenue growth 45 driven benefits middle east activity program wins including tethered aerostat radar system service contracts maxwell air force base fort benning electronic systems division revenue growth 11 driven strength within airborne integrated electronic warfare systems radar systems partially offset yearoveryear declines crew deliveries intelligence information warfare division revenue decreased 194 due timing deliveries electronic ground warfare systems operating income increased 490 67 2009 resulting operating margin 123 improvement 70 basis points versus prior year yearoveryear growth reflecting reduced costs sales sga expenses primarily attributable benefits costsaving initiatives productivity sourcing strategies benefits partially offset increases costs materials labor overhead unfavorable program mix impacts higher employee benefit plan costs increased investments rd received orders 62230 2009 compared 62329 prior year significant orders received 2009 include n 363 domestic sincgars order n 317 award produce additional crew 21 counteried jammers crew n 155 order supply two advanced imagers japanese weather satellite program n 138 intelligence information warfare equipment order n 121 us night vision order n 63 idiq logistics civil augmentation program logcap iv task order 5 contract win estimated value 12 billion funded order backlog 52 billion december 31 2009 2008 level order activity related programs within defense segment affected timing government funding authorizations project evaluation cycles yearoveryear comparisons could times impacted factors among others 2008 versus acquisitions including edo shipments crew contributed 17664 revenue 2008 organic revenue increased 3419 82 primarily due contributions advanced engineering sciences division driven existing new contracts including classified research programs data analysis contracts faa’s contract build next generation airtraffic control system organic revenue growth also attributable contributions communications systems division driven strength international sincgars sales systems division primarily driven nonconflict related programs sensor missile defense space control programs positive contributions gps navigation geoeye projects offset declines remote sensing classified government programs space systems division night vision division organic revenue increased result contributions new products higher international sales revenue electronic systems division relatively flat yearoveryear decreases radar systems offset contributions avionics operating income increased 2243 446 2008 acquisitions including edo contributed 1298 2008 remaining increase 945 attributable organic growth yearoveryear organic growth increase primarily attributable previously mentioned revenue drivers operating margins decreased 40 basis points 116 reflecting higher production costs higher amortization intangible assets recognized result edo acquisition partially offset benefits productivity improvements supply chain initiatives received orders 62329 2008 increase 21590 prior year primarily attributable contributions acquisitions 15551 including edo organic orders grew 148 prior year funded order backlog 52 billion december 31 2008 2007 fluid technology fluid segment provides critical products services markets driven population growth increasing environmental regulation global infrastructure trends products include water wastewater treatment systems pumps related technologies water fluid control products residential commercial industrial applications fluid technology brings product services portfolio market three marketoriented business divisions water wastewater residential commercial water industrial process 2009 versus decline organic revenue 3486 prior year primarily result lower volumes significant overall weakness markets served fluid segment caused challenging global economic conditions segment’s declines driven weakness residential commercial water industrial process divisions overall segment revenue decline partially mitigated moderate growth stability performance within municipal markets however believe 2009 performance compares favorably competing us markets municipal industrial commercial residential details follows water wastewater division organic revenue decreased 628 35 2009 continued weakness within global industrial dewatering markets partially offset stability municipal markets residential commercial water division organic revenue decreased 1948 152 2009 reflecting unfavorable global residential market conditions commercial market declines industrial process division organic revenue decreased 847 104 2009 results reflect weakness related declines north american general industrial markets partially offset growth within oil gas power markets well within emea region operating income 2009 decreased 758 162 prior year decline operating margin 50 basis points 117 declines primarily attributable reductions sales volumes higher employee benefit plan expenses partially offset strong productivity provided increasing benefits year progressed lower realignment costs 2009 fluid segment received orders 32635 decrease 6752 171 including unfavorable foreign currency fluctuations 1830 46 prior year results primarily attributable decline global economic conditions industrial process division experienced 270 decline organic orders due weakness industrial orders within north american asia pacific regions partially offset significant contract wins brazil saudi arabia within oil gas market fourth quarter residential commercial water division experienced 160 decline organic orders reflecting continued global commercial weakness two divisions accounted approximately 87 segment’s total decline organic orders order backlog 8238 december 31 2009 compared 8901 december 31 2008 versus increase revenue primarily attributable organic growth 77 driven higher volume price benefit foreign exchange translation factors driving organic revenue growth follows water wastewater division organic revenue increased 1005 61 2008 due strength waterwastewater transport particularly within municipal market dewatering primarily attributable mining market residential commercial water division organic revenue increased 632 53 2008 due strength global commercial markets well strength north american agricultureirrigation market partially offset weakness north american residential market industrial process division organic revenue increased 1219 173 2008 due strength industrial operations particularly within chemical oil gas power mining markets operating income 2008 increased 360 83 prior year benefit 13 attributable foreign currency exchange translation organic operating income growth 70 primarily attributable previously mentioned revenue drivers operating margins decreased 10 basis points 122 2008 reflecting higher production costs well costs associated disposition manufacturing facility partially offset benefits productivity improvements supply chain initiatives lower pension expense 2008 received orders 39387 increase 2816 77 prior year primarily due organic order growth 2047 56 increase primarily attributable industrial process division resulting strength large project orders strength international markets order backlog 8901 december 31 2008 compared 8871 december 31 2007 motion flow control motion flow segment provides highly engineered durable components serve high end markets group businesses provides products services areas defense aerospace industrial transportation computer telecommunications marine beverage addition traditional markets us western europe opportunities emerging markets asia increasing certain motion flow divisions combined 2008 2009 improve strategic alignment endmarkets better leverage production capabilities cost structure included consolidation controls aerospace controls energy absorption divisions aerospacefacing division referred control technologies combination koni® shocks product line friction technologies division collectively referred motion technologies division motion flow segment consists interconnect solutions motion technologies flow control technologies divisions 2009 versus decline revenue 3304 prior year primarily result lower volumes caused challenging global economic conditions affecting majority markets served motion flow segment 2009 declines mitigated latter half 2009 market share gains beverage marine markets benefits european automotive stimulus programs solid results rail within emerging markets however believe 2009 performance compares favorably competing us key markets automotive general industrial aerospace defense details follows motion technologies division organic revenue decreased 356 63 reflecting weakness automotive rail markets majority 2009 declines partially offset however strength markets latter half 2009 resulting benefits european government stimulus programs growth emerging markets primarily related efforts china’s highspeed rail project interconnect solutions division organic revenue declined 1021 225 results inline overall connectors industry experienced significant reductions revenue orders 2009 division serves aerospace industrial markets severely impacted economic downturn flow control division organic revenue decreased 297 120 primarily attributable declines within global industrial market partially offset market share gains beverage industry relatively flat marine market saw declines original equipment sales offset increase aftermarket sales control technologies division organic revenue declined 563 175 results reflect reduction commercial aerospace original equipment production sluggish aftermarket sales performance well impact decreased industrial production activity partially offset strong performance defense market enidine® product line operating income decreased 735 383 2009 including impacts unfavorable foreign currency fluctuations 249 decline primarily affected lower sales volume well higher postretirement plan costs partially offset benefits net cost reductions driven various costsaving initiatives lower realignment costs second half 2009 began realizing benefits associated significant restructuring realignment actions taken last two years result contributed yearoveryear improvements operating income 167 fourth quarter operating margin decreased 270 basis points 94 2009 primarily reflecting factors described 2009 motion flow segment received orders 12372 decrease 3261 209 including unfavorable foreign currency fluctuations 647 prior year results primarily attributable decline global economic conditions interconnect solutions division experienced 253 decline orders rate consistent industry whole control technologies division incurred 286 decline orders significant impacts coming aerospace market two divisions accounted approximately 76 segment’s total decline organic orders segment’s 2009 order results benefited significant automotive transportation wins ford mercedes bombardier china siemens china well market share gains food beverage market order backlog 3760 december 31 2009 compared 4171 december 31 2008 versus revenue increased 2509 prior year primarily attributable contributions imc benefit foreign currency exchange translation organic revenue grew 274 21 factors driving increase follows motion technologies division organic revenue increased 269 54 increases attributable higher volumes oem components new platform wins aftermarket brake pad sales contributions partially offset general slowdown second half 2008 global automotive markets interconnect solutions division organic revenue increased higher volumes 161 38 primarily attributable americas asia markets strength medical defense aerospace rail industrial markets particularly within oil gas industry partially offset slowdown overall industry order activity fourth quarter 2008 flow control division organic revenue decreased 250 99 decrease primarily attributable overall decline bath spa whirlpool markets partially offset positive contributions domestic beverage market control technologies division organic revenue increased 108 68 primarily driven strength commercialaerospace aftermarket products operating income increased 43 23 including contributions acquisitions benefit foreign currency exchange translation operating income declined 280 149 organic basis primarily due realignment costs associated planned sale spa whirlpool business well european industrial distribution business higher restructuring expense production costs partially offset increased sales volume benefits productivity improvements supply chain initiatives lower pension expense operating margins decreased 200 basis points 121 2008 primarily reflecting factors described 2008 received orders 15633 increase 1843 134 prior year increase driven contributions acquisitions including imc benefit foreign currency exchange translation partially offset decline organic orders 30 order backlog 4171 december 31 2008 compared 4404 december 31 2007 corporate expenses 3777 2009 increased 2004 compared prior year period increase primarily due additional asbestosrelated costs 2232 recognized 2009 partially offset lower environmentalrelated bonus costs well investment gains corporateowned life insurance policies corporate expenses 1773 2008 increased 317 compared prior year primarily reflecting higher bonus restructuring costs well corporate initiatives including expanded resources review procedures tax accounting function restructuring asset impairment charges restructuring activities 2009 recorded net restructuring charge 793 reflecting costs 707 related new actions 114 related prior years’ plans well reversal 28 restructuring accruals management determined would required charges associated actions announced 2009 primarily represent severance costs reductions headcount associated strategic relocation certain production operations within fluid motion flow segments lower cost regions well various planned reductions headcount associated lean fulfillment initiative planned position eliminations total 1092 employees including 528 factory workers 530 office workers 34 management employees costs recognized 2009 related prior years’ plans 114 primarily reflect additional severance lease cancellation related costs expect incur significant additional costs associated plans initiated 2009 future periods made restructuring payments 819 2009 292 related actions announced 2009 527 related prior years’ plans projected future savings fiveyear horizon restructuring actions announced 2009 approximately 61 2010 42 incremental savings realized 2009 272 2011 2014 following table details components restructuring charges recorded 2009 components charges 2010 defense realignment january 2010 strategic realignment defense segment announced better align emerging needs expanding global customer base increasingly integrated networkcentric realignment scheduled completed year end 2010 enable better product portfolio integration encouraging coordinated market approach reduced operational redundancies defense segment renamed itt defense information solutions current organizational structure consisting seven divisions consolidated three larger divisions expect incur approximately 20 30 restructuring expenses 2010 associated realignment incremental margin benefits expected 2011 restructuring activities 2008 recorded net restructuring charge 746 reflecting costs 669 related new actions 93 related prior years’ plans well reversal 16 restructuring accruals management determined would required charges associated actions announced 2008 primarily represent reduction structural costs business segments planned closure facility motion flow segment facility defense segment planned position eliminations total 1360 including 614 factory workers 704 office workers 42 management employees costs associated prior years’ plans primarily reflect severance lease cancellation related costs made restructuring payments 541 2008 161 related actions announced 2008 380 related prior years’ plans projected future savings fouryear horizon restructuring actions announced 2008 approximately 77 2010 231 2011 2013 material changes occurred previously reported anticipated savings restructuring actions following table details components restructuring charges recorded 2008 components charges 2008 asset impairment charges 2008 recognized 29 charges related impairment longlived assets fourth quarter 2008 recognized asset impairment charge 18 related writedown software due decision cancel project result organizational realignment third quarter 2008 recognized impairment charge 11 related one motion flow businesses reflecting reduction expected future earnings business restructuring activities 2007 recorded net restructuring charge 611 reflecting costs 579 related new actions 74 related prior year plans well reversal 42 restructuring accruals management determined would required charges associated actions announced 2007 represent reduction structural costs business segments planned closure four facilities fluid segment one facility motion flow segment two facilities defense segment planned position eliminations total 729 including 341 factory workers 345 office workers 43 management employees costs associated prior years’ plans primarily reflect additional costs related adjustment writeoff leased space well asset writeoffs severance costs made restructuring payments 515 2007of 268 related actions announced 2007 247 related prior years’ plans projected future savings threeyear horizon restructuring actions announced 2007 approximately 58 2010 115 2010 2012 material changes occurred previously reported anticipated savings restructuring actions following table details components restructuring charges recorded 2007 components charges 2007 asset impairment charges fourth quarter 2007 recognized 50 charges related impairment longlived assets impairment result determination two businesses one within motion flow segment one within fluid segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecasts businesses reflect current business conditions asset impairment charges 42 08 recorded within motion flow fluid segments respectively postretirement benefit plans postretirement expense postretirement costs pension employeerelated defined benefit plans affect results segments recorded 985 net periodic postretirement cost consolidated income statement 2009 compared net periodic postretirement costs 283 938 2008 2007 respectively fully described note 16 “employee benefit plans” notes consolidated financial statements primary drivers behind increase net periodic postretirement cost effect increase amortization actuarial losses lower expected returns plan assets partially offset increase discount rate foreign plans 2010 expect incur approximately 1400 net periodic postretirement cost recorded consolidated income statement increase net periodic postretirement cost primarily due increase amortization deferred losses effect higher service cost due addition approximately 3000 employees prior edo corporation us salaried retirement plan funded status plan contributions december 31 2009 postretirement benefit plans underfunded 18 billion substantial portion underfunded position arose fourth quarter 2008 recognized substantial decline fair market value postretirement benefit plan assets favorable market conditions latter half 2009 resulted increase fair market value postretirement benefit plan assets contributing aftertax gain comprehensive income 1459 3779 18 billion underfunded obligation pension plans funding permitted foreign environments funding feasible funding requirements irs rules major consideration making contributions us postretirement benefit plans respect us qualified postretirement benefit plans intend contribute annually less minimum required applicable law regulations 2009 contributed 1610 postretirement plans including voluntary contribution 1000 us salaried retirement plan fourth quarter us pension protection act 2006 pension act contains funding requirements defined benefit pension plans pension act establishes 100 funding target 7 years plan years beginning december 31 2007 shortfall amortization payments required pension plan meets following targets 92 funded 2008 94 funded 2009 96 funded 2010 us worker retiree employer recovery act 2008 wrera passed december 2008 wrera provides shortfall amortization charge based transition percentages 92 2008 94 2009 96 2010 100 thereafter opposed original pension act language 100 funding target ii clarification averaging method used value assets adjusted expected earnings results “asset smoothing” iii relief restriction benefit accruals 2009 allowing plan sponsor use greater adjusted funding target attainment percentage january 1 2008 january 1 2009 2010 required make mandatory contributions us salaried retirement plan satisfy minimum statutory funding requirements assuming actual plan returns consistent expected return plan assets interest rates remain constant additional changes us pension funding legislation may required make mandatory contributions approximately 100 2011 may however make voluntary contributions next two years improve funded status us salaried plan currently anticipate making contributions postretirement benefit plans range 10 15 2010 funded status end 2010 future required contributions depend primarily actual return assets year discount rate end year depending factors resulting funded status pension plans level future statutory minimum contributions could material recoverable pension costs plan contributions us government cost accounting standards govern extent postretirement costs plan contributions allocable recoverable contracts us government result sought would seek reimbursement dod portion postretirement costs plan contributions effective january 1 2010 approximately 3000 employees prior edo corporation join us salaried retirement plan addition employees estimated increase percentage active us salaried retirement plan participants defense segment 76 approximately 72 december 31 2009 cash flow summary 2009 versus cash equivalents increased 2507 12156 2009 12697 cash generated operating activities funded 7719 2851 cash used financing investing activities respectively uses cash due 6398 net repayment debt combined investments business 2716 capital expenditures 343 acquisitions time returning value shareholders 1479 dividend payments increase 22 2008 versus cash equivalents decreased 8751 9649 2008 11196 cash generated operating activities insufficient cover 5029 14074 cash used financing investing activities respectively uses cash due 12517 net repayment debt combined investments business 2487 capital expenditures 2757 acquisitions time returning value shareholders 1209 dividend payments increase 25 2007 operating activities 2009 versus cash provided operating activities 2009 increased 1501 prior year increase largely result net cash improvement 3209 working capital partially offset 1369 increase contributions pension plans working capital improvement primarily due yeartoyear reduction accounts receivable defense fluid segments due lower sales volumes improved collections increase pension plan contributions driven 1000 voluntary contribution us salaried retirement plan 2009 compared none 2008 cash operating activities also negatively impacted compared prior year due 987 increased use cash accrued expenses business segments although income continuing operations declined 1245 prior year largely due increase noncash asbestos costs 2232 excluding income tax benefit reflected within accrued deferred taxes result impact cash flows operating activities net asbestos payments significant years net annual cash outflows related recorded asbestos liability projected approximately 10 15 next several years relatively consistent recent levels increase approximately 30 40 2019 2008 versus cash provided operating activities 2008 increased 3215 prior year significant increase partially due 2351 increase income continuing operations excluding noncash increases depreciation amortization combined 590 reduction contributions pension plans 500 related us salaried retirement plan working capital provided modest increase cash last year 1238 reduction use cash accounts receivable primarily driven improved cash collections within fluid segment largely offset reduced sources cash 759 accounts payable accrued expenses 414 inventories business segments contributed accounts payable accrued expenses impact led lower volumes timing payments change inventories primarily attributable defense segment due ramp crew units coupled delayed international shipments additionally edo businesses significant contribution underlying overall operating cash flow performance investing activities capital expenditures 2009 versus capital expenditures 2009 2716 increase 229 compared prior year increase driven 278 incremental investments within defense segment primarily support adsb contract faa well 217 incremental investments infrastructure incremental investments partially mitigated absence prior year investments itt’s new headquarters consolidated corporate headquarters operations fluid motion flow segments addition reductions fluid motion flow segments response reduced revenues 2008 versus capital expenditures 2008 2487 increase 94 compared 2007 increase driven higher spending 303 defense segment primarily due acquisition edo end 2007 185 increase motion flow segment result purchase manufacturing facility mexico combined timing investments compared last year increases offset net reductions 394 largely reflecting absence prior year cash payment 448 related renewal sale leaseback arrangement itt’s corporate aircraft whose term expired december 2007 see note 20 “guarantees indemnities warranties” notes consolidated financial statements discussion partially offset payments related leasehold improvements itt’s new headquarters consolidates corporate headquarters operations fluid motion flow segments acquisitions 2009 spent 343 primarily acquisitions two businesses within fluid segment 2008 spent 2265 related additional costs 2007 acquisitions including edo acquisition within defense segment also spent 492 acquisitions several smaller companies including two companies motion flow segment two companies fluid segment 2007 spent 20092 acquisition six companies acquisitions edo 15987 within defense segment imc 3905 within motion flow segment comprised total spending acquisitions one defense segment three fluid segment proceeds sale assets businesses 2008 completed sale remaining component switches businesses net proceeds 51 2007 sold substantial part switches businesses net proceeds 2232 buyer acquire remainder asset transfer issues resolved additionally part itt’s renewal corporate aircraft sale leaseback 2007 received cash payment 502 sale aircraft lessor see note 20 “guarantees indemnities warranties” notes consolidated financial statements discussion financing activities debt 2009 repaid net debt 6398 may 2009 company issued 5000 49 senior notes due 2014 5000 6125 senior notes due 2019 offering resulted net proceeds 9921 proceeds combined cash operations used repay 16030 shortterm debt 293 longterm debt 2008 use cash related shortterm debt increased 35409 prior year reflecting net payments 12290 2008 primarily related financing edo acquisition compared net shortterm borrowings 23119 2007 share repurchases consistent 2009 objectives surrounding preservation liquidity participate share repurchase program year december 31 2008 repurchased 71 shares 4308 including commission fees 1 billion share repurchase program 2008 spent 750 including commission fees repurchase common stock 2007 spent 2990 including commission fees repurchase common stock amount 486 relates 09 shares acquired end 2006 settled january 2007 remaining 2505 relates 41 shares repurchased 2007 dividends 2009 made 1479 dividend payments shareholders 22 increase 2008 made 1209 dividend payments shareholders 25 increase 2007 foreign exchange 2009 currency exchange rate effects cash equivalents benefit 400 primarily due stronger euro yearoveryear 2008 734 negative foreign exchange impact primarily due weaker euro swedish krona canadian dollar compared prior year 1030 foreign exchange benefit 2007 driven stronger euro compared prior year liquidity capital resources principal source liquidity operating cash flows ability meet additional shortterm funding requirements issuance commercial paper funding needs monitored strategies executed meet overall liquidity requirements including management capital structure short longterm basis significant factors affect overall management liquidity include adequacy commercial paper supporting bank lines credit ability attract longterm capital satisfactory terms assess factors along current market conditions continuous basis result may alter mix short longterm financing advantageous april 2009 filed shelf registration statement form s3 securities exchange commission sec pursuant may 2009 issued 5000 49 senior notes due 2014 5000 6125 senior notes due 2019 collectively notes offering resulted gross proceeds 9983 offset 62 debt issuance costs may redeem notes whole part time redemption price equal greater 100 principal amount notes ii sum present value remaining scheduled payments principal interest thereon exclusive interest accrued date redemption discounted redemption date semiannual basis treasury rate plus 50 basis points plus case accrued unpaid interest date redemption company experiences change control company required offer repurchase notes price equal 101 principal amount plus accrued interest notes senior unsecured obligations rank equally existing future senior unsecured indebtedness manage worldwide cash requirements considering available funds among many subsidiaries conduct business cost effectiveness funds accessed continue transfer cash international subsidiaries us international subsidiaries cost effective expect available cash committed credit facility access public debt markets provide adequate shortterm longterm liquidity believe cash flows operations access commercial paper market sufficient meet shortterm funding requirements access commercial paper market adversely affected believe alternative sources liquidity including available cash existing committed credit facility would sufficient meet shortterm funding requirements believe subject risks uncertainties inherent estimation process asbestosrelated net liability unasserted claims filed next 10 years result material impact either shortterm longterm liquidity positions anticipate net liability claims filed next 10 years material impact net annual cash flows current debt ratios positioned us grow business investments organic growth strategic acquisitions providing ability return value shareholders increased dividends share repurchases reduction net debt primarily reflects focus preserving liquidity improving financial capacity 2010 improved financial capacity committed entered agreement february 17 2010 purchase nova analytics corporation nova privately held company purchase price approximately 390 subject normal customary closing conditions expect purchase price funded mix cash commercial paper nova leading manufacturer premium quality field portable online laboratory analytical instruments used water wastewater environmental industrial food beverage pharmaceutical medical applications nova provides itt strong brands technologies robust distribution solid aftermarket content growing 6 billion analytical instrumentation market addition nova help strengthen global positions broadening set solutions offer customers key markets municipal water wastewater industrial processing food beverage transaction projected completed end march 2010 pending customary regulatory approvals nova employs approximately 725 people across germany norway france united kingdom united states china projected 2010 revenue approximately 150 credit facilities commercial paper program november 2005 itt entered fiveyear revolving credit agreement november 2005 credit facility aggregate principal amount 125 billion effective november 8 2007 itt exercised option increase principal amount revolving credit agreement 175 billion december 31 2009 compliance financial covenants specified agreement first quarter 2009 separate 364day 10 billion credit facility expired renewed revolving credit agreements intended provide additional liquidity source funding commercial paper program needed policy maintain unused committed bank lines credit amount greater outstanding commercial paper balances 2009 utilized cash operations 10 billion longterm debt issuance pay outstanding commercial paper balance december 31 2009 2008 commercial paper balance 550 16187 respectively contractual obligations itt’s commitment make future payments longterm contractual obligations follows december 31 2009 addition amounts presented table recorded liabilities pending future unasserted asbestos claims filed 10year period uncertain tax positions 9332 1709 respectively consolidated balance sheet december 31 2009 amounts excluded contractual obligations table due inability reasonably estimate timing payments individual years beyond 12 months 1 see note 14 “debt” notes consolidated financial statements discussion use availability debt revolving credit agreements amounts represent total longterm debt including current maturities exclude deferred gain interest rate swaps unamortized discounts debt issuance costs 2 amounts represent estimate future interest payments longterm debt outstanding december 31 2009 utilizing year end interest rates 3 refer note 13 “leases rentals” notes consolidated financial statements discussion lease rental agreements 4 represents unconditional purchase commitments principally take pay obligations related purchase certain raw materials subcontract work 5 longterm obligations include estimated environmental payments estimate based historical experience spend 80 130 per year environmental investigation remediation contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2009 best estimate environmental liabilities 1397 addition longterm obligations include letters credit payments connection settlement compliance issues defense segment offbalance sheet arrangements guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities december 2007 entered sale leaseback type agreement corporate aircraft leased back fiveyear operating lease provided lease residual value guarantee counterparty amount 417 would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2009 projected fair value aircraft end lease estimated 39 less residual value guarantee however since estimated loss exceed 54 gain realized sale aircraft deferred loss contingency residual value guarantee recorded additional accrual financial statements itt number individually immaterial guarantees outstanding december 31 2009 may affected various conditions external forces could require payments made guarantees believe payments material adverse impact financial position results operations cash flow consolidated basis foreseeable future critical accounting estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses significant accounting policies used preparation consolidated financial statements discussed note 1 “summary significant accounting policies” notes consolidated financial statements accounting estimates assumptions discussed section consider critical understanding financial statements inherently involve significant judgments uncertainties actual results areas could differ management’s estimates contingent liabilities time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities intellectual property matters copyright infringement personal injury claims employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures accruals anticipated settlements established outcome matter probable reasonably estimated addition accruals legal fees various matters established fees probable payment reasonably estimated based present information including assessment merits claims well current reserves insurance coverage expect legal proceedings material adverse impact cash flow results operations financial position consolidated basis foreseeable future unless otherwise noted however uncertainties related matters record accruals based currently available information additional information becomes available reassess potential liability related pending claims litigation may revise estimates revisions estimates potential liabilities could material impact consolidated financial position results operations cash flows discussion contingencies including management’s judgment applied recognition measurement specific liabilities refer note 19 “commitments contingencies” notes consolidated financial statements asbestos matters itt including subsidiary goulds pumps inc goulds joined defendant numerous companies product liability lawsuits alleging personal injury due asbestos exposure claims allege certain products sold prior 1985 contained part manufactured third party eg gasket contained asbestos extent thirdparty parts may contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos estimating exposure asbestos claims subject significant management judgment significant uncertainty risk associated variables affect timing severity quantity resolution claims methodology used project future asbestos costs based largely company’s experience reference period including last years claims filed settled dismissed experience compared results previously conducted epidemiological studies estimating number individuals likely develop asbestosrelated diseases studies undertaken connection independent analysis population us workers across eleven different industry occupation categories believed exposed asbestos using information industry occupation categories relevant company estimate developed number future claims filed company well aggregate settlement costs would incurred resolve pending future claims based upon average settlement costs disease reference period addition estimate augmented costs defending asbestos claims tort system using forecast based recent experience well discussions company’s defense counsel methodology project future asbestos costs one underlying assumptions separately assessed reasonableness used input estimating liability assessment underlying assumptions based upon recent experience future expectations yielding one value assumption liability estimate sensitive factors surrounding mesothelioma claims represent nearly 90 percent total liability factors include number new mesothelioma claims filed company average settlement costs mesothelioma claims percentage mesothelioma claims dismissed company factors interdependent one factor predominates determining liability estimate recorded liability represents best estimate based upon current known information potential estimates methodology create range estimates reasonably possible outcomes determined point estimate based upon assessment value underlying assumption projecting future asbestos costs subject numerous variables uncertainties inherently difficult predict addition uncertainties surrounding key factors discussed factors include long latency period prior manifestation asbestosrelated disease costs medical treatment impact bankruptcies companies codefendants uncertainties surrounding litigation process jurisdiction case impact potential legislative judicial changes furthermore predictions respect variables impacting estimate asbestos liability subject even greater uncertainty projection period lengthens light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next 10 years believe reasonable basis estimating costs time part ongoing review asbestos claims quarter reassess projected liability unasserted asbestos claims filed next 10 years based upon trends experiencing factors liability sensitive maintaining rolling 10year projection annually third quarter year conduct detailed study assistance outside consultant review update appropriate underlying assumptions used liability estimate additionally periodically reassess time horizon reasonable estimate unasserted claims projected record corresponding asbestosrelated insurance asset represents best estimate probable insurance recoveries asbestos liabilities pending claims well unasserted claims filed next 10 years developing estimate company considered coverageinplace settlement agreements insurers well number additional factors additional factors include current levels recovery experience financial viability insurance companies method losses allocated various insurance policies years covered policies interpretation various policy terms limits interrelationships timing amount reimbursements vary due differing policy terms certain gaps coverage result insurer insolvencies addition company retained insurance consulting firm assist management estimation probable insurance recoveries based upon analysis policy terms likelihood recovery provided legal counsel assuming continued viability insurance carriers currently solvent incorporating risk mitigation judgments policy terms factors certain estimated insurance cover 69 percent asbestos costs defense settlement costs pending claims well unasserted claims filed next 10 years however gaps coverage reflecting certain uninsured periods prior insurance settlements expect certain policies primary insurers exhaust within next 10 years insurance coverage percent expected decline potential additional asbestos liabilities tenth year projection unasserted asbestos claims liability related insurance asset declines approximately 25 percent future recoverability rates may also impacted factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict subject high degree uncertainty underlying asbestos liability corresponding insurance asset based upon current known information however future events affecting key factors variables either asbestos liability insurance asset could cause actual costs insurance recoveries higher lower currently estimated due uncertainties well inability reasonably estimate additional asbestos liability claims filed beyond next 10 years possible predict ultimate outcome cost resolving pending unasserted asbestos claims believe possible cost asbestos claims filed beyond next 10 years net expected insurance recoveries could material adverse effect financial position results operations cash flows particular period see note 19 “commitments contingencies” notes consolidated financial statements information pension plans itt sponsors numerous defined benefit pension plans employees around world determination projected benefit obligations recognition expenses related pension plans dependent various assumptions major assumptions primarily relate discount rates longterm expected rates return plan assets rate future compensation increases mortality termination disclosed note 16 “employee benefit plans” notes consolidated financial statements factors actual results differ assumptions accumulated amortized generally estimated future working life plan participants significant assumptions management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary summary significant assumptions used estimate defined benefit pension costs obligations follows determine expected return plan assets assumption evaluating historical returns estimates future returns specifically analyze plan’s actual historical annual return assets past 10 15 20 25 years make estimates future returns using capital asset pricing model evaluate historical broad market returns past 75 years based strategic asset allocation detailed note 16 “employee benefit plans” notes consolidated financial statements based approach described estimate longterm annual rate return assets domestic pension plans 90 reference actual geometric average annual return plan assets domestic pension plans 44 93 108 past 10 15 20 25 year periods respectively chart shows actual returns versus expected longterm returns us pension plans utilized calculation net periodic pension cost respective year see note 16 “employee benefit plans” notes consolidated financial statements information recognition net periodic pension cost calculation expected return plan assets generally derived using marketrelated value plan assets based average asset values measurement date last five years use fair value rather calculated value could materially effect net periodic pension cost weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2009 888 discount rate reflects expectation present value expected future cash payments benefits measurement date decrease discount rate increases present value benefit obligations increases pension expense base discount rate assumption current investment yields high quality fixed income investments retirement benefits maturity period pension discount rate determined considering interest rate yield curve comprising aaaaa bonds maturities zero thirty years developed plan’s actuaries annual benefit payments discounted present value using yield curve develop singlepoint discount rate matching plan’s characteristics weighted average discount rate pension plans including foreign affiliate plans december 31 2009 598 rate future compensation increase assumptions reflect longterm actual experience future nearterm outlook december 31 2009 expected rate future compensation 40 us plan participants unchanged prior year pension expense 25 basis point change expected rate return plan assets discount rate future compensation increases would following effect 2010 pension expense funded status funded status derived subtracting respective yearend values projected benefit obligations fair value plan assets itt’s us salaried pension plan represents approximately 77 total pension obligation therefore funded status us salaried retirement plan considerable impact overall funded status pension plans estimate every 25 basis point change discount rate impacts funded status us salaried pension plan approximately 113 similarly every five percentage point change actual 2010 rate return assets impacts plan approximately 176 fair value plan assets plan assets postretirement plans comprised broad range investments including domestic foreign equity securities interests private equity hedge funds fixed income investments commodities real estate cash equivalents substantial portion postretirement benefit plan assets portfolio comprised investments private equity hedge funds private equity hedge fund investments generally measured net asset value however certain instances values reported asset managers current measurement date accordingly management estimated adjustments last reported value necessary measure assets fair value measurement date adjustments consider information received asset managers well general market information adjustment recorded assets represented approximately one percent total plan assets asset values positions generally measured using market observable prices see note 16 “employee benefit plans” notes consolidated financial statements information revenue recognition itt recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority product sales title transfers products shipped certain circumstances title passes products delivered sales recognized customer picks product defense segment certain contracts require delivery installation testing certification customer acceptance revenue recorded defense segment certain businesses fluid segment generally recognize sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones percentage costs incurred total costs estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified itt revenue arising claims process recognized either income offset potential loss reliably estimated realization probable income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates expect effect year expect differences reverse based evaluation available evidence recognize future tax benefits net operating loss carryfowards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimates valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates calculation tax liabilities involves dealing uncertainties application complex tax regulations multitude jurisdictions across global operations recognize potential liabilities record tax liabilities anticipated tax audit issues us tax jurisdictions based estimate whether extent additional taxes due furthermore recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater 50 likelihood realized upon ultimate settlement adjust liability uncertain tax positions light changing facts circumstances however due complexity uncertainties ultimate resolution may result payment materially different current estimate tax liabilities estimate tax liabilities proves less ultimate assessment additional tax expense would result payment amounts ultimately proves less recorded amounts reversal liabilities would result tax benefits recognized period determine liabilities longer necessary goodwill intangible assets review goodwill purchased indefinitelived intangible assets impairment annually whenever events changes circumstances indicate carrying value asset may recoverable conduct annual impairment test first day fourth quarter perform twostep impairment test goodwill first step compare fair value reporting unit carrying value fair value reporting unit exceeds carrying value net assets assigned reporting unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceed fair value must perform second step impairment test order measure impairment loss recorded carrying value reporting unit’s goodwill exceeds implied fair value record impairment loss equal difference also compare fair value purchased intangible assets indefinite lives carrying value recognize impairment loss estimated fair value intangible asset less carrying value estimate fair value reporting units purchased intangible assets indefinite lives using income approach income approach calculate fair value based present value estimated future cash flows determining fair value reporting unit indefinitelived purchased intangible asset judgmental nature involves use significant estimates assumptions particularly related future operating results estimates assumptions include limited revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions identification appropriate market comparable data addition identification reporting units allocation assets liabilities reporting units determine carrying value reporting unit also requires judgment fair value reporting units purchased intangible assets based estimates assumptions believed reasonable significant changes estimates assumptions could adversely impact conclusions actual future results may differ estimates 2009 annual goodwill impairment analysis result impairment charge 2009 fair value reporting units significantly exceeded carrying value order evaluate sensitivity fair value calculations goodwill impairment test applied hypothetical 100 basis point increase discount rates utilized 100 basis point decrease assumed future growth rates reporting unit hypothetical change would result reporting unit failing step one impairment test new accounting pronouncements see note 2 “new accounting pronouncements” notes consolidated financial statements complete discussion recent accounting pronouncements new pronouncements expect material impact financial condition results operations future periods forwardlooking statements certain statements contained document including within management’s discussion analysis financial condition results operations particularly material presented “executive summary” “2009 outlook” “known trends uncertainties” “restructuring asset impairment charges” “employee benefit plans” “liquidity capital resources” “critical accounting estimates” historical facts constitute “forwardlooking statements” within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance itt businesses materially different expressed implied forwardlooking statements factors may described referred time filings made itt securities exchange commission included factors following n general economic business conditions n economic political social conditions countries conduct businesses n changes government defense budgets n decline consumer spending n sales revenues mix pricing levels n availability adequate labor commodities supplies raw materials n interest foreign currency exchange rate fluctuations n competition industry capacity production rates n ability third parties including commercial partners counterparties financial institutions insurers comply commitments us n ability borrow refinance existing indebtedness availability liquidity sufficient meet needs n acquisitions divestitures n personal injury claims n uncertainties respect estimation asbestos liability exposure related insurance recoveries n ability affect restructuring cost reduction programs realize savings actions n government regulations compliance therewith n changes technology n intellectual property matters n governmental investigations n potential future employee benefit plan contributions employment pension matters n contingencies related actual alleged environmental contamination claims concerns n changes generally accepted accounting principles addition factors business segments may affected specific factors referred included management’s discussion analysis item 1a “risk factors” defense segment affected factors including level defense funding domestic foreign governments changes portion us defense budget devoted products services types products provide ability receive contract awards government investigations government contracts subject security facility clearances ability obtain maintain export licenses ability sell international markets ability develop market products services customers outside traditional markets fluid segment affected factors including broad economic conditions markets served governmental funding levels raw material prices international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing motion flow segment affected cyclical nature transportation industry economic conditions major markets weather conditions production levels major auto producers demand replacement parts itt assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 management’s discussion analysis financial condition results operations millions except per share amounts unless otherwise stated executive summary itt reported revenue 110 billion year ended december 31 2010 increase 30 107 billion reported 2009 benefits newly acquired businesses general recovery challenging 2009 market conditions drove revenue growth exceeded declines certain programs support us government armed services investments strategic operational productivity initiatives taken past two years provided significant yearoveryear savings however savings largely offset additional asbestosrelated costs resulted 2010 income continuing operations 654 353 per diluted share reflecting growth 20 adjusted income continuing operations 818 2010 reflecting increase 132 192 prior year adjusted amount adjusted income continuing operations translated 441 per diluted share represents record level itt 068 182 increase prior year see “key performance indicators nongaap measures” section included within management’s discussion analysis reconciliation adjusted nongaap measures additional financial highlights 2010 include following n deployment 10 billion capital number strategic acquisitions growth markets notably acquisitions nova godwin fluid segment provided earnings accretion 008 per share n execution strategic transformation defense segment created greater efficiencies better aligned technical capabilities customers’ needs additionally completed divestiture cas seta business generated proceeds 237 aftertax gain sale 130 n cash flow operating activities 12 billion 18 increase annual dividend shareholders cash position end year excess 10 billion n net charge operating income 385 relating asbestos exposures reflecting increase estimated liability net insurance thirdparty recoveries result deteriorating conditions affected several key factors used estimate net liability n positions secured number significant us government programs including faa systems engineering 2020 se2020 support nasa space communications network services kuwait afghanistan base operations security support services n january 2011 announcement plan transform itt three distinct publicly traded companies end 2011 details related results contained following consolidated financial results segment review sections key performance indicators nongaap measures management reviews key performance indicators including revenue segment operating income margins earnings per share orders growth backlog among others addition consider certain measures useful management investors evaluating operating performance periods presented provide tool evaluating ongoing operations liquidity management assets information assist investors assessing financial performance measures ability generate capital deployment among competing strategic alternatives initiatives including limited dividends acquisitions share repurchases debt repayment metrics however measures financial performance accounting principles generally accepted united states america gaap considered substitute revenue operating income continuing operations income continuing operations per diluted share net cash continuing operations determined accordance gaap consider following nongaap measures may comparable similarly titled measures reported companies key performance indicators n “organic revenue” “organic orders” defined revenue orders respectively excluding impact foreign currency fluctuations contributions acquisitions divestitures include sales insignificant portions business meet criteria classification discontinued operation periodoverperiod change resulting foreign currency fluctuations assumes change exchange rates prior period n “adjusted income continuing operations” “adjusted income continuing operations per diluted share” defined income continuing operations income continuing operations per diluted share adjusted exclude items may include limited unusual infrequent nonoperating items nonoperating tax settlements adjustments related prior periods special items represent significant charges credits impact current results may related company’s ongoing operations performance reconciliation adjusted income continuing operations including adjusted earnings per diluted share provided net asbestosrelated costs net tax include costs related annual remeasurement asbestos assets liabilities quarterly provisions net asbestosrelated costs net tax relate maintaining rolling 10year projection period included special item following table provides reconciliation net asbestosrelated costs adjusted net asbestosrelated costs net tax included special item see note 19 “commitments contingencies” notes consolidated financial statements information b 2010 taxrelated special items primarily include reversal certain valuation allowances reversal uncertain tax positions reduction deferred tax assets associated us patient protection affordable care act healthcare reform act 2009 taxrelated special items primarily relate interest received tax settlement reversal deferred tax liabilities relating restructuring certain international legal entities 2008 taxrelated special items primarily relate tax account validation adjustment see note 6 “income taxes” notes consolidated financial statements information n “free cash flow” defined net cash provided operating activities reported statement cash flows less capital expenditures significant items impact current results management believes related ongoing operations performance definition free cash flow consider certain nondiscretionary cash payments debt interest payments reconciliation free cash flow provided outlook revenue full year 2011 expected grow approximately 114 billion adjusted earnings range approximately 462 482 per diluted share organic revenue expected grow approximately 2 solid growth commercial businesses offsetting slight decline defense segment fullyear revenue defense segment expected decline approximately 2 operating margin expected decline approximately 124 fluid segment revenue expected grow approximately 12 organic revenue growth projected approximately 5 fluid segment operating margin expected grow approximately 140 motion flow segment revenue growth expected approximately 7 reflecting organic revenue growth approximately 5 operating margin motion flow segment estimated grow approximately 150 guidance excludes future impacts earnings per share operating margin result company’s recently announced spinoff transaction january 12 2011 company announced plan spinoff waterrelated defenserelated businesses end 2011 waterrelated businesses include water wastewater division residential commercial water division well flow control division currently reported within motion flow control segment new water business estimated generate pro forma 2011 revenue approximately 36 billion new defenserelated business include divisions currently comprise defense segment estimated generate pro forma 2011 revenue approximately 58 billion new itt include divisions comprise motion flow segment except flow control division include industrial process division currently reported within fluid segment new itt estimated generate pro forma 2011 revenue approximately 21 billion pro forma revenue presented without adjustment known trends uncertainties following list represents summary trends uncertainties could significant impact results operations financial position andor cash flows n global economic environment remains relative state uncertainty although financial markets recovered lows 2009 consider overall global economic recovery gradual longterm process us gradual improvements credit availability solid consumer spending moderate job creation less uncertainty new regulations taxes work reinforce economic recovery however downside factors challenges facing local state federal government finance possible spillover europe’s sovereign debt crisis could limit delay us growth within europe sovereign debt crisis weakened recovery process created potential significant volatility 2011 potential unforeseen adverse macroeconomic events remains concern occurrence events could significant unfavorable effect business n fy 2011 us department defense dod budget submitted congress president obama remains deliberation agencies including department defense operating continuing resolution chance continuing resolution could extended full fiscal year new congress federal cabinet departments agencies operating fullyear continuing resolution instead enacted annual fy 2011 appropriations precluded starting new programmatic initiatives increasing production levels ongoing procurement programs unless receive specific congressional authorization reprogram funds administration’s spending programmatic priorities detailed dod budget request aligned 2010 quadrennial defense review include investments enduring nature focus future challenges modernization transformation forces capabilities examples include intelligence surveillance reconnaissance network communications cyber warfare security unmanned aircraft integrated logistics support portfolio defense solutions covers broad range air sea ground platforms applications aligns priorities outlined dod however uncertainty related potential changes appropriations priorities could materially impact business n programs related specifically support ongoing operations iraq afghanistan face declining revenue streams going forward expectation reflected business plans degree reduction activities accelerates remains area uncertainty particular uncertainty around us administration’s earlier statements intentions regarding reducing troop level presence afghanistan beginning mid2011 n ongoing department defense acquisition reform secretary gates’ cost savings initiatives combined increased industry competitiveness win longterm positions key programs could add pressure industry profit margins going forward n portion fluid segment’s revenue derived municipal projects services european austerity measures budget pressures within us forced governments plan reductions spending reevaluate priorities postpone wastewater infrastructure projects actions led reduction demand increased competition pricing pressures ability inability secure project orders challenging environment could significantly affect fluid segment results n portion fluid segment’s revenue derived us commercial construction spending residential real estate activity commercial construction build rates expected remain low majority 2011 build versus buy indicator real estate investors continues favor investing existing buildings due depressed asset prices similarly consensus expectations residential homebuilding mixed reflecting uncertainty around likelihood magnitude recovery continued uncertainty volatility within markets could significantly affect results fluid segment n portion business provides pumps general industrial mining pulp paper chemical petroleum processing industries emerging markets led global industrial project recovery significantly within mining industry high metal prices promoted robust demand mining equipment however long global economic uncertainty remains difficult predict trends industrial project orders may impacted n portion motion flow segment provides original equipment aftermarket products automotive industry governmental automotive stimulus programs introduced 2009 encouraged moderate recovery induced increased levels inventory restocking 2010 however programs reached conclusion potential unfavorable trends within automotive industry particularly within europe concentration business continues exist could negatively impact future results n connectors industry experienced significant declines orders sales 2009 recent connectors industry data indicates recovering order trend experienced 2010 slowed past months remains favorable compared 2009 due significant volatility experienced within industry difficult predict order trends impacted 2011 n projecting future asbestos costs subject numerous variables uncertainties inherently difficult predict developments several key factors since third quarter 2009 negatively impacted assumptions used estimates deterioration factors could unfavorable effect estimated asbestos costs negatively affect results operations 2011 expect higher net asbestos charges greater net cash outflows result effects inflation decline amount available insurance recoveries addition probable incur additional liabilities asbestos claims filed beyond current 10year horizon liabilities may material see note 19 “commitments contingencies” notes consolidated financial statements information n company currently anticipates significant expenditures associated planned spinoff transaction primarily consisting employeerelated costs start certain standalone functions information technology systems onetime transaction related costs including investment banking consulting fees information provided represent complete list trends uncertainties could impact business either near longterm however considered along risk factors identified item 1a annual report form 10k disclosure caption “forwardlooking statements” end section discussion financial results 2010 versus 2009 revenue 2010 revenue marked growth strategic acquisitions well level economic recovery within majority commercial businesses notably businesses comprise motion flow segment revenue within commercial businesses benefited 2010 order stocking delays caused uncertainty manifested throughout 2009 although revenue yet reached levels achieved 2008 believe competitive position portfolio highly engineered products continue strengthened gradual economic improvement following table illustrates 2010 2009 revenue business segments see discussion yearoveryear revenue activity segment level following table illustrates impact organic growth recent acquisitions fluctuations foreign currency relation consolidated revenue 2010 defense information solutions 2010 revenue generated defense segment 5897 reflecting decline 170 28 segment’s 2009 revenue 6067 results driven decline product revenue 49 186 mitigated consistent results service revenue programs following table provides total revenue yearoveryear change defense segment division 2010 product revenue results impacted volume declines surgerelated equipment specifically crew 21 counter rcied electronic warfare electronic jammers us single channel ground airborne radio systems sincgars related urgent compelling needs past years declines activity related two programs resulted approximate 608 decrease revenue however significant strength majority programs support us department defense government agencies notably special purpose electronic jammer equipment composite structures well increase volume night vision goggles sold us allies partially mitigated significant decline crew 21 sincgars programs order activity related crew 21 us sincgars programs began receding 2009 due reduced us troop deployment programmatic timing however 2010 received key awards develop next generation battlefield improvised explosive device detection crew 32 33 2010 service revenue relatively flat compared prior year logistical service airtraffic management international security program activities generated growth approximately 84 2010 strength logistical service portion business assisted activity several key facilities management awards received second half 2009 2010 including kuwait afghanistan logistics civil augmentation program logcap among others however growth programs offset decline involvement data analysis center software dacs program noted “executive summary” section 2010 secured positions number significant us government servicerelated programs including faa systems engineering 2020 se2020 support nasa space communications network services scns kuwait afghanistan base operations security support services contracts estimated total potential value approximately 49 billion options exercised see information se2020 contract awarded faa lead team aviation industry companies support development advanced concepts involving challenging issues facing faa’s next generation air transportation system initiative modernize us national airspace system contract ceiling value options exercised 14 billion fiveyear base period five oneyear options kuwait facilities operations contract awarded us army rock island contracting center provide comprehensive support services us army facilities kuwait contract estimated potential worth options exercised 14 billion oneyear base period four oneyear options scns contract originally awarded itt october 2008 support nasa space nearearth networks provide communications tracking services wide range earthorbiting spacecraft commencement contract work delayed due number protests filed incumbent contractor protests cleared fourth quarter 2010 contract base performance period five years three months two oneyear option periods maximum estimated potential value options exercised 126 billion afghanistan national security forces facilities support award actual pertains two individual contracts us army corps engineers middle east district provide facilities operations maintenance training services afghanistan national security forces northern afghanistan southern afghanistan award oneyear base period options four additional years contract estimated potential value 450 million northern afghanistan 350 million southern afghanistan options exercised fluid technology 2010 fluid segment revenue 3670 grew 91 including 271 benefit recent acquisitions primarily godwin pumps nova analytics acquisitions expanded product offerings ondemand dewatering pump rental analytical instrumentation markets revenue generated two businesses 2010 exceeded initial expectations 2011 expect continued growth businesses due increased leverage deep customer base distribution channels following table provides total organic revenue yearoveryear organic revenue growth division reconciling total segment revenue organic revenue growth 15 derived water wastewater division reflects mixed regional results organic revenue derived within us canada increased approximately 9 compared 2009 driven primarily increased volume transport equipment organic revenue within asia pacific region increased approximately 19 due positive results transport dewatering equipment growth regions partially offset continued challenging economic competitive pricing conditions within europe impacted majority products lines resulting approximate 6 revenue decline organic revenue growth 40 generated residential commercial water division driven growth residential building services equipment light industrial equipment attribute positive results slow continuing restocking inventory gradual recovery within residential commercial markets significant installed base equipment also provided demand stability organic revenue industrial process division declined 54 2010 reflecting declines large industrial projects partially offset growth aftermarket pumps parts volume due improved customer facility utilization decline large industrial project revenue consistent significant reduction longlead industrial project orders experienced 2009 delayed starts received oil gas orders also contributed overall decline orders improved 118 76 2009 resulting primarily aftermarket pumps parts volume well demand emerging markets related oil gas mining projects motion flow control motion flow segment generated revenue 1441 2010 reflecting growth 150 prior year primarily driven improved market conditions within majority markets served well market share growth new product releases key platform wins unfavorable foreign currency fluctuations negatively impacted revenue growth 31 25 2010 following table provides total revenue yearoveryear change motion flow segment division motion technologies division generated revenue growth 116 2010 including negative impacts unfavorable foreign currency fluctuations 51 growth driven european automotive stimulus programs place latter part 2009 bolstered demand primary geographic markets addition key platform wins obtained past 18 months within europe regions increased share original equipment brake pad market interconnect solutions division generated revenue growth 211 2010 driven overall strengthening recovery within majority markets served 2010 also received key platform wins smartphone devices increased share within communications market control technologies division generated revenue growth 132 2010 reflecting overall strengthening general industrial aerospace defense markets served division compared prior year flow control division generated revenue growth 147 2010 reflecting gains food beverage market new product releases products marine markets benefited major restocking distribution specialty industrial products growth reflected increased presence emerging markets gross profit gross profit 2010 3175 representing 151 increase 50 2009 includes contributions approximately 102 2010 acquisitions organic revenue growth 80 driven increased volume offset unfavorable change defense segment product sales mix pricing contributed overall decline gross profit approximately 131 however overall impact price reductions mitigated significant net savings offset rising material labor costs generated productivity costreduction initiatives see discussion 2010 net savings generated business segment within “operating income” discussion following table illustrates 2010 2009 gross profit results business segments including gross margin results operating expenses operating expenses increased 68 2010 2275 primarily attributable increase net asbestosrelated costs resulting unfavorable trends certain key assumptions reviewed annual assessment asbestos liability following table provides information expense type well breakdown operating expense segment selling general administrative expenses sga expenses incurred within fluid segment increased 75 107 2010 primarily reflecting additional costs 68 related newly acquired godwin nova businesses sga expenses incurred within motion flow segment increased 29 153 2010 primarily reflecting impact increase sales volumes well additional spending various strategic investments incremental sga expenses incurred within commercial segments partially offset 59 114 decrease within defense segment decline includes 24 decrease selling general expenses resulting primarily headcount reductions decline 2010 revenue well 22 benefit reduced amortization expense related intangible assets acquired connection 2007 purchase edo corporation research development expenses rd spending relatively flat yearoveryear rd spending within defense segment decreased 23 165 compared 2009 related completion certain rd projects integrated electronic warfare systems radio frequency technologies rd spending increased within fluid segment 10 161 primarily due newly acquired nova business asbestosrelated costs net 2010 recognized net asbestos related costs 385 reflecting increase 147 prior year primarily reflecting impact annual update underlying assumptions used liability asset estimates part annual update underlying assumptions used estimate asbestos liabilities potential recoveries estimated based experience since last detailed review appropriate reference period years experience used determining assumption reassessed expectations regarding future conditions evaluated based results annual update 2010 increased estimated undiscounted asbestos liability including legal fees 691 reflecting costs company estimated incur resolve pending claims well unasserted claims estimated filed next 10 years increase estimated liability result several developments including higher settlement costs significantly increased activity several highercost jurisdictions increasing number cases adjudicated expected legal costs 2010 detailed review asbestosrelated assets including estimated recoveries insurers responsible parties resulted 372 increase recorded asset net asbestos expense primarily recorded within corporate however portion expense associated businesses disposed number years ago reported within discontinued operations consolidated financial statements see note 19 “commitments contingencies” notes consolidated financial statements information asbestosrelated liability assets restructuring asset impairment charges net 2010 recognized net restructuring charges 52 representing 27 342 decrease compared prior year decrease expense mainly attributable fewer number actions initiated 2010 versus 2009 largest 2010 restructuring initiative related defense segment realignment action commenced first quarter objective enabling better product portfolio integration encouraging coordinated market approach reducing operational redundancies action resulted recognition 28 restructuring expense closure three facilities december 31 2010 consider action substantially complete except remaining cash payments 9 settle remaining severance liabilities estimate defense realignment actions yield approximately 61 annual net savings including estimated 2011 savings 27 incremental 2010 addition defense realignment action incurred 24 related various restructuring initiatives individually material consider majority initiatives substantially complete december 31 2010 except remaining cash payments 13 estimate aggregate annual net savings approximately 37 2010 actions including estimated 2011 savings 33 incremental 2010 see note 5 “restructuring asset impairment charges” notes consolidated financial statements additional information operating income generated operating income 900 2010 07 increase prior year primarily reflecting growth fluid motion flow segment operations offset unfavorable increase net asbestosrelated costs operating margin decreased 82 2010 yearoveryear decline 20 basis points increase net asbestosrelated costs provided unfavorable impact 130 basis points 2010 operating margin following table illustrates 2010 2009 operating income results business segments including operating margin results defense information solutions volume reductions combined unfavorable sales mix pricing pressures additional restructuring expenses approximately 28 led decline operating income impacts partially offset reduced selling administrative general expenses approximately 24 lower rd expenses approximately 24 result defense realignment activities additionally lower amortization approximately 22 also mitigated negative impacts year increase margin 30 bps attributed benefits outlined offsetting volume sales mix pricing challenges 2010 fluid technology operational productivity including savings restructuring actions cost savings initiatives valuebased six sigma global strategic sourcing well yearoveryear revenue growth partially offset rising costs materials labor items combined provide approximately 87 benefit operating income 240 basis point improvement operating margin operating income also favorably impacted 23 reduction 2010 restructuring costs reflecting 80 basis point improvement operating margin increased investment spending approximately 37 2010 technology rd valuebased commercial excellence initiative among others resulted 100 basis point decline operating margin 2010 acquisitions nova godwin provided benefits approximately 26 operating income unfavorably impacted operating margin 30 basis points due costs incurred associated purchase addition unfavorable foreign currency fluctuations additional postretirement benefit costs resulted approximate 50 basis point decline motion flow control operational productivity including yearoveryear revenue growth well savings restructuring actions cost savings initiatives valuebased six sigma global strategic sourcing partially offset rising costs materials labor provided approximately 47 benefit operating income 180 basis point improvement operating margin operating income also favorably impacted 32 reduction 2010 restructuring costs reflecting 220 basis point improvement operating margin increased investment spending approximately 10 2010 technology rd valuebased commercial excellence initiative among others resulted 70 basis point decline operating margin addition unfavorable foreign currency fluctuations additional postretirement benefit costs resulted approximate 50 basis point decline corporate incurred corporate expenses 510 2010 reflecting increase 132 compared 2009 increase expense primarily relates recognition additional asbestosrelated costs mentioned “operating expenses” discussion impacts operating income postretirement expense postretirement costs pension employeerelated defined benefit plans affect results segments recorded 126 net periodic postretirement cost 2010 compared costs 99 2009 fully described note 16 “postretirement benefit plans” notes consolidated financial statements primary drivers behind increase net periodic postretirement cost higher service costs due addition approximately 3000 employees following edo acquisition us salaried retirement plan srp increased amortization net actuarial losses resulted 2008 financial market decline partially offset increase expected returns higher base plan assets 2011 expect incur approximately 184 net periodic postretirement cost representing increase 58 460 compared 2010 increase primarily attributable additional amortization net actuarial losses us government cost accounting standards govern extent postretirement costs plan contributions allocable recoverable contracts us government result sought expect continue seek reimbursement dod portion postretirement costs plan contributions interest nonoperating expenses net interest expense 2010 relatively flat compared 2009 reduction interest expense derived commercial paper 20 offset increase interest expense longterm debt daily average outstanding commercial paper balance decreased 704 2009 231 2010 decline 2010 interest income primarily due recognition 13 interest refund received conjunction irs tax settlement 2009 fluctuation net miscellaneous expense due sale certain availableforsale investments 2010 resulted pretax gain 7 income tax expense income tax expense 164 200 income continuing operations income taxes 2010 compared 169 209 prior year yearoveryear decrease income tax expense primarily attributable additional tax benefit 41 related increase asbestosrelated costs coupled additional tax benefit 26 reversal valuation allowances certain capital loss carryforwards became likely deferred tax assets would realized 2010 tax benefits largely replaced prior year benefit 58 international legal entity restructuring income discontinued operations net tax income discontinued operations net tax 144 2010 compared 3 2009 increase 141 primarily reflects recognition aftertax gain sale 130 related divesture cas inc cas component defense segment sold september 8 2010 cas generated aftertax income operations 9 2009 twelvemonth period 2010 period prior sale also included within income discontinued operations aftertax net asbestosrelated benefit 6 2010 compared expense 6 2009 related business disposed number years ago discussion financial results versus 2008 revenue deteriorating global economic conditions experienced 2009 created recessionary challenges within fluid motion flow segments result experienced significant decline order activity translated 149 decrease revenue segments however full extent unfavorable conditions experienced 2009 mitigated results defense businesses less prone volatility periods economic uncertainty following table illustrates 2009 2008 revenue results business segments see discussion yearoveryear revenue order activity segment level following table illustrates impact organic growth acquisitions completed year fluctuations foreign currency relation consolidated revenue 2009 defense information solutions 2009 revenue generated defense segment 6067 consistent segment’s 2008 revenue 6064 results reflect yearoveryear growth service revenue programs 140 65 decline product revenue 137 35 2009 service revenue benefited logistical service contract wins fort benning maxwell air force base well increased activity global maintenance supply services gmass agreement us army addition service revenue 2009 benefited increase engineering services related tethered aerostat radar system tars program federal aviation administration’s faa next generation airtraffic control program positive service revenue contributions partially offset decline logistics civil augmentation program logcap revenues 2009 product revenue results impacted volume declines c4 command control communications computers business us sincgars crew 21 addition 2009 program revenue adversely affected timing deliveries electronic ground warfare systems decline revenue programs partially offset revenue growth increased volume night vision goggles international countries airborne integrated electronic warfare systems radar systems well gps navigation project classified programs fluid technology 2009 revenue generated fluid segment 3363 representing decline 478 124 segment’s 2008 revenue 3841 results include favorable impact acquisitions 24 unfavorable impact foreign currency fluctuations 153 resulting organic revenue decline 349 91 decline organic revenue primarily result lower volumes significant overall weakness markets served due challenging global economic conditions organic revenue within residential commercial water division decreased 170 water wastewater division decreased 90 industrial process division decreased 85 however overall impact unfavorable conditions partially mitigated stable results product sales municipal markets well longterm construction type contracts within oil gas power generating markets motion flow control 2009 revenue generated motion flow segment 1253 representing decline 330 208 segment’s 2008 revenue 1583 results include unfavorable impacts divestitures 36 foreign currency fluctuations 66 resulting organic revenue decline 228 144 decline organic revenue primarily result lower volumes caused challenging global economic conditions affecting majority markets served declines mitigated latter half 2009 market share gains beverage marine markets benefits european automotive stimulus programs solid results railrelated products within emerging markets organic revenue motion technologies division decreased 36 63 reflecting weakness automotive rail markets majority 2009 declines partially offset however strength markets latter half 2009 resulting benefits european government stimulus programs growth emerging markets primarily related efforts china’s highspeed rail project organic revenue interconnect solutions division declined 102 225 results inline overall connectors industry experienced significant reductions revenue orders 2009 division serves aerospace industrial markets severely impacted economic downturn organic revenue flow control division decreased 30 120 primarily attributable declines within global industrial market partially offset market share gains beverage industry relatively flat marine market saw declines original equipment sales offset increase aftermarket sales organic revenue control technologies division declined 56 175 results reflect reduction commercial aerospace original equipment production sluggish aftermarket sales performance well impact decreased industrial production activity partially offset strong performance defense market gross profit gross profit 2009 3024 representing 190 59 decrease 2008 decrease attributable decline revenue unfavorable foreign currency fluctuations partially offset benefits productivity gains including efforts improve supply chain productivity control material costs gross margin increased 30 basis points 283 2009 30 basis point improvement primarily due benefits productivity improvements various costsaving initiatives offset impacts reductions sales volumes following table illustrates 2009 2008 gross profit results business segments including gross margin results operating expenses operating expenses increased 57 2009 2130 primarily attributable 224 increase net asbestosrelated costs resulting initial recognition estimated liability net expected recoveries insurance responsible parties claims projected filed company next 10 years increase net asbestosrelated costs partially offset reduction sga expenses 134 following table provides information expense type well breakdown operating expense segment meaningful selling general administrative expenses sga decreased 79 1555 2009 yearoveryear decrease primarily attributable costsaving initiatives response declining global economic conditions lower sales volumes favorable foreign currency exchange translation lower stock compensation expense partially offset higher postretirement plan costs research development expenses rd expenses increased 22 2009 prior year primarily due increased spending development materials key growth platforms across defense segment asbestosrelated costs net 2009 recorded asbestosrelated costs 238 related estimated liability net expected recoveries insurers responsible parties claims projected filed company next 10 years see note 19 “commitments contingencies” notes consolidated financial statements additional information restructuring asset impairment charges net 2009 recognized net restructuring charges 79 representing 2 increase compared 2008 charges associated 2009 actions primarily represent severance costs reductions headcount associated strategic relocation certain production operations within fluid motion flow segments lowercost regions well various planned reductions headcount associated lean fulfillment initiative planned position eliminations totaled 1092 employees including 528 factory workers 530 office workers 34 management employees operating income generated operating income 894 2009 254 decrease 2008 primarily reflecting volume declines increased asbestosrelated costs negative impacts partially offset benefits implementation extensive costsaving initiatives productivity improvements structural changes made optimize sourcing reduce cycle times addition completed strategic realignment motion flow segment better leverage production capabilities cost structures well reduce operational redundancies operating margin decreased 84 2009 yearoveryear decline 200 basis points primarily attributable reductions sales volumes impact asbestosrelated costs negative impacts partially offset benefits productivity improvements various costsaving initiatives following table illustrates 2009 2008 operating income results business segments including operating margin results defense information solutions operating income increased 46 64 2009 resulting operating margin 125 improvement 70 basis points versus 2008 yearoveryear growth reflecting reduced costs revenue sga expenses primarily attributable benefits costsaving initiatives productivity sourcing strategies benefits partially offset increases costs materials labor overhead unfavorable program mix impacts higher postretirement benefit plan costs increased investments rd fluid technology operating income 2009 decreased 76 162 2008 decline operating margin 50 basis points 117 declines primarily attributable reductions sales volumes higher postretirement benefit plan expenses partially offset strong productivity provided increasing benefits year progressed lower realignment costs motion flow control operating income decreased 74 385 2009 including impacts unfavorable foreign currency fluctuations 25 decline primarily affected lower sales volume well higher postretirement plan costs partially offset benefits net cost reductions driven various costsaving initiatives lower realignment costs second half 2009 began realizing benefits associated significant restructuring realignment actions taken 2008 2009 result contributed yearoveryear improvements operating income 17 fourth quarter operating margin decreased 270 basis points 94 2009 primarily reflecting factors described corporate incurred corporate expenses 378 2009 reflecting increase 200 1124 compared 2008 increase expense primarily relates recognition additional asbestosrelated costs mentioned “operating expenses” discussion partially offset lower environmentalrelated bonus costs well investment gains corporateowned life insurance policies impacts operating income postretirement expense recorded 99 net periodic postretirement cost 2009 compared costs 29 2008 primary drivers behind increase effect increase amortization net actuarial losses expected returns lower base plan assets partially offset increase discount rate foreign plans interest nonoperating expenses net interest expense decreased 293 2009 due interest rate declines commercial paper variable rate debt well lower yearoveryear levels outstanding commercial paper decrease interest related taxes partially offset increase interest expense fixedrate debt related 10 billion debt issuance may 2009 yearoveryear decrease interest income 226 primarily due lower average interest rates 2009 periods compared prior year partially offset recognition interest refunds 13 received conjunction irs tax settlement income tax expense income tax expense 169 209 income continuing operations income taxes 2009 compared 308 286 2008 yearoveryear decrease effective tax rate primarily attributable completion onetime restructuring certain international legal entities resulted reduction income tax provision amount 58 addition reversals valuation allowances 17 coupled tax credits allowable deductions 12 largely offset prior year benefit tax account validation adjustment 37 see note 6 “income taxes” notes consolidated financial statements additional information income discontinued operations net tax income discontinued operations net tax 3 2009 respectively compared 27 2008 completed sale remaining component switches businesses generated total aftertax income 6 including aftertax gain sale 5 2010 classified cas component defense segment discontinued operation cas generated aftertax income operations 9 2009 compared 7 2008 also included within income discontinued operations 2009 additional aftertax net asbestosrelated expense 6 related business disposed number years ago liquidity capital resources funding liquidity strategy funding needs monitored strategies executed meet overall liquidity requirements including management capital structure short longterm basis believe cash flows operations access commercial paper market sufficient meet shortterm funding requirements access commercial paper market adversely affected believe alternative sources liquidity including existing committed credit facility access public debt market would sufficient meet shortterm funding requirements cash predominately held foreign subsidiaries currencies operations manage worldwide cash requirements considering available funds among many subsidiaries conduct business cost effectiveness funds accessed continue look opportunities access cash balances excess local operating requirements meet global liquidity needs costefficient manner may continue transfer cash certain international subsidiaries us international subsidiaries cost effective funds needed operations us would required accrue pay us taxes repatriate funds however intent indefinitely reinvest funds outside us current plans demonstrate need repatriate fund us operations significant factors affect overall management liquidity include credit ratings adequacy commercial paper supporting bank lines credit ability attract longterm capital satisfactory terms assess factors along current market conditions continuous basis result may alter mix short longterm financing advantageous access commercial paper market supplement cash flows generated internally provide additional shortterm funding strategic investments nonrecurring funding requirements manage shortterm liquidity use commercial paper program adjusting level commercial paper borrowings opportunities deploy additional capital arise cost effective sufficient return investment generated credit facilities commercial paper program supported threeyear revolving 15 billion credit agreement august 2010 credit facility august 2010 replaced fiveyear revolving 175 billion credit agreement due expire november 2010 august 2010 credit facility revolving credit agreement intended provide access additional liquidity source funding commercial paper program needed policy maintain unused committed bank lines credit amount greater outstanding commercial paper balances interest rate borrowings august 2010 credit facility generally based london interbank offered rate libor plus spread reflects debt rating provisions august 2010 credit facility require maintain interest coverage ratio defined 35 times december 31 2010 interest coverage ratio well excess minimum requirements credit ratings december 31 2010 follows subsequent january 2011 announced plan separate itt three publicly traded entities shortand longterm credit ratings modified follows n standard poor’s “creditwatch negative” n moody’s investor service “under review possible downgrade” n fitch ratings “ratings watch evolving” consider certain debt ratios including total debt total capitalization ratio net debt net capitalization ratio key indicators management investors evaluating financial leverage structure strength well ability finance operations calculate total debt total capitalization ratio total shortand longterm borrowings total debt divided shareholders’ equity plus total debt total capitalization calculate net debt net capitalization ratio total debt less cash equivalents divided total capitalization less cash equivalents current debt ratios positioned us grow business investments organic growth strategic acquisitions providing ability return value shareholders dividends share repurchases sources uses liquidity principal source liquidity cash flow generated operating activities provides us ability meet majority shortterm funding requirements following table provides net cash provided operating activities used investing financing activities previous three years net cash provided operating activities decreased 24 2010 compared 2009 contributing factors included 162 higher 2010 net tax payments driven 2009 income tax refund 26 timing 40 extension payment made beginning 2010 unfavorable 2010 impact timing defense segment collections received december 2009 related certain advance payments 85 reduction contributions pension plans included 50 discretionary pension contribution 2010 58 benefit 2010 acquisitions additional cash generation sales growth net cash provided operating activities increased 151 2009 compared 2008 contributing factors included 320 improved accounts receivable conversion benefits primarily timing defense segment collections received december 2009 related certain advanced customer payments 99 reduction net tax payments included 26 income tax refund received 2009 timing 40 extension payment processed 2010 decline cash receipts due decreased sales volume 137 additional contributions pension plans including 100 discretionary 2009 contribution 28 increase restructuringrelated payments annual net cash outflows associated asbestosrelated liability projected average 25 next five years compared average approximately 10 15 past three years increase average approximately 50 60 remainder projection period believe subject risks uncertainties inherent estimation process net asbestosrelated liability unasserted claims estimated filed next 10 years materially affect shortterm longterm liquidity positions net annual cash flows net cash used investing activities increased 832 2010 compared 2009 invested additional 1007 2010 various strategic acquisitions including nova godwin also increased capital expenditure spending 57 primarily related implementation entitywide enterprise resource planning erp system additional investments godwin business additional investment spending noted partially offset increase 237 proceeds sale cas assets businesses 2010 net cash used investing activities decreased 217 2009 compared 2008 primarily related 242 decline acquisition spending 2008 spent 227 related edo acquisition payments carried 2007 2008 49 related acquisitions several smaller companies 2009 made 50 additional investments related construction radio towers support adsb program faa implementation entitywide erp system additional investments partially offset 2008 spending related itt’s new corporate headquarters 2009 2008 used approximately 18 billion cash generated operations repay december 31 2007 outstanding shortterm debt balance 2907 principally resulted financing edo imc acquisitions 2007 remainder shortterm debt repaid using proceeds 10 billion longterm debt issuance may 2009 cash usage related financing activities 2010 primarily 176 payment dividends represented 189 increase compared 2009 also 2010 used 79 retire two longterm outstanding debentures consistent 2009 2010 objectives surrounding preservation liquidity participate share repurchase program either years 2008 spent 75 including commission fees repurchase common stock average daily outstanding commercial paper balance year ended 2010 231 maximum outstanding commercial paper 2010 620 corresponding acquisition nova analytics december 31 2010 commercial paper outstanding funding postretirement plans december 31 2010 postretirement benefit plans underfunded 17 billion 17 billion underfunded obligation includes 773 related us srp substantial portion underfunded position arose fourth quarter 2008 recognized significant decline fair market value postretirement benefit plan assets favorable market conditions latter half 2009 throughout 2010 resulted increase fair market value postretirement benefit plan assets december 31 2010 us srp 83 funded funding requirements irs rules major consideration making contributions us postretirement benefit plans respect us qualified postretirement benefit plans intend contribute annually less minimum required applicable law regulations 2010 contributed 76 postretirement plans including voluntary contribution 50 us srp fourth quarter company significant discretion making voluntary contributions employee retirement income security act 1974 amended pension protection act 2006 amended worker retiree employer recovery act 2008 applicable internal revenue code regulations mandate minimum funding thresholds failure satisfy minimum funding thresholds could result restrictions ability amend plan make benefit payments given 2010 voluntary contribution 50 currently believe mandatory contributions required us srp 2011 however anticipate making contributions postretirement benefit plans range 90 110 2011 funded status end 2011 future required contributions depend primarily actual return assets year discount rate used measure benefit obligation end year depending factors resulting funded status pension plans level future statutory minimum contributions could material capital resources longterm debt raised offering debt securities primarily within united states capital markets longterm debt generally defined debt original maturity greater 12 months following longterm debt outstanding december 31 see details total yearend stated rates debt maturities note 15 “debt” notes consolidated financial statements december 31 2010 availability additional sources long shortterm funding includes access capital markets unlimited 2009 shelf registration statement 15 billion commercial paper program approximately 132 unused credit lines commercial paper program supported threeyear revolving 15 billion credit agreement contractual obligations itt’s commitment make future payments longterm contractual obligations follows december 31 2010 addition amounts presented table recorded liabilities pending unasserted asbestos claims estimated filed next ten years uncertain tax positions 1676 192 respectively consolidated balance sheet december 31 2010 amounts excluded contractual obligations table due inability reasonably estimate timing payments individual years 1 see note 15 “debt” notes consolidated financial statements discussion use availability debt revolving credit agreements amounts represent total longterm debt including current maturities exclude deferred gain interest rate swaps unamortized discounts debt issuance costs 2 amounts represent estimate future interest payments longterm debt outstanding december 31 2010 variable rate debt interest rate effect year end utilized 3 refer note 14 “leases rentals” notes consolidated financial statements discussion lease rental agreements 4 represents unconditional purchase agreements enforceable legally binding specify significant terms purchase goods services including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing transaction purchase agreements cancellable without penalty excluded 5 longterm obligations include estimated environmental payments estimate based historical experience spend 12 15 per year environmental investigation remediation contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2010 best estimate environmental liabilities 139 addition longterm obligations include letters credit payments connection settlement compliance issues defense segment offbalance sheet arrangements offbalance sheet arrangements represent transactions agreements contractual arrangements unconsolidated entities obligation contingent interest exists offbalance sheet arrangements december 31 2010 consist indemnities related acquisition disposition agreements certain thirdparty guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities guarantees part sale leaseback agreement corporate aircraft provided residual value guarantee lessor future value aircraft maximum exposure 42 2010 increased loss contingency 17 due decline projected fair value aircraft december 2012 lease expiration date critical accounting estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent liabilities management bases estimates historical experience various assumptions believes reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources senior management discussed development selection disclosure estimates audit committee itt’s board directors significant accounting policies used preparation consolidated financial statements discussed note 1 “summary significant accounting policies” notes consolidated financial statements accounting estimates assumptions discussed section consider critical understanding financial statements inherently uncertain involve significant judgments include areas different estimates reasonably could used changes estimate reasonably possible could materially impact financial statements management believes accounting estimates employed resulting balances reasonable however actual results areas could differ management’s estimates different assumptions conditions asbestos matters itt including subsidiary goulds pumps inc goulds joined defendant numerous companies product liability lawsuits alleging personal injury due asbestos exposure claims allege certain products sold prior 1985 contained part manufactured third party eg gasket contained asbestos extent thirdparty parts may contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos estimating exposure asbestos claims subject significant management judgment significant uncertainty risk associated variables affect timing severity quantity resolution claims methodology used project future asbestos costs based largely company’s experience reference period including last years claims filed settled dismissed supplemented management’s expectations future experience compared results previously conducted epidemiological studies estimating number individuals likely develop asbestosrelated diseases studies undertaken connection independent analysis population us workers across eleven different industry occupation categories believed exposed asbestos using information industry occupation categories relevant company estimate developed number claims estimated filed company next ten years well aggregate settlement costs would incurred resolve pending estimated future claims based average settlement costs disease reference period addition estimate augmented costs defending asbestos claims tort system using forecast based recent experience well discussions company’s defense counsel addition company retains consulting firm assist management estimating potential exposure pending asbestos claims estimated filed next 10 years methodology project future asbestos costs one underlying assumptions separately assessed reasonableness used input liability estimate assessment underlying assumptions based upon recent experience future expectations yielding one value assumption liability estimate sensitive factors surrounding mesothelioma lung cancer claims together claims represent nearly 90 percent estimated asbestos liability factors include number new claims filed company projected average settlement costs including rate inflation assumed percentage claims dismissed company factors interdependent one factor predominates estimating asbestos liability potential inputs estimation model methodology relies best input available circumstances individual assumption create range reasonably possible outcomes projecting future asbestos costs subject numerous variables uncertainties inherently difficult predict addition uncertainties surrounding key factors discussed factors include long latency period prior manifestation asbestosrelated disease costs medical treatment impact bankruptcies companies codefendants uncertainties surrounding litigation process jurisdiction case impact potential legislative judicial changes furthermore predictions respect variables impacting estimate asbestos liability subject even greater uncertainty projection period lengthens light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next 10 years believe reasonable basis estimating costs time part ongoing review asbestos claims quarter assess recent data available key inputs assumptions comparing data expectations recent annual liability estimate based record corresponding asbestosrelated asset represents best estimate probable recoveries related recorded asbestos liability developing estimate company considers coverageinplace settlement agreements insurers contractual agreements responsible parties well number additional factors additional factors include current levels recovery experience financial viability insurance companies responsible parties method losses allocated various insurance policies years covered policies interpretation various policy contract terms limits interrelationships timing amount reimbursements vary due differing policy terms certain gaps coverage result insurer insolvencies addition company retains insurance consulting firm assist management estimating probable recoveries pending asbestos claims estimated filed next 10 years based analysis policy terms likelihood recovery provided legal counsel assuming continued viability insurance carriers responsible parties currently solvent incorporating risk mitigation judgments policy terms factors certain estimated able recover 62 percent settlement defense costs pending claims well unasserted claims estimated filed next 10 years insurers responsible parties however gaps coverage reflecting certain uninsured periods prior insurance settlements expect certain policies primary insurers exhaust within next 10 years recovery rate expected decline potential additional asbestos liabilities insurance coverage tenth year estimate asbestos liability currently projected approximately 25 percent future recoverability rates may also impacted factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict subject high degree uncertainty asbestos liability related receivables based upon current known information however future events affecting key factors variables either asbestos liability related receivables could cause actual costs recoveries materially higher lower currently estimated due uncertainties well inability reasonably estimate additional asbestos liability claims may filed beyond next 10 years possible predict ultimate outcome cost resolving pending unasserted asbestos claims believe possible future events affecting key factors variables within next 10 years well cost asbestos claims filed beyond next 10 years net expected recoveries could material adverse effect financial position results operations cash flows part ongoing review net asbestos exposure quarter assess recent data available key inputs assumptions comparing data expectations recent annual liability asset estimates based third quarter year conduct detailed study assistance outside consultants review update appropriate underlying assumptions used estimate asbestos liability related assets additionally periodically reassess time horizon reasonable estimate unasserted claims projected see note 19 “commitments contingencies” notes consolidated financial statements information postretirement plans itt sponsors numerous defined benefit pension plans employees around world determination projected benefit obligations recognition expenses related pension plans dependent various assumptions major assumptions primarily relate discount rates longterm expected rates return plan assets rate future compensation increases mortality termination disclosed note 16 “postretirement benefit plans” notes consolidated financial statements factors actual results differ assumptions accumulated amortized generally estimated future working life plan participants significant assumptions management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary table included provides weighted average assumptions used estimate defined benefit pension obligations costs years ended 2010 2009 determine expected return plan assets evaluating historical returns estimates future returns specifically analyze plan’s actual historical annual return assets past 15 20 25 years estimate future returns based independent estimates asset class returns evaluate historical broad market returns longterm timeframes based strategic asset allocation detailed note 16 “postretirement benefit plans” notes consolidated financial statements based approach described estimate longterm annual rate return assets domestic pension plans 90 reference actual geometric average annual return plan assets domestic pension plans 88 101 103 past 15 20 25 year periods respectively chart shows actual returns versus expected longterm returns us pension plans utilized calculation net periodic pension cost respective year see note 16 “postretirement benefit plans” notes consolidated financial statements information recognition net periodic pension cost calculation expected return plan assets generally derived using marketrelated value plan assets based average asset values measurement date last five years use fair value rather calculated value could materially affect net periodic pension cost weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2010 887 discount rate reflects expectation present value expected future cash payments benefits measurement date decrease discount rate increases present value benefit obligations increases pension expense base discount rate assumption current investment yields highquality fixed income investments retirement benefits maturity period pension discount rate determined considering interest rate yield curve comprising aaaaa bonds maturities zero thirty years developed plan’s actuaries annual benefit payments discounted present value using yield curve develop singlepoint discount rate matching plan’s characteristics weighted average discount rate pension plans including foreign affiliate plans december 31 2010 571 rate future compensation increase assumption reflects longterm actual experience future near term outlook december 31 2010 expected rate future compensation 40 us plan participants unchanged prior year pension expense 25 basis point change expected rate return plan assets discount rate future compensation increases would following effect 2011 pension expense amounts included table pretax basis without consideration potential reimbursement dod funded status funded status derived subtracting respective yearend values projected benefit obligations fair value plan assets itt’s us salaried pension plan represents approximately 76 total pension obligation therefore funded status us salaried retirement plan considerable impact overall funded status pension plans estimate every 25 basis point change discount rate impacts funded status us salaried pension plan approximately 118 similarly every five percentage point change actual 2011 rate return assets impacts plan approximately 187 fair value plan assets plan assets postretirement plans comprise broad range investments including domestic foreign equity securities interests private equity hedge funds fixed income investments commodities real estate cash equivalents substantial portion postretirement benefit plan assets portfolio comprises investments private equity hedge funds private equity hedge fund investments generally measured net asset value however certain instances values reported asset managers current measurement date accordingly management estimated adjustments last reported value necessary measure assets fair value measurement date adjustments consider information received asset managers well general market information adjustment recorded assets represented approximately one percent total plan assets asset values positions generally measured using market observable prices see note 16 “postretirement benefit plans” notes consolidated financial statements information revenue recognition defense segment certain businesses within fluid segment enter longterm constructiontype sales contracts revenue recognized percentageofcompletion method based upon units delivery percentage costs incurred total costs completion scheduled performance milestones revenues profits recognized percentageofcompletion methods based management’s estimates total contract revenues contract costs extent progress toward completion due longterm nature contracts estimates subject uncertainties require significant judgment negotiated fees certain contracts may increased decreased accordance cost performance incentive provisions measure actual performance established targets criteria incentive fee awards penalties included revenue sufficient information reasonably assess anticipated contract performance claims contracts recorded probable claim result additional contract revenue amounts reliably estimated estimates contract costs include labor hours rates subcontractor costs material costs estimates consider historical performance complexity work performed estimated time complete project economic factors inflation market rates update estimates periodic basis revisions estimates recorded earnings period determined provisions estimated losses uncompleted longterm contracts made period losses determined record reduction revenue time sale estimated product returns rebates allowances based historical experience known trends future market conditions product transitions may require us take actions increase customer incentive offerings possibly resulting incremental reduction revenue time incentive offered additionally accruals estimated expenses related warranties made time products sold services rendered recorded component costs revenue accruals established using historical information nature frequency average cost warranty claims estimates future costs standard product warranty terms generally include postsales support repairs replacement product additional charge specified period time engage extensive product quality programs processes base estimated warranty obligation product warranty terms offered customers ongoing product failure rates material usage service delivery costs incurred correcting product failure well specific product class failures outside baseline experience actual product failure rates repair rates postsales support costs differ estimates revisions estimated warranty liability would required income taxes deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates effect year expect differences reverse based evaluation available evidence recognize future tax benefits net operating loss carryfowards extent believe likely realize benefits periodically assess likelihood able recover deferred tax assets reflect changes estimate amount likely realize valuation allowance corresponding adjustment earnings comprehensive income loss appropriate assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates effective tax rate reflects impact certain undistributed foreign earnings provided us taxes plan reinvest earnings indefinitely outside united states plan foreign earnings remittance amounts based projected cash flow needs well working capital longterm investment requirements foreign subsidiaries domestic operations based assumptions estimate amount distribute united states provide us federal taxes due amounts material changes estimates cash working capital longterm investment requirements various jurisdictions business could impact effective tax rate calculation tax liabilities involves dealing uncertainties application complex tax regulations multitude jurisdictions across global operations recognize potential liabilities record tax liabilities anticipated tax audit issues us tax jurisdictions based estimate whether extent additional taxes due furthermore recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater 50 likelihood realized upon ultimate settlement adjust liability uncertain tax positions light changing facts circumstances however due complexity uncertainties ultimate resolution may result payment materially different current estimate tax liabilities estimate tax liabilities proves less ultimate assessment additional tax expense would result payment amounts ultimately proves less recorded amounts reversal liabilities would result tax benefits recognized period determine liabilities longer necessary goodwill intangible assets review goodwill indefinitelived intangible assets impairment annually whenever events changes circumstances indicate carrying value asset may recoverable also review carrying value finitelived intangible assets potential impairment indicators arise conduct annual impairment test first day fourth quarter perform twostep impairment test goodwill first step compare estimated fair value reporting unit carrying value estimated fair value reporting unit exceeds carrying value net assets assigned reporting unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value must perform second step impairment test order measure impairment loss recorded carrying value reporting unit’s goodwill exceeds implied fair value record impairment loss equal difference annual impairment test indefinitelived intangible assets compare fair value assets carrying value recognize impairment loss estimated fair value indefinitelived intangible asset less carrying value estimate fair value reporting units intangible assets indefinite lives using income approach income approach calculate fair value based present value estimated future cash flows determining fair value reporting unit indefinitelived intangible asset judgmental nature involves use significant estimates assumptions particularly related future operating results cash flows estimates assumptions include limited revenue growth rates operating margins used calculate projected future cash flows riskadjusted discount rates assumed royalty rates future economic market conditions identification appropriate market comparable data addition identification reporting units allocation assets liabilities reporting units determining carrying value reporting unit also requires judgment goodwill tested impairment reporting unit level either reportable segment eg fluid segment identified note 21 “business segment information” notes consolidated financial statements one level eg divisions defense motion flow segments fair value reporting units indefinitelived intangible assets based estimates assumptions believed reasonable significant changes estimates assumptions could adversely impact conclusions actual future results may differ estimates 2010 annual goodwill impairment analysis indicated estimated fair value reporting units significantly exceeded carrying value accordingly impairment charges recorded order evaluate sensitivity fair value estimates goodwill impairment test applied hypothetical 100 basis point increase discount rates utilized ten percent reduction expected future cash flows reduced assumed future growth rates reporting unit zero hypothetical changes result reporting unit failing step one impairment test 2010 annual indefinitelived intangible asset impairment test result impairment charge estimated fair value assets exceeded carrying value new accounting pronouncements see note 2 “new accounting pronouncements” notes consolidated financial statements complete discussion recent accounting pronouncements new pronouncements expect material impact financial condition results operations future periods forwardlooking cautionary statements information included herein includes forwardlooking statements intended qualify safe harbor liability established private securities litigation reform act 1995 act forwardlooking statements include statements describe business strategy outlook objectives plans intentions goals discussion future operating financial performance whenever used words “anticipate” “estimate” “expect” “project” “intend” “plan” “believe” “target” terms similar meaning intended identify forwardlooking statements forwardlooking statements uncertain extent unpredictable involve known unknown risks uncertainties important factors could cause actual results differ materially expressed implied forwardlooking statements factors could cause results differ materially anticipated include n effects proposed spinoffs water defense business n tax liability associated proposed spinoff transactions n size itt’s operational financial profile spinoffs n economic political social conditions countries conduct businesses n changes us international government defense budgets n decline consumer spending n sales revenues mix pricing levels n availability adequate labor commodities supplies raw materials n interest foreign currency exchange rate fluctuations changes local government regulations n competition industry capacity production rates n ability third parties including commercial partners counterparties financial institutions insurers comply commitments us n ability borrow refinance existing indebtedness availability liquidity sufficient meet needs n changes value goodwill intangible assets n acquisitions divestitures n personal injury claims n uncertainties respect estimation asbestos liability exposures third party recoveries net cash flows n ability affect restructuring cost reduction programs realize savings actions n government regulations compliance therewith including compliance costs associated new doddfrank legislation n changes technology n intellectual property matters n governmental investigations n potential future postretirement benefit plan contributions employment pension matters n contingencies related actual alleged environmental contamination claims concerns n changes generally accepted accounting principles undertake obligation update forwardlooking statements whether result new information future events otherwise addition risks uncertainties relating planned taxfree spinoffs water defense businesses including timing certainty completion transactions ability business operate independent entity guidance fullyear 2011 based company’s current structure give effect separation water defense businesses newly independent public companies item 7anannannannannannannanitem 7 managements discussion analysis financial condition results operations results operations company adopted statement financial accounting standards 142 discontinued amortization goodwill january 1 2002 see footnote 2 changes accounting pronouncements detail total costs expenses 2001 2000 exclude goodwill amortization expense comparative purposes year ended december 31 2002 compared year ended december 31 2001 sales revenues 2002 499 billion increase 3096 million 66 2001 cost sales revenues year ended december 31 2002 increased 1674 55 2001 increases primarily attributable increased sales defense electronics services fluid technology motion flow control segments partially offset volume declines electronic components segment selling general administrative sga expenses 2002 7202 million increase 489 million 73 2001 increase primarily attributable increased marketing expenses fluid technology segment costs associated process improvement initiatives increased information technology spending increased administrative expenses across businesses research development engineering rde expenses increased 944 million 222 2002 compared 2001 primarily due increased spending defense electronics services segment 2002 management conducted quarterly progress reviews companys remaining restructuring actions determined 131 million planned cash expenditures would incurred accordingly 131 million restructuring accruals primarily relating 2001 restructuring plan reversed income also fourth quarter 2002 company recorded restructuring charge 96 million related termination 292 persons closure two facilities 2001 company recorded 977 million restructuring asset impairment charge reduce structural costs improve profitability refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information regarding matters operating income 5376 million 2002 1408 million 355 higher prior year excluding goodwill amortization expense increase 1001 million 229 operating margin 108 230 basis points higher margin 2001 approximately 140 basis points higher 2001 excluding goodwill amortization expense excluding goodwill amortization expense increases primarily due 977 million restructuring asset impairment charge recorded 2001 increased segment volume items partially offset lower operating margins electronic components segment reflecting higher sga expenses increased corporate expenditures reflecting cost process improvement initiatives increased information technology spending increased administrative expenses also offset improved margin interest expense 324 million net interest income 110 million decreased 296 million 2001 primarily due favorable change average interest rates lower average debt levels result increased cash operations effective income tax rate 2002 253 compared 350 2001 decrease 2002 effective tax rate due approximately 31 million tax gains related capital loss carryback benefit several foreign tax planning initiatives initiated 2002 2001 reduce structural rate elimination goodwill expense pursuant adoption statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 also contributed decline effective tax rate income continuing operations 2002 3799 million 406 per diluted share compared 2167 million 239 per diluted share increase due higher operating income lower interest expense items partially offset higher income tax expense fourth quarter 2001 company reassessed accruals discontinued operations determined activities related accruals would completed 600 million less originally estimated reversed related accruals income excess primarily related favorable foreign tax rulings see section entitled discontinued operations note 5 discontinued operations notes consolidated financial statements additional information year ended december 31 2001 compared year ended december 31 2000 sales revenues 2001 468 billion decrease 1537 million 32 2000 cost sales revenues year ended december 31 2001 decreased 1508 million 47 2000 decreases primarily attributable downturn communications industrial connectors markets electronic components scheduled wind certain defense electronics services contracts declines partially offset new contract revenue defense electronics services revenues acquisitions made 2000 sga expenses 2001 6713 million decrease 423 million 59 2000 decrease primarily attributable lower marketing expenses fluid technology electronic components reduced administrative expenses electronic components rde expenses increased 335 million 86 2001 compared 2000 primarily due increased spending defense electronics services segment december 2001 company announced restructuring program reduce structural costs improve profitability accordingly charge 833 million recorded addition based review long lived assets electronic components segment company recorded impairment charge 144 million refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topics restructuring asset impairment charges recorded 2000 operating income 3968 million 2001 963 million 195 lower prior year due 977 million restructuring asset impairment charges taken 2001 operating margin 85 approximately 170 basis points lower margin 2000 decrease primarily due mentioned restructuring asset impairment charges lower sales volume items partially offset cost reduction efforts related nonproduction purchases savings headcount reductions primarily reflecting normal employee attrition improved product mix also partially offset decline interest expense 620 million net interest income 68 million decreased 132 million 2000 due favorable change average interest rates increased cash operations partially offset higher average debt first half 2001 associated several acquisitions made 2000 effective income tax rate 2001 350 compared 370 2000 decrease 2001 effective tax rate due several initiatives taken 2001 2000 reduce structural rate income continuing operations 2001 2167 million 239 per diluted share compared 2645 million 294 per diluted share decrease net income primarily due restructuring asset impairment charges discussed partially offset decrease interest expense lower effective tax rate fourth quarter 2001 company reassessed accruals discontinued operations determined activities related accruals would completed 600 million less originally estimated reversed related accruals income excess primarily related favorable foreign tax rulings see section entitled discontinued operations note 5 discontinued operations notes consolidated financial statements additional information business segment information year ended december 31 2002 compared year ended december 31 2001 fluid technology sales revenues 196 billion increased 1266 million 69 2001 cost sales revenues increased 826 million 69 increases reflect increased volume waterwastewater engineered process solutions group businesses contribution 2002 acquisitions partially offset volume declines industrial pump business sga expenses increased 203 million 58 2002 primarily due increased marketing costs 2002 management conducted quarterly progress reviews remaining restructuring actions reversed 15 million segments restructuring accruals deemed unnecessary additionally fourth quarter 2002 fluid technology segment recorded restructuring charge 60 million primarily reduction 147 employees closure one facility fourth quarter 2001 segment recorded 160 million restructuring charge refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income excluding goodwill amortization expense increased 309 million 140 due factors discussed defense electronics services sales revenues 151 billion increased 2091 million 160 compared 2001 cost sales revenues increased 998 million 134 2001 increases primarily attributable increased volume across businesses sga expenses flat prior year rde costs increased 868 million 265 2002 due fulfillment increased expenditures related customer contracts across businesses fourth quarter 2002 management reviewed remaining restructuring actions reversed 10 million segments restructuring accruals deemed unnecessary refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income 2002 219 million 166 greater 2001 operating income excluding goodwill amortization due factors mentioned defense electronics services segments total backlog 28 billion 26 billion december 31 2002 2001 respectively company generally records new contract awards backlog funding authorized appropriated customer management utilizes backlog measurement analyzing operations defense electronics services segment believes good indicator future performance defense businesses motion flow control recorded sales revenues 9355 million cost sales revenues 6928 million year representing increases 368 million 41 265 million 40 respectively 2001 increases primarily due increased volume automotive fluid handling systems business due higher north american build rates 2002 market share gains friction materials business market growth leisure marine business partially offset declines aerospace controls sga expenses increased 49 million 60 due higher marketing expense fixed asset losses 2002 partially offset decreased administrative expenses second half 2002 management reviewed remaining restructuring actions reversed 15 million segments restructuring accruals deemed unnecessary additionally fourth quarter 2002 motion flow control segment recorded restructuring charge 30 million primarily reduction 140 employees closure one facility consolidation selected functions fourth quarter 2001 segment recorded restructuring charge 81 million refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic excluding goodwill amortization expense operating income 1224 million increased 83 million 73 2001 due mentioned factors electronic components sales revenues cost sales revenues declined 635 million 98 418 million 96 respectively 2001 declines reflect general softness segments markets sga expenses increased 118 million 135 2002 due increased general administrative costs second half 2002 management reviewed remaining restructuring actions reversed 87 million segments restructuring accruals related favorable completion planned actions determination certain planned actions economically feasible additionally fourth quarter 2002 segment recorded restructuring charge 06 million 2001 company recorded restructuring asset impairment charges 552 million 144 million respectively refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topics excluding goodwill amortization expense operating income 704 million 446 million 2001 due mentioned factors year ended december 31 2001 compared year ended december 31 2000 fluid technology sales revenues 183 billion declined 45 million 02 2000 cost sales revenues declined 16 million 01 decreases reflect impact foreign currency translation continued weakness industrial pump markets partially offset higher volume within water wastewater markets sga expenses decreased 112 million 31 2001 due cost reduction initiatives lower marketing expense additionally fourth quarter 2001 fluid technology segment recorded restructuring charge 160 million refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income decreased 38 million 18 due factors discussed defense electronics services sales revenues 130 billion decreased 298 million 22 compared 2000 decline primarily due scheduled wind certain large contracts partially offset contribution new contract revenue cost sales revenues decreased 752 million 91 2000 due lower sales volume improved margins certain mature contracts higher profitability new contracts sga expenses 981 million increased 61 million 66 due higher administrative costs rde costs increased 330 million 112 2001 due increased spending businesses operating income 2001 63 million 54 greater 2000 operating income due factors mentioned defense electronics services segments total backlog 26 billion 24 billion december 31 2001 2000 respectively company generally records new contract awards backlog funding authorized appropriated customer management utilizes backlog measurement analyzing operations defense electronics services segment believes good indicator future performance defense businesses motion flow control recorded sales revenues 8987 million 2001 representing increase 98 million 11 2000 increase due automotive market share gains europe north america sales growth aerospace controls business partially offset softness leisure marine market impact decline north american automotive build rates impact foreign currency translation 2001 cost sales revenues increased 121 million 18 due increased volume startup costs associated new european programs fluid handling systems partially offset process improvements north american fluid handling systems sga expenses increased 21 million 27 due increased administrative expenses 2001 segment recorded 81 million restructuring charge refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topic operating income 1096 million declined 147 million 118 2000 due mentioned factors electronic components sales revenues 6470 million 2001 representing decrease 1276 million 165 2000 decrease reflects downturn communications industrial markets negative impact foreign currency translation partially offset revenues acquisitions made 2000 combined added approximately 64 million incremental sales cost sales revenues decreased 863 million 165 2001 due lower sales volume sga expenses declined 349 million 285 2001 due cost reduction actions headcount reductions resulting normal employee attrition rde expenses 286 million 2001 increased 21 million 79 due increased spending also 2001 company recorded restructuring asset impairment charges 552 million 144 million respectively refer section entitled status restructuring asset impairments note 4 restructuring asset impairment charges notes consolidated financial statements additional information topics operating income 163 million 827 million 835 2000 due mentioned factors status restructuring asset impairments 2002 restructuring activities fourth quarter 2002 company recorded 96 million restructuring charge primarily closure two facilities severance 292 persons severance 85 million represents majority charge lease payments costs represent remainder listed business segment background information 2002 restructuring plan millions actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure one facility fairfield nj termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain platforms automotive fluid handling systems business 2003 resulting excess capacity planned actions include closure one facility rochester ny consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions required continuing difficult market conditions actions include termination five employees comprised three office workers two management employees following table displays rollforward restructuring accruals 2002 restructuring program millions december 31 2002 remaining actions restructuring activities announced 2002 close two facilities reduce headcount 232 persons actions contemplated 2002 restructuring program completed 2003 severance runoff payments occur 2004 closed facility costs continue 2007 future restructuring expenditures funded cash operations supplemented required commercial paper borrowings projected future cash savings 2002 restructuring plan approximately 7 million 2003 approximately 46 million 2004 2007 savings represents lower salary wage expenditures decreased facility operating costs impact reflected cost sales revenues selling general administrative expenses 2001 restructuring activities december 14 2001 company announced restructuring program reduce structural costs improve profitability whereby company recorded charge 833 million related closure five facilities discontinuance 21 products 10 switch product group 11 connectors group severance 3400 persons asset impairments cash portion charge 610 million primarily relates severance lease termination costs noncash portion charge 223 million primarily relates machinery equipment became impaired result announced plans listed business segment background information 2001 restructuring plan millions 2001 sales electronic components segment decreased 1276 million 165 operating income excluding restructuring decreased 131 million 132 excluding contribution acquisitions made 2001 sales decreased approximately 192 million decrease primarily due downturn communication industrial markets addition management expected sales declines 2002 specifically communications industrial commercial aircraft markets combination downturn markets businesses acquired 2000 late 1999 resulted excess capacity prompted management seek opportunities reduce costs result review management decided consolidate manufacturing functions well administrative tasks throughout segment planned actions included outsourcing production operations weinstadt germany third party suppliers poland hungary transfer ten product lines five locations north america europe loveland colorado santa ana california weinstadt germany basingstoke uk dole france two locations china shenzhen tianjin consolidation european administrative functions transfer production operations santa ana california nogales mexico closure manufacturing facilities eden prairie minnesota watertown massachusetts smaller actions consisting primarily elimination administrative functions addition management also decided discontinue 21 older connector switch products revenue 2001 products totaled 293 million planned actions included termination 2753 persons comprised 2395 factory workers 348 office workers 10 management employees resulted cash charge 370 million included 330 million severance asset impairment charge 182 million primarily machinery equipment disposed result restructuring activities actions within fluid technology segment motion flow control segment corporate headquarters identified cost improvement opportunities processes functions identified could outsourced performed existing facilities eliminated redundant measures prompted primarily managements efforts reduce costs projections recovery industrial pumps businesses anticipated declines worldwide automotive build rates planned actions within fluid technology segment included outsourcing manufacturing functions city industry california seneca falls new york ashland pennsylvania third party suppliers united states mexico china consolidation tasks throughout segment closure foundry nanjing china actions incorporated termination 436 persons comprised 236 factory workers 189 office workers 11 management employees resulted cash charge 131 million included 105 million severance asset impairment charges 29 million primarily machinery equipment scrapped planned actions motion flow control segment included closure manufacturing facility costa mesa california operations consolidated three existing facilities closure manufacturing facility saffron walden england operations consolidated facility denmark closure sales office germany consolidation administrative tasks actions included projected termination 183 persons comprised 144 factory workers 28 office workers 11 management employees resulted cash charge 73 million included 49 million severance asset impairment charges 08 million primarily machinery equipment discarded planned actions companys corporate headquarters shared service facilities consisted consolidation administrative tasks included termination 28 persons comprised 26 office workers two management employees resulted cash charge 36 million included 35 million severance asset impairment charge 04 million 2002 2001 company funded restructuring activities cash operations company plans fund future cash requirements restructuring activities cash operations supplemented required commercial paper borrowings following table displays rollforward restructuring accruals 2001 restructuring program millions third fourth quarters 2002 17 million 101 million restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions respectively reversals primarily reflect less anticipated severance costs completed actions segments decision transfer five product lines santa ana california weinstadt germany dole france basingstoke uk shenzhen tianjin china supply chain issues eliminated financial viability transfers decision continue partial operations one electronic components facilities addition management determined one facility within fluid technology segment would remain operational suitable outsource supplier could identified 2002 company reduced headcount 855 persons closed three facilities december 31 2002 remaining actions 2001 restructuring program include closure one facility termination 24 persons severance runoff payments occur 2003 closed facility expenditures continue incurred 2004 revised future cash noncash savings projected approximately 281 million 25 million respectively period 2003 2006 asset impairments fourth quarter 2001 company initiated full review longlived assets electronic components segment significant volume declines pricing pressures business management expected volume declines 2002 specifically communications market industrial commercial aircraft markets result review company recorded impairments machinery equipment 139 million impairment 05 million cost based investment applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities summary 2001 restructuring activities asset impairments total impact restructuring initiative asset impairment review charge 977 million 635 million aftertax recorded 2001 revised projected aggregate future cash noncash savings mentioned actions approximately 281 million 25 million respectively period 2003 2006 figures include total savings 786 million 2003 savings reflected primarily cost sales revenues selling general administrative expenses actual savings approximated plan 2002 second half 2002 management reviewed progress companys remaining restructuring actions determined 118 million cash expenditures would incurred accordingly 118 million restructuring accruals relating 2001 restructuring plan reversed restructuring asset impairments line consolidated income statements connection restructuring activities asset impairment charge company identified assets total book value 262 million primarily machinery equipment disposal electronic components segment identified 220 million fluid technology segment identified 34 million motion flow control segment identified 08 million disposal assets disposed end 2003 1999 restructuring activities fourth quarter 1999 company recorded 202 million charges related restructuring activities primarily closure four facilities severance 324 persons listed business segment background information 1999 restructuring plan millions fourth quarter 1999 management fluid technology segment concluded continued weakness industrial markets represented temporary decline result reduce excess capacity factories guelph canada maracay venezuela closed along related sales offices functions moved existing facilities addition warehouse nottingham england closed consolidated european warehouses positions also determined redundant eliminated actions resulted termination 175 persons comprised 80 factory workers 95 office workers resulted cash charge 69 million included 51 million severance asset impairment charge 32 million primarily reduce building related equipment fair market value electronic components segment facility closed meaux france operations consolidated existing facilities outsourced closure decision based sales declines two major products manufactured facility managements determination would cost effective transfer product line third party closure meaux facility resulted termination 103 persons comprised 76 factory workers 26 office workers one management employee resulted cash charge 57 million included 54 million severance asset impairment charge 11 million primarily machinery equipment disposed result restructuring activities restructuring actions defense electronics services segment amount 03 million related severance five individuals whose positions deemed redundant eliminated actions within motion flow control segment primarily related headcount reductions hockenheim germany factory headcount reductions decisions part ongoing effort reduce costs consolidation functions actions resulted termination 43 persons comprised 42 factory workers one office worker resulted cash charge 19 million included 13 million severance asset impairment charge 11 million following table displays rollforward restructuring accruals 1999 restructuring program millions december 31 2002 1999 restructuring plan completed asset impairments fourth quarter 1999 company recorded 200 million goodwill impairments fluid technology defense electronics services segments goodwill impairments fluid technology segment related unprofitable far east operation goodwill impairments defense electronics services segment related product line sold january 2000 impairments calculated based managements future cash flow projections businesses summary 1999 restructuring asset impairment activities fourth quarter 1999 company recorded 202 million charges related restructuring activities primarily closure four facilities severance 326 persons company also recorded 200 million goodwill writeoffs fluid technology defense electronics services segments fourth quarter 1999 company determined 448 million accruals relating 1998 restructuring plans going utilized reversed income quarter major components reversal amounts consisted savings related severance payments 149 million asset disposal costs 154 million professional fees 103 million 42 million fourth quarter 2002 company reversed 03 million 10 million related 1999 1998 restructuring plans respectively determined expenditures would incurred december 31 2002 1999 1998 restructuring plans complete discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 million brake chassis unit continental ag germany approximately 1930 million dispositions treated discontinued operations connection sale businesses company established accruals taxes 9727 million representation warranty contract purchase price adjustments 1488 million direct costs accruals 1020 million environmental obligations 161 million addition company recorded purchase price adjustment due valeo sa approximately 70 million related purchase price adjustment mechanism contract called company pay receive additional cash consideration depending upon actual net assets sold compared target net assets specified contract 1998 1999 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements company assessed claims determined probable outcome reflected companys original estimate recorded time sale 1999 claims submitted arbitration following tables display rollforward automotive discontinued operations accruals january 1 1999 december 31 2002 thousands 1999 company disbursed 2610 million primarily federal foreign tax obligations company also paid 30 million settle two automotive product recall issues 2000 company made payments 75 million direct costs incurred conjunction sale automotive businesses defense costs related claims filed buyers fourth quarter 2000 assistance outside counsel company determined longer probable would collect approximately 70 million valeo sa company also determined probable would make payments settle outstanding valeo sa claim result company reversed approximately 70 million automotive discontinued operations accruals coincident reversal valeo sa receivable net actions impact consolidated income statement resulted reduction liabilities receivables net consolidated balance sheet 2001 company disbursed approximately 10 million primarily legal defense costs related claims filed buyers second quarter 2001 company settled continental ag claim fourth quarter 2001 arbitration hearing valeo sa concluded company also reassessed obligations related disposal automotive businesses determined would spend 633 million less disposition primarily due favorable foreign tax rulings based assessment 633 million reversed 2001 consolidated income statement income discontinued operations first quarter 2002 arbitrator ruled valeo sa must pay company monies settle claim related sale electrical systems business december 31 2002 company automotive discontinued operations accruals 1900 million primarily relate following taxes 1542 million related original transaction recorded accrued taxes product recalls 80 million related nine potential product recall issues recorded accrued expenses environmental obligations 145 million remediation investigation groundwater soil contamination 13 sites recorded liabilities employee benefits 115 million workers compensation issues recorded accrued expenses 19 million professional fees 08 million recorded liabilities 11 million recorded accrued expenses 2002 company spent approximately 1 million automotive discontinued operations accruals company expects cash settle 1542 million tax obligations 2004 2005 irs audit applicable year concluded company projects 30 million 40 million annual spending related remaining automotive obligations liquidity capital resources company continues generate substantial cash operations remains strong financial position resources available reinvestment existing businesses strategic acquisitions managing capital structure short longterm basis company plans fund anticipated 2003 cash requirements future cash operations supplemented required commercial paper borrowings company revolving credit agreement 20 domestic foreign banks provides aggregate commitments 10 billion expires november 2005 revolving credit agreement provides backup companys commercial paper program commercial paper borrowings december 31 2002 2648 million borrowings credit agreement december 31 2002 provisions facility require company maintain interest coverage ratio defined excess 375 times december 31 2002 companys interest coverage ratio well excess minimum requirement cash flows cash flows operating activities 5948 million 2002 increase 1182 million 248 4766 million generated 2001 increase largely attributable lower tax payments reduced spending accrued expenses accounts payable partially offset lower cash generated accounts receivable increased pension payments status restructuring activities restructuring payments 2002 totaled 322 million comprised primarily expenditures related 2001 restructuring plan company forecasts restructuring payments 149 million 2003 13 million 2004 01 million thereafter payments projected made future cash operations supplemented required commercial paper borrowings see note 4 restructuring asset impairment charges notes consolidated financial statements detailed discussion additions plant property equipment capital expenditures 2002 1532 million decrease 208 million 2001 approximately 30 2002 spending occurred fluid technology primarily related expansion existing product lines new product lines custodial replacement approximately 26 incurred motion flow control process improvements custodial replacement approximately 20 spent electronic components new product introductions manufacturing cost reduction initiatives defense electronics services expended approximately 24 2002 total primarily related expansion new existing product lines well custodial replacements december 31 2002 contractual commitments made future expenditures totaling approximately 33 million acquisitions 2002 company spent 1592 million primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition excess purchase prices fair values net assets acquired 1172 million recorded goodwill purchase price allocations 2002 acquisitions based preliminary data changes expected evaluations completed additional information becomes available additionally company also finalized purchase price allocations related 2001 acquisitions resulted decrease goodwill 92 million 2001 company spent approximately 91 million several small acquisitions investments considered material individually aggregate acquisitions accounted purchases excess purchase price fair values net assets acquired 721 million recorded goodwill additionally 2001 company completed purchase price allocations related acquisitions made 2000 resulted increase goodwill 183 million 2000 company acquired ck components inc manmachine interface several small companies approximately 192 million acquisitions accounted purchases goodwill 1739 million recorded company 2000 amortized period 25 30 years depending appropriate life effective january 1 2002 company ceased recording goodwill amortization accordance adoption statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 acquisitions made second half 2001 goodwill amortization accordance sfas 142 goodwill associated acquisitions made first half 2001 amortized periods 40 years see accounting pronouncements discussion impact sfas 142 refer note 2 changes accounting pronouncements notes consolidated financial statements discussion impacts statement divestitures 2002 company sold interest defenserelated joint venture approximately 6 million property equipment 56 million second quarter 2001 company sold two corporate planes 307 million plant property equipment across businesses 118 million 2000 company generated divestiture proceeds 476 million first quarter 2000 company sold net assets gaastek business defense electronics services segment 283 million remaining 193 million cash proceeds sale assets represents plant property equipment sales across businesses share repurchase 2002 2001 2000 07 million 35 million 17 million shares respectively repurchased offset dilutive effect exercised stock options debt credit facilities debt december 31 2002 7918 million compared 9734 million december 31 2001 decrease debt 1816 million due strong cash flows operating activities partially offset increase fair value companys interest rate swaps 2002 contractual obligations company entered contractual obligations commercial commitments including longterm debt capital operating lease obligations lines credit company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations often require payment maintenance insurance tax expense future minimum operating lease payments longterm operating leases december 31 2002 shown millions company also required make principal payments longterm debt next five years follows millions november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2002 companys coverage ratio well excess minimum requirement commitment fee revolving credit agreement 125 total commitment based companys current debt ratings revolving credit agreement serves backup commercial paper program otherwise restricted market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 18 financial instruments notes consolidated financial statements manage exposure interest rate movements reduce borrowing costs company borrowed several currencies various sources company several fixed floating interest rate swap agreements notional amount 3494 million result swaps interest expense substantially companys longterm debt calculated variable rather fixed rate basis terms agreements match terms fixed debt reference threemonth libor carrying value swaps december 31 2002 2001 970 million 462 million including 40 million 37 million accrued interest respectively december 31 2002 2001 companys shortterm longterm debt obligations 7918 million 9734 million respectively addition companys cash balances december 31 2002 2001 2022 million 1213 million respectively based positions companys overall exposure interest rates changes 15 21 basis points equivalent 10 companys weighted average shortterm interest rates including rates associated companys interest rate swaps december 31 2002 2001 respectively companys cash marketable securities floating rate debt obligations related interest rate derivatives would 08 million 17 million effect companys pretax earnings years ended december 31 2002 2001 respectively increases 78 79 basis points longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 2002 2001 respectively would 28 million 36 million effect fair value companys fixed rate debt years ended december 31 2002 2001 respectively multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge net longterm investments foreign countries 2002 companys largest exposures foreign exchange rates exist primarily euro swedish krona british pound us dollar december 31 2002 company nine foreign currency derivatives outstanding total notional amount 1091 million 10 adverse change currency exchange rates companys foreign currency derivatives foreign currency denominated financial instruments held december 31 2002 would impact approximately 43 million fair value instruments 2001 companys largest exposures foreign exchange rates exist primarily euro swedish krona british pound us dollar december 31 2001 company seven foreign currency derivatives outstanding total notional amount 503 million 10 adverse change currency exchange rates companys foreign currency derivatives foreign currencydenominated financial instruments held december 31 2001 would impact approximately 12 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions income taxes foreign tax credits global company makes provisions pays taxes numerous jurisdictions impose income taxes excess equivalent us domestic rates credit taxes generally available us tax laws earnings remitted deemed remitted united states company expects fully utilize credits generated december 31 2002 income taxes paid foreign jurisdictions deferred tax assets company net deferred tax assets 5329 million 2976 million december 31 2002 2001 respectively deferred tax assets periods composed us foreign state local deferred tax assets net deferred tax assets arise temporary differences assets liabilities financial reporting tax purposes primarily relate timing accrual payments employee benefits accelerated depreciation managements expectation company sufficient future taxable income continuing operations utilize deductions future periods critical accounting policies preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported value assets liabilities disclosure contingent assets liabilities company identified three accounting policies estimates used require assumptions factors uncertain nature different estimate could reasonably utilized changes estimate reasonably likely occur period environmental accruals environmental matters recorded site basis probable liability incurred amount reasonably estimated company calculates liability utilizing cost estimating weighting matrix separates costs recurring nonrecurring categories company uses internal external experts assign confidence levels based sites development stage type contaminant found applicable laws existing technologies identification potentially responsible parties methodology produces range estimates including best estimate december 31 2002 companys best estimate 113 million approximates accrual related remediation ground water soil low range estimate environmental liabilities 85 million high range estimate 174 million annual basis company spends 11 million 14 million environmental remediation liabilities estimates reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company currently involved environmental investigation remediation 104 sites including certain instances considered potentially responsible party united states environmental protection agency epa similar state agency present company involved litigation insurers reimbursement environmental response costs recoveries insurance companies third parties recognized financial statements probable realized event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company see note 21 commitments contingencies notes consolidated financial statements additional details environmental matters employee benefit plans company sponsors numerous employee pension welfare benefit plans utilize various assumptions determination projected benefit obligations expense recognition related pension postretirement obligations assumptions include discount rates expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates disclosed note 19 employee benefit plans notes consolidated financial statements key pension assumptions management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary december 31 2002 company lowered discount rate domestic pension plans represent 92 companys total pension obligations 725 650 companys weighted average discount rate pension plans including foreign affiliate plans december 31 2002 644 reflecting lower future expected return assets company revised downward estimate longterm rate return assets domestic pension plans 90 975 december 31 2002 revised estimate 90 incorporates downward adjustments historical levels riskfree rate return equity risk premium reference companys average annual return plan assets domestic pension plans stood 93 104 113 119 past 10 15 20 25 year periods respectively companys weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2002 886 pension funding company contributed 500 million us master trust fourth quarter 2002 contributed 200 million first quarter 2003 result company face substantial mandatory contributions 2004 current irs contribution rules depending market conditions assuming current irs contribution rules continue apply future company estimates may required contribute additional 200 million 400 million 2005 2006 timeframe companys defense electronics services segment represents approximately 50 active us salaried plan participants result company seek reimbursement department defense portion pension costs accordance government regulations funded status funded status derived subtracting value projected benefit obligations december 31 2002 end year fair value plan assets 2002 companys us salaried pension plan assets declined 4467 million 23418 million end 2002 decline reflected primarily negative return assets 2915 million payments plan beneficiaries 2023 million company contributions 500 million addition projected plan obligation us salaried pension plan increased substantially due 75 basis point decrease discount rate yearend result funded status companys total pension obligation including affiliate plans deteriorated 3835 million end 2001 13239 million end 2002 funded status end 2003 depend primarily actual return assets year discount rate end year company estimates every 25 basis points change discount rate impacts funded status us salaried pension plan represents 81 companys pension obligations approximately 90 million similarly every five percentage points 2003 rate return assets impacts plan approximately 130 million assuming range return assets 5 2003 range discount rate 625 675 company estimates total projected benefit obligations underfunded approximately 12 billion 17 billion december 31 2003 minimum pension liability sfas 87 employers accounting pension requires minimum pension liability recorded plans market value assets falls plans accumulated benefit obligation 2002 combination decline assets decline discount rate caused several companys plans show deficit result 2002 company recorded total aftertax reduction 7655 million total shareholders equity important note reduction total equity cause default companys debt covenants future recognition additional minimum pension liabilities depend primarily rate return assets prevailing discount rate pension expense company recorded 104 million pension income consolidated income statement 2002 company expects incur approximately 20 million pension expense recorded consolidated income statement 2003 revenue recognition company recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority companys sales title transfers products shipped certain circumstances title passes products delivered defense electronics services segment certain contracts require delivery installation testing certification customer acceptance revenue recorded sales recognized customer picks product defense electronics services segment typically recognizes revenue anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract costs resulting margins recorded proportion recorded sales performance contracts estimated final contract prices costs design manufacturing engineering development costs periodically reviewed revisions made necessary effect revisions estimates included earnings period revisions made material revisions estimates covered periods accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims estimates future costs management believes warranty accruals adequate however actual warranty expenses could differ estimated amounts accrual product warranties december 31 2002 2001 404 million 377 million respectively see note 22 guarantees indemnities warranties notes consolidated financial statements additional details accounting pronouncements company adopted sfas 141 business combinations sfas 141 effective july 1 2001 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 prohibits use poolingofinterests method addition sfas 141 requires intangible assets goodwill identified intangibles required amortized economic useful lives adoption sfas 141 2001 material impact companys results operations financial position june 2001 financial accounting standards board fasb issued sfas 142 changes accounting goodwill amortization method impairment approach amortization goodwill past business combinations ceased upon adoption statement january 1 2002 connection adoption sfas 142 company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys results operations financial position company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 effective january 1 2002 sfas 144 outlines accounting financial reporting guidelines sale disposal longlived assets discontinued operations adoption pronouncement material impact companys results operations financial position june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 provisions standard expected material effect companys future results operations financial condition december 2002 fasb issued sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation statement also requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issues employees november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur company currently evaluating provisions interpretation however believe material effect companys future results operations financial condition interpretation also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties notes consolidated financial statements additional information january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created date provisions effective july 1 2003 company currently evaluating provisions interpretation however believe material impact companys results operations financial position risks uncertainties environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes accruals accordance generally accepted accounting principles insurance recoveries included assets probable claim realized although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows disclosure companys commitments contingencies see note 21 commitments contingencies notes consolidated financial statements euro conversion company successfully implemented euro conversion plans experienced problems related conversion 2003 outlook company expect improvement overall economic conditions 2003 due continued low growth overcapacity continue dampen capital spending moreover company anticipates continued pricing pressure major commercial segments company believes defense spending united states increase overall company expects 2003 revenue increase 3 5 2002 revenue partially result acquisitions completed 2002 operating margin expected flat 2002 operating margin reflecting increased contribution defense electronics services segment challenging market conditions described higher taxes including absence 612 million tax refund primary reason company anticipates lower eps 2003 370 390 company expects cash operating activities least 370 million reflecting 200 million prefunding pension obligations fluid technology business company expects continued growth water wastewater businesses weakness industrial pumps translate revenue growth 5 7 2002 defense electronics services business company believes record backlog program rampup translate revenue growth 5 7 2002 motion flow control business company expects declines worldwide automotive airplane build rates automotive platform losses weakness aerospace controls market translate revenue decline 4 6 2002 electronic components business company believes pricing pressures softness end markets continue address conditions company continue shifting production footprint low cost regions anticipated entail restructuring actions associated period costs despite challenging conditions company believes affect new products market penetration result revenue growth flat 3 2002 company expects receive tax refunds 2003 favorably impact effective tax rate interest expense lines consolidated income statements affect tax refunds included eps guidance provided forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented liquidity capital resources market risk exposures critical accounting policies risks uncertainties historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forwardlooking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis areas availability energy sources may affect production processes customer demand products services addition factors business seg ments may affected specific factors referred fluid technology business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense electronics services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets motion flow control business affected cyclical nature transportation industries strikes major auto producers international demand marine leisure products electronic components business affected economic conditions major markets success new products cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations business overview business overview provides information companys four principal operating segments fluid technology defense electronics services motion flow control electronic components including markets served goods services provided relevant factors could impact results business challenges areas focus selected financial data section also provides forecast companys 2006 consolidated results fluid technology fluid technology leading global provider fluid systems solutions markets served goods services provided include residential commercial water pumps accessories residential municipal commercial applications building trades products environmental control buildings building services wastewater handling submersible pumps mixers sewage wastewater treatment facilities treatment biologicalozoneuv treatment systems municipal industrial wastewater treatment industrial biopharm pumpsvalves industrial mining chemical pulp papersolutions process modules skid systems stainless steel vessels factors could impact fluid technologys financial results include broad economic conditions markets served weather conditions ability municipalities fund projects raw material prices continued demand replacement parts servicing primary areas business focus include new product development geographic expansion new markets facility rationalization global sourcing direct material purchases company forecasts revenues fluid technology segment 296 billion 300 billion operating income margin rate 130 131 defense electronic services defense electronics services develops manufactures supports high technology electronic systems components worldwide defense commercial markets well provides communications systems engineering applied research defense electronics services consists two major areas systems services systems advanced engineering sciences businesses defense electronics aerospace communications night vision avionics radar space systems businesses factors could impact defense electronics services financial results include level defense funding domestic foreign governments companys ability receive contract awards ability develop market products services customers outside traditional markets primary areas business focus include new improved product offerings new contract wins successful program execution capacity expansion company forecasts revenues defense electronics services segment 348 billion 354 billion operating income margin rate 109 110 motion flow control motion flow control comprised group units operating motion control flow control market segments markets served goods services provided motion control businesses include design manufacture friction pads braking applications production pumps related products leisure marine recreational vehicle markets pumps components beverage applications design manufacturing jets pumps components whirlpool baths hot tub spas markets served goods services provided flow control businesses include valves actuators switches commercial military regional business general aviation markets switches regulators oil gas power generation chemical markets pressure regulators diaphragm seals industrial applications natural gas vehicles motion flow control business financial results driven cyclical nature transportation industry production levels major auto producers demand marine leisure products weather conditions raw material prices primary areas business focus include expansion adjacent markets new product development manufacturing footprint optimization lean fulfillment company forecasts revenues motion flow control segment 675 million 695 million operating income margin rate 203 205 electronic components electronic components provides products services areas communications industrial transportation militaryaerospace commercial aircraft computer consumer uses business activities communications area include connectors interconnects cable assemblies keypads switches panel switch assemblies smart card systems addition products manufactured industrial markets include industrial controls production equipment instrumentation medical applications ultrasound diagnostic equipment products manufactured transportation market include high reliability connectors multifunction control assemblies switches used power train instrument controls chassis applications militaryaerospace products include circular rack panel micro miniature fiber optic special connectors used military electronics missiles space applications commercial aircraft products include rack panel circular fiber optic connectors computer consumer area products include connectors switches computers computer peripherals keypads remote control devices switches appliances audio circular connectors electronic components business financial results driven economic conditions major markets success new product development product life mobile phone markets changes technology primary areas business focus include global sourcing direct material purchases manufacturing footprint rationalization new product development company forecasts revenues electronic components segment 710 million 730 million operating income margin rate 64 65 consolidated financial results company forecasts 2006 total consolidated sales revenues 78 billion 80 billion segment operating income margin rate 121 122 companys revenues grew 174 year ended december 31 2005 743 billion higher volume business segments contributed 120 growth revenue acquisitions including 2004 defense electronics services acquisition foreign currency translations contributed remaining 54 growth 2004 companys sales revenues increased 225 633 billion approximately 129 growth generated companys existing businesses reflects increased volume four segments contributions acquisitions primarily fluid technology defense electronics services segments accounted growth approximately 63 foreign currency represented remaining growth companys costs sales revenues cgs increased 8144 million 178 2005 due higher volume segments contributions 2004 acquisition defense electronics services segment cgs percentage sales increased 30 basis points 2005 reflecting increased contributions defense electronics services segment manufacturing inefficiencies electronic components segment 2004 cgs increased 8424 million 226 due higher volume business segments contributions acquisitions defense electronics services fluid technology segments cgs percentage sales flat 2004 compared 2003 selling general administrative expenses sga increased 1078 million 112 2005 increase sga expenses primarily due increased marketing expense segments including expenses 2004 acquisition made defense electronics services segment higher general administrative expenses impact foreign currency translation higher general administrative costs reflect additional employee benefit costs cost process improvement initiatives sga expenses increased 1748 million 222 2004 increase sga expenses primarily due impact foreign currency translation increased marketing expense segments including expenses five acquisitions higher general administrative expenses higher general administrative costs reflect additional employee benefit costs cost process improvement initiatives administrative expenses related 2004 acquisitions increased administrative expenses research development expenses rd increased 325 million 224 2005 increase attributable increased spending segments increase internally funded rd reflects companys commitment development new products technology 2004 research development expenses increased 299 million 260 increase attributable increased spending segments fourth quarter 2005 company conducted strategic review electronic components segment certain businesses within segment experiencing lower expected financial results result study company determined certain longlived assets portion goodwill impaired recorded 2227 million charge result strategic review described company decided dispose switches component electronic components segment company process preparing business sale additionally 2005 company recorded 720 million restructuring charge reduce operating costs 2004 company recorded 349 million restructuring charge streamline operating structure 2003 company recorded 308 million restructuring charge reduce operating costs streamline operating structure see section entitled restructuring asset impairment charges note 4 restructuring asset impairment charges notes consolidated financial statements additional information operating income year ended december 31 2005 5001 million decrease 1095 million 180 compared 6096 million 2004 decrease primarily due asset impairment restructuring charges partially offset improved operating profit segments segment operating margin year ended december 31 2005 80 290 basis points comparable prior year period variance segment operating margin primarily due increased restructuring asset impairment charges operating income 2004 6096 million increase 1106 million 222 compared 4990 million 2003 increase primarily due improved sales revenues segments offset increased sga rd expenses segment operating margin 2004 109 relatively flat segment operating margin comparable 2003 period interest expense year ended december 31 2005 750 million increase 246 million 488 comparable prior year period increase reflects higher interest rates higher average debt balances reflecting 2004 acquisitions additionally company recognized 427 million interest income year ended december 31 2005 compared 225 million 2004 increase 202 million 898 primarily reflects recognition interest income 2005 associated tax settlements related closure irs tax audit years 1998 2000 interest expense 504 million 2004 compared 432 million 2003 interest income 225 million 2004 compared 533 million comparable prior year period variance interest expense primarily attributable higher average debt balances reflecting impact 2004 acquisitions reduction interest income 2004 compared 2003 primarily due interest income 323 million related two 2003 tax settlements 2004 company sold interest mesh networks technology company wireless telecommunications market 312 million recorded gain transaction 198 million year ended december 31 2005 income tax expense 1337 million 188 less applicable prior year period variance primarily reflects recognition tax settlements relating prior year tax filings lower taxable income year ended december 31 2005 compared 2004 also contributed variance income tax expense 1647 million 2004 increase 344 million prior year period increase primarily attributable higher pretax income increase companys effective tax rate increase effective tax rate 262 2003 280 2004 predominantly due occurrence magnitude onetime items years 2003 onetime items included tax benefits realized filing amended returns foreign sales corporation redeterminations effects closing 1996 1997 irs audit cycle settlement irs refund claims years 19861995 onetime items occurring 2004 included filing foreign sales corporation redeterminations favorable foreign tax credit utilizations settlement claim tax benefits produced onetime items realized 2003 exceeded generated 2004 income continuing operations 3144 million 167 per diluted share year ended december 31 2005 compared 4201 million 223 per diluted share 2004 decrease reflects results discussed income continuing operations 4201 million 223 per diluted share 2004 compared 3703 million 197 per diluted share 2003 increase reflects results discussed year ended december 31 2005 company recorded cumulative effect change accounting principle 65 million net tax benefit 22 million accordance fasb interpretation 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 fin 47 requires liability recognition conditional obligations associated retirement tangible longlived asset year ended december 31 2005 company recognized 516 million income discontinued operations compared income 122 million comparable prior year 2005 income primarily relates discontinued operations companys automotive brake fuel tubing components businesses tax settlement offset losses asset writedowns associated companys network systems services business costs related discontinued operations 2004 company recognized 122 million income discontinued operations 2004 income primarily relates discontinued operations companys automotive brake fuel tubing components businesses offset 2004 loss discontinued operations companys network systems services business 2003 company recognized 336 million income discontinued operations 2003 income primarily related discontinued operations companys automotive brake fuel tubing components businesses well collection disputed receivable related companys disposed automotive businesses upon collection company reversed related valuation allowances previously established assets resulting income 80 million segment review fluid technology fluid technology segment revenues 284 billion increase 94 2004 revenue growth 82 represented contributions existing businesses waterwastewater treatment industrial biopharm businesses largest contributors revenues acquisitions foreign currency translation provided remaining growth 2004 revenues increased 3442 million 153 compared 2003 revenues acquisitions contributed growth 62 foreign currency translation provided growth 47 remaining revenue growth 44 represented contributions existing businesses including waterwastewater industrial products fluid handling businesses operating income increased 386 million 135 2005 compared 2004 higher volume operational efficiencies represents 179 growth foreign currency translation acquisitions account 06 growth incremental restructuring costs 50 partially offset improvements 2004 operating income increased 145 million 53 compared 2003 foreign currency translation represents 58 growth higher volume operational efficiencies account 28 growth operating losses 2004 acquisitions 17 incremental restructuring costs 16 partially offset improvements defense electronics services defense electronics services segment increased revenues 336 2005 322 billion higher volume tactical communications night vision systems services businesses represented 210 growth third quarter 2004 acquisition also contributed increase revenues accounting 126 revenue growth 2004 revenues increased 348 241 billion increased volume existing businesses represented 245 growth acquisition remote sensing systems business rss accounted 103 revenue growth 2005 operating income increased 1096 million 431 compared 2004 higher volume favorable mix reflecting increased contributions defense products businesses positive experience existing long term contracts represent 378 growth additionally 2004 acquisitions contributed 53 growth 2004 operating income increased 670 million 358 higher volume represents 293 growth 2004 acquisitions contributed 65 growth motion flow control motion flow control revenues increased 57 6700 million increased volume existing businesses including friction material aerospace controls marine leisure businesses accounted 46 revenue growth revenue 2004 acquisition foreign currency translation drive remaining 11 growth 2004 revenues 6338 million 163 higher 2003 higher volume existing businesses including friction products aerospace controls spa whirlpool businesses contributed 86 revenue growth foreign currency translation acquisition revenue accounted remaining revenue growth 77 operating income decreased 28 million 23 2005 compared 2004 higher restructuring costs 2005 decreased operating income 56 higher volume resulted 27 operating income growth foreign currency translation accounted remaining growth 06 operating income increased 220 million 219 2004 compared 2003 higher volume resulted income growth 120 2004 acquisition foreign currency translation contributed 09 90 income growth respectively electronic components electronic components segments revenue increased 17 7089 million 2005 primarily due higher volume commercial businesses partially offset lower volume industrial businesses 2004 revenue increased 190 6969 million higher volume existing businesses contributed 146 revenue growth foreign currency translation accounted 44 growth operating income decreased 2462 million 2005 compared 2004 decrease reflects 2227 million asset impairment charge companys switch business incremental restructuring charges 129 million manufacturing inefficiencies also contributed decline operating income 2004 operating income increased 148 million compared 2003 higher volume product pruning foreign currency translation contributed increase income restructuring asset impairment charges 2005 restructuring activities 2005 company recognized 720 million restructuring charge new actions represent 707 million charge costs associated actions announced previous year plans represent 13 million charge actions segment follows fluid technology segment recorded 297 million severance costs termination 474 employees including 242 factory workers 208 office workers 24 management employees lease cancellation costs 09 million 08 million respectively additionally assets writeoffs totaling 14 million also recorded charges reflect reduction structural costs including closure four facilities electronic components segment recorded 258 million reduction 1246 employees including 926 factory workers 286 office workers 34 management employees costs totaling 19 million primarily representing contract termination costs lease costs also recognized year asset writeoffs associated restructuring actions totaled 01 million actions reflect continued reorganization segment including closure three facilities motion flow control segment recognized 89 million termination 274 employees including 163 factory workers 97 office workers 14 management employees costs totaling 06 million lease costs 02 million also recognized year headcount reductions relate workforce reductions consolidation functions transfer functions france holland outsourcing selected functions eastern europe corporate headquarters recorded 04 million termination one management employee 2005 company made 338 million payments attributable 2005 restructuring actions future restructuring expenditures funded cash operations supplemented interim basis required commercial paper borrowings projected future cash savings restructuring actions announced 2005 approximately 64 million 2006 267 million 2007 2010 savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2005 asset impairment charges fourth quarter 2005 company conducted strategic review electronic components segment certain businesses within segment experiencing lower expected financial results result company recorded impairment charge amounting 83 million write certain longlived assets fair value applicable assets written fair values based upon managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairment unrelated companys restructuring activities longlived asset impairment coupled updated financial forecasts generated fourth quarter represented indicator goodwill may also impaired accordingly company assessed goodwill allocated switches component electronic components segment recorded impairment charge 2144 million fourth quarter 2005 total asset impairment charges recorded electronics components segment fourth quarter 2005 2227 million estimated fair value switches computed principally based upon present value future cash flows discounted cash flow method historical results comparative market data impairment also unrelated companys restructuring activities result strategic review described company decided dispose switches component electronic components segment company process preparing business sale 2004 restructuring activities 2004 company recognized 349 million restructuring charges amount 348 million related new actions announced 2004 primarily planned severance 1235 employees lease cancellation costs additionally 01 million expenditures incurred relating actions announced prior 2004 actions announced 2004 segment follows fluid technology segment recorded 177 million planned termination 211 employees including 52 factory workers 155 office workers four management employees additionally 07 million lease costs 06 million asset writeoffs 07 million costs also recognized 2004 charges include impact two facility closures one sweden one florida electronic components segment recorded 45 million charge recognition lease cancellation costs 45 million charge planned termination 972 employees including 883 factory workers 84 office workers five management employees segment also recorded 11 million 08 million disposal machinery equipment costs respectively motion flow control segment recorded 22 million planned termination 49 employees including 7 factory workers 37 office workers five management employees costs totaling 02 million also recognized 2004 corporate headquarters recorded 18 million planned termination one office worker two management employees 2005 company made 147 million payments attributable 2004 restructuring actions future restructuring expenditures funded cash operations supplemented interim basis required commercial paper borrowings projected future cash savings restructuring actions announced 2004 approximately 28 million 2006 81 million 2007 2009 savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2003 restructuring activities 2003 company recognized 308 million restructuring charges primarily related planned severance 730 employees actions announced 2003 segment follows fluid technology segment recorded 129 million planned termination 161 employees including 52 factory workers 104 office workers five management employees additionally 05 million lease costs 04 million costs including 02 million charge associated disposal machinery equipment also recognized 2003 electronic components segment recorded 117 million planned termination 479 employees including 263 factory workers 199 office workers 17 management employees segment also recorded costs 05 million primarily representing idle facility costs 05 million asset disposal costs motion flow control segment recorded 12 million planned termination 51 employees including 31 factory workers 13 office workers seven management employees lease termination costs totaling 07 million asset disposal costs 01 million respectively also recognized 2003 defense electronics services segment recorded 10 million planned termination 35 employees including seven factory workers 19 office workers nine management employees corporate headquarters recorded 13 million planned termination one office worker three management employees 2005 company made 15 million payments attributable 2003 restructuring actions future restructuring expenditures funded cash operations supplemented iterim basis required commercial paper borrowings projected future cash savings restructuring actions announced 2003 approximately 33 million 2006 65 million 2007 2008 savings primarily represent lower salary wage expenditures reflected costs sales revenues selling general administrative expenses 2003 asset impairment charges 2003 company recorded 14 million asset impairment charge primarily writeoff technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities itt automotive discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 million brake chassis unit continental ag germany approximately 1930 million dispositions treated discontinued operations connection sale businesses company established accruals taxes 9727 million representation warranty contract purchase price adjustments 1488 million direct costs accruals 1020 million environmental obligations 161 million 1998 1999 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved third quarter 2005 company finalized irs tax settlement covered periods 1998 2000 included sale electrical systems business brake chassis unit result agreement company paid 1006 million settle tax matters related sale automotive businesses remaining tax reserves 536 million relating matter reversed included income discontinued operations december 31 2005 company automotive discontinued operations accruals 344 million primarily relate following product recalls 78 million related nine potential product recall issues recorded accrued expenses environmental obligations 140 million remediation investigation groundwater soil contamination thirteen sites recorded liabilities employee benefits 126 million workers compensation issues recorded accrued expenses liquidity capital resources contractual obligations companys commitment make future payments longterm contractual obligations follows december 31 2005 millions 1 see note 16 debt notes consolidated financial statements discussion use availability debt revolving credit agreements 2 refer note 15 leases rentals notes consolidated financial statements discussion lease rental agreements 3 unconditional purchase commitments principally take pay obligations related purchase certain raw materials subcontract work 4 longterm liabilities primarily consists estimated environmental payments company estimates based historical experience spend 80 million 110 million per year environmental investigation remediation approximately 58 sites company contractually required spend portion monies based existing agreements various governmental agencies entities december 31 2005 company calculated best estimate remediate ground water soil 930 million recorded accrual approximates estimate sources uses cash operating company generated 7458 million cash operating activities 2005 net income generated continuing operations plus special charges restructuring asset impairment noncash charges depreciation amortization contributed approximately 7995 million cash flow deferral tax payments 898 million liquidation interest rate swaps 695 million increases accounts payable accrued expenses 1241 million also positive contributors cash increases accounts receivable inventory 1920 million 180 million respectively reflecting increased sales volume partially offset cash generated operations cash operating activities 2005 also reflects 1000 million prefunding pension obligations us salaried pension plan company projects cash operating activities 6700 million 7000 million 2006 investing additions plant property equipment capital expenditures 2005 1792 million increase 338 million 2004 increase primarily reflects increased investments defense electronic services motion flow control segments acquisitions 2005 acquisitions 2005 company made one acquisition 297 million included fluid technology segment company also paid purchase price adjustment totaling 285 million related 2004 acquisition remote sensing systems business rss purchased additional shares wedeco company acquired 2004 108 million 2004 acquisitions august 13 2004 company purchased rss 7369 million cash rss business leading supplier high resolution satellite imaging systems information services management believes acquisition rss enhance companys competitive position space payload service product offering industry create full spectrum provider latest visible infrared satellite imaging technology remote sensing market company also spent 2731 million acquisitions four entities including wedeco included fluid technology segment 2003 acquisitions 2003 company spent 462 million primarily acquisition two entities one electronic components segment one fluid technology segment sale investments december 2004 company sold interest mesh networks inc technology company wireless telecommunications market 312 million 249 million received cash 63 million placed escrow 2003 company sold substantially investment defense related business digitalglobe inc 435 million sale plant property equipment 2005 company generated 269 million cash proceeds sale plant property equipment primarily electronic components fluid technology segments primarily due sale four properties electronic components 171 million remaining 98 million cash proceeds represents plant property equipment sales across segments 2004 company generated 72 million sale plant property equipment primarily electronic components fluid technology segments 2003 company generated 169 million cash proceeds sale plant property equipment primarily due sale land 73 million defense electronics services sale building electronic components 28 million remaining 68 million cash proceeds sale assets represents plant property equipment sales across businesses divestitures fourth quarter 2005 company announced signed definitive agreement sell automotive brake fuel tubing components business cooperstandard automotive privately held company 205 million cash subject certain postclosing adjustments business component companys motion flow control segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry february 7 2006 company completed sale business cooperstandard automotive company process finalizing certain calculations expects aftertax gains transaction approximately 250 million completing strategic review electronic components segment fourth quarter 2005 company decided dispose switches component electronic components segment accounts approximately 50 segments revenue company process preparing business sale financing share repurchases matters 2005 2004 2003 company repurchased 66 million shares 3344 million 40 million shares 1596 million 20 million shares 697 million respectively offset dilutive effect exercised stock options february 21 2006 company effected twoforone stock split common stock financial statements notes references share per share data restated reflect stock split periods presented debt credit facilities debt december 31 2005 12677 million compared 12720 million december 31 2004 cash equivalents 4510 million december 31 2005 compared 2629 million december 31 2004 december 2004 company recorded 1200 million obligation associated ten year agreement major financial institutioninvolving sale subsequent leasing back certain properties terms agreement company required make annual payments principal interest end agreement company option repurchase applicable properties nominal fee transaction reflected debt company maintained two separate revolving credit agreements providing aggregate commitments 14 billion expired fourth quarter 2005 november 2005 two agreements replaced fiveyear revolving credit agreement aggregate principal amount 125 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 35 times december 31 2005 companys coverage ratio well excess minimum requirements commitment fee revolving credit agreements 008 total commitment revolving credit agreements serve backup commercial paper program borrowing commercial paper revolving credit agreements may exceed 125 billion aggregate outstanding time december 31 2005 commercial paper borrowings 7288 million offbalance sheet arrangements guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 million part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 million however lapse time fact parties resolved certain issues december 31 2005 company accrual 78 million best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 million part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 950 million however lapse time fact parties resolved certain issues december 31 2005 company accrual 140 million best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last ten years company provided performance bond guarantee amount 100 million related real estate development activities flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 million december 31 2005 company accrual related expansion bridge amount 100 million december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 million maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2005 company believe loss contingency probable therefore accrual recorded financial statements company number individually immaterial guarantees outstanding december 31 2005 may affected various conditions external forces could require payments made guarantees company believe payments material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future critical accounting policies preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported value assets liabilities disclosure contingent assets liabilities company identified three accounting policies estimates used require assumptions factors uncertain nature different estimate could reasonably utilized changes estimate reasonably likely occur period environmental accruals environmental matters recorded site basis probable liability incurred amount reasonably estimated company calculates liability utilizing cost estimating weighting matrix separates costs recurring nonrecurring categories company uses internal external experts assign confidence levels based sites development stage type contaminant found applicable laws existing technologies identification potentially responsible parties methodology produces range estimates including best estimate december 31 2005 companys best estimate environmental liabilities 930 million approximates accrual related remediation ground water soil low range estimate environmental liabilities 674 million high range estimate 1492 million annual basis company spends 80 million 110 million environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company currently involved environmental investigation remediation 58 sites including certain instances considered potentially responsible party united states environmental protection agency epa similar state agency present company involved litigation insurers reimbursement environmental response costs recoveries insurance companies third parties recognized financial statements probable realized event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company see note 21 commitments contingencies notes consolidated financial statements additional details environmental matters employee benefit plans company sponsors numerous employee pension welfare benefit plans determination projected benefit obligations recognition expenses related pension postretirement obligations dependent assumptions used calculating amounts assumptions include discount rates expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates disclosed note 19 employee benefit plans within notes consolidated financial statements factors key assumptions company determines expected return plan assets assumption evaluating historical returns estimates future returns specifically company analyzes plans actual historical annual return assets past 10 15 20 25 years makes estimates future returns using capital asset pricing model evaluates historical broad market returns past 75 years based companys strategic asset allocation detailed note 19 employee benefit plans notes consolidated financial statements based approach described company estimates longterm annual rate return assets domestic pension plans 90 reference companys actual geometric average annual return plan assets domestic pension plans stood 114 123 120 past 10 15 20 25 year periods respectively companys weighted average expected return plan assets pension plans including foreign affiliate plans december 31 2005 889 company utilizes assistance plan actuaries determining discount rate assumption service clients plan actuaries developed published interest rate yield curve comprised aaaaa bonds maturities zero thirty years plan actuaries discount annual benefit cash flows companys pension plan using yield curve develop singlepoint discount rate matching plans characteristics result process december 31 2005 company lowered discount rate domestic pension plans represent 90 companys total pension obligations 600 575 companys weighted average discount rate pension plans including foreign affiliate plans december 31 2005 564 also december 31 2005 company lowered discount rate postretirement welfare plans 575 550 december 31 2005 company maintained expected rate future compensation increases domestic plan participants 45 based recent historical experience expectations future economic conditions management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary pension plan accounting information respect qualified us defined benefit pension plans one retiree medical plans company set us master trust pay future benefits eligible retirees dependents companys strategic asset allocation target us domestic plans apportions 70 assets equity instruments remaining 30 fixed income instruments december 31 2005 companys actual asset allocation 698 equity instruments 143 fixed income instruments 158 hedge funds remainder cash annual basis companys longterm expected return plan assets often differ actual return plan assets chart shows actual returns versus expected longterm returns companys domestic pension plans utilized calculation net periodic benefit cost please see note 19 employee benefit plans notes consolidated financial statements information companys defense electronics services segment represents approximately 60 active us salaried plan participants result company sought continue seek reimbursement department defense portion pension costs accordance government regulations us government cost accounting standards cas govern extent pension costs allocable recoverable contracts us government reimbursements pension costs made time pricing companys products services us government contracts therefore recognized defense electronics services segments net sales funding requirements irs rules major consideration making contributions pension plan respect qualified pension plans company intends contribute annually less minimum required applicable law regulations company contributed 1000 million 2005 additional 1000 million first quarter 2006 us master trust us salaried pension plan furthermore currently estimate make significant additional contributions companys us salaried pension plan remainder 2006 assuming current irs contribution rules continue apply future barring major disruptions equity bond markets company estimates required make mandatory contributions 2006 2007 timeframe funded status funded status derived subtracting value projected benefit obligations december 31 2005 end year fair value plan assets companys us salaried pension plan represents approximately 80 companys total pension obligation therefore funded status us salaried pension plan considerable impact overall funded status companys pension plans fully described note 19 employee benefit plans notes consolidated financial statements funded status companys us salaried plan improved 1214 million 2215 million end 2005 funded status companys total pension obligations including foreign affiliate plans improved 1175 million 6233 million end 2005 funded status end 2006 depend primarily actual return assets year discount rate end year company estimates every 25 basis point change discount rate impacts funded status us salaried pension plan represents 80 companys pension obligations approximately 132 million similarly every five percentage point change actual 2006 rate return assets impacts plan approximately 197 million minimum pension liability sfas 87 employers accounting pensions sfas 87 requires minimum pension liability recorded plans market value assets falls plans accumulated benefit obligation december 31 2005 companys minimum pension liability recorded shareholders equity 1204 million 2005 company recorded aftertax increase shareholders equity 4000 million due plans improved funded status future recognition reversal additional minimum pension liabilities depend primarily rate return assets prevailing discount rate pension expense company recorded 825 million net periodic pension cost 830 million considering effects curtailment losses settlements consolidated income statement 2005 compared net periodic pension cost 599 million 632 million including curtailments 2004 fully described note 19 employee benefit plans notes consolidated financial statements primary drivers behind increase net periodic pension cost effect change discount rate increased amortization past losses 2005 2006 company expects incur approximately 951 million net periodic pension cost recorded consolidated income statement increase net periodic pension cost primarily due effect change discount rate higher amortization past losses revenue recognition company recognizes revenue services rendered title transfers products subject special terms conditions specific contracts majority companys sales title transfers products shipped certain circumstances title passes products delivered defense electronics services segment certain contracts require delivery installation testing certification customer acceptance revenue recorded sales recognized customer picks product defense electronics services segment typically recognizes revenue anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract costs resulting margins recorded proportion recorded sales performance contracts estimated final contract prices costs design manufacturing engineering development costs periodically reviewed revisions made necessary effect revisions estimates included earnings period revisions made material revisions estimates covered periods accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims estimates future costs management believes warranty accruals adequate however actual warranty expenses could differ estimated amounts accrual product warranties december 31 2005 2004 456 million 387 million respectively see note 22 guarantees indemnities warranties notes consolidated financial statements additional details new accounting pronouncements december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 sharebased payment sfas 123r revision sfas 123 accounting stockbased compensation statement eliminates option using intrinsic value method accounting employee stock options historically utilized company generally resulted recognition compensation cost provisions sfas 123r require recognition employee services received exchange awards equity instruments based grantdate fair value awards determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award sfas 123r effective company january 1 2006 company estimates adoption statement lead recognition employee compensation equivalent 009 per share 2006 november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 statement clarifies criteria abnormal amounts freight handling costs spoilage required expensed current period charges rather deferred inventory addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective company january 1 2006 adoption sfas 151 material effect companys financial statements may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces accounting principles board apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 changes requirements accounting reporting change accounting principle applies voluntary changes accounting principles well changes required accounting pronouncement unusual instance include specific transition provisions specifically sfas 154 requires retrospective application prior periods financial statements unless impracticable determine period specific effects cumulative effect change sfas 154 change transition provisions existing pronouncement sfas 154 effective company accounting changes corrections errors made beginning january 1 2006 january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued subsequently fsp 1062 issued amends fsp 1061 discusses recognition effects medicare prescription drug improvement modernization act 2003 medicare modernization act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 company adopted pronouncement effective july 1 2004 unable conclude whether benefits plans actuarially equivalent based proposed regulations released august 2004 company determined majority healthcare plans pass test actuarial equivalence fourth quarter 2005 made application centers medicare medicaid services cms subsidy provided medicare modernization act effect subsidy expectation retiree participation would affected shortterm given nature companys healthcare plans see note 19 employee benefit plans notes consolidated financial statements discussion postretirement benefits march 2005 fasb issued financial interpretation 47 fin 47 accounting conditional asset retirement obligations fin 47 requires entity recognize liability fair value conditional asset retirement obligation point time liability reasonably estimated majority conditional asset retirement obligations incurred company relates asbestoscontaining materials exist certain owned facilities adoption fin 47 resulted recording cumulative effect change accounting principle 65 million net tax conditional assetretirement obligation liability 112 million utilizing current period assumptions company would liabilities conditional assetretirement obligations 93 million 106 million january 1 2004 december 31 2004 respectively risks uncertainties environmental matters company subject stringent environmental laws regulations affect operating facilities impose liability cleanup past discharges hazardous substances united states laws include federal clean air act clean water act resource conservation recovery act comprehensive environmental response compensation liability act management believes company substantial compliance applicable environmental requirements environmental compliance costs accounted normal operating expenses estimating costs environmental investigation remediation company considers among things regulatory standards prior experience remediating contaminated sites professional judgment environmental experts difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability problems selection alternative remedies changes cleanup standards possible create reasonable estimates liability respect environmental matters company establishes accruals accordance accounting principles generally accepted within united states insurance recoveries included assets probable claim realized although outcome companys various remediation efforts presently cannot predicted high level certainty management expect matters material adverse effect companys consolidated financial position results operations cash flows disclosure companys commitments contingencies see note 21 commitments contingencies notes consolidated financial statements 2006 outlook overall companys revenues expected increase 782 billion 797 billion revenue growth defense electronics services segment expected improve 348 billion 354 billion driven higher service volume reflecting broader range offeringscapabilities fluid technology segment expects grow revenues 296 billion 300 billion due continued growth waterwastewater business revenues 675 million 695 million expected motion flow control reflecting growth aerospace controls marine leisure businesses well expansion friction products business electronic components segment expects revenues 710 million 730 million operating income projected increase 65 70 2006 due revenue growth discussed improved operating margin described segment operating margin projected increase approximately 410 420 basis points 2005 variance primarily reflects recognition 2227 million asset impairment charge 2005 impact process improvement initiatives pruning lower margin products forwardlooking statements certain statements contained document including within managements discussion analysis financial condition results operations particularly material presented executive summary liquidity capital resources critical accounting policies risks uncertainties 2006 outlook historical facts constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements general predict forecast indicate imply future results performance achievements generally use words indicative forward looking statements involve known unknown risks uncertainties factors may cause actual results performance company businesses materially different expressed implied forwardlooking statements factors may described referred time filings made company securities exchange commission included factors following general economic business conditions foreign currency exchange rates political social economic conditions local regulations countries company conducts businesses government regulations compliance therewith demographic changes sales revenues mix pricing levels changes sales revenues identity significant customers changes technology industry capacity production rates ability outside third parties comply commitments competition capacity constraints availability raw materials adequate labor availability appropriate professional expertise availability liquidity sufficient meet companys needs ability adapt changes resulting acquisitions divestitures effect cost reduction programs various factors referenced managements discussion analysis caption risk factors areas availability energy sources may affect production processes customer demand products services addition factors business segments may affected specific factors referred fluid technology business affected factors including global economic conditions governmental funding levels international demand fluid management products ability successfully expand new geographic markets weather conditions continued demand replacement parts servicing defense electronics services business affected factors including level defense funding domestic foreign governments ability receive contract awards ability develop market products services customers outside traditional markets motion flow control business affected cyclical nature transportation industries strikes major auto producers demand marine leisure products electronic components business affected economic conditions major markets success new products cyclical nature industry company assumes obligation update forwardlooking statements reflect actual results changes additions factors affecting forwardlooking statements item 7anannan nannannannanitem 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 16 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 16 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 16 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 18 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 18 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk millions unless otherwise stated market risk exposures itt normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations enter various hedging transactions authorized pursuant policies procedures see note 1 “summary significant accounting policies” note 17 “derivative instruments hedging activities” notes consolidated financial statements december 31 2007 2006 shortterm longterm debt obligations totaled 35660 10974 respectively addition cash equivalents balances december 31 2007 2006 18400 9371 respectively based positions overall exposure interest rates changes 58 53 basis points equivalent 10 itt’s weighted average shortterm interest rates december 31 2007 cash marketable securities floating rate debt obligations would 98 27 effect pretax earnings years ended december 31 2007 2006 respectively increase 61 basis points longterm interest rates equivalent 10 itt’s weighted average longterm interest rates december 31 2007 2006 respectively would 215 229 reduction fair value fixed rate debt december 31 2007 2006 respectively multinational operations itt exposed foreign currency exchange rate risk utilize foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year itt utilized foreign currency denominated derivative instruments selectively hedge certain transactions foreign countries 2007 2006 itt’s largest exposures foreign exchange rates existed primarily euro british pound canadian dollar swedish krona us dollar december 31 2007 ten foreign currency derivative contracts outstanding total notional amount 1158 10 depreciation euro currencies related itt’s foreign currency derivatives held december 31 2007 would cause net reduction 69 fair value instruments december 31 2006 eleven foreign currency derivative contracts outstanding total notional amount 1154 10 depreciation euro currencies related itt’s foreign currency derivatives held december 31 2006 would cause net reduction 75 fair value instruments use derivative instruments hedge exposures quantification itt’s market risk foreign exchange financial instruments account offsetting impact underlying investment transactional positions see note 17 “derivative instruments hedging activities” notes consolidated financial statements additional information item 8item 7a quantitative qualitative disclosures market risk millions unless otherwise stated market risk exposures december 31 2008 shortterm longterm debt obligations totaled 21 billion addition cash equivalents balances december 31 2008 9649 based positions overall exposure interest rates change 61 basis points equivalent 10 itt’s weighted average shortterm interest rates december 31 2008 cash marketable securities floating rate debt obligations would 44 effect pretax earnings year ended december 31 2008 item 8item 7a quantitative qualitative disclosures market risk nature business activities necessarily involves management various financial market risks including related changes interest rates currency exchange rates commodity prices itt uses derivative financial instruments mitigate eliminate risks hold issue derivative instruments trading speculative purposes credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value counterparty fail perform contracted counterparties derivative contracts consist number major international financial institutions itt continually monitors credit quality financial institutions expect nonperformance counterparty itt times uses interest rate swaps manage debt portfolio related financing costs interest rate structure december 31 2009 material open interest rate swap contracts consider current risk related market fluctuations interest rates minimal considering debt largely longterm fixedrate nature december 31 2009 shortterm debt including current maturities longterm debt longterm debt obligations totaled 750 14308 respectively longterm debt almost entirely consists fixedrate debt instruments weighted average interest rate 587 december 31 2009 variablerate debt year’s end included 550 outstanding commercial paper instruments weighted average interest rate december 31 2009 021 effective january 1 2010venezuela determined highly inflationary economy addition january 8 2010 venezuela announced devaluation bolivar given limited presence venezuela devaluation well highly inflationary accounting treatment expected material impact results operations financial position cash flows item 8item 7a quantitative qualitative disclosures market risk result global operating financing activities exposed market risks changes foreign currency exchange rates interest rates commodity prices may adversely affect operating results financial position impact changes market conditions generally minimized normal operating financing activities however use derivative instruments primarily forward contracts manage exposures use derivative financial instruments trading speculative purposes minimize risk counterparty nonperformance derivative instrument agreements made major financial institutions significant concentration exposure one party summary accounting policies derivative financial instruments included note 1 “significant accounting policies” notes consolidated financial statements foreign currency exchange rate exposures foreign currency exchange rate risk relates receipts customers payments suppliers intercompany transactions denominated foreign currencies primarily utilize forward contracts mitigate exposures related intercompany transactions december 31 2010 total 13 forward contracts place mitigate exposures related intercompany transactions aggregate notional amount 197 related net fair value 2 forward contracts shortterm duration generally maturing within three months contract date may also use derivative financial instruments offset risk related receipts customers payments suppliers believed exposure limited normal operating financing activities principal currency exposures relate us dollar euro swedish krona british pound canadian dollar chinese renminbi australian dollar currently believe net exposure related receipts customers payments suppliers significant entered derivative financial instruments offset potential exposure effective january 1 2010 venezuela determined highly inflationary economy addition january 8 2010 venezuela announced devaluation bolivar provided currency adjustments january 1 2011 given limited presence venezuela devaluation well highly inflationary accounting treatment expected material impact results operations financial position cash flows interest rate exposures december 31 2010 material exposure interest rate risk debt portfolio entirely comprises longterm fixedrate instruments issue commercial paper exposes us changes interest rates however outstanding commercial paper balance december 31 2010 account longterm debt using fair value option commodity price exposures portions business exposed volatility prices certain commodities copper nickel aluminum among others primary exposure volatility resides use materials purchased component parts generally maintain longterm fixed price contracts raw materials component parts however prone exposure contracts expire estimate hypothetical 10 adverse movement prices raw metal commodities would material financial position results operations cash flows however difficult estimate extent timing rise raw metal commodities would impact total cost purchased component parts item 8nannannannannannannanitem 7a quantitative qualitative disclosures market risk information called item 7a provided caption market risk exposures item 7 managements discussion analysis financial condition results operations note 16 financial instruments notes consolidated financial statements herein item 8item 7a quantitative qualitative disclosures market risk market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant companys policies procedures see note 1 accounting policies note 18 financial instruments notes consolidated financial statements october 28 2005 company terminated five interest rate swap contracts aggregate notional value 3333 million contracts effectively converted fixedrate debt variable rate debt company realized approximately 778 million proceeds transaction proceeds received 695 million represented fair value contracts 83 million accrued interest earned swap prior termination date fair value amortized remaining life notes reduction interest expense december 31 2004 swaps notional value 3358 million carrying value 849 million including 33 million accrued interest december 31 2005 2004 companys shortterm longterm debt obligations totaled 12677 million 12720 million respectively addition companys cash balances december 31 2005 2004 4510 million 2629 million respectively based positions companys overall exposure interest rates changes 44 24 basis points equivalent 10 companys weighted average shortterm interest rates including rates associated companys interest rate swaps december 31 2004 companys cash marketable securities floating rate debt obligations related interest rate derivatives would 13 million 19 million effect companys pretax earnings years ended december 31 2005 2004 respectively increases 59 48 basis points longterm interest rates equivalent 10 companys weighted average longterm interest rates december 31 2005 2004 respectively would 241 million 34 million reduction fair value companys fixed rate debt december 31 2005 2004 respectively multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge certain transactions foreign countries 2005 2004 companys largest exposures foreign exchange rates existed primarily euro swedish krona british pound us dollar december 31 2005 company six foreign currency derivative contracts outstanding total notional amount 1205 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2005 would cause net reduction 43 million fair value instruments december 31 2004 company eight foreign currency derivative contracts outstanding total notional amount 933 million 10 depreciation euro currencies related companys foreign currency derivatives held december 31 2004 would cause net reduction 05 million fair value instruments company uses derivative instruments hedge exposures quantification companys market risk foreign exchange financial instruments account offsetting impact companys underlying investment transactional positions see note 18 financial instruments notes consolidated financial statements additional information item 8item 7a quantitative qualitative disclosures market risk market risk exposures company normal course business exposed risks associated changes interest rates currency exchange rates commodity prices limit risks fluctuations company enters various hedging transactions authorized pursuant company’s policies procedures see note 1 “accounting policies” note 18 “derivative instruments hedging activities” notes consolidated financial statements december 31 2006 2005 company’s shortterm longterm debt obligations totaled 10974 million 12669 million respectively addition company’s cash equivalents balances december 31 2006 2005 9371 million 4510 million respectively based positions company’s overall exposure interest rates changes 53 44 basis points equivalent 10 company’s weighted average shortterm interest rates december 31 2006 company’s cash marketable securities floating rate debt obligations would 27 million 29 million effect company’s pretax earnings years ended december 31 2006 2005 respectively increases 61 59 basis points longterm interest rates equivalent 10 company’s weighted average longterm interest rates december 31 2006 2005 respectively would 229 million 241 million reduction fair value company’s fixed rate debt december 31 2006 2005 respectively october 28 2005 company terminated five interest rate swap contracts aggregate notional value 3333 million contracts effectively converted fixedrate debt variable rate debt company realized approximately 778 million proceeds transaction proceeds received 695 million represented fair value contracts 83 million accrued interest earned swaps prior termination date fair value amortized reduction interest expense remaining life notes mature various dates 2025 december 31 2006 2005 remaining balance accreted income 639 million 687 million respectively multinational operations company exposed foreign currency exchange rate risk company utilizes foreign currency denominated forward contracts hedge adverse changes foreign exchange rates contracts generally durations less one year company utilized foreign currency denominated derivative instruments selectively hedge certain transactions foreign countries 2006 2005 company’s largest exposures foreign exchange rates existed primarily euro british pound canadian dollar swedish krona us dollar december 31 2006 company eleven foreign currency derivative contracts outstanding total notional amount 1154 million 10 depreciation euro currencies related company’s foreign currency derivatives held december 31 2006 would cause net reduction 75 million fair value instruments december 31 2005 company six foreign currency derivative contracts outstanding total notional amount 1205 million 10 depreciation euro currencies related company’s foreign currency derivatives held december 31 2005 would cause net reduction 43 million fair value instruments company uses derivative instruments hedge exposures quantification company’s market risk foreign exchange financial instruments account offsetting impact company’s underlying investment transactional positions see note 18 “derivative instruments hedging activities” notes consolidated financial statements additional information item 8nan item 8 financial statements supplementary data see index financial statements schedules elsewhere herein item 9item 8 financial statements supplementary data see index financial statements schedules elsewhere herein item 9item 8 financial statements supplementary data see index financial statements schedules elsewhere herein item 9item 8 financial statements supplementary data see index financial statements schedules elsewhere herein item 9item 8 financial statements supplementary data see index financial statements schedule elsewhere herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9nannannannannannannanitem 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9item 8 financial statements supplementary data see index consolidated financial statements schedule herein item 9nan nannannannannannannannannanitem 15 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries fourth quarter ended december 31 2003 filing annual report form 8k dated november 12 2003 reporting item 5 events item 7 financial statements exhibits announcing business combination agreement acquire wedeco ag water technology pursuant tender offer form 8k dated february 4 2004 reporting item 5 events february 3 2004 press release announcing decision board directors implement ceo succession plan companys ceo mr louis j giuliano announced intention retire form 8k dated february 11 2004 reporting item 5 events item 7 financial statements exhibits february 9 2004 press release announcing company entered definitive agreement acquire eastman kodaks remote sensing systems index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance accounting principles generally accepted united states necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited deloitte touche llp independent auditors whose appointment ratified shareholders management made itt industries financial records related data available deloitte touche llp believes representations made independent auditors valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent auditors also consider internal controls perform tests accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation 2002 itt industries established disclosure committee responsibility considering evaluating materiality information reviewing disclosure obligations timely basis disclosure committee meets regularly reports general counsel chief financial officer assists chief executive officer chief financial officer designing establishing reviewing evaluating companys disclosure controls procedures audit committee board directors composed independent nonemployee directors meets periodically management also separately privately independent auditors contracted auditors evaluate effectiveness work performed discharging respective responsibilities independent auditors report board directors shareholders itt industries inc white plains new york audited accompanying consolidated balance sheets itt industries inc subsidiaries company december 31 2003 2002 related consolidated statements income comprehensive income changes shareholders equity cash flows years ended financial statements responsibility companys management responsibility express opinion financial statements based audits consolidated financial statements company year ended december 31 2001 audited auditors ceased operations auditors expressed unqualified opinion financial statements report dated january 23 2002 conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion 2003 2002 consolidated financial statements present fairly material respects financial position company december 31 2003 2002 results operations cash flows years ended conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill conform statement financial accounting standards sfas 142 discussed consolidated financial statements company year ended december 31 2001 audited auditors ceased operations notes 6 13 17 financial statements include additional disclosures related 2001 additional disclosures audit procedures performed us additional disclosures described note 6 consolidated financial statements year ended december 31 2001 includes additional disclosures relating components comprising sales revenues costs sales revenues audit procedures respect disclosures note 6 respect 2001 included agreeing previously reported sales revenues costs sales revenues previously issued financial statements ii agreeing product sales service revenues costs product sales costs service revenues companys underlying sales revenues costs sales revenues records obtained management iii agreeing service revenues costs service revenues segment companys underlying service revenues costs service revenues records obtained management iv testing mathematical accuracy reconciliation product sales service revenues costs product sales costs service revenues opinion disclosures 2001 note 6 appropriate discussed note 13 consolidated financial statements consolidated financial statements year ended december 31 2001 revised include transitional disclosures required sfas 142 adopted company january 1 2002 audit procedures respect disclosures consolidated income statement respect 2001 included agreeing previously reported net income previously issued financial statements adjustments reported net income representing amortization expense including related tax effects recognized periods related goodwill intangible assets longer amortized companys underlying records obtained management ii testing mathematical accuracy reconciliation reported net income adjusted net income related earnings per share amounts opinion disclosures 2001 consolidated income statement appropriate note 17 consolidated financial statements year ended december 31 2001 includes additional disclosures relating cash flow components comprising individual changes receivables inventories accounts payable accrued expenses audit procedures respect disclosures note 17 respect 2001 included agreeing previously reported cumulative change accounts receivables inventories accounts payable accrued expenses previously issued financial statements ii agreeing change receivables change inventories change accounts payable accrued expenses companys underlying records obtained management iii testing mathematical accuracy reconciliation change receivables inventories accounts payable accrued expenses opinion disclosures 2001 note 17 appropriate engaged audit review apply procedures 2001 consolidated financial statements company respect disclosures mentioned accordingly express opinion form assurance 2001 consolidated financial statements taken whole audits conducted purpose forming opinion basic 2003 2002 financial statements taken whole supplemental schedule listed table contents page s1 presented purpose additional analysis required part basic financial statements schedule responsibility companys management 2003 2002 schedules subjected auditing procedures applied audits basic financial statements opinion fairly stated material respects considered relation basic financial statements taken whole 2001 schedule subjected auditing procedures auditors ceased operations auditors expressed unqualified opinion financial statement schedule report dated january 23 2002 deloitte touche llp stamford connecticut march 11 2004 report independent public accountants itt industries inc subsidiaries shareholders itt industries inc audited accompanying consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 2001 2000 three years period ended december 31 2001 set forth accompanying index consolidated financial statements schedule financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 23 2002 copy audit report previously issued arthur andersen llp connection companys 2001 annual report form 10k audit report reissued arthur andersen llp refer exhibit 232 regarding implications lack updated consent arthur andersen llp use audit report itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt industries inc majority owned subsidiaries company consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 23 business segment information description companys segments sales revenue recognition company recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 783 780 764 total rde costs expended pursuant customer contracts three years ended december 31 2003 2002 2001 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout lifo method represent 117 114 total 2003 2002 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount certain losses recognized 2003 2001 recorded restructuring asset impairments see note 4 itt industries inc subsidiaries notes consolidated financial statements continued restructuring asset impairment charges discussions losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years gains losses sale retirement assets included selling general administrative expenses goodwill intangible assets accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant january 1 2002 pursuant sfas 142 company ceased amortization goodwill indefinitelived assets 2001 goodwill amortized straightline basis periods exceeding 40 years purchased intangible assets including patents trademarks noncompete agreements amortized straightline basis economic useful lives exceed 40 years see note 2 changes accounting pronouncements impact changes accounting pronouncements goodwill amortization investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value yearend investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used companys share net income losses equity investments included miscellaneous income expense consolidated income statements material period presented investments included assets consolidated balance sheets foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year gains losses foreign currency translations reflected cumulative translation adjustments component shareholders equity national currencies foreign companies generally functional currencies net gains foreign currency transactions reported currently selling general administrative expenses 42 03 29 2003 2002 2001 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustments component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas 133 accounting derivative instruments itt industries inc subsidiaries notes consolidated financial statements continued hedging activities sfas 133 derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swaps terminated unrealized gains losses would deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses would reflected net interest expense environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included liabilities consolidated balance sheets undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized stockbased employee compensation december 31 2003 company one stockbased employee compensation plan issuing new options restricted shares company also two stockbased employee compensation plans two stockbased nonemployee directors compensation plans options restricted shares outstanding issuing additional stockbased compensation plans described fully note 20 shareholders equity company accounts plans recognition measurement principles apb opinion 25 accounting stock issued employees related interpretations compensation cost plans determined based fair value recognition provisions sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 2003 2002 2001 dividend yield 157 165 189 respectively expected itt industries inc subsidiaries notes consolidated financial statements continued volatility 2872 2830 2761 respectively expected life six years riskfree interest rates 337 478 491 respectively value stockbased compensation recognized selling general administrative expenses within consolidated income statements periods ended december 31 2003 2002 2001 07 06 09 respectively earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting pronouncements december 2003 financial accounting standards board fasb issued sfas 132 revised december 2003 employers disclosures pensions post retirement benefits sfas 132 revised standard retains disclosure requirements sfas 132 additionally pronouncement requires additional disclosures regarding types plan assets investment strategy measurement dates plan obligations cash flows components net periodic benefit cost recognized interim periods defined benefit pension plans defined benefit post retirement plans company adopted pronouncement effective december 31 2003 adoption material impact financial statements company adopted sfas 141 business combinations sfas 141 effective july 1 2001 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 prohibits use poolingofinterests method addition sfas 141 requires intangible assets goodwill identified intangibles required amortized economic useful lives adoption sfas 141 2001 significant impact companys financial statements june 2001 fasb issued sfas 142 changes accounting goodwill amortization method impairment approach amortization goodwill past business combinations ceased upon adoption statement january 1 2002 connection adoption sfas 142 company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys financial statements company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 effective january 1 2002 sfas 144 outlines accounting financial reporting itt industries inc subsidiaries notes consolidated financial statements continued guidelines sale disposal longlived assets discontinued operations adoption pronouncement material impact companys financial statements june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 adoption standard material effect companys financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issues employees april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 149 clarifies circumstances contract initial net investment meets characteristics derivative discussed sfas 133 addition sfas 149 clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption interpretation material effect companys financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 requires certain financial instruments embody obligations issuer characteristics liabilities equity classified liabilities provisions sfas 150 effective financial instruments entered modified may 31 2003 instruments exist beginning first interim financial reporting period beginning june 15 2003 company financial instruments met provisions sfas 150 therefore adoption standard material effect companys financial statements november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur interpretation also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties additional information adoption interpretation material effect companys financial statements january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities itt industries inc subsidiaries notes consolidated financial statements continued consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created january 31 2003 provisions effective december 31 2003 company create obtain variable interest entities 2003 adoption interpretation material effect companys financial statements december 2003 fasb issued revision interpretation 46 however impact itts adoption january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued fsp 1061 permits deferral recognizing effects medicare prescription drug improvement modernization act 2003 act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 deferral accounting act continues apply authoritative guidance issued accounting federal subsidy provided act certain events requiring plan remeasurement company elected deferral provided fsp evaluating magnitude potential favorable impact fsp financial statements authoritative guidance issued could require change previously reported information see note 19 employee benefits discussion postretirement benefits note 3 acquisitions 2003 company spent 462 primarily acquisition two entities one electronic components segment one fluid technology segment excess purchase price fair values net assets acquired 305 recorded goodwill 56 tax deductible electronic components segment assigned 240 goodwill balance fluid technology motion flow control segments assigned 54 11 respectively purchase price allocations 2003 acquisitions based preliminary data changes expected evaluations finalized additional information becomes available acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows veamtec division northrop grumman corporation designer manufacturer cylindrical filter fiber optic connectors militaryaerospace industrial transit entertainment nuclear markets uniservice wellpoint srl manufacturer high quality diesel electric powered vacuum primed centrifugal pumps along spear well point dewatering systems rental market sale additionally company also finalized purchase price allocations related 2002 acquisitions resulted decrease goodwill 51 2002 company spent 1592 primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operations financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation itt industries inc subsidiaries notes consolidated financial statements continued sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry company recognized 1172 goodwill acquisitions approximately 69 tax deductible fluid technology segment assigned 1166 goodwill defense electronics services segment assigned remaining 06 addition 2002 company finalized purchase price allocations associated 2001 acquisition reduced goodwill 92 2001 company completed several small acquisitions total 909 none exceeded 500 aggregate acquisition costs exceeded fair value net assets acquired 721 excess recorded goodwill related acquisitions made june 30 2001 amortized periods 40 years goodwill related acquisitions made june 30 2001 amortized accordance sfas 142 2001 company also finalized purchase price allocations related acquisitions made prior 2001 resulted increase goodwill 183 note 4 restructuring asset impairment charges 2003 restructuring activities company recorded restructuring charges related 2003 actions accordance sfas 146 accounting costs associated exit disposal activities restructuring actions initiated prior january 1 2003 recorded accordance guidelines emerging issues task force issue 943 liability recognition certain employee benefits including certain costs incurred restructuring fourth quarter 2003 company announced actions reduce operating costs primarily reduction headcount new 154 restructuring charge primarily reflects severance 301 employees actions segment follows electronic components segment recorded 15 charge termination 132 employees including 113 factory workers 14 office workers five management employees fluid technology segment recognized 124 charge severance 134 employees including 39 factory workers 90 office workers five management employees lease costs represent 03 charge segment also recorded 02 charge associated disposal machinery equipment defense electronics services segment recorded 10 charge severance 35 employees including seven factory workers 19 office workers nine management employees addition new restructuring actions announced fourth quarter motion flow control segment recognized 05 severance employee benefit costs related actions announced first quarter electronic components segment recognized 02 outplacement related actions announced earlier 2003 third quarter 2003 company announced actions reduce operating costs primarily reduction headcount new 26 restructuring charge primarily reflects planned severance 72 employees actions segment follows electronic components segment recorded 12 charge planned termination 40 employees including 15 factory workers 25 office workers segment also recorded 01 charge itt industries inc subsidiaries notes consolidated financial statements continued associated disposal machinery equipment fluid technology segment recognized 05 charge planned severance 13 factory workers 14 office workers lease costs represent 04 charge motion flow control segment recorded 04 charge planned severance one management employee four factory workers addition new restructuring actions announced third quarter motion flow control segment recognized 02 severance employee benefit costs related actions announced first quarter second quarter 2003 company continued program reduce structural costs increase profitability new restructuring actions totaling 47 announced period charge primarily reflected planned severance 148 employees cancellation operating lease actions segment follows electronic components segment comprises 27 charge actions taken segment include planned termination six management employees 19 factory workers 71 office workers motion flow control segment recognized 10 planned severance 50 employees including six management employees 31 factory workers 13 office workers lease termination fees 07 asset disposal costs 01 also reflected charge corporate headquarters charge 02 recorded planned termination one management employee one office worker addition new restructuring actions announced second quarter motion flow control segment recognized 12 severance employee benefit costs related actions announced first quarter first quarter 2003 company recorded 90 restructuring charge primarily planned severance 465 persons severance 83 represents majority charge actions segment follows electronic components segment recorded 68 charge planned termination 226 persons comprised 101 office workers 116 factory workers nine management employees idle facility costs 03 asset disposal costs 04 also reflected charge actions prompted managements projections continued weakness certain businesses corporate headquarters recorded 11 charge consolidation administrative tasks including planned termination two management employees motion flow control segment recorded 04 charge planned termination 237 employees comprised 21 office workers 216 factory workers charge relates closure manufacturing facility arkansas actions completed 2003 2004 total estimated charge approximately 26 recognized ratably restructuring period terminations become effective management deemed restructuring actions necessary address anticipated loss certain platforms second half 2003 also 2003 company recorded 14 asset impairment charge primarily technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities itt industries inc subsidiaries notes consolidated financial statements continued 2002 restructuring activities restructuring charges year ended december 31 2002 detailed following table fourth quarter 2002 company recorded 96 restructuring charge primarily closure two facilities planned severance 292 persons severance 85 represents majority charge lease payments costs represent remainder actions primarily occurred fluid technology motion flow control segments actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure fairfield nj facility termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain platforms automotive fluid handling systems business 2003 resulting excess capacity planned actions include closure rochester ny facility consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions include termination five employees comprised three office workers two management employees 2001 restructuring activities restructuring asset impairment charges year ended december 31 2001 detailed following table december 14 2001 company announced restructuring program reduce structural costs improve profitability program primarily impacted electronic components segment significant decline sales volume occurred 2000 2001 management expected sales decline 2002 restructuring actions locations primarily related process improvements planned restructuring activities involved closure five facilities discontinuance 21 products termination approximately 3400 persons electronic components segment planned actions included closure two facilities discontinuance 21 older products workforce terminations 2753 persons consolidation outsourcing functions activities fluid technology segment consisted closure one facility workforce reductions 436 persons consolidation outsourcing functions motion flow control segment planned actions included closure two facilities workforce reductions 183 consolidation functions addition 28 corporate shared services positions eliminated also fourth quarter 2001 company recorded asset impairments amounting 144 machinery equipment cost based investment assets written fair values based managements projections individual future cash flows generated assets reviewed itt industries inc subsidiaries notes consolidated financial statements continued impairment fourth quarter 2001 time business events indicated carrying amounts assets may recovered management deemed market decline experienced 2001 certain products temporary recognized exists significant pricing pressure electronic components segment expected continue cash portion restructuring charge included approximately 52 severance 9 primarily facility carrying costs incurred operations cease facilities noncash portion restructuring charge represents asset impairments recorded based managements projection cash flows generated assets operations cease itt industries inc subsidiaries notes consolidated financial statements continued following table displays rollforward cash restructuring accruals third fourth quarters 2002 131 restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions reversals applicable 2001 planned restructuring actions totaled 118 primarily reflect less anticipated severance costs completed actions segments decision transfer five product lines santa ana california weinstadt germany dole france basingstoke uk shenzhen tianjin china supply chain issues eliminated financial viability transfers decision continue partial operations one electronic components facilities addition management determined one facility within fluid technology segment would remain operational suitable outsource supplier could identified remaining 13 restructuring reversals represents accruals earlier restructuring plans management determined incurred december 31 2002 accrual balance restructuring activities 163 cash payments 250 additional cash charges 330 recorded 2003 also management reviewed companys remaining restructuring actions determined certain 2003 2002 2001 actions electronic components segment totaling 44 would completed less planned deemed longer feasible additionally actions motion flow control segment completed 01 less planned accordingly restructuring accruals totaling 45 reversed income 2003 accrual balance increased 03 due effect foreign currency translation accrual balance december 31 2003 201 includes 177 severance 24 facility carrying costs 2003 02 noncash charges reversed december 31 2002 remaining actions restructuring activities announced 2001 2002 close three facilities reduce headcount 256 2003 company closed three facilities reduced headcount 919 persons related actions taken plans company also itt industries inc subsidiaries notes consolidated financial statements continued experienced employee attrition leaving balance 208 planned reductions including 2003 plans additionally one facility related first quarter 2003 actions remains closed actions announced 2003 substantially completed end third quarter 2004 actions contemplated 2001 plan completed actions contemplated 2002 plan substantially completed close 2003 closed facility expenditures related 2001 plan continue incurred 2004 also severance runoff related 2001 plan 2004 future restructuring expenditures funded cash operations supplemented required commercial paper borrowings note 5 discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 1998 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved fourth quarter 2001 company reassessed automotive discontinued operations accruals determined excess accruals aftertax basis approximately 60 company reversed accruals consolidated income statement income discontinued operations excess primarily related favorable foreign tax rulings december 31 2003 company automotive discontinued operations accruals 1861 primarily related taxes 1542 product recalls 78 environmental obligations 143 employee benefits 99 2003 company spent 18 company expects cash settle 1542 tax obligations 2004 2005 note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following defense electronics services segment comprises 7922 6278 5405 total service revenues years ended december 31 2003 2002 2001 respectively 5250 3740 3252 total costs service revenues respectively period fluid technology segment comprises majority remaining balances service revenues costs service revenues itt industries inc subsidiaries notes consolidated financial statements continued note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards deferred tax assets liabilities include following companys deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 4451 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions december 31 2003 company approximately 462 foreign tax credit carryforwards credit carryforwards expire follows 02 december 31 2004 339 december 31 2005 121 december 31 2006 company approximately 20 general business credit carryforwards expire december 31 2020 company net operating losses itt industries inc subsidiaries notes consolidated financial statements continued us subsidiaries amount 419 begin expire december 31 2019 company net operating losses foreign subsidiaries amount 323 expiration december 31 2003 valuation allowance approximately 407 exists deferred income tax benefits related certain us subsidiary loss carryforwards certain foreign tax credits may realized 2003 valuation allowance increased 152 shareholders equity december 31 2003 2002 reflects tax benefits related stock options exercised 2003 2002 approximately 181 402 respectively irs currently examining federal consolidated tax returns company years ended december 31 1998 december 31 2000 irs completed examination years 1997 december 31 2003 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations note 8 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 options purchase 78940 shares common stock average price 6537 per share outstanding december 31 2003 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 2013 2 options purchase 49240 shares common stock average price 6560 per share outstanding december 31 2002 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 3 options purchase 12923 shares common stock average price 4587 per share outstanding december 31 2001 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2011 note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 current assets december 31 2003 2002 current assets consist primarily advance itt industries inc subsidiaries notes consolidated financial statements continued payments contracts prepaid expenses capitalized tooling costs note 12 plant property equipment net plant property equipment consist following note 13 goodwill intangible assets june 2001 fasb issued sfas 141 sfas 142 sfas 141 eliminates pooling interests method accounting business combinations initiated june 30 2001 addresses initial recognition measurement goodwill intangible assets acquired business combination company adopted sfas 141 july 1 2001 january 1 2002 company adopted sfas 142 addresses financial accounting reporting standards acquisition intangible assets outside business combination goodwill intangible assets subsequent acquisition accounting standard requires goodwill indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant longer amortized provisions standard also require completion transitional impairment test year adoption impairments identified treated cumulative effect change accounting principle connection adoption sfas 142 company completed transitional initial goodwill impairment test 12 identified reporting units determined impairment exists tests conducted first quarter 2002 company also conducted annual impairment test first quarter 2003 beginning year determined impairment exists accordance sfas 142 goodwill associated acquisitions consummated june 30 2001 amortized amortization goodwill business combinations consummated june 30 2001 ceased january 1 2002 reconciliation previously reported net income earnings per share amounts adjusted exclusion goodwill amortization reflected face consolidated income statements included herein changes carrying amount goodwill years ended december 31 2003 2002 operating segment follows itt industries inc subsidiaries notes consolidated financial statements continued information regarding companys intangible assets follows amortization expense related intangible assets years ended december 31 2003 2002 27 09 respectively estimated amortization expense five succeeding years approximately 3 per year note 14 assets december 31 2003 2002 assets primarily consist prepaid pension expense employee benefit plan costs investments unconsolidated companies assets held trusts receivables assets held trusts restricted specified reasons primarily environmental remediation costs employee benefits totaled 294 446 december 31 2003 2002 respectively investments unconsolidated companies consist following 2003 company sold substantially interest digitalglobe inc developmental stage company recently launched satellite capable collecting highresolution digital imagery 435 company recorded sales unconsolidated affiliates 2003 2002 2001 totaling 210 242 226 respectively addition company provided services unconsolidated affiliate companies 2003 2002 2001 received 05 04 respectively exchange services investments unconsolidated companies companys exposure limited amount investment investments accounted cost method represent voting right interests less 20 hisan joint venture brake fuel line supplier asian transplant oems united states annual sales hisan approximately 133 note 15 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 667 602 501 2003 2002 2001 respectively future minimum operating lease payments longterm operating leases december 31 2003 shown itt industries inc subsidiaries notes consolidated financial statements continued note 16 debt consists following 1 interest rate notedebenture 102 128 december 31 2003 2002 respectively 2 weighted average interest rate 512 524 december 31 2003 2002 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 153 173 december 31 2003 2002 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2003 fair value longterm debt 4840 compared fair value 5179 december 31 2002 yearoveryear decrease fair value primarily reflects impact decrease longterm debt levels upward shift yield curve experienced 2003 november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2003 companys coverage ratio well excess minimum requirement commitment fee revolving credit agreement 125 total commitment based companys current debt ratings revolving credit agreement serves backup commercial paper program otherwise restricted assets pledged secure indebtedness amounted 361 december 31 2003 note 17 cash flow information change receivables inventories payables accrued expenses listed consolidated statements cash flows twelve months ended december 31 2003 2002 2001 consist following itt industries inc subsidiaries notes consolidated financial statements continued note 18 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 2003 2002 company interest rate swaps outstanding notional values totaling 3368 3494 respectively carrying value swaps december 31 2003 2002 816 970 respectively including 40 accrued interest period swaps designed manage interest rate exposure associated certain longterm debt swaps mature various dates 2025 effectively convert much longterm debt mentioned note 16 fixed variable rate borrowings variable interest rates based threemonth libor rates plus spread reflects companys debt rating coupon underlying longterm obligations weighted average variable fixed interest rates 122 740 december 31 2003 ineffective portions interest rate swaps amounts excluded assessment effectiveness foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures foreign currency cash flow hedges outstanding december 31 2003 2002 changes forecasted transactions 2003 2002 regarding probability occurring would require amounts reclassified earnings ineffective portions changes fair values cash flow hedge positions reported earnings twelve month periods ended december 31 2003 2002 2001 amounts excluded measure effectiveness reported earnings periods december 31 2003 2002 company foreign currency forward contracts notional amounts 811 1091 respectively hedge value recognized assets liabilities firm commitments fair values contracts 02 06 december 31 2003 2002 respectively ineffective portion changes fair values hedge positions reported operating income 2003 2002 2001 amounted 03 01 06 respectively amounts excluded measure effectiveness itt industries inc subsidiaries notes consolidated financial statements continued fair values associated foreign currency contracts valued using net position contracts applicable spot rates forward rates reporting date note 19 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 07 04 years ended 2003 2002 2001 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 272 253 239 years ended 2003 2002 2001 respectively changes benefit obligations changes plan assets weightedaverage assumptions components net periodic benefit cost years ended 2003 2002 2001 follows itt industries inc subsidiaries notes consolidated financial statements continued amounts recognized consolidated balance sheets consist 2003 company recorded total tax increase 1825 shareholders equity reflects decrease minimum pension liability information pension plans accumulated benefit obligation excess plan assets accumulated benefit obligation defined benefit pension plans 41043 38146 december 31 2003 2002 respectively accumulated benefit obligation accumulated benefit obligation defined benefit plans 41043 38146 december 31 2003 2002 respectively table assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 plan assets pension welfare benefit plans assets comprised broad range domestic foreign securities fixed income investments hedge funds investments cash equivalent investments assets domestic pension master trust covers domestic pension plans various welfare benefit plan trusts itt industries inc subsidiaries notes consolidated financial statements continued following asset allocations december 31 strategic asset allocation target companys domestic pension funds apportions 70 equity investments 30 fixed income instruments investment companys stock within master trust approximates 1 2003 2002 contributions company currently anticipates making contributions pension plans range 1000 1250 2004 1000 made first quarter 2004 us salaried pension plan cash flows estimated future benefit payments following benefit payments covering domestic pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees assumed rate future increases per capita cost health care health care trend rate 90 2003 rate assumed 80 2004 decreasing ratably 50 2007 increasing table health care trend rates one percent per year would effect increasing benefit obligation 383 aggregate service interest cost components 28 decrease one percent trend rate would reduce benefit obligation 335 aggregate service interest cost components 24 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable financial accounting standards review various indexes discussion consulting actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company december 8 2003 medicare prescription drug improvement modernization act 2003 act signed law act introduces prescription drug benefit medicare part provides several options medicare eligible participants employers including federal subsidy companies elect provide retiree prescription drug benefit least actuarially equivalent medicare part act provides two year transitional period allow among items possibility companies may amend existing plans significant uncertainties regarding eventual regulations required implement act well acts overall effect plan participants coverage choices related impact health care costs effects act reflected accumulated postretirement benefit obligation december 31 2003 net periodic postretirement benefit cost itt currently evaluating provisions act potential impact postretirement medical plans believe ultimately reduce accumulated postretirement benefit obligation postretirement benefit costs itt industries inc subsidiaries notes consolidated financial statements continued note 20 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 shares designated common stock par value 1 per share 50000000 shares designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 2003 2002 52876689 53323493 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted company makes shares available exercise stock options purchasing shares open market issuing shares treasury itt industries inc subsidiaries notes consolidated financial statements continued summary status companys stock option incentive plans december 31 2003 2002 2001 changes years ended presented shares thousands following table summarizes information companys stock options december 31 2003 shares thousands 2003 equity incentive plan established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 6100000 december 31 2003 6055811 shares available future grants 2003 company awarded 9489 restricted shares fiveyear restriction periods payment annual retainer nonemployee directors 2003 equity incentive plan replaces 2002 itt industries stock option plan nonemployee directors itt industries 1996 restricted stock plan nonemployee directors 1994 itt industries incentive stock plan prospective basis awards granted prior plans continue vest exercisable accordance original terms however future grants made prior plans 1994 incentive stock plan provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged restricted shares awarded 2003 10000 restricted shares awarded 2002 restricted shares awarded 2001 plan 2003 2002 2001 pursuant itt industries 1996 restricted stock plan nonemployee directors company awarded zero 6098 7469 restricted shares fiveyear restriction periods respectively payment annual retainer directors restrictions may lapse earlier depending certain circumstances itt industries inc subsidiaries notes consolidated financial statements continued note 21 commitments contingencies company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures company continue vigorously defend claims accruals established outcome matter probable reasonably estimated although ultimate outcome legal matter cannot predicted certainty based present information including companys assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future environmental company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amount accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability conditions selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party prp limited number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent december 31 2003 company responsible alleged responsible 104 environmental investigation remediation sites various countries many proceedings companys liability considered de minimis december 31 2003 company calculated best estimate 1080 approximates accrual related cleanup soil ground water low range estimate environmental liabilities 800 high range estimate liabilities 1710 annual basis company spends 80 110 environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company involved environmental proceeding glendale california relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed operating water treatment system operation water itt industries inc subsidiaries notes consolidated financial statements continued treatment system expected continue 2013 itt prps continue pay respective allocated costs operation water treatment system company anticipate default prps would increase allocated share liability december 31 2003 companys accrual liability 109 representing best estimate low estimate liability 74 high estimate 164 itt corporation operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected site since itt completed investigation site coordination state federal environmental authorities process evaluating various remedies remedy site yet selected currently estimated range remediation 59 200 best estimate 105 company accrued 105 matter approximates best estimate company involved number prps regarding property city bronson michigan operated former subsidiary itt corporation higbie manufacturing prior time itt acquired higbie company prps investigating remediating discharges industrial waste occurred 1930s companys current estimates exposure 39 132 accrual matter 98 represents best estimate current liabilities company anticipate default part prps suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including three listed discovery procedural matters changes california law various appeals prolonged case currently matter california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions hearing expected 2004 event appeal successful company pursue administrative claims excess insurers course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive portion recoveries insurance settlements placed trust used reimburse company environmental costs product liability company subsidiary goulds pumps inc goulds joined defendants numerous industrial companies product liability lawsuits alleging injury due asbestos actions company managed historic product liability insurance carriers claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers products may contained asbestos frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2003 itt goulds resolved approximately 2000 claims settlement dismissal average amount settlement per plaintiff nominal substantially defense settlement costs covered insurance based upon past claims experience available insurance coverage consultation counsel management believes matters material adverse effect companys consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property itt industries inc subsidiaries notes consolidated financial statements continued casualty company et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 parties cases seeking appropriate allocation responsibility companys historic asbestos liability exposure among insurers california action filed venue companys environmental insurance recovery litigation pending since 1991 actions stayed allow parties negotiate acceptable allocation arrangement addition utica national goulds historic insurer requested company negotiate coverage place agreement allocate goulds asbestos liabilities insurance policies issued utica issued others parties currently negotiating terms agreement company continuing receive benefit insurance payments pendency proceedings company believes actions materially affect availability insurance coverage material adverse effect companys consolidated financial position results operations cash flows company one several defendants suit filed el paso texas bund zur unterstutzung radargeschadigter et al v itt industries et al sup ct el paso texas ca 20024730 complaint filed us german citizens alleges itt four major companies failed warn plaintiffs dangers associated exposure xray radiation radar devices complaint also seeks certification class similarly injured persons companys aviation insurers contributing defense matter management believes matter material adverse effect companys consolidated financial position results operations cash flows company received notice product liability suit filed superior court new york danis v rule industries et al sup ct ny ca 11597502 seeking damages injuries sustained boat explosion suit contains number causes action various defendants including boat manufacturer marina operator individuals working marina company complaint alleges fume detector manufactured itts subsidiary rule industries inc prior date company acquired rule malfunctioned companys insurer notice matter management believes matter material adverse effect companys consolidated financial position results operations cash flows company received demands us silica partial indemnity regarding personal injury actions alleging injury due silica 1985 company sold stock subsidiary pennsylvania glass sand us silica part transaction company provided indemnity us silica personal injury suits indemnity expires september 2005 costs incurred matters related defense settlements judicial awards allocated us silica company companys allocated portion paid part historic product liability carriers shared pursuant distribution agreement see company history certain relationships within part 1 item 1 annual report description distribution agreement management believes matters material adverse effect companys consolidated financial position results operations cash flows company received notice claim rayonier inc former subsidiary companys predecessor itt corporation claim stems 1994 distribution agreement spinoff rayonier itt corporation seeks allocation proceeds certain settlements connection companys environmental insurance recovery litigation parties seeking resolution matter arbitration company believes claim grossly overstated material adverse effect companys consolidated financial position results operations cash flows itt industries inc subsidiaries notes consolidated financial statements continued note 22 guarantees indemnities warranties guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 however lapse time fact parties resolved certain issues december 31 2003 company accrual 78 best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 950 however lapse time fact parties resolved certain issues december 31 2003 company accrual 143 best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last eight years company provided three guarantees respect real estate development activities flagler county florida two guarantee bonds issued dunes community development district bond issuances used primarily construction infrastructure water sewage utilities bridge company would required perform guarantees district failed provide interest payments principal payments due bond holders maximum amount undiscounted future payments guarantees equal 289 december 31 2003 company believe loss contingency probable guarantees therefore accrual recorded financial statements third guaranty performance bond amount 100 favor flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 december 31 2003 company accrual related expansion bridge amount 100 itt industries inc subsidiaries notes consolidated financial statements continued december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2003 company believe loss contingency probable therefore accrual recorded financial statements product warranties accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims company warrants numerous products terms vary widely general company warrants products defect specific non performance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall december 31 2003 company product warranty accrual amount 345 product warranty liabilities itt industries inc subsidiaries notes consolidated financial statements continued note 23 business segment information itt industries inc subsidiaries notes consolidated financial statements continued net sales external customers attributed individual regions based upon destination product service delivery sales revenues product category net intercompany balances follows defense electronics services sales revenues united states government 14547 11053 11049 2003 2002 2001 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr richtertm making company worlds largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products well systems municipal industrial residential agricultural commercial applications brand names mcdonnell millerr itt standardr addition mentioned segment comprises approximately 40 companys sales revenues approximately 45 segment operating income 2003 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 44 sales revenues segment generated contracts technical support services company provides military government agencies approximately 81 73 85 2003 2002 2001 defense electronics services sales revenues respectively us government defense electronics services segment comprises 32 companys sales revenues 31 segment operating income 2003 motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabscor ruler flojetr danforthr fluid handling materials tubing systems connectors various automotive industrial markets specialty shock absorbers brand koni brake components transportation industry motion flow control segment comprises approximately 17 companys sales revenues itt industries inc subsidiaries notes consolidated financial statements continued approximately 22 segment operating income 2003 electronic components business consists companys products marketed cannonr brand products include connectors switches cabling used communications computing aerospace industrial applications well network services segment comprises 11 companys sales revenues 2 segment operating income 2003 corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 24 quarterly results 2003 2002 sum quarters earnings per share equal full year amounts due rounding table reflects range market prices companys common stock 2003 2002 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2004 february 29 2004 high low reported market prices companys common stock 7852 7126 respectively company declared dividends 017 per common share first quarter 2004 30553 holders record companys common stock february 29 2004 itt industries inc subsidiaries notes consolidated financial statements continued note 25 subsequent events january 19 2004 company announced acquired approximately 814 shares wedeco ag water technology wedeco approximately 2325 wedeco worlds largest manufacturer uv disinfection ozone oxidation systems alternatives chlorine treatment acquisition expands companys technological geographic reach water business additionally february 9 2004 company signed definitive agreement purchase remote sensing systems rss business eastman kodak company 725 rss worlds leading supplier highresolution satellite imaging systems image information processing services acquisition significantly broadens companys space payload service product offering us military well science government commercial customers schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc mark e lang mark e lang vice president corporate controller principal accounting officer march 11 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 ii5item 15 exhibits financial statement schedules documents filed part report 1 see index consolidated financial statements appearing page list financial statements filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt industries inc white plains new york audited accompanying consolidated balance sheets itt industries inc subsidiaries company december 31 2004 2003 related consolidated statements income comprehensive income cash flows changes shareholders equity three years period ended december 31 2004 audits also included financial statement schedule listed page s1 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position company december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness companys internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 11 2005 expressed unqualified opinion managements assessment effectiveness companys internal control financial reporting unqualified opinion effectiveness companys internal control financial reporting stamford connecticut march 11 2005 itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt industries inc majority owned subsidiaries company consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 23 business segment information description companys segments sales revenue recognition company recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 754 785 782 total rde costs expended pursuant customer contracts three years ended december 31 2004 2003 2002 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout lifo method represent 107 117 total 2004 2003 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount certain losses recognized 2003 recorded restructuring asset impairments see note 4 restructuring itt industries inc subsidiaries notes consolidated financial statements continued asset impairment charges discussions losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years gains losses sale retirement assets included selling general administrative expenses goodwill intangible assets accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value yearend investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used companys share net income losses equity investments included miscellaneous income expense consolidated income statements material period presented investments included assets consolidated balance sheets foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year gains losses foreign currency translations reflected cumulative translation adjustments component shareholders equity national currencies foreign companies generally functional currencies net lossesgains foreign currency transactions reported currently selling general administrative expenses 09 41 02 2004 2003 2002 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustments component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas 133 accounting derivative instruments hedging activities sfas 133 derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair itt industries inc subsidiaries notes consolidated financial statements continued value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swaps terminated unrealized gains losses would deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses would reflected net interest expense environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included liabilities consolidated balance sheets undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized stockbased employee compensation december 31 2004 company one stockbased employee compensation plan issuing new options restricted shares company also one stockbased employee compensation plan two stockbased nonemployee directors compensation plans options restricted shares outstanding however new awards granted plans described fully note 20 shareholders equity company accounts plans recognition measurement principles apb opinion 25 accounting stock issued employees related interpretations compensation cost plans determined based fair value recognition provisions sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 2004 2003 2002 dividend yield 139 157 165 respectively expected volatility 2577 2872 2830 respectively expected life six years riskfree interest rates 371 337 478 respectively value stockbased compensation recognized selling general administrative expenses within consolidated income statements periods ended december 31 2004 2003 2002 16 07 06 respectively itt industries inc subsidiaries notes consolidated financial statements continued earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting pronouncements december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 sharebased payment sfas 123r revision sfas 123 accounting stockbased compensation statement eliminates option using intrinsic value method accounting employee stock options historically utilized company generally resulted recognition compensation cost provisions sfas 123r require recognition employee services received exchange awards equity instruments based grantdate fair value awards determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award sfas 123r effective company july 1 2005 adoption statement material impact companys financial statements december 2003 fasb issued sfas 132 revised december 2003 employers disclosures pensions post retirement benefits sfas 132 revised pronouncement retains disclosure requirements sfas 132 additionally pronouncement requires additional disclosures regarding types plan assets investment strategy measurement dates plan obligations cash flows components net periodic benefit cost recognized interim periods defined benefit pension plans defined benefit post retirement plans company adopted pronouncement effective december 31 2003 adoption material impact financial statements company june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys financial statements june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 adoption standard material effect companys financial statements december 2002 fasb issued sfas 148 accounting stockbased compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires prominent disclosures annual interim financial state itt industries inc subsidiaries notes consolidated financial statements continued ments method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issues employees april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 accounting derivative instruments hedging activities sfas 133 sfas 149 clarifies circumstances contract initial net investment meets characteristics derivative discussed sfas 133 addition sfas 149 clarifies derivative contains financing component warrants special reporting statement cash flows sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption statement material effect companys financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 sfas 150 requires certain financial instruments embody obligations issuer characteristics liabilities equity classified liabilities provisions sfas 150 effective financial instruments entered modified may 31 2003 instruments exist beginning first interim financial reporting period beginning june 15 2003 company financial instruments met provisions sfas 150 therefore adoption statement material effect companys financial statements november 2004 fasb issued sfas 151 inventory costs amendment arb 43chapter 4sfas 151 statement clarifies criteria abnormal amounts freight handling costs spoilage required expensed current period charges rather deferred inventory addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective company july 1 2005 company currently process determining impact statement companys financial statements november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur interpretation also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties additional information adoption interpretation material effect companys financial statements january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created january 31 2003 provisions effective december 31 2003 company create obtain variable interest entities 2003 itt industries inc subsidiaries notes consolidated financial statements continued company elected early adoption provisions fin 46 related variable interest entities created prior january 31 2003 july 1 2003 adoption interpretation material effect companys financial statements december 2003 fasb issued revision fin 46 however impact companys adoption january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued subsequently fsp 1062 issued amends fsp 1061 discusses recognition effects medicare prescription drug improvement modernization act 2003 medicare modernization act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 company adopted pronouncement effective july 1 2004 unable conclude whether benefits plans actuarially equivalent based proposed regulations released august 2004 currently company analyzing effect medicare modernization act companys plans based final regulations issued end january 2005 taken action time reflect medicare changes addition assumed adoption pronouncement affect demographic factors used determine plan assets obligations december 31 2004 companys measurement date see note 19 employee benefit plans discussion postretirement benefits december 2004 fasb issued fsp 1091 application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004 fsp 1091 american jobs creation act 2004 ajca provides tax relief us domestic manufacturers fsp 1091 states tax benefit recorded year taken companys tax return rather reflecting deferred tax asset period ajca enacted fsp 1091 effective upon issuance adoption fsp 1091 material effect companys financial statements december 2004 fasb issued fsp 1092 accounting disclosures guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1092 foreign earnings repatriation provision within act provision provides special limitedtime dividends received deduction repatriation certain foreign earnings us taxpayer fsp 1092 states company recognize income tax effect related provision decides plan reinvestment repatriation foreign earnings time company expect elect apply provision ajca note 3 acquisitions 2004 acquisitions august 13 2004 company purchased remote sensing systems business rss 7369 cash rss business leading supplier high resolution satellite imaging systems information services management believes acquisition rss enhance companys competitive position space payload service product offering industry create full spectrum provider latest visible infrared satellite imaging technology remote sensing market excess purchase price rss fair value net assets acquired 5976 recorded goodwill deductible tax purposes entire goodwill balance reflected defense electronics services segment company preliminarily assigned values assets liabilities rss however allocation subject refinement following table summarizes fair value assets acquired liabilities assumed date acquisition purchase price itt industries inc subsidiaries notes consolidated financial statements continued allocations based preliminary data changes expected evaluations items employee benefit obligations finalized additional data becomes available 1249 intangible assets comprised 1200 customer relationships amortized 16 years 34 maintenance contracts amortized 15 years 15 product software amortized 12 years company also spent 2731 additional 2004 acquisitions believe material individually aggregrate results operations financial condition acquisitions include wedeco ag water technology wedeco worlds largest manufacturer uv disinfection ozone oxidation systems alternatives chlorine treatment allen osborne associates inc aoa leader development global positioning system receivers portable fixed sites shanghai hengtong purified water development co ltd shanghai hengtong water treatment engineering co ltd hengtong shanghaibased producer reverseosmosis membrane water treatment systems power pharmaceutical chemical manufacturing markets china cleghorn waring co pumps limited distributor pumps marine products excess purchase price fair value net assets acquired transactions 2470 recorded goodwill 2401 35 34 reflected fluid technology defense electronics services motion flow control segments respectively additionally purchase price allocations 2004 acquisitions based preliminary data changes expected evaluations finalized additional information becomes available intangibles assets relating acquisitions wedeco aoa totaled 562 amount includes 254 proprietary technology amortized 15 years 188 customer relationships amortized 10 years 120 indefinitelived tradenames company also finalized purchase price allocations related 2003 acquisitions resulted increase goodwill 15 pro forma results following unaudited pro forma financial information presents combined results operations company rss acquired january 1 2004 2003 pro forma results presented 2004 combine results company 2004 historical results rss january 1 2004 august 12 2004 respectively pro forma results presented 2003 combine results company 2003 historical results rss comparable period unaudited pro forma financial information intended represent indicative companys consolidated results operations would reported rss acquired beginning periods presented taken indicative companys future consolidated results operations pro forma adjustments tax effected companys effective tax rate periods presented itt industries inc subsidiaries notes consolidated financial statements continued 2003 acquisitions 2003 company spent 462 primarily acquisition two entities one electronic components segment one fluid technology segment excess purchase price fair values net assets acquired 305 recorded goodwill 56 tax deductible electronic components segment assigned 240 goodwill balance fluid technology motion flow control segments assigned 54 11 respectively acquisitions accounted purchases accordingly results operations acquired company included consolidated income statement date acquisition company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows veamtec division northrop grumman corporation designer manufacturer cylindrical filter fiber optic connectors militaryaerospace industrial transit entertainment nuclear markets uniservice wellpoint srl manufacturer high quality diesel electric powered vacuum primed centrifugal pumps along spear well point dewatering systems rental market sale additionally 2003 company finalized purchase price allocations related 2002 acquisitions resulted decrease goodwill 51 2002 acquisitions 2002 company spent 1592 primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operations financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry company recognized 1172 goodwill acquisitions approximately 690 tax deductible fluid technology segment assigned 1166 goodwill defense electronics services segment assigned remaining 06 addition 2002 company finalized purchase price allocations associated 2001 acquisition reduced goodwill 92 note 4 restructuring asset impairment charges 2004 restructuring activities fourth quarter 2004 company recognized 124 charge primarily planned severance 727 employees actions segment follows fluid technology segment recorded 93 planned termination 80 employees including 20 factory workers 60 office workers costs totaling 03 also recognized quarter motion flow control segment recognized 18 planned termination 43 employees including 14 factory workers 25 office workers four management employees segment also recorded 01 outplacement electronic components segment recorded 09 planned termination 604 employees terminations include 17 office workers 587 factory workers addition restructuring actions announced fourth quarter motion flow control segment recognized 05 severance employee benefit costs related actions announced first quarter 2003 01 outplacement related actions announced 2002 electronic compo itt industries inc subsidiaries notes consolidated financial statements continued nents recognized additional 05 severance related actions announced first quarter 2004 additional 01 moving costs related actions announced third quarter 2004 third quarter 2004 company recognized 55 charge primarily planned severance 71 employees movement production actions segment follows fluid technology segment recorded 33 planned termination 36 employees including nine factory workers 23 office workers four management employees costs totaling 02 also recognized quarter motion flow control segment recognized 05 planned termination 30 employees including 23 factory workers seven office workers segment also recorded 06 relocation moving costs electronic components segment recorded 02 planned termination five employees terminations include four office workers one management employee segment also recorded 07 charge primarily costs associated moving two product lines weinstadt germany shenzhen china one product line santa ana ca nogales mexico addition restructuring actions announced third quarter motion flow control segment recognized 01 severance employee benefit costs related actions announced first quarter 2003 second quarter 2004 company recognized 136 charge primarily planned severance 418 employees recognition lease cancellation fees actions segment follows electronic components segment recorded 45 charge recognition lease cancellation costs severance 09 recorded planned reduction 328 employees terminations include 273 factory workers 52 office workers three management employees segment also recorded 11 charge disposal machinery equipment fluid technology segment recorded 24 planned termination 45 employees including eight factory workers 37 office workers lease commitments totaling 07 recognized related closure two facilities one sweden one florida asset writeoffs costs totaling 02 01 respectively also recognized quarter motion flow control segment recognized 21 planned termination 44 employees including seven factory workers 32 office workers five management employees corporate headquarters recorded 16 severance one management employee addition restructuring actions announced second quarter motion flow control segment recognized 03 severance employee benefit costs related actions announced first quarter 2003 electronic components segment recognized 03 severance employee benefit costs related actions announced first quarter 2004 01 outplacement related actions announced 2003 first quarter 2004 company recognized 53 charge primarily planned severance 103 employees actions segment follows fluid technology segment recorded 27 planned termination 50 employees including 15 factory workers 35 office workers asset writeoffs costs totaling 04 01 respectively also recognized quarter electronic components segment recorded 17 charge primarily planned reduction 35 employees including 23 factory workers 11 office workers one management employee motion flow control segment recognized 02 planned termination 16 employees including three factory workers 13 office workers itt industries inc subsidiaries notes consolidated financial statements continued corporate headquarters recorded 02 planned severance one office worker one management employee 2003 restructuring activities fourth quarter 2003 company announced actions reduce operating costs primarily reduction headcount new 153 restructuring charge primarily reflects planned severance 296 employees actions segment follows electronic components segment recorded 14 charge planned termination 127 employees including 113 factory workers ten office workers four management employees fluid technology segment recognized 124 charge planned severance 134 employees including 39 factory workers 90 office workers five management employees lease costs represent 03 charge segment also recorded 02 charge associated disposal machinery equipment defense electronics services segment recorded 10 charge planned severance 35 employees including seven factory workers 19 office workers nine management employees addition new restructuring actions announced fourth quarter motion flow control segment recognized 05 severance employee benefit costs related actions announced first quarter electronic components segment recognized 02 outplacement related actions announced earlier 2003 third quarter 2003 company announced actions reduce operating costs primarily reduction headcount 26 restructuring charge primarily reflects planned severance 71 employees actions segment follows electronic components segment recorded 12 charge planned termination 39 employees including 15 factory workers 24 office workers segment also recorded 01 charge associated disposal machinery equipment fluid technology segment recognized 05 charge planned severance 13 factory workers 14 office workers lease costs represent 04 charge motion flow control segment recorded 04 charge planned severance one management employee four office workers addition restructuring actions announced third quarter motion flow control segment recognized 02 severance employee benefit costs related actions announced first quarter second quarter 2003 company continued program reduce structural costs increase profitability restructuring actions totaling 44 announced period charge primarily reflected planned severance 143 employees cancellation operating lease actions segment follows electronic components segment comprises 24 charge actions taken segment include planned termination five management employees 19 factory workers 67 office workers motion flow control segment recognized 10 planned severance 50 employees including six management employees 31 factory workers 13 office workers lease termination fees 07 asset disposal costs 01 also reflected charge corporate headquarters charge 02 recorded planned termination one management employee one office worker addition restructuring actions announced second quarter motion flow control segment recognized 12 severance employee benefit costs related actions announced first quarter first quarter 2003 company recorded 89 restructuring charge primarily planned severance 461 persons severance 82 represents majority itt industries inc subsidiaries notes consolidated financial statements continued charge actions segment follows electronic components segment recorded 67 charge planned termination 222 persons comprised 98 office workers 116 factory workers eight management employees idle facility costs 03 asset disposal costs 04 also reflected charge actions prompted managements projections continued weakness certain businesses corporate headquarters recorded 11 charge consolidation administrative tasks including planned termination two management employees motion flow control segment recorded 04 charge planned termination 237 employees comprised 21 office workers 216 factory workers charge relates closure manufacturing facility arkansas actions completed 2003 2004 total estimated charge approximately 26 recognized ratably restructuring period terminations become effective management deemed restructuring actions necessary address anticipated loss certain platforms second half 2003 also 2003 company recorded 14 asset impairment charge primarily technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities 2002 restructuring activities restructuring charges year ended december 31 2002 detailed following table fourth quarter 2002 company recorded 96 restructuring charge primarily closure two facilities planned severance 292 persons severance 85 represents majority charge lease payments costs represent remainder actions primarily occurred fluid technology motion flow control segments actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure fairfield nj facility termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain platforms automotive fluid handling systems business 2003 resulting excess capacity planned actions include closure rochester ny facility consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions include termination five employees comprised three office workers two management employees 2001 restructuring activities december 14 2001 company announced restructuring program reduce structural costs improve profitability itt industries inc subsidiaries notes consolidated financial statements continued whereby company recorded charge 829 related closure five facilities discontinuance 21 products 10 switch product group 11 connectors group severance 3386 persons asset impairments cash portion charge 606 primarily relates severance lease termination costs noncash portion charge 223 primarily relates machinery equipment became impaired result announced plans also fourth quarter 2001 company recorded asset impairments amounting 144 machinery equipment cost based investment assets written fair values based managements projections individual future cash flows generated assets reviewed impairment fourth quarter 2001 time business events indicated carrying amounts assets may recovered management deemed market decline experienced 2001 certain products temporary recognized exists significant pricing pressure electronic components segment expected continue following table displays rollforward cash restructuring accruals third fourth quarters 2004 total 02 restructuring accruals related 2004 restructuring actions reversed income second quarter 2004 01 02 restructuring accruals related 2003 2002 restructuring actions respectively reversed income reversals related 2003 actions primarily reflect lower anticipated severance costs completed actions electronic components segment reversals related 2002 actions represent lower anticipated severance costs completed actions fluid technology segment itt industries inc subsidiaries notes consolidated financial statements continued first quarter 2004 02 04 restructuring accruals related 2003 2001 restructuring actions respectively reversed income reversals related 2003 actions primarily reflect lower anticipated severance costs completed actions due favorable employee attrition electronic components segment reversals associated 2001 actions represent lower anticipated closed facility costs 2003 34 01 09 restructuring accruals related 2003 2002 2001 programs respectively reversed income result quarterly reviews companys remaining restructuring actions reversals primarily reflected lower anticipated severance costs completed actions favorable employee attrition electronic components segment additionally certain actions completed longer deemed feasible company also reversed noncash charges totaling 02 third fourth quarters 2002 131 restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions reversals applicable 2001 planned restructuring actions totaled 118 primarily reflect less anticipated severance costs completed actions segments decision transfer five product lines santa ana california weinstadt germany dole france basingstoke uk shenzhen tianjin china supply chain issues eliminated financial viability transfers decision continue partial operations one electronic components facilities addition management determined one facility within fluid technology segment would remain operational suitable outsource supplier could identified remaining 13 restructuring reversals represents accruals earlier restructuring plans management determined incurred december 31 2003 accrual balance restructuring activities 201 cash payments 336 additional cash charges 371 recorded 2004 also management reviewed companys remaining restructuring actions determined certain 2004 2003 2002 2001 actions totaling 11 would completed less planned accordingly restructuring accruals totaling 11 reversed income 2004 accrual balance increased 02 due effect foreign currency translation accrual balance december 31 2004 227 includes 166 severance 61 facility carrying costs december 31 2003 remaining actions restructuring activities announced 2003 2002 2001 close one facility reduce headcount 208 2004 company closed three facilities reduced headcount 833 persons related plans experienced employee attrition leaving balance 685 planned reductions actions announced fourth quarter 2004 substantially completed second quarter 2005 actions announced second quarter 2004 substantially completed end first quarter 2005 actions announced first third quarters 2004 substantially completed actions announced 2003 substantially completed 2004 actions contemplated 2002 2001 plans substantially completed 2003 note 5 discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 1998 company received notifications claims buyers automotive businesses requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved december 31 2004 company automotive discontinued operations accruals 1887 primarily related taxes 1541 product recalls 78 environmental obligations 142 employee benefits itt industries inc subsidiaries notes consolidated financial statements continued 126 2004 company made immaterial payments automotive discontinued operations liabilities company expects settle 1541 tax obligations 2005 nss discontinued operations 4th quarter 2004 company decided sell network systems services nss business nss produces robust structured cabling intelligent highspeed network solutions comprehensive review companys expected future profitability market participation company believed nss would provide greater value organization whose primary focus networking market statement financial accounting standards 144 accounting impairment disposal longedlived assets sfas 144 requires company classify assets liabilities disposal group held sale results operations component classified discontinued operations note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following defense electronics services segment comprises 11039 7922 6278 total service revenues years ended december 31 2004 2003 2002 respectively 7601 5250 3740 total costs service revenues respectively period fluid technology segment comprises majority remaining balances service revenues costs service revenues note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards itt industries inc subsidiaries notes consolidated financial statements continued deferred tax assets liabilities include following companys deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 6696 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions december 31 2004 company approximately 521 foreign tax credit carryforwards credit carryforwards expire follows 339 december 31 2010 121 december 31 2011 61 december 31 2013 company approximately 20 general business credit carryforwards expire december 31 2020 29 expire december 31 2021 company net operating losses us subsidiaries amount 668 begin expire december 31 2019 company net operating losses foreign subsidiaries amount 382 expiration december 31 2004 valuation allowance approximately 439 exists deferred income tax benefits related certain us subsidiary loss carryforwards certain foreign tax credits may realized 2004 valuation allowance increased 32 shareholders equity december 31 2004 2003 reflects tax benefits related stock options exercised 2004 2003 approximately 264 181 respectively company expects settle 1541 tax obligations relate reorganization disposition automotive businesses 1998 part current irs examination companys federal consolidated tax returns years ended december 31 1998 december 31 2000 december 31 2004 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations addition company contingent tax obligations jurisdictions related 1998 dispositions reorganizations approximately 850 company determined payment amount unlikely october 22 2004 ajca signed law includes deduction 85 certain foreign earnings repatriated defined ajca company may elect apply provision qualifying earnings repatriations occurring 2004 2005 taxable year time company made determination expect elect apply provision distributions occurring either taxable years note 8 earnings per share reconciliation data used calculation basic diluted earnings per itt industries inc subsidiaries notes consolidated financial statements continued share computations income continuing operations follows 1 options purchase 127500 shares common stock average price 8302 per share outstanding december 31 2004 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2014 2 options purchase 78940 shares common stock average price 6537 per share outstanding december 31 2003 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 2013 3 options purchase 49240 shares common stock average price 6560 per share outstanding december 31 2002 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 current assets december 31 2004 2003 current assets consist primarily advance payments contracts prepaid expenses capitalized tooling costs note 12 plant property equipment net plant property equipment consist following note 13 goodwill intangible assets january 1 2002 company adopted sfas 142 addresses financial accounting reporting standards acquisition intangible assets outside business combination goodwill intangible assets subsequent acquisition accounting standard requires goodwill indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant provisions standard also require completion transitional impairment test year adoption impairments identified treated cumulative effect change accounting principle connection adoption sfas 142 com itt industries inc subsidiaries notes consolidated financial statements continued pany completed transitional initial goodwill impairment test 12 identified reporting units determined impairment exists tests conducted first quarter 2002 company also conducted annual impairment tests first quarters 2004 2003 beginning year determined impairment exists changes carrying amount goodwill years ended december 31 2004 2003 operating segment follows information regarding companys intangible assets follows first quarter 2004 company completed acquisition wedeco acquisition wedeco resulted recognition 2383 goodwill 120 intangibles tradenames 214 proprietary technology 188 customer relationships 27 patents third quarter 2004 company completed acquisition rss acquisition preliminarily resulted recognition 5976 goodwill 1200 intangible assets related customer relationships 49 intangible assets amortization expense related intangible assets years ended december 31 2004 2003 2002 104 27 09 respectively estimated amortization expense five succeeding years follows customer relationships proprietary technology patents amortized weighted average lives 15 years 15 years 25 years respectively note 14 assets december 31 2004 2003 assets primarily consist prepaid pension expense employee benefit plan costs investments unconsolidated companies assets held trusts receivables assets held trusts restricted specified reasons primarily environmental remediation costs employee benefits totaled 171 294 december 31 2004 2003 respectively itt industries inc subsidiaries notes consolidated financial statements continued investments unconsolidated companies consist following december 2004 company sold interest mesh networks technology company wireless telecommunications market 312 including 249 received cash 63 placed escrow 2003 company sold substantially interest digitalglobe inc developmental stage company launched satellite capable collecting highresolution digital imagery 435 company recorded sales unconsolidated affiliates 2004 2003 2002 totaling 241 210 242 respectively addition company provided services unconsolidated affiliate companies 2004 2003 2002 received 06 05 respectively exchange services investments unconsolidated companies companys exposure limited amount investment investments accounted cost method represent voting right interests less 20 hisan joint venture brake fuel line supplier asian transplant oems united states annual sales hisan approximately 152 note 15 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 827 666 601 2004 2003 2002 respectively future minimum operating lease payments longterm operating leases december 31 2004 shown note 16 debt consists following 1 interest rate notedebenture 227 102 december 31 2004 2003 respectively itt industries inc subsidiaries notes consolidated financial statements continued 2 weighted average interest rate 472 512 december 31 2004 2003 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 231 153 december 31 2004 2003 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2004 fair value longterm debt 5557 compared fair value 4840 december 31 2003 yearoveryear increase fair value primarily reflects impact increase longterm debt levels related 2004 acquisitions march 2004 company entered revolving credit agreement expires march 2005 five domestic foreign banks providing aggregate commitments 4000 november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion total aggregate commitments 14 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2004 companys coverage ratio well excess minimum requirement additionally borrowing commercial paper revolving credit agreement may exceed 14 billion aggregate outstanding time commitment fee revolving credit agreements 125 total commitment based companys current debt ratings revolving credit agreements serve backup commercial paper program otherwise restricted december 2004 company recorded 1200 obligation associated ten year agreement involving sale subsequent leasing back certain properties terms agreement company required make annual payments principal interest end agreement company option repurchase applicable properties nominal fee transaction reflected debt book value assets pledged collateral amounted 676 december 31 2004 note 17 cash flow information change receivables inventories payables accrued expenses listed consolidated statements cash flows twelve months ended december 31 2004 2003 2002 consist following note 18 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major interna itt industries inc subsidiaries notes consolidated financial statements continued tional financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 2004 2003 company interest rate swaps outstanding notional values totaling 3358 periods carrying value swaps december 31 2004 2003 849 816 respectively including 33 40 accrued interest respectively swaps designed manage interest rate exposure associated certain longterm debt swaps mature various dates 2025 effectively convert much longterm debt mentioned note 16 debt fixed variable rate borrowings variable interest rates based threemonth libor rates plus spread reflects companys debt rating coupon underlying longterm obligations weighted average variable fixed interest rates 264 740 december 31 2004 ineffective portions interest rate swaps amounts excluded assessment effectiveness foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 2004 company one foreign currency cash flow hedge outstanding change value 2004 december 31 2003 company foreign currency cash flow hedges outstanding changes forecasted transactions 2004 regarding probability occurring would require amounts reclassified earnings notional amount foreign currency forward contract utilized hedge cash flow exposures 01 december 31 2004 applicable fair value contract december 31 2004 approximately zero ineffective portions changes fair values cash flow hedge positions reported earnings twelve months ended december 31 2004 2003 2002 amounts excluded measure effectiveness reported earnings periods december 31 2004 2003 company foreign currency forward contracts notional amounts 933 811 respectively hedge value recognized assets liabilities firm commitments fair values contracts 04 02 december 31 2004 2003 respectively ineffective portion changes fair values hedge positions reported operating income 2004 2003 2002 amounted 04 03 01 respectively amounts excluded measure effectiveness fair values associated foreign currency contracts valued using net position contracts applicable spot rates forward rates reporting date note 19 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required addition company sponsored itt industries inc subsidiaries notes consolidated financial statements continued pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 12 07 04 years ended 2004 2003 2002 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 312 272 253 years ended 2004 2003 2002 respectively changes benefit obligations changes plan assets weightedaverage assumptions components net periodic benefit cost years ended 2004 2003 follows itt industries inc subsidiaries notes consolidated financial statements continued amounts recognized consolidated balance sheets consist 2004 company recorded total tax increase 818 shareholders equity reflects decrease minimum pension liability information pension plans accumulated benefit obligation excess plan assets accumulated benefit obligation accumulated benefit obligation defined benefit plans 45863 41043 december 31 2004 2003 respectively table assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary itt industries inc subsidiaries notes consolidated financial statements continued plan assets pension welfare benefit plans assets comprised broad range domestic foreign securities fixed income investments hedge funds cash equivalents assets domestic pension us master trust covers domestic pension plans various welfare benefit plan trusts following asset allocations december 31 strategic asset allocation target companys domestic pension funds apportions 70 equity investments 30 fixed income instruments investment companys stock within us master trust approximates 1 2004 2003 contributions company currently anticipates making contributions pension plans range 1200 1400 2005 1024 made first quarter 2005 us master trust cash flows estimated future benefit payments following benefit payments covering domestic pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees assumed rate future increases per capita cost health care health care trend rate 80 2004 assumed rate 100 2005 decreasing ratably 50 2010 increasing health care trend rates one percent per year would effect increasing benefit obligation 399 aggregate service interest cost components 31 decrease one percent health care trend rate would reduce benefit obligation 404 aggregate service interest cost components 26 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various indexes discussion actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company december 8 2003 medicare modernization act signed law medicare modernization act introduces prescription drug benefit medicare part provides several options medicare eligible participants employers including federal subsidy companies elect provide retiree prescription drug benefit least actuarially equivalent medicare part medicare modernization act provides two year transitional period allow among items possibility companies may amend existing plans significant uncertainties regarding eventual regulations required implement medicare modernization act well medicare itt industries inc subsidiaries notes consolidated financial statements continued modernization acts overall effect plan participants coverage choices related impact health care costs effects medicare modernization act reflected accumulated postretirement benefit obligation december 31 2004 net periodic postretirement benefit cost company currently evaluating provisions medicare modernization act potential impact postretirement medical plans believe ultimately reduce accumulated postretirement benefit obligation postretirement benefit costs matters result acquisition rss august 2004 company assumed 2600 liabilities related pension benefits accrued acquired employees kodak retirement income plan benefits merged became part itt industries domestic salaried pension plan terms purchase sale agreement kodak plan made preliminary transfer assets us master trust effective closing date amount 2795 subject adjustment order comply irs regulations relative transfer assets one pension plan another company actuaries believe ultimate transfer amount allowed regulations approximately 2350 accordingly company reflected payable 445 accounts pension plan amounts shown table assets presented net amount expected refunded kodak trust fund note 20 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 shares designated common stock par value 1 per share 50000000 shares designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 2004 2003 52853895 52876689 shares common stock held treasury respectively company included 356 931 1000 capital surplus retained earnings december 31 2004 2003 2002 respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods except certain instances itt industries inc subsidiaries notes consolidated financial statements continued death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted company makes shares available exercise stock options purchasing shares open market issuing shares treasury summary status companys stock option incentive plans december 31 2004 2003 2002 changes years ended presented shares thousands following table summarizes information companys stock options december 31 2004 shares thousands 2003 equity incentive plan established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 6100000 december 31 2004 4105057 net shares available future grants 2004 2003 company awarded 6194 9489 restricted shares fiveyear restriction periods respectively payment annual retainer nonemployee directors 2004 company awarded 13100 restricted shares employees weighted average restriction period 24 years 2003 equity incentive plan replaces 2002 itt industries stock option plan nonemployee directors itt industries 1996 restricted stock plan nonemployee directors 1994 itt industries incentive stock plan prospective basis awards granted prior plans continue vest itt industries inc subsidiaries notes consolidated financial statements continued exercisable accordance original terms however future grants made prior plans 1994 incentive stock plan provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged restricted shares awarded 2004 2003 10000 restricted shares awarded 2002 plan pursuant itt industries 1996 restricted stock plan nonemployee directors company grant awards 2004 2003 2002 6098 restricted shares fiveyear restriction periods awarded payment annual retainer directors restrictions may lapse earlier depending certain circumstances note 21 commitments contingencies company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures company continue vigorously defend claims accruals established outcome matter probable reasonably estimated although ultimate outcome legal matter cannot predicted certainty based present information including companys assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future environmental company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amount accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability conditions selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party prp limited number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent december 31 2004 company responsible alleged responsible approximately 80 environmental investigation remediation sites various countries many proceedings companys liability considered de minimis december 31 2004 company calculated best estimate 980 approximates accrual related cleanup soil ground water low range estimate environmental liabilities 729 high range estimate liabilities 1608 annual basis company spends 80 110 environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis itt industries inc subsidiaries notes consolidated financial statements continued company involved environmental proceeding glendale california relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed operating water treatment system operation water treatment system expected continue 2013 itt prps continue pay respective allocated costs operation water treatment system company anticipate default prps would increase allocated share liability december 31 2004 companys accrual liability 104 representing best estimate low estimate liability 70 high estimate 159 itt corporation operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected site since itt completed investigation site coordination state federal environmental authorities process evaluating various remedies remedy site yet selected currently estimated range remediation 55 193 company accrued 81 matter approximates best estimate company involved number prps regarding property city bronson michigan operated former subsidiary itt corporation higbie manufacturing prior time itt acquired higbie company prps investigating remediating discharges industrial waste occurred 1930s companys current estimates exposure 57 135 accrual matter 92 represents best estimate current liabilities company anticipate default part prps suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including three listed discovery procedural matters changes california law various appeals prolonged case currently matter california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions hearing expected 2005 event appeal successful company pursue administrative claims excess insurers course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive product liability company subsidiary goulds pumps inc goulds joined defendants numerous industrial companies product liability lawsuits alleging injury due asbestos claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers products may contained asbestos frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2004 itt goulds resolved excess 4200 claims settlement dismissal average amount settlement per plaintiff nominal substantially itt industries inc subsidiaries notes consolidated financial statements continued defense settlement costs covered insurance based upon past claims experience available insurance coverage consultation counsel management believes matters material adverse effect companys consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property casualty company ace et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 parties cases seeking appropriate allocation responsibility companys historic asbestos liability exposure among insurers california action filed venue companys environmental insurance recovery litigation pending since 1991 new york action stayed favor california suit itt ace successfully resolved matter company working parties suit resolve matter insurers addition utica national goulds historic insurer requested company negotiate coverage place agreement allocate goulds asbestos liabilities insurance policies issued utica issued others company continuing receive benefit insurance payments pendency proceedings company believes actions materially affect availability insurance coverage material adverse effect companys consolidated financial position results operations cash flows company one several defendants suit filed el paso texas bund zur unterstutzung radargeschadigter et al v itt industries et al sup ct el paso texas ca 20024730 complaint filed us german citizens alleges itt four major companies failed warn plaintiffs dangers associated exposure xray radiation radar devices complaint also seeks certification class similarly injured persons numerous motions currently pending court hearing class certification expected late 2005 october 5 2004 company filed action itt industries inc et al v firemans fund insurance company et al superior court county los angeles ca bc 322546 various insurers issued historic aircraft products coverage company seeking declaration liable costs defense el paso matter parties agreement principle resolve matter whereby company continue receive cost defense matter insurers management believes el paso suit material adverse effect companys consolidated financial position results operations cash flows company received demands us silica partial indemnity regarding personal injury actions alleging injury due silica 1985 company sold stock subsidiary pennsylvania glass sand us silica part transaction company provided indemnity us silica personal injury suits indemnity expires september 2005 costs incurred matters related defense settlements judicial awards allocated us silica company companys allocated portion paid part historic product liability carriers shared pursuant distribution agreement see company history certain relationships within part 1 item 1 annual report description distribution agreement management believes matters material adverse effect companys consolidated financial position results operations cash flows company involved arbitration rayonier inc former subsidiary companys predecessor itt corporation arbitration involves claim rayonier stemming 1994 distribution agreement spinoff rayonier itt corporation rayonier seeks portion proceeds certain settlements connection companys environmental insurance recovery litiga itt industries inc subsidiaries notes consolidated financial statements continued tion parties completed arbitration hearings late 2004 decision expected spring 2005 company believes claim grossly overstated material adverse effect companys consolidated financial position results operations cash flows note 22 guarantees indemnities warranties guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 however lapse time fact parties resolved certain issues december 31 2004 company accrual 78 best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 950 however lapse time fact parties resolved certain issues december 31 2004 company accrual 142 best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last nine years company provided three guarantees respect real estate development activities flagler county florida two guarantee bonds issued dunes community development district bond issuances used primarily construction infrastructure water sewage utilities bridge company released obligation perform guarantees third quarter 2004 third guarantee performance bond amount 100 favor flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 december 31 2004 company accrual related expansion bridge amount 100 itt industries inc subsidiaries notes consolidated financial statements continued december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2004 company believe loss contingency probable therefore accrual recorded financial statements company number individually immaterial guarantees outstanding december 31 2004 may affected various conditions external forces could require payments made guarantees company believe payments material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future product warranties accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims company warrants numerous products terms vary widely general company warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall december 31 2004 company product warranty accrual amount 403 product warranty liabilities itt industries inc subsidiaries notes consolidated financial statements continued note 23 business segment information itt industries inc subsidiaries notes consolidated financial statements continued net sales external customers attributed individual regions based upon destination product service delivery sales revenues product category net intercompany balances follows defense electronics services sales revenues united states government 20982 14547 11053 2004 2003 2002 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains companys pump pumping system businesses including brands flygtr gouldsr bell gossettr ac pumpr marlowr flowtronexr lowarar vogelr richterr making company worlds largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products well systems municipal industrial residential agricultural commercial applications brand names mcdonnell millerr hoffman specialtytm itt standardr addition mentioned additionally fluid technology segment produces wastewater aeration diffuser systems brands sanitairer abjr ultraviolet ozone water disinfection systems wedecor brand membrane filtration bioreactor systems aquioustm brand water wastewater treatment markets segment comprises approximately 38 companys sales revenues approximately 40 segment operating income 2004 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 46 sales revenues segment generated contracts technical support services company provides military government agencies approximately 87 81 73 2004 2003 2002 defense electronics services sales revenues respectively us government defense electronics services segment comprises 36 companys sales revenues 35 segment operating income 2004 motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabscor ruler flojetr danforthr system components whirlpool baths hot itt industries inc subsidiaries notes consolidated financial statements continued tub spa markets hydroairr brand fluid handling materials hydrologictm brand tubing systems posilockr hydrolockr brand connectors various automotive industrial markets specialty shock absorbers brand konir brake components transportation industry motion flow control segment comprises approximately 16 companys sales revenues approximately 20 segment operating income 2004 electronic components business consists companys products marketed cannonr brand products include connectors switches cabling used communications computing aerospace industrial applications segment comprises 10 companys sales revenues 4 segment operating income 2004 corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 24 quarterly results 2004 2003 unaudited sum quarters earnings per share equal full year amounts due rounding table reflects range market prices companys common stock 2004 2003 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2005 february 28 2005 high low reported market prices companys common stock 8995 8048 respectively company declared dividends 018 per common share first quarter 2005 25511 holders record companys common stock february 28 2005 index schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc robert j pagano jr robert j pagano jr vice president corporate controller principal accounting officer march 11 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 ii5 management compensatory plan ii6item 15 exhibits financial statement schedule documents filed part report 1 see index consolidated financial statements appearing page list financial statements filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt corporation white plains new york audited accompanying consolidated balance sheets itt corporation subsidiaries “company” december 31 2007 2006 related consolidated statements income comprehensive income cash flows changes shareholders’ equity three years period ended december 31 2007 audits also included financial statement schedule page s1 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt corporation subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 7 consolidated financial statements company changed method accounting uncertain income tax positions 2007 discussed note 18 consolidated financial statements company changed method accounting defined benefit pension postretirement plans 2006 discussed note 19 consolidated financial statements company changed method accounting sharebased payments 2006 also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 28 2008 expressed adverse opinion company’s internal control financial reporting material weakness deloitte touche llp stamford connecticut february 28 2008 itt corporation subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated balance sheets 1 shares outstanding include unvested restricted common stock 08 million 04 million december 31 2007 2006 respectively accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements changes shareholders’ equity accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries notes consolidated financial statements millions except per share amounts unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt corporation majority owned subsidiaries unless context otherwise indicates references herein “itt” “the company” words “we” “us” “our” include itt corporation subsidiaries itt consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 23 “business segment information” description segments use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates sales revenue recognition itt recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services business segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones percentage costs incurred total costs estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified itt revenue arising claims process recognized either income offset potential loss reliably estimated realization probable accruals estimated expenses related warranties made time products sold services rendered recorded component cost sales revenues accruals established using historical information nature frequency average cost warranty claims estimates future costs research development significant costs incurred year connection research development “rd” programs expected contribute future earnings rd costs specifically covered contracts charged expense incurred rd costs incurred contracts customers charged directly related contracts reported component costs sales revenues cash equivalents itt considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout “fifo” market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout “lifo” method represent 97 118 total 2007 2006 inventories respectively would material difference value inventories fifo method used us value inventories longlived asset impairment losses record impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount see itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated note 4 “restructuring asset impairment charges” discussions impairment losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years goodwill intangible assets accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant see note 12 “goodwill intangible assets” description goodwill intangible assets investments ability exercise significant influence readily determinable market value accounted cost method accounting itt periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value end period investments control 20 voting shares exert significant influence operating financial policies equity method used share net income losses equity investments included miscellaneous expense material period presented investments included assets foreign currency translation balance sheet accounts translated exchange rate effect end period income statement accounts translated average rates exchange prevailing period gains losses foreign currency translations reflected cumulative translation adjustments component shareholders’ equity national currencies foreign companies generally functional currencies net gainslosses foreign currency transactions reported currently selling general administrative expenses “sga” 17 07 12 2007 2006 2005 respectively derivative financial instruments time itt uses certain derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks itt subsidiaries endusers utilize instruments speculative purposes itt rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas 133 “accounting derivative instruments hedging activities” amended “sfas 133” derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest expense swaps terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses reflected net interest expense itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated employee benefit plans itt accounts defined benefit pension plans postretirement benefit plans using actuarial models required sfas 87 “employers’ accounting pensions” “sfas 87” sfas 106 “employers’ accounting postretirement benefits pensions” “sfas 106” respectively models use attribution approach generally spreads individual events service lives employees plan examples “events” changes actuarial assumptions discount rate compensation increase mortality effective december 31 2006 adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” effectively requires balance sheet recognition underfunded overfunded status pension postretirement benefit plans recognize changes funded status comprehensive income actuarial gains losses prior service costs credits recognized sfas 87 sfas 106 must recognized accumulated comprehensive income within shareholders’ equity net taxes amortized component net periodic benefit cost stockbased compensation itt adopted sfas 123r “sharebased payment” “sfas 123r” effective january 1 2006 prospective basis accounting stockbased compensation accordingly recognize employee services received exchange awards equity instruments based grantdate fair value award determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award see note 19 “stockbased longterm incentive employee compensation” detail periods prior 2006 accounted using intrinsic value method accounting employee stock options prescribed accounting principles board opinion “apb” 25 “accounting stock issued employees” “apb 25” generally resulted compensation cost recognized exercise price stock options granted employees directors equaled fair market value underlying stock grant date income taxes determine provision income taxes using asset liability approach deferred income taxes represent expected future tax consequences temporary differences carrying amounts tax basis assets liabilities record valuation allowance reduce deferred tax assets uncertainty regarding reliability exists itt adopted financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” effective january 1 2007 effectively changed accounting uncertain tax positions related disclosures see note 2 “new accounting pronouncements” note 7 “income taxes” details commitments contingencies record accruals commitments loss contingencies probable amount reasonably estimated addition legal fees accrued cases loss probable related fees reasonably estimated environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities primarily included liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets known claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated earnings per share based weighted average number common shares outstanding potentially dilutive common shares includes stock options restricted stock reclassifications certain amounts prior years’ consolidated financial statements reclassified conform current year presentation note 2 new accounting pronouncements june 2006 fasb issued fin 48 fin 48 itt may recognize tax benefit uncertain tax position likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements position measured based largest benefit greater 50 likelihood realized upon ultimate settlement itt adopted provisions set forth fin 48 effective january 1 2007 total amount unrecognized tax benefits date adoption 888 result implementation fin 48 itt recognized increase liabilities 261 unrecognized tax benefits see note 7 “income taxes” details related itt’s adoption september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” effective fiscal years beginning november 15 2007 interim periods within years statement defines fair value establishes framework measuring fair value expands related disclosure requirements however fasb issued fasb staff positions “fsp” 1571 1572 fsp 1571 amends sfas 157 exclude fasb 13 “accounting leases” related interpretive accounting pronouncements address leasing transactions fsp2 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis fiscal years beginning november 15 2008 furthermore fasb proposed fsp 157c clarifies principles sfas 157 fair value measurement liabilities public comments fsp 157c due february 2008 itt currently evaluating potential impact statement september 2006 fasb issued fasb staff position aug air1 “accounting planned major maintenance activities” effective fiscal years beginning december 15 2006 position statement eliminates accrueinadvance method accounting planned major maintenance activities pronouncement material effect itt’s financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” effective fiscal years beginning november 15 2007 sfas 159 permits entity measure certain financial assets financial liabilities fair value sfas 159 entities electing fair value option report unrealized gains losses earnings subsequent reporting date fair value option may elected instrumentbyinstrument basis exceptions long applied instrument entirety sfas 159 establishes presentation disclosure requirements help financial statement users understand effect entity’s election earnings sfas 159 requires prospective application entity elects fair value option items existing date adoption difference carrying amount fair value included cumulativeeffect adjustment opening balance retained earnings itt currently evaluating potential impact statement december 2007 fasb issued sfas 141 revised 2007 “business combinations” sfas 141r replaces sfas 141 “business combinations” sfas 141r retains fundamental requirements sfas 141 acquisition method accounting used business combinations acquirer identified business combination however sfas 141r changes method applying acquisition method number significant areas including acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense sfas 141r effective prospective basis business combinations acquisition date beginning first annual period subsequent december 15 2008 itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated exception accounting valuation allowances deferred taxes acquired tax contingencies sfas 141r amends sfas 109 “accounting income taxes” adjustments made valuation allowances deferred taxes acquired tax contingencies associated acquisitions closed prior effective date sfas 141r would also apply provisions sfas 141r early adoption sfas 141r permitted currently evaluating potential impact statement december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” statement requires recognition noncontrolling interest minority interest separate component within equity within consolidated balance sheet also requires amount consolidated net income attributable parent noncontrolling interest clearly identified presented within consolidated statement income statement also amends certain arb 51’s consolidation procedures make consistent requirements sfas 141r sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 earlier adoption prohibited currently evaluating potential impact statement note 3 acquisitions edo corporation december 20 2007 itt spent 11852 net cash acquired including direct acquisition costs acquire outstanding shares edo corporation “edo” global aerospace defense company 56 per outstanding share addition expect additional acquisition costs 5670 connection repayment debt acquired december 31 2007 paid 4135 expect pay remaining portion 1535 first quarter 2008 management believes addition edo allow itt’s defense electronics services business segment provide broader set solutions wider band customers furthermore itt expects better positioned play important role us military’s vital transformational initiatives joint strike fighter navy’s littoral combat ship counter improvised explosive device coast guard deepwater programs contingent consideration related acquisition itt’s results operations year ended december 31 2007 reflect impact results operations edo december 20 2007 application purchase accounting sfas 141 “business combinations” “sfas 141” requires total purchase price allocated fair value assets acquired liabilities assumed based fair value acquisition date amounts exceeding net fair value recorded goodwill allocation process requires analysis acquired contracts customer relationships fixed assets contractual commitments legal contingencies brand value identify record fair value assets liabilities assumed valuing acquired assets liabilities fair values based limited future expected discounted cash flows comparable market rates replacement costs expected settlement amounts discount growth rates assigned preliminary fair value amounts tangible intangible assets acquired liabilities assumed however proximity transaction yearend values certain assets liabilities subject adjustment additional information obtained additional information includes limited valuation customer relationships estimatetocomplete contract analyses valuation tradenames valuation physical counts property plant equipment following table summarizes preliminary estimates fair values assets acquired liabilities assumed edo december 20 2007 effective date acquisition december 31 2007 excess purchase price fair value net assets acquired 12004 itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated none taxdeductible recorded goodwill defense electronics services business segment intangible assets relating acquisition totaled 4424 december 31 2007 entirely consisting customer relationships weighted average amortization period approximately 13 years following unaudited proforma information assumes acquisition edo completed january 1 fiscal years shown unaudited proforma financial information intended represent indicative consolidated results operations would reported edo acquired beginning periods presented taken indicative future consolidated results operations 2007 acquisitions 2007 spent 4105 net cash acquired including direct acquisition costs acquisitions believe material individually aggregate results operations financial position significant acquisitions follows september 10 2007 itt announced completed acquisition international motion control inc “imc” 3905 net cash acquired including direct acquisition costs imc global developer motion control products market leader manufacture specialty energy absorption industrial aviation control automation technology management believes imc 2006 revenues approximately 200 add complementary mix highly engineered missioncritical products itt’s motion flow control business segment itt preliminarily assigned value assets liabilities 2007 acquisitions however allocations subject refinement december 31 2007 excess purchase price fair value net assets acquired transactions 2563 recorded goodwill 2369 140 54 reflected motion flow control defense electronics services fluid technology business segments respectively definitelived intangible assets relating 2007 acquisitions totaled 910 december 31 2007 amount includes 807 customer relationships 96 proprietary technology 07 identifiable intangible assets intangible assets amortized weighted average lives approximately 16 years 13 years 9 years respectively indefinitelived intangible assets include trademarks 91 december 31 2007 itt material changes resulting finalization purchase price allocations related prior period acquisitions 2006 spent 895 acquisitions believe material individually aggregate results operations financial position acquisitions included • privately held company included defense electronics services business segment leading provider semiconductor design services intellectual property product management believes technology help itt lead way providing new generation radios modern soldier • fb leopold company included fluid technology business segment primarily serves municipal industrial water wastewater treatment facilities management believes acquisition expand itt’s ability provide pretreatment filtration technology surface water reuse desalination • sota corporation included motion flow control business segment manufacturer fuel boost override pumps potable water pumps aerospace applications management believes acquisition enhances capability positions us reach strategic goals becoming potable water waste water fuel systems integrator december 31 2006 excess purchase price fair value net assets acquired transactions 533 recorded goodwill 149 290 94 reflected defense electronics services fluid technology motion flow control business segments respectively 94 reflected motion flow control business segment deductible tax purposes intangible assets relating acquisitions totaled 376 december 31 2006 amount includes 79 customer relationships 197 proprietary technology 51 trademarks 49 patents itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated identifiable intangible assets intangible assets amortized weighted average lives 10 years 8 years 10 years 8 years respectively 2006 material changes resulting finalization purchase price allocations related prior period acquisitions 2005 spent 690 acquisitions believe material individually aggregate results operations financial position amount 297 paid ellis k phelp co largest us distributor products sold itt’s flygt brand within fluid technology business segment wastewater pumping treatment market itt also paid purchase price adjustment totaling 285 related 2004 acquisition remote sensing systems business “rss” purchased additional shares wedeco ag water technology “wedeco” 108 addition finalized purchase price allocations related prior period acquisitions resulted increase goodwill 111 note 4 restructuring asset impairment charges restructuring activities 2007 recorded net restructuring charge 611 reflecting costs 579 related new actions 74 related prior year plans well reversal 42 restructuring accruals management determined would required components 2007 charges associated actions announced 2007 represent reduction structural costs business segments planned closure four facilities fluid technology business segment one facility motion flow control business segment two facilities defense electronics services business segment planned position eliminations total 729 including 341 factory workers 345 office workers 43 management employees costs associated prior years’ plans primarily reflect additional costs related adjustment writeoff leased space well asset writeoffs severance costs asset impairment charges fourth quarter 2007 recognized 50 charges related impairment longlived assets impairment result determination two businesses one within motion flow control business segment one within fluid technology business segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecasts businesses reflect current business conditions asset impairment charges 42 08 recorded within motion flow control fluid technology business segments respectively restructuring activities 2006 recorded net restructuring charge 517 reflecting costs 527 related new actions 38 related prior year plans well reversal 48 restructuring accruals management determined would required itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated components 2006 charges associated actions announced 2006 represent reduction structural costs business segments closure three facilities fluid technology business segment two motion flow control business segment one defense electronics services business segment planned position eliminations total 816 including 427 factory workers 360 office workers 29 management employees costs associated prior years’ plans primarily reflect additional severance costs restructuring activities 2005 recorded net restructuring charge 539 reflecting costs 587 related new actions costs 02 related previous plans well reversal 50 restructuring accruals management determined would required components 2005 charges represent reduction structural costs business segments closure four facilities fluid technology business segment addition activity motion flow control business segment reflected closure two facilities continued reorganization including workforce reductions consolidation functions transfer functions france holland outsourcing selected functions eastern europe planned position eliminations total 941 including 485 factory workers 402 office workers 54 management employees itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated following table displays rollforward restructuring accruals accrual balance december 31 2007 400 includes 334 severance 66 facility carrying costs following reconciliation employee position eliminations associated restructuring activities 2007 end 2007 announced planned facility closures two facilities fluid technology business segment one facility defense electronics services motion flow control business segments remain closed closures expected within next six months note 5 discontinued operations dispositions switches july 26 2007 itt completed sale substantially switches businesses private equity firm net proceeds 2232 aftertax gain 844 remaining portion switches businesses expected sold first quarter 2008 divestiture businesses consistent strategy concentrating resources core product areas deemphasizing products determined less strategic us switches businesses produce variety switches keypads customized dome arrays interface control products switches businesses sell products wide range customers itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated transportation consumer telecommunications medical instrumentation market segments switches businesses reported discontinued operations since third quarter 2006 revenues operating income loss switches businesses reported discontinued operations follows assets liabilities switches businesses representing itt’s discontinued businesses held sale follows december 31 2007 december 31 2006 itt’s balance sheet included cumulative translation gain adjustment 08 cumulative translation loss adjustment 401 respectively related switches businesses held sale dispositions fluid handling systems first quarter 2006 completed sale automotive brake fueling tubing components business “fluid handling systems” “fhs” privately held company net proceeds 1877 gain 190 business component motion flow control business segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry revenues operating income fhs reported discontinued operations follows richter first quarter 2006 also completed sale industrial nonmetallic lined pumps valves business “richter” private equity investor net proceeds 248 gain 222 business component fluid technology business segment manufacturer pumps valves selected segments chemical fine chemical pharmaceutical industries revenues operating income richter reported discontinued operations follows dispositions itt automotive september 1998 completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 2005 finalized irs tax settlement covered periods 1998 2000 included sale electrical systems business brake chassis unit result paid 1006 settle tax matters related sale automotive businesses remaining tax reserves 536 relating matter reversed included income discontinued operations year ended december 31 2005 itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following defense electronics services business segment comprises 17945 14754 13524 total service revenues 2007 2006 2005 respectively 15741 12881 11366 total costs service revenues respectively periods fluid technology business segment comprises majority remaining balances service revenues costs service revenues amount rd costs incurred contracts customers included component costs sales revenues amounted 7089 4993 4720 2007 2006 2005 respectively note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated deferred tax assets liabilities include following deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 19456 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions net operating losses us subsidiaries amount 277 begin expire december 31 2020 state net operating losses 21479 begin expire december 31 2008 also net operating losses foreign subsidiaries amount 5750 begin expire december 31 2008 state tax credit carryforwards amount 86 begin expire december 31 2012 us federal state capital loss carryforwards amount 1211 expire december 31 2012 also us foreign tax credit carryforwards amount 11 begin expire december 31 2009 december 31 2007 valuation allowance 2122 exists certain us subsidiary state net operating loss carryforwards certain foreign net operating loss carryforwards certain us federal capital loss carryforwards may realized december 31 2006 valuation allowance 794 existed certain us subsidiary state net operating loss carryforwards certain foreign net operating loss carryforwards 2007 valuation allowance increased 1328 resulting following 851 attributable foreign net operation loss carryforwards 32 attributable state net operating loss carryforwards 445 attributable us federal state capital loss carryforwards shareholders’ equity december 31 2007 2006 reflects tax benefits related stockbased compensation 2007 2006 approximately 215 231 respectively internal revenue service “irs” currently examining federal consolidated income tax returns company years ended december 31 2004 december 31 2006 irs completed examination years 2003 december 31 2007 believe accrual income taxes payable sufficient cover potential liabilities arising examinations itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated uncertain tax positions june 2006 fasb issued fin 48 fin 48 prescribes comprehensive model company measure recognize present disclose financial statements uncertain tax positions company taken expects take tax return fin 48 applies tax positions accounted financial statements accordance fasb statement 109 “accounting income taxes” including positions taken previously filed tax return expected taken future return fin 48 company recognizes tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement adopted provisions set forth fin 48 effective january 1 2007 total amount unrecognized tax benefits date adoption 888 total amount unrecognized tax benefits recognized would affect effective tax rate 790 result implementation fin 48 recognized increase liabilities 261 unrecognized tax benefits increase summarized follows 1 first quarter ended march 31 2007 recorded 113 cumulative effect adjustment retained earnings second quarter ended june 30 2007 recorded charge 61 income tax expense reconciliation beginning ending amount unrecognized tax benefits december 31 2007 follows december 31 2007 total amount unrecognized tax benefits 1033 amount unrecognized tax benefits recognized would affect effective tax rate 428 however certain unrecognized tax benefits realized adoption fas 141r additional 102 would impact effective tax rate prior adoption fas 141r adjustment fin 48 reserve recorded increase goodwill expense benefit applied general reduce zero goodwill related acquisition subsequent adoption fas 141r effective itt year beginning january 1 2009 rule longer apply expense benefit associated realizing unrecognized tax benefit recorded part income tax expense included balance december 31 2007 tax positions 421 deferred tax accounting would impact annual effective tax rate could accelerate payment cash taxing authority addition tax positions 82 attributable discontinued operations would impact annual effective tax rate believe total amount unrecognized tax benefits significantly change within 12 months reporting date classify interest relating tax matters component interest expense tax penalties component income tax expense income statement total amount accrued interest penalties date adoption fin 48 349 years ended december 31 2007 2006 2005 recognized 67 18 162 interest penalties 362 295 payment interest penalties accrued december 31 2007 2006 respectively many cases uncertain tax positions related tax years remain subject examination relevant taxing authorities following table summarizes open tax years major jurisdiction itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated note 8 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows shares underlying stock options excluded computation diluted earnings per share antidilutive follows amounts antidilutive restricted common stock excluded computation diluted earnings per share 2007 2006 2005 insignificant note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 plant property equipment net plant property equipment consist following note 12 goodwill intangible assets itt follows provisions sfas 142 require goodwill indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant itt completed annual goodwill indefinitelived intangible asset impairment tests october 1 2007 itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated 2006 concluded impairment charges required dates changes carrying amount goodwill years ended december 31 2007 2006 operating segment follows information regarding intangible assets follows amortization expense related intangible assets 2007 2006 2005 353 267 215 respectively estimated amortization expense five succeeding years follows see note 3 “acquisitions” additional information customer relationships proprietary technology trademarks patents amortized weighted average lives approximately 13 years 11 years 18 years 19 years respectively note 13 assets consist following itt recorded sales unconsolidated affiliates 2007 2006 2005 totaling 137 160 97 respectively additionally itt purchased 279 products unconsolidated affiliates 2007 investments unconsolidated companies exposure limited amount investment investments accounted cost method represent voting rights interests less 20 note 14 leases rentals itt leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations itt often pays itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated maintenance insurance tax expense related leased assets rental expenses operating leases 992 851 816 2007 2006 2005 respectively future minimum operating lease payments longterm operating leases december 31 2007 shown note 15 debt consists following 1 includes 1535 related debt acquired connection acquisition edo 2 interest rate notedebenture 452 531 december 31 2007 2006 respectively 3 weighted average interest rate 262 535 december 31 2007 2006 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 578 529 december 31 2007 2006 respectively fair value shortterm loans approximates carrying value fair value longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2007 fair value longterm debt 4602 compared fair value 4825 december 31 2006 yearoveryear decrease fair value primarily reflects impact principal payments certain long term debt decrease longterm interest rates book value assets pledged collateral amounted 508 december 31 2007 november 2005 itt entered fiveyear revolving credit agreement aggregate principal amount 125 billion effective november 8 2007 itt exercised option increase principal amount revolving credit agreement 175 billion interest rate borrowings agreements generally based london interbank offered rate “libor” plus spread reflects itt’s debt rating provisions agreement require maintain interest coverage ratio defined 35 times december 31 2007 compliance debt covenants commitment fee revolving credit agreements 008 total commitment revolving credit agreement serves backup commercial paper program prior december 2007 borrowing commercial paper revolving credit agreements could exceed 125 billion aggregate outstanding december 2007 itt board directors approved commercial paper borrowings using revolving credit agreement backup increase 175 billion december 31 2007 commercial paper borrowings 15897 december 31 2007 itt 899 obligation associated tenyear agreement involving sale subsequent lease back certain properties terms agreement itt required make annual payments principal interest end agreement 2014 itt option repurchase applicable properties nominal fee transaction reflected debt itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated note 16 liabilities consist following note 17 derivative instruments hedging activities nature business activities necessarily involves management various financial market risks including related changes interest rates currency exchange rates commodity prices itt uses derivative financial instruments mitigate eliminate risks credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties derivative contracts consist number major international financial institutions itt continually monitors credit quality financial institutions expect nonperformance counterparty reconciliation current period changes contained accumulated comprehensive loss component shareholders’ equity required material activity occurred 2007 2006 2005 additional disclosures required sfas 133 presented hedges recognized assets liabilities firm commitments itt maintains multicurrency debt portfolio fund operations itt times uses interest rate swaps manage debt portfolio related financing costs interest rate structure fourth quarter 2005 terminated interest rate swaps established manage interest rate exposure associated certain longterm debt terminated swaps effectively converted much longterm debt mentioned note 15 “debt” fixed variable rate borrowings fair value instruments time termination 695 accreted income remaining terms underlying debt mature various dates 2025 december 31 2007 2006 remaining balance accreted income 592 639 respectively december 31 2007 2006 foreign currency forward contracts notional amounts 1158 1154 respectively hedge value recognized assets liabilities firm commitments fair values associated foreign currency contracts determined using net position contracts applicable spot rates forward rates reporting date fair values contracts immaterial december 31 2007 2006 respectively ineffective portion changes fair values hedge positions reported expense operating income immaterial 2007 2006 2005 amounts excluded measure effectiveness hedges future cash flows december 31 2007 2006 itt foreign currency cash flow hedges outstanding changes forecasted transactions covered period regarding probability occurring would require amounts reclassified earnings note 18 employee benefit plans investment savings plans sponsor numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require us match percentage employee contributions certain limits matching contributions charged income amounted 366 356 325 years ended 2007 2006 2005 respectively pension plans itt sponsors numerous defined benefit pension plans fund employee pension benefits except countries outside us funding required addition sponsored pension plans certain employees participate multiemployer pension plans sponsored local national unions contribution plans amounted 08 12 13 2007 2006 2005 respectively postretirement health life insurance plans itt provides health care life insurance benefits certain eligible retired employees prefunded itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated portion health care life insurance obligations prefunding accomplished taxeffective basis changes benefit obligations plan assets funded status years ended 2007 2006 follows amounts recognized consolidated balance sheets december 31 2007 2006 consist amounts recognized accumulated comprehensive income loss december 31 2007 2006 consist estimated net loss prior service cost amortized accumulated comprehensive income loss net periodic benefit cost next fiscal year follows accumulated benefit obligation defined benefit pension plans 50894 48678 december 31 2007 2006 respectively information pension plans accumulated benefit obligation excess plan assets itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated components net periodic benefit cost amounts recognized comprehensive income years 2007 2006 2005 follows assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary assumed rate future increases per capita cost health care health care trend rate 80 2008 decreasing ratably 50 2016 increasing health care trend rates one percent per year would effect increasing benefit obligation 383 aggregate service interest cost components 33 itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated decrease one percent health care trend rate would reduce benefit obligation 315 aggregate service interest cost components 27 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various indices discussion actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial position results operations plan assets pension welfare benefit plans’ assets comprise broad range domestic foreign securities fixed income investments hedge funds cash equivalents assets domestic pension us master trust covers relatively domestic pension plans various welfare benefit plan trusts follows current asset allocation target domestic pension funds apportions 74 equity market investments including private equity investments 26 fixed income instruments hedge funds commodities investment stock within us master trust approximated 1 2007 2006 contributions currently anticipate making contributions pension plans range 250 300 2008 75 expected made first quarter cash flows estimated future benefit payments following benefit payments covering pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees note 19 stockbased longterm incentive employee compensation itt adopted sfas 123r january 1 2006 using modified prospective method described accounting standard sfas 123r requires cost stock options issued equity awards measured fair value grant date recognized income statement consolidated financial statements year ended december 31 2007 2006 reflect impact sfas 123r accordance modified prospective transition method consolidated financial statements prior periods restated reflect include impact sfas 123r stockbased longterm incentive employee compensation cost reduced consolidated results operations follows total stockbased compensation costs capitalized inventory immaterial periods presented stockbased compensation expense recognized consolidated income statements year ended december 31 2007 2006 based awards ultimately expected vest accordingly expense itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated reduced estimated forfeitures sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates proforma information required sfas 123r periods prior fiscal 2006 accounted forfeitures occurred prior adoption sfas 123r applied apb 25 account stockbased awards following table details effect net income diluted net income per share compensation expense stockbased awards recorded 2005 based fair value method sfas 123r 1 net income net income per share include stockbased compensation expense employee stock options sfas 123r adopt recognition provisions sfas 123r 2 stockbased compensation expense calculated based proforma application sfas 123r 3 amount includes total stockbased longterm incentive employee compensation expense entities presented discontinued operations 4 net income net income per share represents proforma information based sfas 123r prior january 1 2006 stock option restricted stock compensation plans stock option restricted share award incentive plans provide awarding options common shares restricted common shares employees nonemployee directors options exercisable seven tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation common shares six nine years date grant options become exercisable upon earlier attainment specified market price appreciation itt’s common shares threeyear period commencing date grant exercise price per share fair market value underlying common stock option date option granted restricted shares typically vest three years date grant itt makes shares available exercise stock options vesting restricted shares purchasing shares open market issuing shares treasury itt 2003 equity incentive plan “2003 equity incentive plan” approved shareholders established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 122 december 31 2007 26 net shares available future grants 2007 2006 itt awarded 04 05 restricted shares respectively weighted average restriction periods three years 2003 equity incentive plan replaced 2002 itt stock option plan nonemployee directors itt 1996 restricted stock plan nonemployee directors 1994 itt incentive stock plan prospective basis awards granted prior plans continue vest exercisable accordance original terms however future grants made prior plans itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated summary status stock option restricted stock shares december 31 2007 2006 2005 changes years ended presented restricted shares restricted stock unit awards granted years ended december 31 2007 2006 2005 fair market values based itt’s stock price date grant vesting periods three years itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated outstanding restricted shares include 01 shares issued nonemployee directors payment annual retainer cost expected recognized ratably weighted average period 13 years intrinsic value options exercised amount stock price exceeded exercise price options date exercise 2007 2006 2005 707 1008 1737 respectively 2007 amount cash received exercise stock options 654 associated tax benefit realized 200 sfas 123r requires classify financing activity cash flows attributable excess tax benefits stock option exercises cash provided operating activities decreased cash provided financing activities increased 150 167 years ended december 31 2007 2006 respectively related excess tax benefits stock options restricted stock following table summarizes information itt’s stock options december 31 2007 aggregate intrinsic value preceding table represents total pretax intrinsic value based itt’s closing stock price 6604 december 31 2007 would received option holders option holders exercised options date options exercisable december 31 2007 inthemoney december 31 2007 total number stock options itt expects vest including already vested 83 million stock options weightedaverage exercise price 3764 aggregate intrinsic value 2502 weightedaverage remaining contractual life 49 years december 31 2007 413 total unrecognized compensation cost related nonvested awards granted stock option restricted stock plans cost expected recognized ratably weightedaverage period 18 years itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated fair value option grant estimated date grant using binomial lattice pricing model 2007 2006 2005 following weightedaverage assumptions 2007 2006 2005 expected volatilities based itt’s stock price history including implied volatilities traded options stock itt uses historical data estimate option exercise employee termination behavior within valuation model employee groups option characteristics considered separately valuation purposes expected life represents estimate period time options expected remain outstanding expected life provided represents weighted average expected behavior certain groups employees historically exhibited different behavior riskfree rate based us treasury yield curve effect time option grant longterm incentive plan itt 1997 longterm incentive plan “ltip” approved shareholders 1997 authorizes performance awards made key employees itt ltip considered liability plan provisions sfas 123r accordingly itt required reassess fair value ltip awards end reporting period payment target cash awards made end applicable threeyear performance period based itt’s total shareholder return performance measured total shareholder return performance stocks comprising sp industrials index fair value award calculated quarterly basis using monte carlo simulations threeyear volatility outstanding awards december 31 2007 approximately 16 number companies included applicable benchmark group range 305 340 awards outstanding december 31 2007 december 31 2007 189 total unrecognized compensation cost related nonvested awards granted ltip cost expected recognized ratably weightedaverage period 14 years total cash paid settle ltip liability 176 172 157 years ended 2007 2006 2005 respectively note 20 capital stock itt authority issue aggregate 300 shares capital stock 250 shares designated “common stock” par value 1 per share 50 shares designated “preferred stock” par stated value december 31 2007 2006 254 266 shares common stock held treasury respectively note 21 commitments contingencies company time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities product liabilities including asbestos employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures company continue defend vigorously claims although ultimate outcome legal matter cannot predicted certainty based present information including company’s assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact financial position results operations cash flows company consolidated basis environmental accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies company’s environmental liability includes matters associated properties containing disposed recycled wastes generated current former properties itt nearby properties impacted contamination originating properties difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated parties uncertainty regarding extent contamination company’s share liability conditions selection alternative remedies changes cleanup standards management’s opinion total amount accrued related receivables appropriate based existing facts circumstances management anticipate liabilities material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party “prp” limited number sites united states environmental protection agency “epa” andor similar state agency comprehensive environmental response compensation liability act state equivalent december 31 2007 company responsible alleged responsible approximately 90 ongoing environmental investigation remediation sites various countries sites various stages investigation andor remediation many proceedings company’s liability considered de minimis december 31 2007 company’s best estimate environmental liabilities 1247 approximates accrual related investigation remediation ground water soil vapor well related legal fees estimate includes company’s estimated accrual environmental liabilities associated former automotive business see note 5 “discontinued operations” additional information low range estimate environmental liabilities 946 high range estimate liabilities 2132 annual basis company spends 80 120 environmental remediation liabilities estimates related accruals reviewed periodically updated progress investigation remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company involved environmental proceeding glendale california relating san fernando valley company one numerous prps alleged epa contributed contamination aquifers january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed funding operation water treatment plant operation water treatment plant expected continue 2013 time separate allocation continued operation plant expected itt prps continue pay respective allocated costs operation water treatment plant 2007 one prp defaulted percentage share costs prp group pursuing remedy default however default may increase itt’s allocated share liability additionally modification allowable hexavalent chromium national pollution discharge elimination system discharge standard occurred 2007 impact change may result additional costs potential modifications water treatment plant december 31 2007 company’s accrual operation water treatment plant 2013 85 representing best estimate low estimate liability 51 high estimate 140 prior 1995 distribution agreement see “company history certain relationships” within part item 1 annual report form 10k description distribution agreement predecessor itt corporation operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected former manufacturing site since itt completed investigation site coordination state federal environmental authorities process evaluating various remedies final remedy site yet selected currently estimated range remediation 28 167 company accrued 54 matter approximates best estimate company involved number prps regarding property city bronson michigan operated former subsidiary predecessor itt corporation higbie manufacturing prior time itt acquired higbie company prps investigating remediating discharges industrial waste occurred early 1930s company’s current estimates exposure 69 156 accrual matter 110 represents best estimate company itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated anticipate default part prps itt pursuing legal claims potentially responsible parties past future costs itt received notice potential claims third parties company operated facility rochester new york called rochester form machine 1979 2003 rochester form machine former subsidiary predecessor itt corporation known itt higbie itt acquired higbie 1972 august 2003 company subsidiary itt fluid handling systems entered order consent new york state department environmental conservation investigate remediate facilityrelated impacts soil vapor indoor air ground water december 31 2007 company’s current estimate exposure 39 158 accrual matter 63 represents best estimate company pursuing legal claim certain prps may share responsibility impacts suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including matters listed discovery procedural matters changes california law various appeals prolonged case several years case appeal california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions however april 2007 superior court vacated earlier ruling dismissing claims based california supreme court’s decision powerine oil co v superior court result court appeals dismissed appeal moot thus case back superior court parties engaged informal discovery information exchange anticipation settlement conferences necessary litigation course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive product liability matters company including subsidiary goulds pumps inc “goulds” joined defendant numerous industrial companies product liability lawsuits alleging injury due asbestos claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos december 31 2007 approximately 103000 open claims company 8000 prior year frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2007 company resolved approximately 12200 claims nearly claims dismissed settlement small percentage claims average amount settlement per claim nominal substantially defense settlement costs covered insurance company’s estimated accrued costs net expected insurance recoveries resolution pending claims 248 218 december 31 2007 2006 respectively probable company incur additional costs claims filed future additional costs reasonably estimable time although impossible predict ultimate outcome product liability suits based current information company’s experience handling matters substantial insurance program management believe claims material adverse effect company’s consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property casualty company “ace” et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 parties cases seeking appropriate allocation responsibility company’s historic asbestos liability exposure among insurers california action filed venue company’s environmental insurance recovery litigation pending since 1991 new york action stayed favor california suit itt ace nationwide indemnity successfully resolved matter company working parties suit resolve matter insurers itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated addition utica national “utica” goulds negotiated coverageinplace agreement allocate goulds’ asbestos liabilities insurance policies issued utica issued others terms settlement provide goulds substantial coverage utica asbestos liabilities goulds continue seek coverage insurers liabilities company provides indemnity us silica company silica personal injury suits former subsidiary pennsylvania glass sand filed prior september 12 2005 itt sold stock pennsylvania glass sand us silica company 1985 company’s indemnity paid part historic product liability carrier however september 2005 carrier communicated itt would longer provide insurance claims october 4 2005 itt filed suit insurer itt v pacific employers insurance co ca 05cv 5223 seeking defense costs indemnity insurance carrier pennsylvania glass sand product liabilities april 2007 court granted company’s motion summary judgment carrier’s duty defend silica cases silica related costs net insurance recoveries shared pursuant distribution agreement see “business company history certain relationships” description distribution agreement insurer appealed court’s decision matter returned superior court part determination several factual issues company continue seek past future defense costs cases carrier management believes matters material adverse effect company’s consolidated financial position results operations cash flows october 25 2006 hartford fencourt reinsurance company “fencourt” subsidiary hartford filed contribution claim itt losses incurred fencourt result reinsurance contract obligation owes century indemnity company subsidiary ace insurance century insurer itt’s domestic casualty program 1978 1992 fencourt formed 1978 captive insurer itt provided reinsurance century certain itt selfinsured losses fencourt transferred hartford demerger itt 1995 matter covered 1995 distribution agreement see “business company history certain relationships” agreement contains clear language hartford agreed assume liabilities fencourt indemnify itt claims fencourt case stayed pending resolution arbitration proceeding currently pending new jersey company believes matter material adverse effect company’s consolidated financial position results operations cash flows december 2005 company received anonymous complaint regarding possible payment commissions foreign government officials employees nanjing goulds pumps company nanjing china commission payments may violate foreign corrupt practices act company conducting investigation utilizing internal external resources voluntarily disclosed preliminary results investigation united states department justice securities exchange commission conclusion investigation us government could impose civil penalty criminal fine andor order company disgorge profits derived contracts inappropriate commissions paid company expect matter material adverse impact financial position results operations cash flows company consolidated basis march 27 2007 company reached settlement relating investigation itt night vision division’s compliance international traffic arms regulations “itar” part settlement company pleaded guilty united states district court western district virginia one itar violation relating improper handling sensitive documents one itar violation involving making misleading statements company assessed total 50 fines forfeitures penalties total 30 paid 2007 remaining balance paid five years including 4 first quarter 2008 liability fully accrued december 31 2006 us government agreed defer action regarding third count itar violations pending company’s implementation remedial action plan company also agreed invest 500 next five years research development capital improvements night vision products result guilty plea company became subject automatic statutory “debarment” future export licenses however debarment applicable portion company’s night vision business expected net effect debarment restrict less 5 total night vision sales period less one year company seek reinstatement export privileges one year october 11 2007 company department defense finalized administrative compliance agreement wherein company itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated agreed take certain remedial actions including implementing compliance programs appointing independent monitor oversight company’s compliance programs december 28 2007 company finalized administrative agreement department state management believes matters material adverse effect company’s consolidated financial position results operations cash flows april 17 2007 company’s board directors received letter behalf shareholder requesting board take appropriate action employees responsible actions described company’s agreements united states attorney’s office western district virginia disclosed form 8k filed march 30 2007 board directors appointed special litigation committee evaluate request april 20 2007 company received notice shareholder derivative action sylvia piven trustee trust agreement dated april 3 1973 fbo sylvia b piven derivatively behalf itt corporation v steve loranger et al itt corporation us district court southern district new york ca 07cv2878 “piven” action alleging company’s board directors breached fiduciary duties connection company’s compliance programs night vision business piven complaint seeks compensatory punitive damages company directors removal directors election new directors july 12 2007 company received notice second shareholder derivative action norman levy derivatively behalf itt industries inc v steven r loranger et al itt industries inc us district court southern district new york ca 07cv6339 “levy” action levy complaint asserts similar claims piven complaint seeks compensatory damages company directors august 20 2007 company received notice third derivative action anthony reale v steven r loranger et al itt company sic us district court southern district new york ca 07cv6339 “reale” action reale action also names john doe defendants individual managers allegedly responsible actions gave rise night vision guilty plea well law firm advised company connection voluntary disclosure violations three actions consolidated us district court southern district new york itt corporation derivative litigation ca 07cv2878 clb company filed motion dismiss consolidated complaint currently pending district court management believes suit material adverse effect company’s consolidated financial position results operations cash flows note 22 guarantees indemnities warranties guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities existing material indemnities discussed detail december 2007 entered salestype lease agreement corporate aircraft leased aircraft back fiveyear operating lease provided lease residual value guarantee counterparty amount 502 maximum amount undiscounted future payments would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2007 believe loss contingency probable therefore accrual recorded financial statements itt number individually immaterial guarantees outstanding december 31 2007 may affected various conditions external forces could require payments made guarantees believe payments material adverse impact financial position results operations cash flow consolidated basis foreseeable future itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated product warranties itt warrants numerous products terms vary widely general itt warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall changes product warranty accruals december 31 2007 2006 follows itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated note 23 business segment information 1 includes amortization stock compensation itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated net sales external customers attributed individual regions based upon destination product service delivery sales revenues product category net intercompany balances follows defense electronics services business segment sales revenues united states government 39203 32440 26683 2007 2006 2005 respectively apart united states government commercial customer accounted 10 sales revenues fluid technology business segment contains itt’s pump pumping system businesses including brands flygt® goulds pumps® bell gossett® ac pump® marlow® flowtronex® lowara® red jacket water products® vogel® itt world’s largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products well systems municipal industrial residential agricultural commercial applications itt goes market brand names mcdonnell miller® hoffman specialtytm itt standard® addition mentioned additionally fluid technology business segment produces wastewater aeration diffuser systems brands sanitaire® abj® ultraviolet ozone water disinfection systems wedeco® brand membrane filtration bioreactor systems itt advanced treatment name addition itt also supplying rough filtration pressure filtration clarification systems water wastewater treatment utilities leopold brand name segment comprises approximately 39 itt’s sales revenues approximately 38 segment operating income 2007 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 43 sales revenues business segment generated contracts technical support services itt provides military government agencies approximately 94 89 83 2007 2006 2005 defense electronics services sales revenues respectively us government defense electronics services business segment comprises 46 itt’s sales revenues 45 segment operating income 2007 sales revenues edo period december 20 2007 december 31 2007 accounted approximately 1 defense electronics services business segment edo designs manufactures diverse range products aerospace defense intelligence commercial markets major product groups include defense electronics communications aircraft armament systems undersea warfare integrated composite structures professional engineering services itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated motion flow control motion flow control business segment produces switches valves industrial aerospace applications products marine leisure markets brands jabsco® rule® flojet® danforth® system components whirlpool baths hot tub spa markets hydroair® brand specialty shock absorbers brands koni® enidine® brake components transportation industry connectors used communications transportation aerospace industrial applications marketed cannon® brand electromechanical actuators servo motors cnc systems industrial aerospace applications motion flow control business segment comprises approximately 15 itt’s sales revenues approximately 17 segment operating income 2007 corporate primarily includes operating results assets corporate headquarters note 24 quarterly results 2007 2006 unaudited sum quarters’ earnings per share equal full year amounts due rounding itt corporation subsidiaries notes consolidated financial statements continued millions except per share amounts unless otherwise stated table reflects range market prices itt’s common stock 2007 2006 prices reported consolidated transaction reporting system new york stock exchange principal market itt’s common stock traded symbol “itt” common stock listed new york euronext exchanges period january 1 2008 january 31 2008 high low reported market prices itt’s common stock 6601 5271 respectively itt declared dividends 0175 per common share first quarter 2008 22125 holders record itt’s common stock january 31 2008 index schedule ii valuation qualifying accounts s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation registrant janice klettner janice klettner vice president chief accounting officer principal accounting officer february 28 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 ii5 ii6 ii7item 15 exhibits financial statement schedule documents filed part report 1 see index consolidated financial statements appearing page 45 list financial statements filed part report 2 see exhibit index beginning pages ii2 list exhibits filed incorporated herein part report b financial statement schedules omitted absence conditions required information included consolidated financial statements filed part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt corporation white plains new york audited accompanying consolidated balance sheets itt corporation subsidiaries “company” december 31 2008 2007 related consolidated statements income comprehensive income cash flows changes shareholders’ equity three years period ended december 31 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt corporation subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements company changed method accounting uncertain income tax positions 2007 discussed note 1 consolidated financial statements company changed method accounting defined pension postretirement plans 2006 also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 25 2009 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp new york new york february 25 itt corporation subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements comprehensive loss income accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated balance sheets 1 shares outstanding include unvested restricted common stock 11 08 december 31 2008 2007 respectively accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements changes shareholders’ equity accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries notes consolidated financial statements dollars share amounts millions unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt corporation majority owned subsidiaries unless context otherwise indicates references herein “itt” “the company” words “we” “us” “our” include itt corporation subsidiaries itt consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 21 “business segment information” information segments use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates sales revenue recognition itt recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services business segment certain businesses within fluid technology business segment generally recognize sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones percentage costs incurred total costs estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified itt revenue arising claims process recognized either income offset potential loss reliably estimated realization probable accruals estimated expenses related warranties made time products sold services rendered recorded component cost sales revenues accruals established using historical information nature frequency average cost warranty claims estimates future costs research development significant costs incurred year connection research development “rd” programs expected contribute future earnings rd costs specifically covered contracts charged expense incurred rd costs incurred contracts customers charged directly related contracts reported component costs sales revenues amount rd costs incurred contracts customers included component costs sales revenues amounted 9352 7089 4993 2008 2007 2006 respectively cash equivalents itt considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout “fifo” market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout “lifo” method represent 76 97 total 2008 2007 inventories respectively would material difference value inventories fifo method used us value inventories see note 9 “inventories net” information longlived asset impairment losses record impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount see note 4 “restructuring asset itt corporation subsidiaries notes consolidated financial statements continued impairment charges” discussion impairment losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years see note 10 “plant property equipment net” information goodwill intangible assets accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant see note 11 “goodwill intangible assets net” information foreign currency translation balance sheet accounts translated exchange rate effect end period income statement accounts translated average rates exchange prevailing period gains losses foreign currency translations reflected cumulative translation adjustments component shareholders’ equity national currencies foreign companies generally functional currencies net gainslosses foreign currency transactions reported currently selling general administrative expenses “sga” 39 17 07 2008 2007 2006 respectively employee benefit plans itt accounts defined benefit pension plans postretirement benefit plans using actuarial models required sfas 87 “employers’ accounting pensions” “sfas 87” sfas 106 “employers’ accounting postretirement benefits pensions” “sfas 106” respectively models use attribution approach generally spreads individual events service lives employees plan examples “events” changes actuarial assumptions discount rate compensation increase mortality effective december 31 2006 adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” effectively requires balance sheet recognition underfunded overfunded status pension postretirement benefit plans recognize changes funded status comprehensive income actuarial gains losses prior service costs credits recognized sfas 87 sfas 106 must recognized accumulated comprehensive income within shareholders’ equity net taxes amortized component net periodic benefit cost see note 16 “employee benefit plans” information benefit plans stockbased compensation itt adopted sfas 123r “sharebased payment” “sfas 123r” effective january 1 2006 prospective basis accounting stockbased compensation accordingly recognize employee services received exchange awards equity instruments based grantdate fair value award determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award generally stockbased compensation costs reflected selling general administrative expenses see note 17 “stockbased longterm incentive employee compensation” detail income taxes determine provision income taxes using asset liability approach deferred income taxes represent expected future tax consequences temporary differences carrying amounts tax basis assets liabilities record valuation allowance reduce deferred tax assets uncertainty regarding reliability exists itt adopted financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” effective january 1 2007 effectively changed accounting uncertain tax positions related disclosures see note 6 “income taxes” details commitments contingencies record accruals commitments loss contingencies probable amount reasonably estimated addition legal fees accrued cases loss probable related fees reasonably estimated accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies estimated liability reduced reflect anticipated participation itt corporation subsidiaries notes consolidated financial statements continued potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities primarily included liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets known claim realized see note 19 “commitments contingencies” details earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options restricted stock see note 7 “earnings per share” information fair value measurements accordance sfas 157 “fair value measurements” “sfas 157” determine fair value price would received sell asset paid transfer liability orderly transaction use hierarchical structure prioritize inputs valuation techniques used measure fair value three broad levels fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities “level 1” quoted market prices similar assets liabilities active markets “level 2” lowest priority unobservable inputs eg discounted cash flows “level 3” note 2 new accounting pronouncements september 2006 fasb issued sfas 157 became effective january 1 2008 except amended fasb staff positions “fsp” 1571 1572 1573 sfas 157 defines fair value establishes framework measuring fair value expands related disclosure requirements fsp 1571 excludes sfas 13 “accounting leases” related interpretive accounting pronouncements address leasing transactions fsp 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis fiscal years beginning november 15 2008 fsp 1573 clarifies application sfas 157 market active provides example determine fair value financial asset inactive market itt adopted provisions sfas 157 amended exception application statement nonrecurring nonfinancial assets nonfinancial liabilities adoption statement material effect itt’s financial statements fair value measurements made year ended december 31 2008 itt adopt provisions statement related nonrecurring nonfinancial assets nonfinancial liabilities effective january 1 2009 expect adoption material effect itt’s financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” effective january 1 2008 sfas 159 issued fasb february 2007 permits entity measure certain financial assets financial liabilities fair value sfas 159 entities electing fair value option report unrealized gains losses earnings subsequent reporting date fair value option may elected instrumentbyinstrument basis exceptions long applied instrument entirety sfas 159 establishes presentation disclosure requirements help financial statement users understand effect entity’s election earnings sfas 159 requires prospective application entity elects fair value option items existing date adoption difference carrying amount fair value included cumulativeeffect adjustment opening balance retained earnings itt adopted statement january 1 2008 elected apply fair value option eligible assets liabilities thus adoption statement material effect itt’s financial statements year ended december 31 2008 december 2007 fasb issued sfas 141 revised 2007 “business combinations” “sfas 141r” replaces sfas 141 “business combinations” sfas 141r retains fundamental requirements sfas 141 acquisition method accounting used business combinations acquirer identified business combination however sfas 141r changes method applying acquisition method number significant areas including acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs itt corporation subsidiaries notes consolidated financial statements continued associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense sfas 141r effective prospective basis business combinations acquisition date beginning first annual period subsequent december 15 2008 exception accounting valuation allowances deferred taxes acquired tax contingencies sfas 141r amends sfas 109 “accounting income taxes” adjustments made valuation allowances deferred taxes acquired tax contingencies associated acquisitions closed prior effective date sfas 141r would also apply provisions sfas 141r see note 6 “income taxes” discussion early adoption sfas 141r permitted itt adopt statement effective january 1 2009 expect material impact itt’s financial statements upon adoption effects future periods depend upon nature significance future business combinations subject statement december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements amendment arb 51” statement requires recognition noncontrolling interest minority interest separate component within equity within consolidated balance sheet also requires amount consolidated net income attributable parent noncontrolling interest clearly identified presented within consolidated statement income statement also amends certain arb 51’s consolidation procedures make consistent requirements sfas 141r sfas 160 effective fiscal years interim periods within fiscal years beginning december 15 2008 earlier adoption prohibited itt adopt statement effective january 1 2009 expect adoption material effect itt’s financial statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” statement amends sfas 133 requiring enhanced disclosures entity’s derivative instruments hedging activities change sfas 133’s scope accounting sfas 161 requires increased qualitative quantitative creditrisk disclosures entity’s derivative instruments hedging activities sfas 161 effective fiscal years interim periods within fiscal years beginning november 15 2008 earlier adoption permitted itt adopt statement effective january 1 2009 statement impact itt’s financial results statement disclosure nature june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp concluded outstanding unvested sharebased payment awards contain rights nonforfeitable dividends participate undistributed earnings common shareholders therefore considered participating securities purposes computing earnings per share entities participating securities convertible common stock required use “twoclass” method computing earnings per share twoclass method earnings allocation formula determines earnings per share class common stock participating security according dividends declared accumulated participation rights undistributed earnings fsp effective fiscal years beginning december 15 2008 interim periods within fiscal years early adoption prohibited itt adopt statement effective january 1 2009 expect adoption material effect itt’s financial statements december 2008 fasb issued fsp fas 132r1 “employers’ disclosure postretirement benefit plan assets” amends sfas 132r require disclosures employers’ plan assets defined benefit pension postretirement plan including employers’ investing strategies major categories plan assets concentrations risk within plan assets valuation techniques used measure fair value plan assets fsp effective fiscal years ending december 15 2009 earlier application provisions fsp permitted statement impact itt’s financial results statement disclosure nature note 3 acquisitions 2008 spent 492 net cash acquired acquisitions believe material individually aggregate results operations financial position well acquisitionrelated costs additionally spent 2265 connection companies acquired 2007 see information acquisitions edo corporation december 20 2007 itt acquired outstanding shares edo corporation “edo” global aerospace itt corporation subsidiaries notes consolidated financial statements continued defense company 56 per outstanding share edo plus assumption debt valued transaction approximately 18 billion contingent consideration related acquisition edo designs manufactures diverse range products defense intelligence commercial markets provides related engineering professional services addition edo allows defense electronics services business segment provide broader set solutions wider band customers furthermore expect better positioned play important role us military’s vital transformational initiatives itt’s results operations year ended december 31 2007 reflect impact results operations edo december 20 2007 december 31 2007 excess purchase price fair value net assets acquired 12004 none tax deductible recorded goodwill defense electronics services business segment intangible assets relating acquisition totaled 4424 december 31 2007 entirely consisting customer relationships weighted average amortization period approximately 13 years following table summarizes preliminary estimates fair values assets acquired liabilities assumed edo december 20 2007 effective date acquisition finalized purchase price allocation 2008 resulted increase recorded goodwill 366 decrease 315 amortizable intangible assets 2007 acquisitions 2007 spent 4105 net cash acquired including direct acquisition costs acquisitions believe material individually aggregate results operations financial position significant acquisitions international motion control inc “imc” acquired september 10 2007 3905 net cash acquired including direct acquisition costs imc global developer motion control products market leader manufacture specialty energy absorption industrial aviation control automation technology imc 2006 revenues approximately 200 adds complementary mix highly engineered missioncritical products itt’s motion flow control business segment acquisitions 2006 spent 895 acquisitions believe material individually aggregate results operations financial position note 4 restructuring asset impairment charges fourth quarter 2008 restructuring activities asset impairment charges response current anticipated market conditions accelerated restructuring activities across businesses fourth quarter 2008 restructuring actions resulted net restructuring charge 563 related payments 95 anticipate additional 62 restructuring charges incurred payments 477 occur 2009 related actions itt corporation subsidiaries notes consolidated financial statements continued components charges associated actions announced fourth quarter 2008 primarily represent reduction structural costs business segments planned closure facility within motion flow control business segment planned position eliminations total 1258 including 601 factory workers 629 office workers 28 management employees additionally fourth quarter 2008 recorded net restructuring asset impairment charge 53 reflecting costs 39 related prior actions reversal 04 restructuring accruals management determined would required well asset impairment charge 18 related writedown software due decision cancel project result organizational realignment restructuring activities 2008 recorded net restructuring charge 746 reflecting costs 669 related new actions 93 related prior years’ plans well reversal 16 restructuring accruals management determined would required components charges associated actions announced 2008 primarily represent reduction structural costs business segments planned closure facility motion flow control business segment facility defense electronics services business segment planned position eliminations total 1360 including 614 factory workers 704 office workers 42 management employees costs associated prior years’ plans primarily reflect severance lease cancellation related costs 2008 asset impairment charges 2008 recognized 29 charges related impairment longlived assets fourth quarter 2008 recognized asset impairment charge 18 related writedown software due decision cancel project result organizational realignment third quarter 2008 recognized impairment charge 11 related one motion flow control businesses reflecting reduction expected future earnings business itt corporation subsidiaries notes consolidated financial statements continued restructuring activities 2007 recorded net restructuring charge 611 reflecting costs 579 related new actions 74 related prior year plans well reversal 42 restructuring accruals management determined would required components charges associated actions announced 2007 represent reduction structural costs business segments planned closure four facilities fluid technology business segment one facility motion flow control business segment two facilities defense electronics services business segment planned position eliminations total 729 including 341 factory workers 345 office workers 43 management employees costs associated prior years’ plans primarily reflect additional costs related adjustment writeoff leased space well asset writeoffs severance costs 2007 asset impairment charges fourth quarter 2007 recognized 50 charges related impairment longlived assets impairment result determination two businesses one within motion flow control business segment one within fluid technology business segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecasts businesses reflect current business conditions asset impairment charges 42 08 recorded within motion flow control fluid technology business segments respectively restructuring activities 2006 recorded net restructuring charge 517 reflecting costs 527 related new actions 38 related prior year plans well reversal 48 restructuring accruals management determined would required components charges associated actions announced 2006 represent reduction structural costs business segments closure three facilities fluid technology business segment two motion flow control business segment one defense electronics services business segment planned position eliminations total 816 including 427 factory workers 360 office workers 29 management employees costs associated prior years’ plans primarily reflect additional severance costs itt corporation subsidiaries notes consolidated financial statements continued following table displays rollforward restructuring accruals itt corporation subsidiaries notes consolidated financial statements continued accrual balance december 31 2008 584 includes 512 severance 72 facility carrying costs following reconciliation employee position eliminations associated restructuring activities 2008 end 2008 planned facility closures one facility motion flow control business segment remains closed closure expected first half 2009 note 5 discontinued operations switches 2007 sold majority switches businesses private equity firm net proceeds 2232 aftertax gain 844 third quarter 2008 completed sale remaining component switches businesses buyer net proceeds 51 result recorded aftertax gain sale 54 year ended december 31 2008 revenues operating income switches businesses reported discontinued operations follows fluid handling systems first quarter 2006 completed sale automotive brake fueling tubing components business “fluid handling systems” “fhs” privately held company net proceeds 1877 gain 190 business component motion flow control business segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry revenues operating income 412 26 respectively year ended december 31 2006 richter first quarter 2006 also completed sale industrial nonmetallic lined pumps valves business “richter” private equity investor net proceeds 248 gain 222 business component fluid technology business segment manufacturer pumps valves selected segments chemical fine chemical pharmaceutical industries revenues operating income 20 02 respectively year ended december 31 2006 itt corporation subsidiaries notes consolidated financial statements continued note 6 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards deferred tax assets liabilities include following deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 14748 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions taxes provided outside basis differences since differences expected reverse foreseeable future itt corporation subsidiaries notes consolidated financial statements continued following attributes available utilization december 31 2008 valuation allowance 2654 exists certain us subsidiary state net operating loss carryforwards certain foreign net operating loss carryforwards certain us federal capital loss carryforwards may realized december 31 2007 valuation allowance 2122 existed certain us subsidiary state net operating loss carryforwards certain foreign net operating loss carryforwards certain us federal capital loss carryforwards may realized 2008 valuation allowance increased 532 resulting following increase 41 attributable foreign net operation loss carryforwards decrease 136 attributable state net operating loss carryforwards increase 570 attributable state deferred tax asset pension increase 57 attributable us federal state capital loss carryforwards shareholders’ equity december 31 2008 2007 reflects tax benefits related stockbased compensation 2008 2007 approximately 86 215 respectively internal revenue service “irs” currently examining federal consolidated income tax returns years ended december 31 2004 december 31 2006 irs completed examination years 2003 december 31 2008 believe accrual income taxes payable sufficient cover potential liabilities arising examinations uncertain tax positions fin 48 recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized consolidated financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement reconciliation beginning ending amount unrecognized tax benefits december 31 2008 follows january 1 2009 adopt fas 141r subsequent recognition previously unrecognized tax position reflected tax expense attributable continuing discontinued operations december 31 2008 recognition uncertain tax positions would affect effective tax rate 769 included balance december 31 2008 tax positions 598 deferred tax accounting would impact annual effective rate could accelerate payment cash taxing authority addition tax positions 82 attributable discontinued operations would impact annual effective tax rate believe unrecognized tax benefits significantly change within twelve months reporting date many cases uncertain tax positions related tax years remain subject examination relevant taxing authorities following table summarizes open tax years major jurisdiction itt corporation subsidiaries notes consolidated financial statements continued classify interest relating tax matters component interest expense tax penalties component income tax expense consolidated income statement years ended december 31 2008 2007 recognized 97 67 interest penalties respectively 281 362 payment interest penalties accrued december 31 2008 2007 respectively note 7 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows shares underlying stock options excluded computation diluted earnings per share antidilutive follows amounts antidilutive restricted common stock excluded computation diluted earnings per share 2008 2007 2006 insignificant note 8 receivables net note 9 inventories net note 10 plant property equipment net itt corporation subsidiaries notes consolidated financial statements continued note 11 goodwill intangible assets net changes carrying amount goodwill years ended december 31 2008 2007 business segment follows information regarding intangible assets follows amortization expense related intangible assets 2008 2007 2006 1000 353 267 respectively estimated amortization expense five succeeding years follows customer relationships proprietary technology trademarks patents amortized weighted average lives approximately 15 years 13 years 14 years 16 years respectively impairment testing account goodwill indefinitelived intangibles accordance sfas 142 sfas 142 states goodwill indefinitelived intangible assets amortized instead reviewed impairment annually frequently impairment indicators arise conduct annual impairment testing october 1 determine able recover portion carrying value goodwill indefinitelived intangibles conducted annual goodwill impairment test october 1 2008 determined impairment subsequently updated forecast assumptions reflect declining economic conditions result reassessed goodwill impairment reporting units significantly affected changes initial projections despite declines estimated fair value certain reporting units since annual impairment test concluded impairments interim test dates itt corporation subsidiaries notes consolidated financial statements continued continue closely monitor 2009 results projections units economic conditions product endmarkets significant change market conditions estimates judgments could give rise impairment period change becomes known note 12 assets consist following itt recorded sales unconsolidated affiliates 2008 2007 2006 totaling 173 137 160 respectively additionally itt purchased 181 products unconsolidated affiliates 2008 investments unconsolidated companies exposure limited amount investment investments accounted cost method represent voting rights interests less 20 note 13 leases rentals itt leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations itt often pays maintenance insurance tax expense related leased assets rental expenses operating leases 1333 992 851 2008 2007 2006 respectively future minimum operating lease payments longterm operating leases december 31 2008 shown note 14 debt consists following 1 weighted average interest rate shortterm borrowings 617 578 december 31 2008 2007 respectively fair value shortterm loans approximates carrying value itt corporation subsidiaries notes consolidated financial statements continued 2 includes 1535 related debt acquired connection acquisition edo december 31 2007 repaid 2008 3 interest rate 016 452 december 31 2008 2007 respectively 4 weighted average interest rate 538 262 december 31 2008 2007 respectively 5 deferred gain terminated interest rate swaps accreted income remaining terms underlying debt mature various dates 2025 6 fair value longterm debt excluding deferred gain interest rate swaps 4504 4747 december 31 2008 2007 respectively yearoveryear decrease fair value primarily reflects impact principal payments certain longterm debt 7 fair value net longterm debt excluding deferred gain interest rate swaps 4371 4602 december 31 2008 2007 respectively yearoveryear decrease fair value primarily reflects impact principal payments certain longterm debt principal payments required longterm debt next five years book value assets pledged collateral amounted 466 december 31 2008 november 2005 itt entered fiveyear revolving credit agreement aggregate principal amount 125 billion effective november 8 2007 itt exercised option increase principal amount revolving credit agreement 175 billion march 2008 itt entered new 364day revolving credit agreement “march 2008 credit facility” providing additional 10 billion principal amount available borrowings result maximum amount outstanding borrowings facilities 275 billion intended purpose credit agreements provide additional liquidity source funding commercial paper program needed interest rate borrowings agreements generally based london interbank offered rate “libor” plus spread reflects itt’s debt rating commitment fee november 2005 march 2008 credit facilities 008 006 respectively total commitment provisions agreement require maintain minimum interest coverage ratio december 31 2008 compliance financial covenants prior december 2007 borrowing commercial paper revolving credit agreements could exceed 125 billion aggregate outstanding december 2007 itt board directors approved commercial paper borrowings increase 175 billion december 31 2008 commercial paper borrowings 16187 december 31 2008 itt 822 obligation associated tenyear agreement involving sale subsequent lease back certain properties terms agreement itt required make annual payments principal interest end agreement 2014 itt option repurchase applicable properties nominal fee transaction reflected debt note 15 liabilities consist following note 16 employee benefit plans investment savings plans itt sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require us match percentage employee contributions certain limits matching contributions charged income amounted 550 366 356 years ended 2008 2007 2006 respectively pension plans itt sponsors numerous defined benefit pension plans fund employee pension benefits except countries outside us funding required addition sponsored pension plans certain employees participate multiemployer pension plans sponsored local national unions contribution plans amounted 06 08 12 2008 2007 2006 respectively itt corporation subsidiaries notes consolidated financial statements continued postretirement health life insurance plans itt provides health care life insurance benefits certain eligible retired employees prefunded portion health care life insurance obligations prefunding accomplished taxeffective basis changes benefit obligations plan assets funded status years ended 2008 2007 follows amounts recognized consolidated balance sheets december 31 2008 2007 consist amounts recognized accumulated comprehensive loss december 31 2008 2007 consist fourth quarter 2008 recognized substantial decline fair market value pension plan assets contributing pretax charge comprehensive loss 21188 see “fair value plan assets” section footnote details related method judgment used value pension plan assets estimated net loss prior service cost amortized accumulated comprehensive loss net periodic benefit cost next fiscal year follows accumulated benefit obligation defined benefit pension plans 50754 50894 december 31 2008 2007 respectively information pension plans accumulated benefit obligation excess plan assets itt corporation subsidiaries notes consolidated financial statements continued components net periodic benefit cost amounts recognized comprehensive loss income years 2008 2007 2006 follows assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary assumed rate future increases per capita cost health care health care trend rate 75 2009 decreasing ratably 50 2016 increasing health care trend rates one percent per year would effect increasing benefit obligation 372 aggregate service interest cost components 29 decrease one percent health care trend rate would reduce benefit obligation 319 aggregate service interest cost components 24 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements itt corporation subsidiaries notes consolidated financial statements continued review various indices discussion actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial position results operations plan assets domestic plan assets held within itt corporation master trust covers relatively domestic pension plans various welfare benefit plan trusts follows current asset allocation domestic pension funds apportions 695 equity market investments including private equity investments 305 fixed income instruments hedge funds commodities investment stock within us master trust approximated 1 2008 2007 fair value plan assets pension welfare benefit plans’ assets comprised broad range investments including domestic foreign securities private equity fixed income investments hedge funds commodities cash equivalents available valued investments based observable market inputs observable inputs market participants would use pricing investment based market data obtained independent sources include inputs quoted prices active markets inputs quoted prices active markets either directly indirectly observable unobservable inputs reflect company’s assumptions estimates market participants would use pricing investment based best information available circumstances extent valuation based inputs less observable unobservable market determination fair value requires judgment substantial portion pension welfare benefit plans’ assets portfolio comprised hedge fund private equity investments private equity portion hedge fund investments directly observable inputs require significant judgment determine fair value plan assets based yearend fair market values absent timely availability audited yearend financial statements investments derive allocable portion investment’s fair value management incorporated judgment assumptions value investments yearend see “critical accounting estimates” within item 7 management’s discussion analysis financial condition results operations employee benefit plan information including related estimates assumptions uncertainties potential financial statement impact revisions estimates contributions funding requirements irs rules major consideration making contributions pension plans respect qualified pension plans intend contribute annually less minimum required applicable law regulations currently anticipate making contributions pension plans range 200 250 2009 55 expected made first quarter estimated future benefit payments following benefit payments covering pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees itt corporation subsidiaries notes consolidated financial statements continued note 17 stockbased longterm incentive employee compensation stockbased longterm incentive employee compensation cost reduced consolidated results operations follows stock option restricted stock compensation plans stock option restricted share award incentive plans provide awarding options common shares restricted common shares employees nonemployee directors options exercisable seven tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation common shares six nine years date grant options become exercisable upon earlier attainment specified market price appreciation itt’s common shares threeyear period commencing date grant exercise price per share fair market value underlying common stock date option granted restricted shares typically vest three years date grant itt makes shares available exercise stock options vesting restricted shares purchasing shares open market issuing shares treasury itt amended restated 2003 equity incentive plan “2003 equity incentive plan” approved shareholders established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 122 december 31 2008 50 shares available future grants 2003 equity incentive plan replaced 2002 itt stock option plan nonemployee directors itt 1996 restricted stock plan nonemployee directors 1994 itt incentive stock plan prospective basis awards granted prior plans continue vest exercisable accordance original terms however future grants made prior plans summary status stock option restricted stock shares december 31 2008 2007 2006 changes years ended presented restricted shares restricted stock unit awards granted years ended december 31 2008 2007 2006 fair market values based itt’s stock price date grant vesting periods three years itt corporation subsidiaries notes consolidated financial statements continued outstanding restricted shares include 01 shares issued nonemployee directors inpayment part annual retainer cost expected recognized ratably weighted average period 15 years intrinsic value options exercised amount stock price exceeded exercise price options date exercise 2008 2007 2006 295 707 1008 respectively 2008 amount cash received exercise stock options 344 associated tax benefit realized 121 sfas 123r requires classify financing activity cash flows attributable excess tax benefits stock option exercises cash provided operating activities decreased cash provided financing activities increased 67 150 167 years ended december 31 2008 2007 2006 respectively related excess tax benefits stock options restricted stock itt corporation subsidiaries notes consolidated financial statements continued following table summarizes information itt’s stock options december 31 2008 aggregate intrinsic value preceding table represents total pretax intrinsic value based itt’s closing stock price 4599 december 31 2008 would received option holders option holders exercised options date number options “outofthemoney” december 31 2008 included exercisable preceding table 05 million december 31 2008 total number stock options itt expects vest including already vested 80 million stock options weightedaverage exercise price 3951 aggregate intrinsic value 613 weightedaverage remaining contractual life 39 years december 31 2008 398 total unrecognized compensation cost related nonvested awards granted stock option restricted stock plans cost expected recognized ratably weightedaverage period 18 years fair value option grant estimated date grant using binomial lattice pricing model 2008 2007 2006 following weightedaverage assumptions 2008 2007 2006 expected volatilities based itt’s stock price history including implied volatilities traded options stock itt uses historical data estimate option exercise employee termination behavior within valuation model employee groups option characteristics considered separately valuation purposes expected life represents estimate period time options expected remain outstanding expected life provided represents weighted average expected behavior certain groups employees historically exhibited different behavior riskfree rate based us treasury yield curve effect time option grant longterm incentive plan itt 1997 longterm incentive plan “ltip” approved shareholders 1997 authorizes performance awards made key employees itt ltip considered liability plan provisions sfas 123r accordingly reassess fair value ltip awards end reporting period payment target cash awards made end applicable threeyear performance period based itt’s total shareholder return performance measured total shareholder return performance stocks generally comprising sp industrials index fair value award calculated quarterly basis using monte carlo simulations threeyear volatility outstanding awards december 31 2008 approximately 26 number companies included applicable benchmark group range 300 342 awards outstanding december 31 2008 itt corporation subsidiaries notes consolidated financial statements continued december 31 2008 200 total unrecognized compensation cost related nonvested awards granted ltip cost expected recognized ratably weightedaverage period 13 years total cash paid settle ltip liability 193 176 172 years ended 2008 2007 2006 respectively note 18 capital stock itt authority issue aggregate 550 shares capital stock 500 shares designated “common stock” par value 1 per share 50 shares designated “preferred stock” par stated value december 31 2008 2007 252 254 shares common stock held treasury respectively note 19 commitments contingencies itt corporation subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages relating environmental liabilities intellectual property matters copyright infringement personal injury claims employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures itt continue vigorously defend claims although ultimate outcome legal matter cannot predicted certainty based present information including assessment merits particular claim well current reserves insurance coverage expect legal proceedings material adverse impact cash flow results operations financial condition itt consolidated basis foreseeable future unless otherwise noted see “critical accounting estimates” within item 7 management’s discussion analysis financial condition results operations discussion contingent liabilities including related estimates assumptions uncertainties potential financial statement impact revisions estimates environmental ordinary course business itt subject federal state local foreign environmental laws regulations itt responsible alleged responsible ongoing environmental investigation remediation sites various countries sites various stages investigation andor remediation many proceedings itt’s liability considered de minimis itt received notification us environmental protection agency similar state foreign environmental agencies number sites formerly currently owned andor operated itt properties impacted operations contain disposed recycled materials wastes require environmental investigation andor remediation sites include instances itt identified potentially responsible party federal state environmental laws regulations accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies itt’s accrued liabilities environmental matters represent best estimates related investigation remediation environmental media water soil vapor air structures well related legal fees estimates related accruals reviewed periodically updated progress investigation remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis difficult estimate final total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent investigation remediation share liability conditions selection alternative remedial approaches changes environmental standards regulatory requirements management’s opinion total amount accrued appropriate based existing facts circumstances management anticipate liabilities material adverse effect consolidated financial position results operations cash flows following table illustrates activity related itt’s accrued liabilities environmental matters itt corporation subsidiaries notes consolidated financial statements continued following table illustrates low highend range estimated liability number active sites environmental matters suit filed 1991 california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers seeking recovery costs incurred connection certain environmental liabilities discovery procedural matters changes california law various appeals prolonged case several years case appeal california court appeals decision california superior court dismissing certain claims made itt dismissed claims costs incurred solely due administrative versus judicial actions however april 2007 superior court vacated earlier ruling dismissing claims based california supreme court’s decision powerine oil co v superior court result court appeals dismissed appeal moot case back superior court parties engaged discovery course litigation negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive product liability matters itt including subsidiary goulds pumps inc “goulds” joined defendant numerous companies product liability lawsuits alleging injury due asbestos claims allege products sold prior 1985 contained part manufactured third party eg gasket contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos december 31 2008 103006 open claims itt frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2008 resolved 5894 claims dismissed settlement modest percentage claims average amount settlement per claim nominal additionally large majority defense settlement costs covered insurance within past several years negotiated coverageinplace agreements significant insurance carriers continuing seek payment net exposure costs insurers estimated accrued costs net expected insurance recoveries resolution pending claims 276 248 december 31 2008 2007 respectively table provides additional information regarding asbestosrelated claims filed itt although impossible predict ultimate outcome current open claims based current information experience handling matters substantial insurance program believe claims material adverse effect consolidated financial position results operations cash flows probable incur additional costs claims filed future additional costs reasonably estimable time part coverageinplace agreements assumed primary responsibility administering asbestosrelated claims prior agreements asbestos claims administered paid primary insurance carriers result limited information claims engaged outside consultant construct comprehensive database existing claims database expected provide additional information nature claims allow us reassess whether reasonable estimate future claims associated costs developed effort anticipated completed second half 2009 possible estimated costs future claims net expected insurance recoveries may material results operations period recorded provide indemnity us silica company silica personal injury suits filed prior september 12 2005 former subsidiary pennsylvania glass sand itt sold stock pennsylvania glass sand us silica company itt corporation subsidiaries notes consolidated financial statements continued 1985 past three years majority silica cases involving pgs dismissed without payment currently less 4000 cases pending pgs company expects majority remaining cases also dismissed indemnity paid part historic product liability carrier however september 2005 carrier communicated us would longer provide insurance claims october 4 2005 filed suit insurer itt v pacific employers insurance co ca 05cv 5223 seeking defense costs indemnity insurance carrier pennsylvania glass sand product liabilities april 2007 court granted motion summary judgment carrier’s duty defend silica cases however decision overturned appeal matter returned superior court part determination several factual issues continue seek past future defense costs cases carrier believe matters material adverse effect consolidated financial position results operations cash flows silicarelated costs net insurance recoveries shared pursuant distribution agreement see “business company history certain relationships” description distribution agreement october 25 2006 fencourt reinsurance company “fencourt” subsidiary hartford filed contribution claim itt losses incurred fencourt result reinsurance contract obligation owes century indemnity company fencourt reinsurance co ltd v itt industries inc ca 064786 us dct edpa century indemnity company insurer itt’s domestic casualty program 1978 1992 fencourt formed 1978 captive insurer predecessor itt corporation provided reinsurance century certain itt selfinsured losses fencourt transferred hartford demerger itt 1995 matter covered 1995 distribution agreement see “business company history certain relationships” agreement contains clear language hartford agreed assume liabilities fencourt indemnify itt claims fencourt case stayed pending resolution arbitration proceeding pending american arbitration association new jersey january 20 2009 arbitrator issued favorable decision itt liable losses incurred fencourt parties reviewing case determine matters remain decided arbitrator management believes matter material adverse effect consolidated financial position results operations cash flows december 2005 company received anonymous c omplaint regarding possible payment commissions foreign government officials employees nanjing goulds pumps company nanjing china commission payments may violate foreign corrupt practices act company conducted investigation utilizing internal external resources voluntarily disclosed results investigation united states department justice sec february 11 2009 company entered settlement sec company without admitting denying liability agreed pay 17 total related disgorged profits prejudgment interest civil penalty settlement also restrains enjoins company violating sections 13b2a b securities exchange act 1934 march 27 2007 reached settlement relating investigation itt night vision division’s compliance international traffic arms regulations “itar” pursuant pled guilty two violations based export defense articles without license omission material facts required export reports company assessed total 500 fines forfeitures penalties accrued fully december 31 2006 also entered deferred prosecution agreement us government deferred action regarding third count violations related itar pending implementation remedial action plan including appointment independent monitor itt also assessed deferred prosecution monetary penalty 500 itt reduce monies spent five years following date plea agreement accelerate development fielding advanced night vision technology october 11 2007 itt department defense finalized administrative compliance agreement wherein agreed take certain remedial actions including implementing compliance programs appointing independent monitor oversight compliance programs december 28 2007 finalized consent agreement department state wherein agreed undertake certain remedial actions including appointment special compliance official company continues perform terms agreements management believes matters material adverse effect consolidated financial position results operations cash flows april 17 2007 itt’s board directors received letter behalf shareholder requesting board take appropriate action employees responsible violations night vision facility described disclosed form 8k filed march 30 2007 board itt corporation subsidiaries notes consolidated financial statements continued directors appointed special litigation committee evaluate request special litigation committee conducted investigation assistance independent counsel concluded legal actions brought itt 2007 2008 company received notice four shareholder derivative actions filed us district court southern district new york known variously sylvia piven trustee trust agreement dated april 3 1973 fbo sylvia b piven derivatively behalf itt corporation v steve loranger et al itt corporation “piven” action norman levy derivatively behalf itt industries inc v steven r loranger et al itt industries inc anthony reale v steven r loranger et al itt company sic robert wilkinson v steven r loranger et al itt corporation case alleges itt’s board directors breached fiduciary duties failing properly oversee itt’s compliance programs night vision business complaints seeks compensatory punitive damages itt directors removal directors election new directors four cases consolidated one action itt corporation derivative litigation ca 07cv2878 clb motion company piven action dismissed lack diversity april 10 2008 court denied company’s motion dismiss consolidated complaint itt filed motion reconsideration november 25 2008 court granted motion dismissed matter without prejudice court provided plaintiffs opportunity refile case upon development certain additional facts plaintiffs refiled case december 23 2008 company filed another motion dismiss currently court defendants also filed motion dismiss based special litigation committee’s report referenced also currently court management believes derivative suits material adverse effect consolidated financial position results operations cash flows note 20 guarantees indemnities warranties guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities december 2007 entered sale leaseback type agreement corporate aircraft leased back fiveyear operating lease provided lease residual value guarantee counterparty amount 502 maximum amount undiscounted future payments would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2008 projected fair value aircraft end lease estimated 24 less residual value guarantee since estimated loss exceed 54 gain realized sale aircraft deferred loss contingency residual value guarantee recorded additional accrual financial statements itt number individually immaterial guarantees outstanding december 31 2008 may affected various conditions external forces could require payments made guarantees believe payments material adverse impact financial position results operations cash flow consolidated basis foreseeable future product warranties itt warrants numerous products terms vary widely general itt warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall changes product warranty accruals december 31 2008 2007 follows itt corporation subsidiaries notes consolidated financial statements continued note 21 business segment information sales revenues external customers attributed individual regions based upon destination product service delivery itt corporation subsidiaries notes consolidated financial statements continued sales revenues product category net intercompany balances follows defense electronics services business segment sales revenues united states government 58938 39203 32440 2008 2007 2006 respectively apart united states government commercial customer accounted 10 sales revenues itt corporation subsidiaries notes consolidated financial statements continued note 22 quarterly results 2008 2007 unaudited table reflects range market prices itt’s common stock 2008 2007 prices reported consolidated transaction reporting system new york stock exchange principal market itt’s common stock traded symbol “itt” common stock listed new york euronext exchanges period january 1 2009 january 31 2009 high low reported market prices itt’s common stock 5080 4436 respectively itt declared dividends 02125 per common share first quarter 2009 21381 holders record itt’s common stock january 31 2009 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation registrant janice klettner janice klettner vice president chief accounting officer principal accounting officer february 25 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 ii5 management compensatory plan ii6item 15 exhibits financial statement schedule documents filed part report 1 see index consolidated financial statements appearing page 47 list financial statements filed part report 2 see exhibit index beginning pages ii2 list exhibits filed incorporated herein part report b financial statement schedules omitted absence conditions required information included consolidated financial statements filed part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt corporation white plains new york audited accompanying consolidated balance sheets itt corporation subsidiaries “company” december 31 2009 2008 related consolidated statements income comprehensive income cash flows changes shareholders’ equity three years period ended december 31 2009 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt corporation subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 26 2010 expressed unqualified opinion company’s internal control financial reporting deloitte touche new york new york february 26 itt corporation subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements comprehensive income loss accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated balance sheets 1 shares outstanding include unvested restricted common stock 13 11 december 31 2009 2008 respectively accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements changes shareholders’ equity accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries notes consolidated financial statements dollars share amounts millions unless otherwise stated note 1 summary significant accounting policies consolidation principles itt corporation global multiindustry leader hightechnology engineering manufacturing operating three principal business segments defense electronics services defense segment fluid technology fluid segment motion flow control motion flow segment consolidated financial statements include accounts itt corporation majorityowned subsidiaries prepared conformity accounting principles generally accepted united states america gaap unless context otherwise indicates references herein “itt” “the company” words “we” “us” “our” include itt corporation subsidiaries itt consolidates companies owns 50 voting shares considered primary beneficiary results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated certain prior year amounts reclassified conform current year presentation use estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period estimates revised additional information becomes available significant estimates assumptions used limited revenue recognition pension benefits income tax contingency accruals valuation allowances asbestosrelated liabilities insurance recoveries asset impairment product liability litigationrelated accruals actual results could differ estimates revenue recognition itt recognizes revenue services rendered title transfers products subject special terms conditions specific contracts defense segment certain businesses within fluid segment generally recognize revenue anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones percentage costs incurred total costs estimated contract profits recorded earnings proportion recorded revenue performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made revenue costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred fees certain contracts may increased decreased accordance cost performance incentive provisions measure actual performance established targets criteria incentive fee awards penalties included sales sufficient information reasonably assess anticipated contract performance anticipated losses contracts recorded first identified itt revenue arising claims process recognized either income offset potential loss reliably estimated realization probable accruals estimated expenses related warranties made time products sold services rendered recorded component cost revenue accruals established using historical information nature frequency average cost warranty claims estimates future costs research development significant costs incurred year connection research development rd programs expected contribute future earnings rd costs specifically covered contracts charged expense incurred totaled 2581 2443 1823 2009 2008 2007 respectively rd costs incurred contracts customers charged directly related contracts reported component costs revenue cash equivalents itt considers highly liquid investments purchased original maturity three months less cash equivalents included within cash equivalents marketable securities 723 283 december 31 2009 2008 respectively itt corporation subsidiaries notes consolidated financial statements continued inventories recorded lower cost market generally firstin firstout fifo basis estimated net realizable value full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout lifo method represent 64 76 total 2009 2008 inventories respectively would material difference value inventories fifo method used value inventories inventoried costs related longterm contracts stated actual production cost including overhead related nonrecurring costs incurred date reduced amounts identified revenue recognized units delivered progress completed general administrative costs applicable costreimbursement type contracts also included inventories inventoried costs relating longterm contracts programs reduced charging amounts excess estimated realizable value cost sales plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years fully depreciated assets retained property accumulated depreciation accounts disposal plant property equipment tested impairment whenever events changes circumstances indicate carrying value asset may recoverable assess recoverability longlived assets based undiscounted future cash flow assets expected generate recognize impairment loss estimated undiscounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified reduce carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values goodwill intangible assets goodwill represents purchase consideration paid business combination exceeds values assigned net assets acquired businesses intangible assets include customer relationships proprietary technology trademarks patents intangible assets certain intangible assets indefinite life namely brands trademarks intangible assets finite life amortized straightline basis estimated economic useful life generally ranges 1520 years goodwill indefinitelived intangibles amortized instead reviewed impairment annually frequently impairment indicators arise changes reporting unit structure significant adverse changes business climate adverse action assessment regulator conduct annual impairment testing first day fourth quarter impairment test twostep test goodwill first step fair value reporting unit compared carrying value fair value reporting unit exceeds carrying value net assets assigned reporting unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceed fair value second step impairment test performed order measure impairment loss recorded carrying value reporting unit’s goodwill exceeds implied fair value record impairment loss equal difference estimate fair value reporting units purchased intangible assets indefinite lives using income approach income approach calculate fair value based present value estimated future cash flows foreign currency translation balance sheet accounts translated exchange rate effect end period income statement accounts translated average rates exchange prevailing period gains losses foreign currency translations reflected cumulative translation adjustments component shareholders’ equity national currencies foreign companies generally functional currencies net lossesgains foreign currency transactions reported currently selling general administrative expenses sga 12 39 17 2009 2008 2007 respectively postretirement plans itt sponsors numerous pension employeerelated defined benefit plans collectively postretirement benefit plans employees around world determination projected benefit obligations recognition expenses related postretirement plans dependent various itt corporation subsidiaries notes consolidated financial statements continued assumptions major assumptions primarily relate discount rates longterm expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates factors management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed periodically thirdparty actuarial consultants adjusted necessary recognition net periodic pension cost calculation longterm expected return plan assets generally derived using marketrelated value plan assets based yearly average asset values measurement date last five years actual results differ assumptions accumulated amortized estimated future working life plan participants funded unfunded position plan recorded balance sheet actuarial gains losses prior service costs credits yet recognized net income recorded accumulated comprehensive income within shareholders’ equity net taxes amortized component net periodic postretirement cost fair value plan assets determined based market prices estimated fair value measurement date stockbased compensation stockbased awards issued employees nonemployee directors include nonqualified stock options restricted stock awards certain liabilitybased awards compensation costs resulting sharebased payment transactions recognized primarily within sga fair value requisite service period typically three years calculated compensation cost adjusted based estimate awards ultimately expected vest fair value nonqualified stock option determined date grant using binomial lattice pricing model incorporating multiple variable assumptions time including assumptions employee exercise patterns stock price volatility changes dividends fair value restricted stock awards determined using closing price company’s common stock date grant fair value liabilitybased awards including cash awards longterm incentive plan reassessed end reporting period similarly liability maintained end reporting period corresponds fair value liabilitybased awards ultimately expected vest income taxes determine provision income taxes using asset liability approach deferred income taxes represent expected future tax consequences temporary differences carrying amounts tax basis assets liabilities record valuation allowance reduce deferred tax assets uncertainty regarding realizability exists recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized consolidated financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement asbestosrelated contingencies insurance receivables itt defendant product liability lawsuits alleging personal injury due asbestos exposure recognize undiscounted liability asbestosrelated contingency probable occurrence reasonably estimable accrued estimated value current pending claims unasserted claims filed next 10 years including legal fees factors utilized determining liability pending unasserted claims include disease type average settlement costs percentage claims settled dismissed number new claims filed company light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next 10 years believe reasonable basis estimating costs time part ongoing review asbestos claims quarter reassess projected liability unasserted asbestos claims filed next 10 years based upon trends experiencing factors liability sensitive maintaining rolling 10year projection annually third quarter year conduct detailed study assistance outside consultant review update appropriate underlying assumptions used liability estimate additionally periodically reassess time horizon reasonable estimate unasserted claims projected connection recognition liabilities asbestosrelated matters record asbestosrelated insurance recoveries probable assessing probability itt corporation subsidiaries notes consolidated financial statements continued insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers commitments contingencies record accruals commitments loss contingencies probable amount reasonably estimated addition legal fees accrued cases loss probable related fees reasonably estimated accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities primarily included liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets recovery probable earnings per share basic earnings per common share considers weighted average number common shares outstanding well outstanding unvested sharebased payment awards contain rights nonforfeitable dividends diluted earnings per share considers outstanding shares utilized basic earnings per share calculation well dilutive effect outstanding stock options restricted stock contain rights nonforfeitable dividends fair value measurements determine fair value price would received sell asset paid transfer liability orderly transaction use hierarchical structure prioritize inputs valuation techniques used measure fair value three broad levels fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities level 1 quoted market prices similar assets liabilities active markets level 2 gives lowest priority unobservable inputs level 3 derivative financial instruments nature business activities necessarily involves management various financial market risks including related changes currency exchange rates interest rates commodity prices itt uses derivative financial instruments mitigate eliminate risks hold issue derivative instruments trading speculative purposes counterparty credit risk associated derivative contracts generally limited net unrealized gain contracts positive fair market value counterparty fail perform contracted counterparties derivative contracts consist number major international financial institutions record derivatives fair value either current asset current liability include adjustments reflect changes fair values derivatives earnings december 31 2009 2008 foreign currency forward contracts notional amounts 1777 1531 respectively hedge value recognized assets liabilities firm commitments fair values associated foreign currency contracts determined using net position contracts applicable spot rates forward rates reporting date amount gains losses recorded related foreign currency exchange contracts net fair value outstanding contracts material years ended 2009 2008 2007 itt times uses interest rate swaps manage debt portfolio related financing costs interest rate structure interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest expense swaps terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses reflected net interest expense december 31 2009 2008 material open interest rate swap contracts note 2 new accounting pronouncements july 1 2009 gaap hierarchy codified accounting standards codification asc codification considered single source itt corporation subsidiaries notes consolidated financial statements continued authoritative us accounting reporting standards except additional authoritative rules interpretive releases issued securities exchange commission sec codification developed provide logical organization gaap pronouncements topic pronouncements yet adopted october 2009 financial accounting standards board fasb issued accounting standards update asu 200913 amended accounting requirements multiple element arrangements revenue recognition topic asc 60525 objective update address accounting multipledeliverable arrangements enable vendors account products services deliverables separately rather combined unit amendments establish hierarchy determining selling price deliverable allow separation products services instances previously permitted guidance provided within asu 200913 effective fiscal years beginning june 15 2010 allows either prospective retrospective application early adoption permitted currently evaluating impact adoption guidance consolidated financial statements october 2009 fasb issued asu 200914 amended accounting requirements revenue recognition software topic asc 985605 objective update address accounting revenue arrangements contain tangible products software specifically products contain software “more incidental” product whole removed scope asc subtopic 985605 amendments align accounting revenue transaction types amendments asu 200913 mentioned guidance provided within asu 200914 effective fiscal years beginning june 15 2010 allows either prospective retrospective application early adoption permitted currently evaluating impact adoption guidance consolidated financial statements effective january 1 2010 consolidation topic asc 81010 variable interest entities amends requirements pertaining consolidation variable interest entities vies amendments include replacing quantitativebased risks rewards calculation determining enterprise controlling financial interest vies approach focused identifying enterprise power direct activities vies significantly impact entity’s economic performance 1 obligation absorb losses entity 2 right receive benefits entity addition amended guidance require ongoing assessments whether enterprise primary beneficiary vies requires additional disclosures enterprise’s involvement vies pronouncement adopted january 1 2010 material impact consolidated financial statements based current involvement variable interest entities recently adopted accounting pronouncements september 2009 fasb issued asu 200912 provides guidance fair value measurements disclosures topic asc 82010 new guidance provides investors practical expedient measuring fair value investments certain entities calculate net asset value per share nav asu effective periods ending december 15 2009 adoption material effect consolidated financial statements august 2009 fasb issued asu 200905 provides additional guidance application fair value techniques liabilities fair value measurements disclosures topic asc 82010 guidance clarifies quoted price liability traded asset active market level 1 measurement adjustment quoted price required absence level 1 quoted price measurement entity must use one valuation techniques estimate fair value manner consistent principles asc 820 requirements asu effective fourth quarter period beginning october 1 2009 adoption material effect consolidated financial statements effective january 1 2009 earnings per share topic asc 260 clarified outstanding unvested sharebased payment awards contain rights nonforfeitable dividends participate undistributed earnings common shareholders therefore considered participating securities purposes computing earnings per share entities participating securities convertible common stock required use “twoclass” method computing earnings per share twoclass method earnings allocation formula determines earnings per share class common stock participating security according dividends declared accumulated participation rights undistributed earnings application clarifying guidance material effect financial statements comparability purposes prior period earnings per share itt corporation subsidiaries notes consolidated financial statements continued amounts adjusted reflect impact adoption follows effective january 1 2009 business combinations topic asc 805 provided amended guidance pertaining method applying acquisition method accounting number significant areas amendments included acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense new business combination accounting guidance material impact consolidated financial statements upon adoption effects future periods depend upon nature significance future business combinations effective january 1 2009 consolidations topic asc 8101045 nature classification noncontrolling interest consolidated statement financial position requires recognition noncontrolling interest previously minority interest separate component equity section within consolidated balance sheet guidance also requires amount consolidated net income attributable parent noncontrolling interest clearly identified presented within consolidated statement income well amends certain consolidation requirements conform asc 805 business combinations adoption material effect consolidated financial statements note 3 acquisitions 2009 spent 343 net cash acquired acquisitions material individually aggregate results operations financial position significant acquisitions laing gmbh laing acquired may 2009 laing privately held producer energyefficient circulator pumps primarily used residential commercial plumbing heating ventilating air conditioning systems fully integrated fluid segment 2009 acquisitions 2008 spent 492 net cash acquired acquisitions material individually aggregate results operations financial position additionally spent 2265 connection companies acquired 2007 see information acquisitions edo corporation december 20 2007 itt acquired outstanding shares edo corporation edo global aerospace defense company 56 per outstanding share edo plus assumption debt valued transaction approximately 18 billion contingent consideration related acquisition edo designs manufactures diverse range products defense intelligence commercial markets provides related engineering professional services addition edo allows defense segment provide broader set solutions wider band customers improved position play important role us military’s vital transformational initiatives itt’s results operations year ended december 31 2007 reflect impact results operations edo december 20 2007 goodwill 12370 recorded within defense itt corporation subsidiaries notes consolidated financial statements continued segment connection edo acquisition representing excess purchase price fair value net assets acquired intangible assets relating acquisition totaled 4109 entirely consisting customer relationships weighted average amortization period approximately 6 years following table summarizes fair values assets acquired liabilities assumed connection edo acquisition 2007 acquisitions 2007 spent 4105 net cash acquired acquisitions material individually aggregate results operations financial position significant acquisitions international motion control inc imc acquired september 10 2007 3905 imc global developer motion control products market leader manufacture specialty energy absorption industrial aviation control automation technology imc 2006 revenue approximately 200 adds complementary mix highly engineered missioncritical products itt’s motion flow segment note 4 restructuring asset impairment charges restructuring activities 2009 recorded net restructuring charge 793 reflecting costs 707 related new actions 114 related prior years’ plans well reversal 28 restructuring accruals management determined would required charges associated actions announced 2009 primarily represent severance costs reductions headcount associated strategic relocation certain production operations within fluid motion flow segments lower cost regions well various planned reductions headcount associated lean fulfillment initiative planned position eliminations total 1092 including 528 factory workers 530 office workers 34 management employees costs recognized 2009 related prior years’ plans 114 primarily reflect additional severance lease cancellation related costs following table details components restructuring charges recorded 2009 restructuring activities 2008 recorded net restructuring charge 746 reflecting costs 669 related new actions 93 related prior years’ plans well reversal 16 restructuring accruals management determined would required charges associated actions announced 2008 primarily represent reduction structural costs business segments planned closure facility motion flow segment facility defense segment planned position eliminations total 1360 including 614 factory workers 704 office workers 42 management employees costs associated prior years’ plans primarily reflect severance lease cancellation related costs following table details components restructuring charges recorded 2008 itt corporation subsidiaries notes consolidated financial statements continued 2008 asset impairment charges 2008 recognized 29 charges related impairment longlived assets fourth quarter 2008 recognized asset impairment charge 18 related writedown software due decision cancel project result organizational realignment third quarter 2008 recognized impairment charge 11 related one motion flow control businesses reflecting reduction expected future earnings business restructuring activities 2007 recorded net restructuring charge 611 reflecting costs 579 related new actions 74 related prior year plans well reversal 42 restructuring accruals management determined would required charges associated actions announced 2007 represent reduction structural costs business segments planned closure four facilities fluid segment one facility motion flow segment two facilities defense segment planned position eliminations total 729 including 341 factory workers 345 office workers 43 management employees costs associated prior years’ plans primarily reflect additional costs related adjustment writeoff leased space well asset writeoffs severance costs following table details components restructuring charges recorded 2007 asset impairment charges fourth quarter 2007 recognized 50 charges related impairment longlived assets impairment result determination two businesses one within motion flow segment one within fluid segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecasts businesses reflect current business conditions asset impairment charges 42 08 recorded within motion flow fluid segments respectively itt corporation subsidiaries notes consolidated financial statements continued rollforward restructuring accrual balance december 31 2009 533 includes 463 severance 70 facility carrying costs expect remaining planned headcount reductions end 2009 past restructuring activities substantially completed mid2010 end 2009 planned facility closures remaining associated actions taken 2009 prior following reconciliation employee position eliminations associated restructuring activities 2009 itt corporation subsidiaries notes consolidated financial statements continued note 5 divestitures engaged divestiture actions material individually aggregate results operations financial position either 2009 2008 received proceeds sale assets businesses 206 216 2009 2008 respectively amounts reported discontinued operations within consolidated income statements years pertain costs incurred previously divested businesses reported discontinued operations period divestiture 2007 sold majority switches businesses private equity firm net proceeds 2232 aftertax gain 844 third quarter 2008 completed sale remaining component switches businesses buyer net proceeds 51 result recorded aftertax gain sale 54 year ended december 31 2008 revenue operating income switches businesses reported discontinued operations follows note 6 income taxes income tax data continuing operations follows reconciliation tax provision continuing operations us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards deferred tax assets liabilities include following itt corporation subsidiaries notes consolidated financial statements continued deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 17446 amounts indefinitely reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions taxes provided basis differences since differences expected reverse foreseeable future following attributes available utilization december 31 2009 valuation allowance approximately 1499 established reduce deferred income tax asset related certain us state foreign net operating losses us federal capital loss carryforwards 2009 valuation allowance decreased 1155 resulting following decrease 98 attributable foreign net operating loss carryforwards foreign investments decrease 937 attributable state net operating loss credit carryforwards see statement main components amount decrease 120 attributable us federal capital loss carryforwards utilized 2009 company completed study state tax attributes result study company determined 216 state deferred tax assets unrecognized tax benefits approximately 205 state deferred tax assets attributable excess tax benefits stockbased compensation realized identified additional state net operating losses 156 refined state tax attributable minimum pension liability 570 accordingly changed valuation allowance addition company result expected future income determined likely portion state deferred tax assets amount 137 realized valuation allowance necessary shareholders’ equity december 31 2009 2008 reflects excess tax benefits related stockbased compensation 2009 2008 approximately 30 86 respectively uncertain tax positions recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized consolidated financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement reconciliation beginning ending amount unrecognized tax benefits december 31 2009 2008 follows subsequent recognition previously unrecognized tax position reflected tax expense attributable continuing discontinued operations december 31 2009 recognition uncertain tax positions would affect effective tax rate 813 included balance december 31 2009 tax positions 814 deferred tax accounting would impact annual effective rate could accelerate payment cash taxing authority itt corporation subsidiaries notes consolidated financial statements continued addition tax positions 82 attributable discontinued operations would impact annual effective tax rate believe unrecognized tax benefits significantly change within twelve months reporting date many cases uncertain tax positions related tax years remain subject examination relevant taxing authorities following table summarizes open tax years major jurisdiction classify interest relating tax matters component interest expense tax penalties component income tax expense consolidated income statement 2009 2008 recognized net interest income 29 primarily due interest settlement claim irs 97 interest expense respectively 232 281 payment interest accrued december 31 2009 2008 respectively note 7 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows shares underlying stock options excluded computation diluted earnings per share antidilutive follows amounts antidilutive restricted common stock excluded computation diluted earnings per share 2009 2008 2007 insignificant itt corporation subsidiaries notes consolidated financial statements continued note 8 receivables net unbilled amounts represent revenue recognized longterm contracts arise based performance attainment though appropriately recognized cannot billed balance sheet date expect bill collect substantially december 31 2009 unbilled contract receivables 2010 scheduled performance milestones completed units delivered outstanding accounts receivable balance us government 3375 4000 december 31 2009 2008 respectively note 9 inventories net deferred production costs incurred within defense segment inprocess delivered units excess aggregate estimated average cost units 214 342 december 31 2009 2008 respectively note 10 plant property equipment net itt corporation subsidiaries notes consolidated financial statements continued note 11 goodwill intangible assets net changes carrying amount goodwill years ended december 31 2009 2008 business segment follows goodwill acquired 2009 relates laing acquisition amounts reported “other” relate primarily writeoff goodwill associated various immaterial business divestitures occurring 2009 2008 information regarding intangible assets follows customer relationships proprietary technology trademarks patents amortized weighted average lives approximately 7 years 13 years 17 years 21 years respectively amortization expense related intangible assets 2009 2008 2007 1039 1000 353 respectively estimated amortization expense five succeeding years follows note 12 noncurrent assets itt recorded sales unconsolidated affiliates 2009 2008 2007 totaling 425 173 137 respectively additionally itt purchased 335 products unconsolidated affiliates 2009 investments itt corporation subsidiaries notes consolidated financial statements continued unconsolidated companies exposure limited amount investment investments accounted cost method generally represent voting rights interests less 20 note 13 leases rentals itt leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewal payment escalation clauses itt often pays maintenance insurance tax expense related leased assets rental expenses operating leases 1413 1333 992 2009 2008 2007 respectively future minimum operating lease payments longterm operating leases december 31 2009 shown note 14 debt 2009 modified debt structure issuance 10 billion longterm debt repayment majority outstanding commercial paper balance details surrounding issuance provided following table provides outstanding debt balances type december 31 2009 2008 commercial paper program performed fiveyear revolving credit agreement aggregate principal amount 175 billion intended purpose credit agreement provide additional liquidity source funding commercial paper program needed interest rate borrowings agreement generally based london interbank offered rate libor plus spread reflects itt’s debt rating weighted average interest rate shortterm borrowings 021 617 december 31 2009 2008 respectively commitment fee credit facility 008 total commitment provisions agreement require maintain adjusted ebitda earnings interest tax depreciation amortization interest expense ratio greater 351 december 31 2009 2008 compliance financial covenants b deferred gain terminated interest rate swaps accreted income remaining terms underlying debt mature various dates 2025 following table summarizes carrying fair value longterm outstanding notes debentures maturity itt corporation subsidiaries notes consolidated financial statements continued date december 31 2009 2008 fair value shortterm loans approximates carrying value principal payments required per year outstanding longterm notes debentures next five years thereafter 105 799 100 131 5380 7545 respectively book value assets pledged collateral amounted 538 december 31 2009 c may 2009 company issued 5000 49 senior notes due may 1 2014 5000 6125 senior notes due may 1 2019 collectively “notes” issuance resulted gross proceeds 9983 offset 62 debt issuance costs may redeem notes whole part time redemption price equal greater 100 principal amount notes ii sum present value remaining scheduled payments principal interest thereon exclusive interest accrued date redemption discounted redemption date semiannual basis treasury rate plus 50 basis points plus case accrued unpaid interest date redemption company experiences change control company required offer repurchase notes price equal 101 principal amount plus accrued interest notes senior unsecured obligations rank equally existing future senior unsecured indebtedness december 31 2009 itt 741 obligation associated tenyear agreement involving sale subsequent lease back certain properties terms agreement required make annual payments principal interest end agreement 2014 itt option repurchase applicable properties nominal fee transaction reflected debt e variable rate debt interest rate 016 december 31 2009 2008 f includes individually immaterial notes bonds capital leases weighted average interest rate 524 538 december 31 2009 2008 respectively note 15 noncurrent liabilities note 16 employee benefit plans defined contribution plans itt sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require us match percentage employee contributions certain limits matching contributions charged income amounted 533 550 366 2009 2008 2007 respectively itt stock fund investment option itt salaried investment savings plan considered employee stock ownership plan result participants itt stock fund may receive dividends cash may reinvest dividends itt stock fund itt stock fund held approximately 92 shares itt common stock december 31 2009 defined benefit plans pension plans itt sponsors numerous defined benefit pension plans around world significant us salaried retirement plan fund employee pension benefits except countries outside us funding required addition sponsored pension plans certain employees participate multiemployer pension plans sponsored local national unions contribution plans amounted 08 06 08 2009 2008 2007 respectively postretirement health life insurance plans itt provides health care life insurance benefits certain eligible employees upon retirement prefunded itt corporation subsidiaries notes consolidated financial statements continued portion health care life insurance obligations prefunding accomplished taxeffective basis balance sheet income statement items changes projected benefit obligations plan assets funded status pension employeerelated benefit plans collectively postretirement benefit plans years ended 2009 2008 follows amounts recognized consolidated balance sheets december 31 2009 2008 consist amounts recognized accumulated comprehensive loss december 31 2009 2008 consist estimated net loss prior service cost amortized accumulated comprehensive loss net periodic benefit cost next fiscal year follows accumulated benefit obligation defined benefit pension plans 53777 50754 december 31 2009 2008 respectively information pension plans accumulated benefit obligation excess plan assets itt corporation subsidiaries notes consolidated financial statements continued components net periodic benefit cost amounts recognized comprehensive income loss years 2009 2008 2007 follows assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed annually adjusted necessary expected longterm rate return assets reflects expected returns major asset class plans invest weight asset class target mix correlations among asset classes expected volatilities expected return plan assets estimated evaluating historical returns estimates future returns specifically analyze plan’s actual historical annual return assets net fees past 10 15 20 25 years make estimates future returns using capital asset pricing model evaluate historical broad market returns past 75 years based asset allocation range based approach estimate longterm annual rate return assets domestic pension plans 90 reference actual geometric average annual return plan assets domestic pension plans december 31 2009 itt corporation subsidiaries notes consolidated financial statements continued 44 93 108 past 10 15 20 25 year periods respectively chart shows actual versus expected longterm returns domestic pension plans utilized calculation net periodic benefit cost assumed rate future increases per capita cost health care health care trend rate 70 2010 decreasing ratably 50 2016 increasing health care trend rates one percent per year would effect increasing benefit obligation 380 aggregate annual service interest cost components 30 decrease one percent health care trend rate would reduce benefit obligation 324 aggregate annual service interest cost components 25 extent actual experience differs assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various market data discussion actuaries changes assumptions could materially affect financial position results operations investment policy investment strategy managing worldwide postretirement benefit plan assets seek optimal rate return relative appropriate level risk plan investment strategies vary plan depending specific characteristics plan size design funded status liability profile legal requirements substantially postretirement benefit plan assets attributable us salaried hourly pension plans managed commingled basis master investment trust respect us plans company allows broad discretion invest tactically respond changing market conditions staying reasonably within asset allocation ranges prescribed investment guidelines making asset allocation decisions company takes account recent expected returns volatility returns asset class expected correlation returns among different investments well anticipated funding cash flows enhance returns mitigate risk company diversifies investments strategy asset class geography sector company engages large number managers gain broad exposure markets generating excessofmarket returns mitigating managerconcentration risk asset allocations us plans december 31 2009 2008 related asset allocation ranges follows strategies allocations plan assets outside us managed locally may differ significantly us general december 31 2009 nonus plans managed closely strategic allocations fair value plan assets measuring plan assets fair value fair value hierarchy applied categorizes prioritizes inputs used estimate fair value three levels fair value hierarchy based maximizing use observable inputs minimizing use unobservable inputs measuring fair value classification within fair value hierarchy based lowest level input significant fair value measurement three levels fair value hierarchy defined follows n level 1 inputs quoted prices unadjusted active markets identical assets liabilities n level 2 inputs quoted prices included within level 1 observable asset liability either directly indirectly level 2 inputs include quoted prices nonactive markets active markets similar assets liabilities inputs quoted prices observable inputs derived principally corroborated observable market data correlation means n level 3 inputs unobservable inputs assets liabilities itt corporation subsidiaries notes consolidated financial statements continued certain instances fair value estimated using quoted market prices obtained external pricing services obtaining data pricing service company evaluated methodologies used develop estimate fair value order assess whether valuations representative fair value including net asset value nav additionally certain circumstances company may adjust nav reported asset manager sufficient evidence indicates nav representative fair value following description valuation methodologies inputs used measure fair value major categories investments n equity securities equities including common preferred shares domestic listed foreign listed closed end mutual funds exchange traded funds generally valued closing price reported major market individual securities traded measurement date equity securities held company publicly traded active markets securities classified within level 1 fair value hierarchy n open ended mutual funds collective trusts commingled funds open ended mutual funds collective trusts commingled funds measured net asset value nav funds generally classified within level 2 fair value hierarchy n private equity valuation limited partnership interests private equity funds may require significant management judgment nav reported asset manager adjusted management determines nav representative fair value making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager funds generally classified within level 3 fair value hierarchy n absolute return hedge funds valuation limited partnership interests hedge funds may require significant management judgment nav reported asset manager adjusted management determines nav representative fair value making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending quickly itt redeem investments extent adjustments nav hedge funds classified within either level 2 redeemable within 90 days level 3 redeemable beyond 90 days fair value hierarchy n fixed income us government securities generally valued using quoted prices securities similar characteristics corporate bonds notes generally valued using pricing models eg discounted cash flows quoted prices securities similar characteristics broker quotes fixed income securities generally classified level 2 fair value hierarchy itt corporation subsidiaries notes consolidated financial statements continued fair value plan assets held postretirement benefit plans december 31 2009 asset class follows private equity buyout funds included within postretirement benefit plan assets partnership investment vehicles take controlling interest primarily private companies intent developing future sale higher price strategic financial buyer initial public offering investments include 4824 ownership partnership interest directly held 3622 invested funds private equity funds b private equity distressed funds partnership investment vehicles purchase debt preferred equity instruments companies distressed near bankrupt c venture growth equity private equity funds partnership investment vehicles provide seed growth capital startups early stage companies usually high growth industries information clean technology health care biotechnology mezzanine private equity funds provide mezzanine loans companies need capital want sell dilute equity interests mezzanine loans subordinated debt preferred equity securities represent claim borrower’s assets senior common equity subordinate senior secured unsecured debt e absolute return fund funds include partnership investment vehicles invest diversified portfolio hedge funds employ range investment strategies f fixed incomemultistrat absolute return funds partnership investment vehicles invest multiple investment strategies macro equity longshort convertible arbitrage event driven often intent diversify risk reduce volatility g equity longshort absolute return funds include partnership investment vehicles purchase long short positions publicly traded equities management fund ability shift investments value growth strategies small large capitalization companies net long position net short position h macro absolute return funds include partnership investment vehicles make investments predicated managers views either fundamentally quantitatively derived different global factors asset allocation eg stocks vs bonds interest rates currency sovereign risk commodities span different time frames itt corporation subsidiaries notes consolidated financial statements continued following table presents reconciliation beginning ending balances fair value measurement within pension plans using significant unobservable inputs level 3 following table presents reconciliation beginning ending balances fair value measurement within postretirement welfare plans using significant unobservable inputs level 3 contributions funding requirements internal revenue service rules major consideration making contributions postretirement plans respect qualified pension plans intend contribute annually less minimum required applicable law regulations made contributions 1610 pension plans 2009 including voluntary contribution us salaried retirement plan 1000 fourth quarter currently anticipate making contributions pension plans range 100 150 2010 30 expected made first quarter estimated future benefit payments following benefit payments covering pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees note 17 longterm incentive employee compensation longterm incentive awards program comprised three components nonqualified stock options nqos restricted stock awards units rsas rsus respectively target cash award tsr account nqos rsas equitybased compensation awards rsu tsr awards cash settled accounted liabilitybased compensation itt corporation subsidiaries notes consolidated financial statements continued nqo rsa incentive plans provide awarding options common shares restricted common shares employees nonemployee directors itt amended restated 2003 equity incentive plan 2003 equity incentive plan approved shareholders established may 2003 number shares initially available awards plan 122 december 31 2009 36 shares available future grants itt makes available exercise stock options vesting restricted shares purchasing shares open market issuing shares treasury 2003 equity incentive plan replaced 2002 itt stock option plan nonemployee directors itt 1996 restricted stock plan nonemployee directors 1994 itt incentive stock plan prospective basis outstanding awards granted prior plans vested exercisable future grants made prior plans longterm incentive employee compensation costs primarily recorded within sga expenses reduced estimated forfeiture rate costs impacted consolidated results operations follows december 31 2009 381 total unrecognized compensation cost related nonvested awards granted stock option restricted stock plans cost expected recognized ratably weightedaverage period 17 years rsu compensation costs related number units granted settled outstanding periods presented considered material nonqualified stock options generally vest conclusion three year period exercisable seven tenyear periods except certain instances death retirement disability exercise price per share fair market value underlying common stock date option granted summary status stock option restricted stock shares december 31 2009 2008 2007 changes years ended presented intrinsic value options exercised amount stock price exceeded exercise price options date exercise 2009 2008 2007 175 295 707 respectively amount cash received exercise stock options 202 344 2009 2008 respectively tax benefit realized 2009 2008 associated stock option exercises lapses restricted stock 107 121 respectively classify financing activity cash flows attributable excess tax benefits arising stock option exercises restricted stock lapses cash provided operating activities decreased cash provided financing activities increased 30 67 150 2009 2008 2007 respectively following table summarizes information itt’s stock options december 31 2009 itt corporation subsidiaries notes consolidated financial statements continued aggregate intrinsic value preceding table represents total pretax intrinsic value based itt’s closing stock price 4974 december 31 2009 would received option holders option holders exercised options date number options “outofthemoney” december 31 2009 included exercisable preceding table 09 million december 31 2009 total number stock options expected vest including already vested 79 million stock options weightedaverage exercise price 4009 aggregate intrinsic value 801 weightedaverage remaining contractual life 35 years fair value option grant estimated date grant using binomial lattice pricing model considered preferred method incorporating multiple variable assumptions time including assumptions employee exercise patterns stock price volatility changes dividends following weightedaverage assumptions 2009 2008 2007 expected volatilities based itt’s stock price history including implied volatilities traded options stock itt uses historical data estimate option exercise employee termination behavior within valuation model employee groups option characteristics considered separately valuation purposes expected life represents estimate period time options expected remain outstanding expected life provided represents weighted average expected behavior certain groups employees historically exhibited different behavior riskfree rate based us treasury yield curve effect time option grant restricted stock awards rsas typically vest three years date grant itt makes shares available vesting restricted shares purchasing shares open market issuing shares treasury holders rsas right receive dividends vote shares employee leaves company prior vesting whether resignation termination cause restricted stock forfeited employee retires terminated cause pro rata portion rsa may vest restricted shares restricted stock unit awards granted december 31 2009 2008 2007 fair market values based itt’s stock price date grant itt corporation subsidiaries notes consolidated financial statements continued outstanding restricted shares include 01 shares issued nonemployee directors payment part annual retainer cost expected recognized ratably weighted average period 10 years total shareholder return awards tsr award plan performancebased cash award incentive program provided key employees itt tsr awards accounted stockcompensation principles accounting liabilitybased awards fair value outstanding awards determined conclusion threeyear performance period measuring itt’s total shareholder return percentage total shareholder return performance stocks generally comprising sp industrials index number companies included applicable benchmark group range 305 357 december 31 2009 reassess fair value tsr awards quarterly basis end reporting period using actual total shareholder itt corporation subsidiaries notes consolidated financial statements continued return data elapsed performance period well monte carlo simulation fair value outstanding awards december 31 2009 2008 273 460 respectively payment based tsr performance comparison measured targets established time award total cash paid settle tsr liability 211 193 176 years ended 2009 2008 2007 respectively december 31 2009 total unrecognized compensation costs projected incurred based current performance measurements remaining vesting period 71 cost expected recognized ratably weightedaverage period 13 years note 18 capital stock itt authority issue aggregate 550 shares capital stock 500 shares designated “common stock” par value 1 per share 50 shares designated “preferred stock” par stated value preferred stock outstanding december 31 2009 2008 december 31 2009 2008 240 252 shares common stock held treasury respectively note 19 commitments contingencies time involved legal proceedings incidental operation businesses proceedings allege damages relating environmental liabilities intellectual property matters copyright infringement personal injury claims employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures continue vigorously defend claims although ultimate outcome legal matter cannot predicted certainty based present information including assessment merits particular claim well current reserves insurance coverage expect legal proceedings material adverse impact cash flow results operations financial condition consolidated basis foreseeable future unless otherwise noted asbestos matters itt including subsidiary goulds pumps inc goulds joined defendant numerous companies product liability lawsuits alleging personal injury due asbestos exposure claims allege certain products sold prior 1985 contained part manufactured third party eg gasket contained asbestos extent thirdparty parts may contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos december 31 2009 104679 open claims itt filed various state federal courts alleging injury result exposure asbestos activity related asserted asbestos claims period follows excludes 34813 claims related maritime actions placed inactive dockets company believes litigated almost claims filed united states district court northern district ohio transferred eastern district pennsylvania pursuant order federal judicial panel multidistrict litigation mdl reflects adjustment increase number open claims result transition comprehensive database assumed responsibility administering asbestos claims primary insurance companies frequently plaintiffs unable identify itt goulds product source asbestos exposure addition large majority 104679 pending claims company plaintiffs unable demonstrate injury many claims placed inactive dockets including 44303 claims mississippi experience date substantial portion resolved claims dismissed without payment company result management believes approximately 90 percent 104679 open claims little value average payment per resolved claim year ended december 31 2009 2008 116 thousand 77 thousand respectively claims sometimes dismissed large groups average cost per resolved claim well number open claims fluctuate significantly period historically recorded liability pending asbestos claims previously disclosed 2008 annual report form 10k probable would incur itt corporation subsidiaries notes consolidated financial statements continued additional costs future claims filed company liability potential future claims reasonably estimable due number factors begin primary insurance carriers managed paid settlements legal costs directly compounded fact part claims administration processes insurance companies maintained limited claims information insufficient detail critical estimate potential liability future claims disease type lastly insurers restricted access claim filings related information past several years negotiated coverageinplace agreements several insurers assumed responsibility administering asbestos claims since taking claims administration process time gained considerable knowledge claims addition end 2008 engaged outside consultant construct comprehensive database claims filed company completion work early third quarter 2009 able develop analyze key data settlements dismissals disease type necessary estimate exposure potential future asbestos claims third quarter 2009 engaged leading consultant asbestosrelated professional services assist us estimating asbestos liability pending unasserted claims firm reviewed information provided company concerning claims filed settled dismissed amounts paid settlements relevant claim information nature asbestosrelated disease asserted claimant time lag filing disposition claims specifically methodology used estimate total liability pending unasserted future asbestos claims relied upon included following key factors n interpretation widely accepted forecast population likely occupationally exposed asbestos n widely accepted epidemiological studies estimating number people likely develop mesothelioma lung cancer exposure asbestos n company’s historical experience filing nonmalignant claims historical relationship nonmalignant malignant claims filed company n analysis number likely asbestos personal injury claims filed company based epidemiological historical data company’s recent claims experience history n analysis company’s pending cases disease type n analysis company’s recent history determine average settlement resolution value claims disease type n analysis company’s defense costs relation settlement costs resolved claims n adjustment inflation future average settlement value claims defense costs 22 annual rate n analysis time company likely resolve asbestos claims liability estimate sensitive factors surrounding mesothelioma claims represent nearly 90 percent total liability factors include number new mesothelioma claims filed company average settlement costs mesothelioma claims percentage mesothelioma claims dismissed company factors interdependent one factor predominates determining liability estimate methodology used project future asbestos costs based largely company’s experience reference period including last years claims filed settled dismissed experience compared results previously conducted epidemiological studies estimating number individuals likely develop asbestosrelated diseases studies undertaken connection independent analysis population us workers across eleven different industry occupation categories believed exposed asbestos using information industry occupation categories relevant company estimate developed number future claims filed company well aggregate settlement costs would incurred resolve pending future claims based upon average settlement costs disease reference period addition estimate augmented costs defending asbestos claims tort system using forecast based recent experience well discussions company’s defense counsel methodology project future asbestos costs one underlying assumptions separately assessed reasonableness used input estimating liability assessment underlying assumptions based upon recent experience future expectations yielding one value assumption based methodology third quarter 2009 increased estimated total undiscounted asbestos liability including legal fees 6861 reflecting costs company estimated incur resolve pending claims well unasserted claims estimated filed next 10 years potential estimates itt corporation subsidiaries notes consolidated financial statements continued methodology create range estimates reasonably possible outcomes determined point estimate based upon assessment value underlying assumption projecting future asbestos costs subject numerous variables uncertainties inherently difficult predict addition uncertainties surrounding key factors discussed factors include long latency period prior manifestation asbestosrelated disease costs medical treatment impact bankruptcies companies codefendants uncertainties surrounding litigation process jurisdiction case impact potential legislative judicial changes furthermore predictions respect variables impacting estimate asbestos liability subject even greater uncertainty projection period lengthens light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next 10 years believe reasonable basis estimating costs time part ongoing review asbestos claims quarter reassess projected liability unasserted asbestos claims filed next 10 years based upon trends experiencing factors liability sensitive maintaining rolling 10year projection annually third quarter year conduct detailed study assistance outside consultant review update appropriate underlying assumptions used liability estimate additionally periodically reassess time horizon reasonable estimate unasserted claims projected third quarter 2009 company recorded 4503 increase asbestosrelated assets comprised insurance asset well receivables former itt entities portion asbestos liability related former business whose liability shared accordance distribution agreement refer itt’s 2009 annual report form 10k item 1 “ company history certain relationships” description distribution agreement update assessment asbestosrelated assets quarterly annual basis conjunction aforementioned update asbestos liability insurance asset represents best estimate probable insurance recoveries asbestos liabilities pending claims well unasserted claims filed next 10 years developing estimate company considered coverageinplace settlement agreements insurers well number additional factors additional factors include current levels recovery experience financial viability insurance companies method losses allocated various insurance policies years covered policies interpretation various policy terms limits interrelationships timing amount reimbursements vary due differing policy terms certain gaps coverage result insurer insolvencies addition company retained insurance consulting firm assist management estimation probable insurance recoveries based upon analysis policy terms likelihood recovery provided legal counsel assuming continued viability insurance carriers currently solvent incorporating risk mitigation judgments policy terms factors certain estimated insurance cover 69 percent asbestos costs defense settlement costs pending claims well unasserted claims filed next 10 years however gaps coverage reflecting certain uninsured periods prior insurance settlements expect certain policies primary insurers exhaust within next 10 years insurance coverage percent expected decline potential additional asbestos liabilities tenth year projection unasserted asbestos claims liability related insurance asset declines approximately 25 percent future recoverability rates may also impacted factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict subject high degree uncertainty resultant third quarter 2009 net asbestos charge income summarized follows 2229 pretax charge continuing operations comprised 133 82 aftertax updated assessment net liability pending claims 2096 1307 aftertax initial recording quarter net liability estimated future claims filed next 10 years company’s estimated asbestos exposure net expected insurance recoveries former itt entities resolution pending estimated unasserted asbestos claims filed within next 10 years itt corporation subsidiaries notes consolidated financial statements continued 2669 december 31 2009 company’s estimate cost pending claims net insurance recoveries 269 december 31 2008 certain portion liability corresponding asbestos asset relates business disposed number years ago treated discontinued operations following table provides rollforward asbestos liability related assets 2009 total amounts 2465 comprised 2375 charge continuing operations 90 charge discontinued operations subject qualifications regarding uncertainties previously described expected future annual net cash outflows related pending claims unasserted claims filed next 10 years extend approximately 2023 due time lag filing claim resolution annual net cash outflows projected 10 15 next several years relatively constant recent levels increase 30 40 2019 underlying asbestos liability corresponding insurance asset based upon current known information however future events affecting key factors variables either asbestos liability insurance asset could cause actual costs insurance recoveries higher lower currently estimated due uncertainties well inability reasonably estimate additional asbestos liability claims filed beyond next 10 years possible predict ultimate outcome cost resolving pending unasserted asbestos claims believe possible cost asbestos claims filed beyond next 10 years net expected insurance recoveries could material adverse effect financial position results operations cash flows particular period environmental matters ordinary course business itt subject federal state local foreign environmental laws regulations itt responsible alleged responsible ongoing environmental investigation remediation sites various countries sites various stages investigation andor remediation many proceedings itt’s liability considered de minimis itt received notification us environmental protection agency similar state foreign environmental agencies number sites formerly currently owned andor operated itt properties water supplies may impacted operations contain disposed recycled materials wastes require environmental investigation andor remediation sites include instances itt identified potentially responsible party federal state environmental laws regulations accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies itt’s accrued liabilities environmental matters represent best estimates related investigation remediation environmental media water soil vapor air structures well related legal fees estimates related accruals reviewed periodically updated progress investigation remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis difficult estimate final total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent investigation remediation share liability conditions selection alternative remedial approaches changes environmental standards regulatory requirements management’s opinion total amount accrued appropriate based existing facts circumstances management anticipate liabilities material adverse effect consolidated financial position results operations cash flows itt corporation subsidiaries notes consolidated financial statements continued following table illustrates activity related itt’s accrued liabilities environmental matters following table illustrates low highend range estimated liability number active sites environmental matters december 31 2009 matters company involved coverage litigation various insurers seeking recovery costs incurred connection certain environmental product liabilities suit filed 1991 itt corporation et al v pacific indemnity corporation et al sup ct los angeles county seeking recovery costs related environmental losses discovery procedural matters changes california law various appeals prolonged case several years case appeal california court appeals decision california superior court dismissing certain claims made itt case back superior court parties engaged discovery february 13 2003 commenced action cannon electric inc v affiliated fm ins co sup ct los angeles county seeking recovery costs related asbestos product liability loses described coverage litigation itt entered coverageinplace settlement agreements ace wausau utica mutual dated april 2004 september 2004 february 2007 respectively agreements provide specific coverage company’s legacy asbestos liabilities company prepared pursue legal remedies remaining defendants reasonable negotiations productive provide indemnity us silica company silica personal injury suits filed prior september 12 2005 former subsidiary pennsylvania glass sand pgs itt sold stock pgs us silica company 1985 past several years majority silica cases involving pgs dismissed without payment currently less 4000 cases pending pgs company expects majority remaining cases also dismissed indemnity paid part historic product liability carrier however september 2005 carrier communicated us would longer provide insurance claims october 4 2005 filed suit insurer itt v pacific employers insurance co ca 05cv 5223 superior court los angeles ca seeking defense costs indemnity insurance carrier pgs product liabilities april 2007 court granted motion summary judgment carrier’s duty defend silica cases however decision overturned appeal matter returned superior court part determination several factual issues continue seek past future defense costs cases carrier believe matters material adverse effect consolidated financial position results operations cash flows silicarelated costs net insurance recoveries shared pursuant distribution agreement information distribution agreement provided within “business company history certain relationships” section 2009 annual report form 10k october 25 2006 fencourt reinsurance company fencourt subsidiary hartford filed contribution claim itt losses incurred fencourt result reinsurance contract obligation owes century indemnity company us district court eastern district pennsylvania fencourt reinsurance co ltd v itt industries inc ca 064786 us dct edpa century indemnity company insurer itt’s domestic casualty program 1978 1992 fencourt formed 1978 captive insurer predecessor itt corporation provided reinsurance century certain itt selfinsured losses fencourt transferred hartford demerger itt 1995 matter covered 1995 distribution agreement contains clear language hartford agreed assume liabilities fencourt indemnify itt claims fencourt case stayed pending resolution arbitration proceeding pending american arbitration association new jersey january 20 2009 arbitrator issued favorable decision itt liable losses incurred fencourt subsequent decision fencourt’s second motion summary judgment arbitrator agreed position ruled certain liabilities shared liabilities terms itt corporation subsidiaries notes consolidated financial statements continued distribution agreement parties asked arbitrator resolve several issues related interpretation distribution agreement management believes matter material adverse effect consolidated financial position results operations cash flows march 27 2007 reached settlement relating investigation itt night vision division’s compliance international traffic arms regulations itar pursuant pled guilty two violations based export defense articles without license omission material facts required export reports company assessed total 500 fines forfeitures penalties accrued fully december 31 2006 also entered deferred prosecution agreement us government deferred action regarding third count violations related itar pending implementation remedial action plan including appointment independent monitor itt also assessed deferred prosecution monetary penalty 500 itt reduce monies spent five years following date plea agreement accelerate development fielding advanced night vision technology october 11 2007 itt department defense finalized administrative compliance agreement wherein agreed take certain remedial actions including implementing compliance programs appointing independent monitor oversight compliance programs december 28 2007 finalized consent agreement department state wherein agreed undertake certain remedial actions including appointment special compliance official company continues perform terms agreements february 22 2010 department state issued notice terminated ineligible status statutory debassment previously imposed company april 11 2007 75 fed reg 7650 2010 management believes matters material adverse effect consolidated financial position results operations cash flows april 17 2007 itt’s board directors received letter behalf shareholder requesting board take appropriate action employees responsible violations night vision facility described disclosed form 8k filed march 30 2007 board directors appointed special litigation committee evaluate request special litigation committee conducted investigation assistance independent counsel concluded legal actions brought itt 2007 2008 company received notice four shareholder derivative actions filed us district court southern district new york known variously sylvia piven trustee trust agreement dated april 3 1973 fbo sylvia b piven derivatively behalf itt corporation v steven r loranger et al itt corporation piven action norman levy derivatively behalf itt industries inc v steven r loranger et al itt industries inc anthony reale v steven r loranger et al itt company sic robert wilkinson v steven r loranger et al itt corporation cases allege itt’s board directors breached fiduciary duties failing properly oversee itt’s compliance programs night vision business complaints seeks compensatory punitive damages itt directors removal directors election new directors three cases consolidated one action itt corporation derivative litigation ca 07cv2878 clb levy complaint dropped consolidation motion company piven action dismissed lack diversity april 10 2008 court denied company’s motion dismiss consolidated complaint itt filed motion reconsideration november 25 2008 court granted motion dismissed matter without prejudice court provided plaintiffs opportunity refile case upon development certain additional facts plaintiffs refiled case december 23 2008 order dated september 8 2009 court granted company’s subsequent motion dismiss dismissed wilkinson complaint defendants filed motion terminate reale action based special litigation committee’s report referenced also september 8 2009 order court denied defendants’ motion defendants filed motion reconsideration alternative requested matter certified indiana supreme court interpretation indiana business code october 9 2009 court denied motion reconsideration however certified matter appeal matter pending indiana supreme court management believes derivative suit material adverse effect consolidated financial position results operations cash flows itt corporation subsidiaries notes consolidated financial statements continued note 20 guarantees indemnities warranties guarantees indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded historic indemnifications aware claims information would give rise material payments indemnities december 2007 entered sale leaseback type agreement corporate aircraft leased back fiveyear operating lease provided lease residual value guarantee counterparty amount 417 would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2009 projected fair value aircraft end lease estimated 39 less residual value guarantee however since estimated loss exceed 54 gain realized sale aircraft deferred loss contingency residual value guarantee recorded additional accrual financial statements itt number individually immaterial guarantees outstanding december 31 2009 may affected various conditions external forces could require payments made guarantees believe payments material adverse impact financial position results operations cash flow consolidated basis foreseeable future product warranties itt warrants numerous products terms vary widely general itt warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect interrupts production results recall changes product warranty accrual december 31 2009 2008 follows 1 includes changes estimates note 21 business segment information company’s business segments reported basis used internally evaluating performance allocating resources three reporting segments referred defense electronics services defense segment fluid technology fluid segment motion flow control motion flow segment corporate consists corporate office expenses including compensation benefits occupancy depreciation administrative costs well charges occur time related certain matters asbestos environmental liabilities managed corporate level included business segments evaluating performance allocating resources assets business segments exclude general corporate assets principally consist cash deferred tax assets insurance receivables certain property plant equipment certain assets defense businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radarguided missiles digital combat radios night vision devices satellite instruments defense electronics communications aircraft armament systems undersea warfare integrated composite structures professional engineering services approximately 39 sales revenues business segment generated contracts technical support services itt provides military government agencies defense segment revenue us government 57898 58938 39203 2009 2008 2007 respectively apart us government commercial customer accounted 10 revenue defense itt corporation subsidiaries notes consolidated financial statements continued segment comprises approximately 58 consolidated revenue 60 segment operating income 2009 fluid segment provider water wastewater treatment systems pumps related technologies water fluid control products residential commercial industrial applications segment comprises approximately 31 consolidated revenue approximately 31 segment operating income 2009 motion flow motion flow segment comprised group businesses providing products services areas transportation defense aerospace industrial computer telecommunications marine beverage motion flow businesses primarily serve high end markets highly engineered products high brand recognition focus new product development operational excellence motion flow segment comprises approximately 11 consolidated revenue approximately 9 segment operating income 2009 itt corporation subsidiaries notes consolidated financial statements continued revenue external customers attributed individual regions based upon destination product service delivery revenue product category net intercompany balances follows itt corporation subsidiaries notes consolidated financial statements continued note 22 quarterly results 2009 2008 unaudited third quarter 2009 results include 1389 net aftertax charge income continuing operations primarily associated establishment estimated asbestosrelated liability net expected recoveries claims projected filed company next ten years see note 19 “commitments contingencies” information table reflects range market prices itt’s common stock 2009 2008 prices reported consolidated transaction reporting system new york stock exchange principal market itt’s common stock traded symbol “itt” common stock listed new york euronext exchanges period january 1 2010 january 31 2010 high low reported market prices itt’s common stock 5179 4805 respectively itt declared dividends 025 per common share first quarter 2010 20510 holders record itt’s common stock january 29 2010 itt corporation subsidiaries notes consolidated financial statements continued note 23 subsequent events february 17 2010 company announced signed agreement purchase nova analytics corporation nova privately held company purchase price approximately 390 subject normal customary closing conditions expect purchase price funded mix cash commercial paper nova leading manufacturer premium quality field portable online laboratory analytical instruments used water wastewater environmental industrial food beverage pharmaceutical medical applications nova provides itt brands technologies distribution aftermarket content 6 billion analytical instrumentation market addition nova broaden solutions offer customers key markets municipal water wastewater industrial processing food beverage transaction projected completed end march 2010 pending customary regulatory approvals nova employs approximately 725 people across germany norway france united kingdom united states china signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation registrant janice klettner janice klettner vice president chief accounting officer principal accounting officer february 26 2010 ii1 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii2 exhibit index ii3 ii4 ii5 ii6 management compensatory plan ii7item 15 exhibits financial statement schedule documents filed part report 1 see index consolidated financial statements appearing page 51 list financial statements filed part report 2 see exhibit index beginning pages ii2 list exhibits filed incorporated herein part report b financial statement schedules omitted absence conditions required information included consolidated financial statements filed part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt corporation white plains new york audited accompanying consolidated balance sheets itt corporation subsidiaries “company” december 31 2010 2009 related consolidated statements income comprehensive income cash flows changes shareholders’ equity three years period ended december 31 2010 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt corporation subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states company’s internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 24 2011 expressed unqualified opinion company’s internal control financial reporting deloitte touche llp stamford connecticut february 24 itt corporation subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part income statements itt corporation subsidiaries consolidated statements comprehensive income loss accompanying notes consolidated financial statements integral part statements comprehensive income loss itt corporation subsidiaries consolidated balance sheets shares outstanding include unvested restricted common stock 10 13 december 31 2010 2009 respectively accompanying notes consolidated financial statements integral part balance sheets itt corporation subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements cash flows itt corporation subsidiaries consolidated statements changes shareholders’ equity accompanying notes consolidated financial statements integral part statements changes shareholders’ equity itt corporation subsidiaries notes consolidated financial statements dollars share amounts millions unless otherwise stated note 1 summary significant accounting policies basis presentation itt corporation global multiindustry leader hightechnology engineering manufacturing operating three principal business segments defense information solutions defense segment fluid technology fluid segment motion flow control motion flow segment consolidated financial statements prepared conformity accounting principles generally accepted united states america gaap unless context otherwise indicates references herein “itt” “the company” words “we” “us” “our” include itt corporation subsidiaries certain prior year amounts reclassified conform current year presentation reclassifications principally relate designation cas inc cas discontinued operation accordingly reclassifications affected results continuing operations historical periods see note 4 “discontinued operations” notes consolidated financial statements information cas divestiture use estimates preparation financial statements conformity gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenue expenses reporting period estimates revised additional information becomes available estimates assumptions used limited asbestosrelated liabilities recoveries insurers responsible parties postretirement obligations assets revenue recognition income tax contingency accruals valuation allowances goodwill impairment testing contingent liabilities actual results could differ estimates consolidation principles itt consolidates companies controlling financial interest itt considered primary beneficiary variable interest entity account investments companies ability exercise significant influence hold controlling interest equity method record proportionate share income losses consolidated income statements results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated business combinations itt allocates purchase price acquisitions tangible intangible assets acquired liabilities assumed noncontrolling interests acquired based estimated fair value acquisition date changes acquisition date fair values prior expiration measurement period exceed 12 months date acquisition recorded adjustment associated goodwill changes acquisition date fair values expiration measurement period recorded earnings excess acquisition price estimated fair values recorded goodwill acquisitionrelated expenses restructuring costs recognized separately business combination expensed incurred revenue recognition revenue recognized persuasive evidence arrangement exists price fixed determinable collectability reasonably assured delivery occurred services rendered product sales longterm constructiontype contracts recognize revenue time title risks rewards ownership pass generally products shipped certain contracts customers require delivery installation testing certification acceptance provisions satisfied revenue recognized recognize revenue product sales channel partners including resellers distributors valueadded solution providers time sale channel partners economic substance apart itt completed obligations related sale service revenue recognized services performed agreements contain multiple deliverables recognize revenue delivered element standalone value customer objective reliable evidence fair value undelivered elements arrangements include general right return relative delivered element performance undelivered element considered probable substantially company’s control defense segment certain businesses within fluid segment enter longterm constructiontype sales contracts revenue recognized percentageofcompletion method based upon units delivery percentage costs incurred total costs completion scheduled performance milestones units delivery revenues profits recognized based upon ratio actual itt corporation subsidiaries units delivered estimated total units delivered contract costtototal cost method revenue recognized based upon ratio costs incurred estimated total costs completion revenue recognized milestone method based upon accomplishing clear deliverable output contract performance value customer revenue costreimbursement contracts recorded costs incurred includes estimated earned fees profits calculated basis relationship costs incurred total estimated costs revenue profits timeandmaterial type contracts recognized based billable rates times direct labor hours incurred plus material reimbursable costs incurred completed contract method utilized reasonable reliable cost estimates project cannot made amounts invoiced customers excess revenue recognized recorded deferred revenue recognition criteria satisfied recorded component accounts payable revenue earned recognized excess amounts invoiced recorded component trade receivables performance longterm sale contracts estimated final contract prices costs periodically reviewed revisions made required recorded earnings period determined additionally fees certain contracts may increased decreased accordance cost performance incentive provisions measure actual performance established targets criteria incentive fee awards penalties included revenue sufficient information reasonably assess anticipated contract performance claims contracts recorded probable claim result additional contract revenue amounts reliably estimated provisions estimated losses uncompleted longterm contracts made period losses determined recorded component costs revenue record reduction revenue time sale estimated product returns rebates allowances based historical experience known trends additionally accruals estimated expenses related warranties made time products sold services rendered recorded component costs revenue accruals established using historical information nature frequency average cost warranty claims estimates future costs revenue reported net required taxes collected customers remitted government authorities collected taxes recorded current liabilities remitted relevant government authority shipping handling costs shipping handling costs recorded component costs revenue postretirement benefit plans itt sponsors numerous pension employeerelated defined benefit plans collectively postretirement benefit plans employees around world determination benefit obligations recognition expenses related postretirement plans dependent various assumptions major assumptions primarily relate discount rates longterm expected rates return plan assets rate future compensation increases mortality termination health care inflation trend rates factors management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist actuarial assumptions reviewed periodically thirdparty consultants adjusted necessary recognition net periodic postretirement cost calculation longterm expected return plan assets generally derived using marketrelated value plan assets based yearly average asset values measurement date last five years actual results differ assumptions accumulated amortized estimated future working life plan participants fair value plan assets determined based market prices estimated fair value measurement date see note 16 “postretirement benefit plans” information measurement fair value funded unfunded position plan recorded balance sheet actuarial gains losses prior service costs credits yet recognized net income recorded accumulated comprehensive income within shareholders’ equity net taxes amortized component net periodic postretirement cost research development research development rd programs include companysponsored activities well activities performed pursuant customer contracts rd costs incurred part companysponsored activity charged expense incurred reported component operating income within rd expense line rd costs incurred customer contracts reported component costs revenue expense incurred stockbased compensation stockbased awards issued employees nonemployee directors include nonqualified stock options restricted stock itt corporation subsidiaries awards certain liabilitybased awards compensation costs resulting sharebased payment transactions recognized primarily within sga fair value requisite service period typically three years straightline basis calculated compensation cost adjusted based estimate awards ultimately expected vest fair value nonqualified stock option determined date grant using binomial lattice pricing model incorporating multiple variable assumptions time including assumptions employee exercise patterns stock price volatility changes dividends fair value restricted stock awards determined using closing price company’s common stock date grant fair value liabilitybased awards including cash awards longterm incentive plan reassessed end reporting period including adjustment awards ultimately expected vest asbestosrelated contingencies receivables itt defendant product liability lawsuits alleging personal injury due asbestos exposure recognize undiscounted liability asbestosrelated contingency probable occurrence reasonably estimable accrued estimated value pending claims unasserted claims estimated filed next 10 years including legal fees factors utilized determining liability pending unasserted claims include disease type average settlement costs percentage claims settled dismissed number new claims filed company light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next 10 years believe reasonable basis estimating costs time addition company retains consulting firm assist management estimating potential exposure pending asbestos claims estimated filed next 10 years company also recorded asbestos asset comprised predominantly insurance asset expected recoveries responsible parties asbestos asset represents best estimate probable recoveries third parties pending claims well unasserted claims estimated filed next 10 years timing amount reimbursements vary due differing policy terms certain gaps coverage result possible insurer insolvencies part ongoing review net asbestos exposure quarter assess recent data available key inputs assumptions comparing data expectations recent annual liability asset estimates based third quarter year conduct detailed study assistance outside consultants review update appropriate underlying assumptions estimate asbestos liability related assets additionally periodically reassess time horizon reasonable estimate unasserted claims projected restructuring periodically initiate management approved restructuring activities achieve cost savings reduced operational redundancies strategically position market response prevailing economic conditions associated customer demand costs associated restructuring actions include severance infrastructure charges vacate facilities consolidate operations contract termination costs related charges involuntary separation plans liability recognized probable reasonably estimable voluntary separation plans liability recognized employee irrevocably accepts voluntary termination onetime termination benefits additional severance pay benefit payouts exit costs lease termination costs liability measured recognized initially fair value period liability incurred subsequent changes liability recognized adjustments period change income taxes determine provision income taxes using asset liability approach deferred income taxes represent expected future tax consequences temporary differences carrying amounts tax basis assets liabilities record valuation allowance reduce deferred tax assets uncertainty regarding realizability exists assessing need valuation allowance look future reversal existing taxable temporary differences taxable income carryback years feasibility tax planning strategies estimated future taxable income valuation allowance affected changes tax laws changes statutory tax rates changes future taxable income estimates recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized consolidated financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement itt corporation subsidiaries foreign currency translation national currencies foreign companies generally functional currencies balance sheet accounts translated exchange rate effect end period income statement accounts translated average rates exchange prevailing period gains losses foreign currency translations reflected cumulative translation adjustments component shareholders’ equity net gains losses foreign currency transactions reported currently selling general administrative expenses earnings per share basic earnings per common share considers weighted average number common shares outstanding well outstanding unvested sharebased payment awards contain rights nonforfeitable dividends diluted earnings per share considers outstanding shares utilized basic earnings per share calculation well dilutive effect outstanding stock options restricted stock contain rights nonforfeitable dividends cash equivalents itt considers highly liquid investments purchased original maturity three months less cash equivalents investments marketable securities reported within cash equivalents december 31 2010 december 31 2009 marketable securities included cash equivalents totaled 72 concentrations credit risk financial instruments potentially subject itt significant concentrations credit risk consist principally cash equivalents accounts receivable trade customers derivative contracts maintain cash equivalents derivative contracts various financial institutions financial institutions located many different geographical regions policy designed limit exposure one institution part cash risk management processes perform periodic evaluations relative credit standing financial institutions sustained material credit losses previous three years instruments held financial institutions may utilize forward contracts protect effects foreign currency fluctuations contracts involve risk nonperformance counterparty us government accounted 25 18 gross accounts receivable december 31 2010 2009 respectively credit risk respect accounts receivable generally diversified due large number entities comprising itt’s customer base dispersion across many different industries geographic regions itt performs ongoing credit evaluations financial condition thirdparty distributors resellers customers requires collateral letters credit bank guarantees certain circumstances allowance doubtful accounts determine allowance doubtful accounts using combination factors reduce trade receivables balances estimated net realizable amount maintain allowance doubtful accounts based variety factors including length time receivables past due macroeconomic trends conditions significant onetime events historical experience financial condition customers record specific reserve individual accounts become aware specific customer circumstances case bankruptcy filings deterioration customer’s operating results financial position past due delinquency status receivable based contractual payment terms receivable circumstances related specific customer change adjust estimates recoverability receivables appropriate inventories recorded lower cost market cost generally computed firstin firstout fifo basis full absorption policy employed using standard cost techniques periodically reviewed adjusted estimated losses obsolete slowmoving inventories recorded reduce inventory values estimated net realizable value inventories valued lastin firstout lifo method represent 71 64 total 2010 2009 inventories respectively would material difference value inventories fifo method used value inventories inventoried costs related longterm contracts stated actual production cost including overhead related nonrecurring costs incurred date reduced amounts identified revenue recognized units delivered progress completed general administrative costs applicable costreimbursement type contracts also included inventories inventoried costs relating longterm contracts programs reduced charging amounts excess estimated realizable value costs revenue plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost depreciation computed straightline basis economic useful lives assets involved follows buildings itt corporation subsidiaries improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years leasehold improvements depreciated life lease asset whichever shorter fully depreciated assets retained property accumulated depreciation accounts disposal capitalized internal use software itt capitalizes certain internal external costs incurred acquire create internal use software principally related software coding designing system interfaces installation testing software itt amortizes capitalized internal use software costs using straightline method estimated useful life software generally three seven years longlived asset impairment longlived assets including intangible assets finite lives tested impairment whenever events changes circumstances indicate carrying value may recoverable assess recoverability longlived assets based undiscounted future cash flow assets expected generate recognize impairment loss estimated undiscounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset impairment identified reduce carrying amount asset estimated fair value based discounted cash flow approach available appropriate comparable market values goodwill intangible assets goodwill represents purchase consideration paid business combination exceeds values assigned net assets acquired businesses intangible assets include customer relationships proprietary technology trademarks patents intangible assets intangible assets finite life amortized straightline basis estimated economic useful life generally range 1520 years tested impairment indicators impairment identified certain intangible assets indefinite life namely certain brands trademarks goodwill indefinitelived intangible assets amortized instead tested impairment annually frequently impairment indicators arise changes reporting unit structure significant adverse changes business climate adverse action assessment regulator conduct annual impairment testing first day fourth quarter goodwill impairment test twostep test first step estimated fair value reporting unit compared carrying value net assets assigned reporting unit estimated fair value reporting unit exceeds carrying value goodwill impaired second step impairment test performed carrying value reporting unit exceeds estimated fair value second step impairment test performed order measure impairment loss recorded carrying value reporting unit’s goodwill exceeds implied fair value record impairment loss equal difference estimate fair value reporting units indefinitelived intangible assets using income approach income approach estimate fair value based present value estimated future cash flows commitments contingencies record accruals commitments loss contingencies probable amount reasonably estimated addition legal fees accrued cases loss probable related fees reasonably estimated significant judgment required determine probability estimated amount loss review accruals quarterly adjust accruals reflect impact negotiations settlements rulings advice legal counsel updated information accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information become available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities primarily included noncurrent liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties primarily included noncurrent assets recovery probable fair value measurements determine fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date use hierarchical structure prioritize inputs valuation itt corporation subsidiaries techniques used measure fair value three broad levels fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities level 1 quoted market prices similar assets liabilities active markets level 2 gives lowest priority unobservable inputs level 3 derivative financial instruments itt uses derivative financial instruments primarily foreign currency forward contracts mitigate exposure foreign currency exchange rate fluctuations pertains intercompany transactions use derivative instruments speculative purposes record derivatives fair value either current asset current liability include adjustments reflect changes fair values derivatives earnings contracts designated hedges amount gains losses recorded related foreign currency exchange contracts net fair value outstanding contracts material years ended 2010 2009 2008 fair values associated foreign currency contracts determined using net position contracts applicable spot rates forward rates reporting date itt may use interest rate swaps manage debt portfolio related financing costs interest rate structure interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest expense interest rate swaps designated hedges terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses reflected net interest expense december 31 2010 2009 material open interest rate swaps note 2 new accounting pronouncements yet adopted december 2010 financial accounting standards board fasb issued accounting standards update asu 201028 provides additional guidance testing goodwill impairment specifically reporting units zero negative carrying amounts entity required perform second step goodwill impairment test likely goodwill impairment exists considering adverse qualitative factors date 2010 annual goodwill impairment test net carrying amounts reporting units exceeded zero guidance effective fiscal years interim periods within years beginning december 15 2010 currently expect adoption asu january 1 2011 significant effect consolidated financial statements october 2009 fasb issued asu 200913 amended accounting revenue arrangements contain multiple elements objective amendment address accounting multipledeliverable arrangements enable vendors account products services deliverables separately rather combined unit amendments establish hierarchy determining selling price deliverable allow separation products services instances previously permitted guidance provided within asu 200913 effective new materially modified arrangements fiscal years beginning june 15 2010 allows either prospective retrospective application early adoption permitted adopt provisions asu january 1 2011 although continue evaluate effects adoption asu currently believe results operations financial position liquidity adversely affected october 2009 fasb issued asu 200914 amended accounting requirements software revenue recognition objective update address accounting revenue arrangements contain tangible products software specifically products contain software “more incidental” product whole removed scope software revenue recognition literature amendments align accounting revenue transaction types amendments described asu 200913 guidance provided within asu 200914 effective new materially modified arrangements fiscal years beginning june 15 2010 allows either prospective retrospective application early adoption permitted believe adoption asu january 1 2011 significant impact consolidated financial statements april 2010 fasb issued asu 201017 establishes authoritative guidance permitting use milestone method revenue recognition research development arrangements contain payment provisions consideration contingent achievement specified events guidance effective milestones achieved fiscal years beginning june 15 2010 allows either prospective retrospective application early adoption permitted believe adoption asu january 1 2011 significant impact consolidated financial statements itt corporation subsidiaries recently adopted accounting pronouncements june 2009 fasb amended accounting disclosure requirements related consolidation variable interest entities vies amendments include replacing quantitativebased risks rewards calculation determining enterprise controlling financial interest vies approach focused identifying enterprise power direct activities vies significantly impact entity’s economic performance 1 obligation absorb losses entity 2 right receive benefits entity addition amendments require ongoing assessment whether enterprise primary beneficiary vies requires additional disclosures enterprise’s involvement vies adoption amendments january 1 2010 material impact consolidated financial statements september 2009 fasb issued asu 200912 provides guidance fair value measurements disclosures topic asc 82010 new guidance provides investors practical expedient measuring fair value investments certain entities calculate net asset value per share nav asu effective periods ending december 15 2009 adoption material effect consolidated financial statements august 2009 fasb issued asu 200905 provides additional guidance application fair value techniques liabilities fair value measurements disclosures topic asc 820 guidance clarifies quoted price liability traded asset active market level 1 measurement adjustment quoted price required absence level 1 quoted price measurement entity must use one valuation techniques estimate fair value manner consistent principles asc 820 requirements asu effective fourth quarter period beginning october 1 2009 adoption material effect consolidated financial statements january 2009 fasb amended requirements pertaining method applying acquisition method accounting business combinations amendments included acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense amendments applied prospectively business combinations acquisition date subsequent january 1 2009 new business combination accounting guidance material impact consolidated financial statements adoption effects future periods depend upon nature significance future business combinations note 3 acquisitions 2010 spent aggregate 1041 net cash acquired primarily acquisitions nova analytics corporation nova godwin pumps america inc godwin holdings limited collectively referred godwin results operations cash flows 2010 acquisitions included consolidated financial statements prospectively date acquisition pro forma results operations acquisitions completed 2010 2009 2008 presented material consolidated financial statements either individually aggregate provided additional information related nova godwin acquisitions nova analytics march 23 2010 acquired 100 outstanding stock nova manufacturer premium quality laboratory field portable online analytical instruments used water wastewater environmental medical food beverage applications purchase price 385 net cash acquired nova provides us brands technologies distribution aftermarket content analytical instrumentation market addition nova broadens solutions fluid segment offers customers key markets municipal water wastewater industrial processing food beverage purchase price nova allocated net tangible intangible assets acquired liabilities assumed based estimated fair values march 23 2010 aggregate estimated fair value distributor relationships trademarks proprietary technology 112 42 10 respectively assets acquired liabilities assumed part acquisition 70 primarily related working capital balances 81 primarily related deferred tax liabilities respectively excess purchase price estimated fair value net assets acquired equal 232 recorded goodwill expected deductible income tax purposes goodwill arising acquisition consists largely planned expansion nova footprint new geographic markets synergies economies scale goodwill assigned fluid segment itt corporation subsidiaries godwin pumps august 3 2010 acquired 100 privately held stock godwin purchase price 580 net cash acquired godwin supplier servicer automatic selfpriming ondemand pumping solutions serving global industrial construction mining municipal oil gas dewatering markets addition godwin’s specialized products skills fluid segment’s broad submersible pump portfolio global sales distribution network provides significant geographic expansion opportunities purchase price godwin allocated net tangible intangible assets acquired liabilities assumed based estimated fair values august 3 2010 aggregate estimated fair value customer relationships trademarks proprietary technology 107 46 14 respectively assets acquired part acquisition 191 primarily including rental equipment inventory trade receivables liabilities assumed part acquisition 30 excess purchase price fair value net assets acquired equal 252 recorded goodwill significant portion expected deductible income tax purposes goodwill arising acquisition primarily related planned geographic expansion godwin’s operations goodwill assigned fluid segment 2009 2008 acquisitions 2009 spent 34 net cash acquired acquisitions material individually aggregate results operations financial position significant acquisitions laing gmbh laing acquired may 2009 laing privately held producer energyefficient circulator pumps primarily used residential commercial plumbing heating ventilating air conditioning systems fully integrated fluid segment 2009 2008 spent 276 net cash acquired acquisitions material individually aggregate results operations financial position cash spent acquisitions 2008 included 226 related 2007 acquisition edo corporation edo global aerospace defense company note 4 discontinued operations 2010 sold cas inc cas component defense information solutions business segment defense segment engaging systems engineering technical assistance seta us government sale cas completed september 8 2010 resulting recognition 130 aftertax gain reported component income discontinued operations within consolidated income statements transaction resulted tax benefit 4 primarily due difference book tax bases cas proceeds sale cas 237 subsequent divestiture significant continuing involvement operations cas expect significant continuing cash flows cas accordingly financial position results operations cas reported discontinued operation periods presented following table provides thirdparty revenue operating income provided cas included within discontinued operations assets liabilities cas reported discontinued operations within consolidated balance sheet presented table engage divestiture actions material individually aggregate results operations financial position either 2009 2008 received proceeds sale assets businesses 20 22 2009 2008 respectively amounts reported discontinued operations within consolidated income statements years pertain costs incurred previously divested businesses reported discontinued operations period divestiture itt corporation subsidiaries note 5 restructuring asset impairment charges initiated various restructuring activities throughout business past three years realignment defense segment 2010 entitywide reduction force fourth quarter 2008 considered individually significant see discussion two plans components restructuring costs incurred previous three years ended presented following table displays rollforward restructuring accruals presented consolidated balance sheet within accrued liabilities previous three years ended following rollforward employee position eliminations associated restructuring activities 2010 defense segment realignment activities first quarter 2010 initiated action realign defense segment enable better product portfolio integration encouraging coordinated market approach reduced operational redundancies part strategic realignment defense segment previous organizational structure consisting seven divisions consolidated three larger divisions charges incurred 2010 action primarily related employee severance lesser extent lease cancellation costs associated three facilities substantially closed 2010 headcount reductions totaling 642 originally planned action including 162 factory workers 457 office workers 23 management employees december 31 2010 substantially headcount initiative completed expect incur significant restructuring charges action going forward estimate itt corporation subsidiaries defense realignment actions yield approximately 61 annual net savings following table provides rollforward restructuring accrual associated action including related charges payments fourth quarter 2008 reduction force activities fourth quarter 2008 initiated action reduce headcount across businesses response declining economic conditions fourth quarter 2008 reduction force activities resulted 64 total restructuring charges segment fluid 29 motion flow 23 defense 11 corporate 1 action resulted total headcount reduction 1257 including 601 factory workers 628 office workers 28 management employees following table provides rollforward restructuring accrual associated action including related charges payments note 6 income taxes income tax data continuing operations follows reconciliation tax provision continuing operations us statutory rate effective income tax expense rate reported follows itt corporation subsidiaries deferred tax assets liabilities determined based temporary differences financial reporting tax bases assets liabilities applying enacted tax rates effect year expect differences reverse deferred tax assets liabilities include following included within deferred tax table provided 6 net deferred tax liability december 31 2009 related discontinued operations deferred taxes consolidated balance sheets consist following december 31 2010 provided deferred taxes excess financial reporting tax basis investments certain foreign subsidiaries amount 1865 plan reinvest earnings indefinitely outside united states amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions following attributes available utilization december 31 2010 valuation allowance approximately 116 established reduce deferred income tax asset related certain us state foreign net operating losses us capital loss carryforwards 2010 valuation allowance decreased 34 resulting following decrease 34 attributable us federal capital loss carryforwards utilized 2010 decrease 12 attributable state net operating loss credit carryforwards increase 12 attributable foreign net operating loss carryforwards foreign investments shareholders’ equity december 31 2010 2009 reflects excess tax benefits related stockbased compensation 2010 2009 approximately 9 3 respectively uncertain tax positions recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities based technical merits position tax benefits recognized consolidated financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement reconciliation beginning ending amount unrecognized tax benefits december 31 2010 2009 follows itt corporation subsidiaries december 31 2010 90 unrecognized tax benefits would affect effective tax rate realized included balance december 31 2010 tax positions 96 deferred tax accounting would impact annual effective rate could accelerate payment cash taxing authority addition tax positions 6 attributable discontinued operations would impact annual effective tax rate believe uncertain tax positions significantly change within twelve months reporting date many cases uncertain tax positions related tax years remain subject examination relevant taxing authorities following table summarizes earliest open tax years major jurisdiction classify interest relating tax matters component interest expense tax penalties component income tax expense consolidated income statement 2010 recognized less 1 net interest expense related tax matters 2009 recognized net interest income 3 primarily due interest settlement claim irs 23 interest accrued december 31 2010 2009 note 7 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows restricted stock awards containing rights nonforfeitable dividends participate undistributed earnings common shareholders considered participating securities purposes computing earnings per share shares underlying stock options excluded computation diluted earnings per share antidilutive follows itt corporation subsidiaries note 8 receivables net unbilled contract receivables represent revenue recognized longterm contracts arise based performance attainment though appropriately recognized cannot billed balance sheet date expect bill collect substantially december 31 2010 unbilled contract receivables 2011 scheduled performance milestones completed units delivered outstanding trade accounts receivable balance us government 491 327 december 31 2010 2009 respectively following table displays aggregate rollforward allowance doubtful accounts years ended december 31 2010 2009 note 9 inventories net note 10 current noncurrent assets itt recorded sales unconsolidated affiliates 2010 2009 2008 totaling 51 44 20 respectively additionally itt purchased 22 15 products unconsolidated affiliates 2010 2009 respectively note 11 plant property equipment net depreciation expense 190 173 179 recognized 2010 2009 2008 respectively itt corporation subsidiaries note 12 goodwill intangible assets net goodwill changes carrying amount goodwill years ended december 31 2010 2009 business segment follows goodwill 76 disposed 2010 related sale cas september 8 2010 see note 4 “discontinued operations” information goodwill acquired 2010 primarily relates nova godwin acquisitions goodwill acquired 2009 primarily relates laing acquisition amounts reported “other” relate primarily writeoff goodwill associated various immaterial business divestitures occurring 2009 based results annual impairment tests determined impairment goodwill existed measurement date 2010 2009 however future goodwill impairment tests could result charge earnings continue evaluate goodwill annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may potential impairment intangible assets information regarding intangible assets follows indefinitelived intangibles consist brands trademarks based results annual impairment tests determined impairment indefinitelived intangibles existed measurement date 2010 2009 however future impairment tests could result charge earnings continue evaluate indefinitelived intangible assets annual basis beginning fourth fiscal quarter whenever events changes circumstances indicate may indicator potential impairment customer distributor relationships proprietary itt corporation subsidiaries technology trademarks patents amortized weighted average lives approximately nine years 17 years 15 years 11 years respectively amortization expense related intangible assets 2010 2009 2008 90 101 96 respectively estimated amortization expense five succeeding years follows note 13 accrued liabilities noncurrent liabilities note 14 leases rentals itt leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates 2023 may include renewal payment escalation clauses itt often pays maintenance insurance tax expense related leased assets rental expenses operating leases 132 139 131 2010 2009 2008 respectively future minimum operating lease payments noncancellable operating leases initial term excess one year december 31 2010 shown note 15 debt principal payments required per year outstanding longterm notes debentures next five years thereafter 11 13 538 1 754 respectively book value assets pledged collateral amounted 63 december 31 2010 commercial paper weighted average interest rate outstanding commercial paper 021 december 31 2009 commercial paper program supported revolving credit agreement intended purposes providing additional liquidity needed august 2010 replaced 175 billion revolving credit agreement new threeyear 15 billion revolving credit agreement august 2010 credit facility interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects itt’s debt rating commitment fee august 2010 credit facility 0225 total commitment itt corporation subsidiaries provisions agreement require maintain adjusted ebitda earnings interest tax depreciation amortization interest expense ratio greater 351 december 31 2010 2009 compliance debt covenants longterm debt following table summarizes carrying fair value longterm outstanding notes debentures maturity date december 31 2010 2009 fair value outstanding commercial paper shortterm loans approximates carrying value variable rate debt interest rate 019 december 31 2010 016 december 31 2009 b includes individually immaterial notes bonds capital leases weighted average interest rate 486 524 december 31 2010 2009 respectively may 2014 may 2019 senior notes may 2009 company issued 500 49 senior notes due may 1 2014 500 6125 senior notes due may 1 2019 collectively referred notes issuance resulted gross proceeds 998 offset 6 debt issuance costs may redeem notes whole part time redemption price equal greater 100 principal amount notes ii sum present value remaining scheduled payments principal interest thereon exclusive interest accrued date redemption discounted redemption date semiannual basis treasury rate plus 50 basis points plus case accrued unpaid interest date redemption notes senior unsecured obligations rank equally existing future senior unsecured indebtedness november 2025 senior notes november 1995 company issued 250 74 senior notes due november 15 2025 1995 senior notes may redeem 1995 senior notes whole part time redemption price equal greater 100 principal amount 1995 senior notes ii sum present value remaining scheduled payments principal interest thereon discounted redemption date semiannual basis treasury rate plus 20 basis points plus case accrued interest date redemption 1995 senior notes senior unsecured obligations rank equally existing future senior unsecured indebtedness december 31 2010 itt 66 obligation associated tenyear agreement involving sale subsequent lease back certain properties terms agreement required make annual payments principal interest end agreement 2014 itt option repurchase applicable properties nominal fee transaction reflected debt longterm debt includes unamortized portion deferred gain terminated interest rate swap amortized earnings 2025 note 16 postretirement benefit plans defined contribution plans itt sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require us match percentage employee contributions certain limits matching contributions charged income amounted 64 44 47 2010 2009 2008 respectively itt stock fund investment option itt salaried investment savings plan considered employee stock ownership plan result participants itt stock fund may receive dividends cash may reinvest dividends itt stock fund itt stock fund held approximately 83 shares itt common stock december 31 2010 defined benefit plans itt sponsors numerous defined benefit pension plans december 31 2010 total projected benefit obligation us salaried retirement plan us srp represented 76 us plans represented 14 international pension plans represented 10 fund us srp required statutory regulations discretionary contributions addition fund certain international pension plans countries funding allowable taxeffective itt corporation subsidiaries itt also provides health care life insurance benefits certain eligible us employees upon retirement funded portion health care life insurance obligations funding accomplished taxeffective basis balance sheet information amounts recognized consolidated balance sheets pension employeerelated benefit plans collectively postretirement benefit plans reflect funded status postretirement benefit plans following table provides summary funded status postretirement benefit plans presentation balances within consolidated balance sheet december 31 2010 2009 portion projected benefit obligation includes amounts yet recognized expense results operations amounts recorded within accumulated comprehensive loss amortized component net periodic postretirement cost following table provides summary amounts recorded within accumulated comprehensive loss december 31 2010 2009 following table provides rollforward projected benefit obligations us international pension plans years ended 2010 2009 itt corporation subsidiaries following table provides rollforward projected benefit obligations employeerelated benefit plans years ended 2010 2009 following table provides rollforward pension plan assets ending funded status us international pension plans years ended 2010 2009 following table provides rollforward employeerelated benefit plan assets ending funded status years ended 2010 2009 accumulated benefit obligation defined benefit pension plans 5644 5378 december 31 2010 2009 respectively following table provides information pension plans accumulated benefit obligation excess plan assets itt corporation subsidiaries income statement information following table provides components net periodic benefit cost amounts recognized comprehensive income years 2010 2009 2008 pertain defined benefit pension plans itt corporation subsidiaries following table provides components net periodic benefit cost amounts recognized comprehensive loss years 2010 2009 2008 pertain employeerelated benefit plans following table provides estimated net actuarial loss prior service cost amortized accumulated comprehensive loss net periodic benefit cost 2011 postretirement plan assumptions following table provides weightedaverage assumptions used determine projected benefit obligations net periodic benefit cost pertain defined benefit pension plans itt corporation subsidiaries following table provides weightedaverage assumptions used determine projected benefit obligations net periodic benefit cost pertain employeerelated benefit plans management develops assumption using relevant company experience conjunction marketrelated data individual country plans exist assumptions reviewed annually adjusted necessary expected longterm rate return assets reflects expected returns major asset class plans invest weight asset class target mix correlations among asset classes expected volatilities expected return plan assets estimated evaluating historical returns estimates future returns specifically analyze plan’s actual historical annual return assets net fees past 15 20 25 years estimate future returns based independent estimates asset class returns evaluate historical broad market returns longterm timeframes based asset allocation range based approach estimate longterm annual rate return assets domestic pension plans 90 reference actual geometric average annual return plan assets domestic pension plans december 31 2010 88 101 103 past 15 20 25 year periods respectively table provides actual rate return generated plan assets years presented compare expected longterm return utilized calculating net periodic benefit costs pertain us pension plans assumed rate future increases per capita cost health care health care trend rate 78 2011 decreasing ratably 50 2019 increasing health care trend rates one percent per year would effect increasing benefit obligation 36 aggregate annual service interest cost components 3 decrease one percent health care trend rate would reduce benefit obligation 30 aggregate annual service interest cost components 2 extent actual experience differs assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various market data discussion actuaries changes assumptions could materially affect financial position results operations investment policy investment strategy managing worldwide postretirement benefit plan assets seek optimal rate return relative appropriate level risk plan investment strategies vary plan depending specific characteristics plan size design funded status liability profile legal requirements substantially postretirement benefit plan assets attributable company’s us srp managed commingled basis master investment trust respect master investment trust company allows broad discretion invest tactically respond changing market conditions staying reasonably within asset allocation ranges prescribed investment guidelines making asset allocation decisions company takes account recent expected returns volatility returns asset class expected correlation returns among different investments well anticipated funding cash flows enhance returns mitigate risk company diversifies investments strategy asset class geography sector company engages large number managers gain broad exposure markets generating excessofmarket returns mitigating managerconcentration risk itt corporation subsidiaries following table provides actual asset allocations us plans december 31 2010 2009 related asset allocation ranges asset category strategies allocations plan assets outside us managed locally may differ significantly us general december 31 2010 nonus plans managed closely strategic allocations fair value plan assets measuring plan assets fair value fair value hierarchy applied categorizes prioritizes inputs used estimate fair value three levels fair value hierarchy based maximizing use observable inputs minimizing use unobservable inputs measuring fair value classification within fair value hierarchy based lowest level input significant fair value measurement three levels fair value hierarchy defined follows n level 1 inputs quoted prices unadjusted active markets identical assets liabilities n level 2 inputs quoted prices included within level 1 observable asset liability either directly indirectly level 2 inputs include quoted prices nonactive markets active markets similar assets liabilities inputs quoted prices observable inputs derived principally corroborated observable market data correlation means n level 3 inputs unobservable inputs assets liabilities certain instances fair value estimated using quoted market prices obtained external pricing services obtaining data pricing service company evaluated methodologies used develop estimate fair value order assess whether valuations representative fair value including net asset value nav additionally certain circumstances company may adjust nav reported asset manager sufficient evidence indicates nav representative fair value following description valuation methodologies inputs used measure fair value major categories investments n equity securities equities including common preferred shares domestic listed foreign listed closed end mutual funds exchange traded funds generally valued closing price reported major market individual securities traded measurement date equity securities held company publicly traded active markets securities classified within level 1 fair value hierarchy n open ended mutual funds collective trusts commingled funds open ended mutual funds collective trusts commingled funds measured nav funds generally classified within level 2 fair value hierarchy n private equity valuation limited partnership interests private equity funds may require significant management judgment nav reported asset manager adjusted management determines nav representative fair value making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager funds generally classified within level 3 fair value hierarchy n absolute return hedge funds valuation limited partnership interests hedge funds may require significant management judgment nav reported asset manager adjusted management determines nav representative fair value making assessment variety factors reviewed management including limited timeliness nav reported asset manager changes general economic market conditions subsequent last nav reported asset manager depending quickly itt redeem investments extent adjustments nav hedge funds classified within either level 2 redeemable within 90 days level 3 redeemable beyond 90 days fair value hierarchy n fixed income us government securities generally valued using quoted prices securities similar characteristics corporate bonds notes generally valued using pricing models eg discounted cash flows quoted prices securities similar characteristics broker quotes fixed income securities generally classified level 2 fair value hierarchy itt corporation subsidiaries following table provides fair value plan assets held postretirement benefit plans december 31 2010 2009 asset class private equity buyout funds included within postretirement benefit plan assets partnership investment vehicles take controlling interest primarily private companies intent developing future sale higher price strategic financial buyer initial public offering investments include 499 ownership partnership interest directly held 442 invested funds private equity funds b private equity distressed funds partnership investment vehicles purchase debt preferred equity instruments companies distressed near bankrupt c venture growth equity private equity funds partnership investment vehicles provide seed growth capital startups early stage companies usually highgrowth industries information clean technology health care biotechnology mezzanine private equity funds provide mezzanine loans companies need capital want sell dilute equity interests mezzanine loans subordinated debt preferred equity securities represent claim borrower’s assets senior common equity subordinate senior secured unsecured debt e absolute return fund funds include partnership investment vehicles invest diversified portfolio hedge funds employ range investment strategies f fixed incomemultistrat absolute return funds partnership investment vehicles invest multiple investment strategies macro equity longshort convertible arbitrage event driven often intent diversify risk reduce volatility g equity longshort absolute return funds include partnership investment vehicles purchase long short positions publicly traded equities management fund ability shift investments value growth strategies small large capitalization companies net long position net short position h macro absolute return funds include partnership investment vehicles make investments predicated managers views either fundamentally quantitatively derived different global factors asset allocation eg stocks vs bonds interest rates currency sovereign risk commodities span different time frames itt corporation subsidiaries following table presents reconciliation beginning ending balances fair value measurement within pension plans using significant unobservable inputs level 3 following table presents reconciliation beginning ending balances fair value measurement within employeerelated benefit plans using significant unobservable inputs level 3 contributions funding requirements internal revenue service rules major consideration making contributions postretirement plans respect qualified pension plans intend contribute annually less minimum required applicable law regulations made contributions 76 161 pension plans 2010 2009 respectively including voluntary contributions us srp 50 100 fourth quarter 2010 2009 respectively currently anticipate making contributions pension plans range 90 110 2011 20 expected made first quarter itt corporation subsidiaries estimated future benefit payments following table provides projected timing payments benefits earned date expectation certain future service earned current active employees pension employeerelated benefit plans note 17 longterm incentive employee compensation longterm incentive awards program comprises three components nonqualified stock options nqos restricted stock rs target cash award tsr account nqos rs equitybased compensation awards tsr awards cash settled accounted liabilitybased compensation itt amended restated 2003 equity incentive plan 2003 equity incentive plan approved shareholders established may 2003 provide awarding options common shares restricted common shares employees nonemployee directors number shares initially available awards plan 122 december 31 2010 29 shares available future grants itt makes available exercise stock options vesting restricted shares purchasing shares open market issuing shares treasury stock 2003 equity incentive plan replaced 2002 itt stock option plan nonemployee directors itt 1996 restricted stock plan nonemployee directors 1994 itt incentive stock plan prospective basis outstanding awards granted prior plans vested exercisable future grants made prior plans longterm incentive employee compensation costs primarily recorded within sga expenses reduced estimated forfeiture rate costs impacted consolidated results operations follows december 31 2010 43 total unrecognized compensation cost related nonvested awards granted stock option restricted stock plans cost expected recognized ratably weightedaverage period 18 years nonqualified stock options generally vest conclusion threeyear period exercisable seven tenyear periods except certain instances death retirement disability options granted 2004 2009 awarded contractual term seven years options granted prior 2004 2010 awarded contractual term ten years exercise price per share fair market value underlying common stock date option granted itt corporation subsidiaries summary status nqos december 31 2010 2009 2008 changes years ended presented intrinsic value options exercised amount stock price exceeded exercise price options date exercise 2010 2009 2008 22 18 30 respectively amount cash received exercise stock options 35 20 2010 2009 respectively tax benefit realized 2010 2009 associated stock option exercises lapses restricted stock 14 11 respectively classify financing activity cash flows attributable excess tax benefits arising stock option exercises restricted stock lapses cash provided operating activities decreased cash provided financing activities increased 6 3 7 2010 2009 2008 respectively following table summarizes information itt’s stock options december 31 2010 amount rounds less 01 aggregate intrinsic value preceding table represents total pretax intrinsic value based itt’s closing stock price 5211 december 31 2010 would received option holders option holders exercised options date number options “outofthemoney” december 31 2010 included exercisable preceding table 21 december 31 2010 total number stock options expected vest including already vested 73 stock options weightedaverage exercise price 4246 aggregate intrinsic value 75 weightedaverage remaining contractual life 30 years itt corporation subsidiaries fair value option grant estimated date grant using binomial lattice pricing model incorporates multiple variable assumptions time including assumptions employee exercise patterns stock price volatility changes dividends following weightedaverage assumptions 2010 2009 2008 expected volatilities based itt’s stock price history including implied volatilities traded options stock itt uses historical data estimate option exercise employee termination behavior within valuation model employee groups option characteristics considered separately valuation purposes expected life represents estimate period time options expected remain outstanding expected life provided represents weighted average expected behavior certain groups employees historically exhibited different behavior riskfree rate based us treasury yield curve effect time option grant restricted stock restricted stock typically vests three years date grant holders restricted stock right receive dividends vote shares employee leaves company prior vesting whether resignation termination cause restricted stock forfeited employee retires terminated cause pro rata portion restricted stock may vest included within restricted stock outstanding 02 vested shares deferred termination service per individual award agreements december 31 2010 total number restricted stock expected vest 14 table provides rollforward outstanding restricted stock previous three years ended outstanding restricted shares include 01 shares issued nonemployee directors payment part annual retainer cost expected recognized ratably weighted average period 06 years total shareholder return awards tsr award plan performancebased cash award incentive program provided key employees itt tsr awards accounted stockcompensation principles accounting liabilitybased awards fair value outstanding awards determined conclusion threeyear performance period measuring itt’s total shareholder return percentage total shareholder return performance stocks generally comprising sp industrials index number companies included applicable benchmark group range 312 365 december 31 2010 reassess fair value tsr awards quarterly basis end reporting period using actual total shareholder return data elapsed performance period well monte carlo simulation fair value outstanding awards december 31 2010 2009 2 27 respectively payment based tsr performance comparison measured targets established time award total cash paid settle tsr liability 18 21 19 years ended 2010 2009 2008 respectively december 31 2010 total unrecognized compensation costs projected incurred based current performance measurements remaining vesting period itt corporation subsidiaries 4 cost expected recognized ratably weightedaverage period 20 years note 18 capital stock itt authority issue aggregate 550 shares capital stock 500 shares designated “common stock” par value 1 per share 50 shares designated “preferred stock” par stated value preferred stock outstanding december 31 2010 2009 stockholders itt common stock entitled receive dividends declared itt’s board directors dividends paid quarterly dividends declared 100 085 070 per common share 2010 2009 2008 respectively october 27 2006 threeyear 1 billion share repurchase program approved board directors december 16 2008 provisions share repurchase program modified board directors replace original threeyear term indefinite term december 2008 repurchased 71 million shares 431 including commission fees 1 billion share repurchase program shares repurchased 2010 2009 make available exercise stock options vesting restricted stock purchasing shares open market issuing shares treasury stock 2010 issued 14 shares treasury account related equity compensation arrangements december 31 2010 2009 229 240 shares common stock held treasury account respectively note 19 commitments contingencies time involved legal proceedings incidental operation businesses proceedings allege damages relating asbestos liabilities environmental liabilities intellectual property matters copyright infringement personal injury claims employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures continue defend vigorously claims although ultimate outcome legal matter cannot predicted certainty based present information including assessment merits particular claim well current reserves insurance coverage expect legal proceedings material adverse impact cash flow results operations financial condition consolidated basis foreseeable future unless otherwise noted asbestos matters background itt including subsidiary goulds pumps inc goulds joined defendant numerous companies product liability lawsuits alleging personal injury due asbestos exposure claims allege certain products sold us subsidiaries prior 1985 contained part manufactured third party eg gasket contained asbestos extent thirdparty parts may contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos december 31 2010 103575 open claims itt filed various state federal courts alleging injury result exposure asbestos activity related asserted asbestos claims period follows previously indicated 34869 claims related maritime actions almost filed united states district court northern district ohio included count asserted claims company believed would litigated august 2010 cases dismissed b september 2010 itt executed amended costsharing agreement related business disposed number years ago amended agreement provides sharing costs claims resolved 2010 2019 naming itt entity acquired disposed business excluded table claim activity associated amended costsharing agreement claims filed itt c reflects adjustment increase number open claims result transitioning claims data primary insurance companies internal database frequently plaintiffs unable identify itt goulds product source asbestos exposure addition large majority 103575 pending claims company plaintiffs unable demonstrate injury many claims placed inactive dockets including 39985 claims mississippi experience date itt corporation subsidiaries substantial portion resolved claims dismissed without payment company result management believes large majority 103575 open claims little value average cost per claim resolved 2010 2009 16 thousand 12 thousand respectively claims sometimes dismissed large groups average cost per resolved claim well number open claims fluctuate significantly period beginning third quarter 2009 company recorded undiscounted asbestos liability including legal fees costs company estimated incur resolve pending claims well unasserted claims estimated filed next 10 years prior third quarter 2009 recognized liability pending claims probable would incur additional costs future claims filed company liability potential future claims reasonably estimable time due number factors begin primary insurance carriers managed paid settlement legal costs directly compounded fact part claims administration processes insurance companies maintained limited claims information insufficient detail critical estimate potential liability future claims disease type lastly insurers restricted access claim filings related information past several years negotiated coverageinplace agreements several insurers assumed responsibility administering asbestos claims since taking claims administration process time gained considerable knowledge claims addition end 2008 engaged outside consultant construct comprehensive database claims filed company completion work early third quarter 2009 able develop analyze key data settlements dismissals disease type necessary estimate exposure potential future asbestos claims third quarter 2009 2010 engaged leading consultant asbestosrelated professional services assist us estimating asbestos liability pending unasserted claims firm reviewed information provided company concerning claims filed settled dismissed amounts paid settlements relevant claim information nature asbestosrelated disease asserted claimant time lag filing disposition claims methodology used estimate total liability pending unasserted future asbestos claims relies includes following key factors n interpretation widely accepted forecast population likely occupationally exposed asbestos n widely accepted epidemiological studies estimating number people likely develop mesothelioma lung cancer exposure asbestos n company’s historical experience filing nonmalignant claims historical relationship nonmalignant malignant claims filed company n analysis number likely asbestos personal injury claims filed company based epidemiological historical data company’s recent claims experience history n analysis company’s pending cases disease type n analysis company’s recent history determine average settlement resolution value claims disease type n analysis company’s defense costs relation settlement costs resolved claims n adjustment inflation future average settlement value claims defense costs n analysis time company likely resolve asbestos claims methodology determines point estimate based assessment value underlying assumption rather range reasonably possible outcomes projecting future asbestos costs subject numerous variables uncertainties inherently difficult predict addition uncertainties surrounding key factors discussed factors include long latency period prior manifestation asbestosrelated disease costs medical treatment impact bankruptcies companies codefendants uncertainties surrounding litigation process jurisdiction case impact potential legislative judicial changes furthermore predictions respect variables impacting estimate asbestos liability subject even greater uncertainty projection period lengthens light uncertainties variables inherent longterm projection company’s total asbestos liability although probable company incur additional costs asbestos claims filed beyond next itt corporation subsidiaries 10 years believe reasonable basis estimating costs time record asset represents best estimate probable recoveries insurers responsible parties estimated asbestos liabilities developing estimate company considers coverageinplace settlement agreements insurers contractual agreements responsible parties well number additional factors additional factors include current levels recovery experience financial viability insurance companies responsible parties method losses allocated various insurance policies years covered policies interpretation various policy contract terms limits interrelationships timing amount reimbursements vary due differing policy terms certain gaps coverage result insurer insolvencies addition company retains insurance consulting firm assist management estimating probable recoveries pending asbestos claims estimated filed next 10 years based analysis policy terms likelihood recovery provided legal counsel assuming continued viability insurance carriers responsible parties currently solvent incorporating risk mitigation judgments policy terms factors certain part ongoing review net asbestos exposure quarter assess recent data available key inputs assumptions comparing data expectations recent annual liability asset estimates based third quarter year conduct detailed study assistance outside consultants review update appropriate underlying assumptions used estimate asbestos liability related assets additionally periodically reassess time horizon reasonable estimate unasserted claims projected charge third quarter 2010 conducted annual detailed study assistance outside consultants review update underlying assumptions used liability asset estimates study underlying assumptions updated based actual experience since last detailed review third quarter 2009 reassessment appropriate reference period years experience used determining assumption expectations regarding future conditions including inflation based results study increased estimated undiscounted asbestos liability including legal fees 691 reflecting costs company estimated incur resolve pending claims well unasserted claims estimated filed next 10 years increase estimated liability result several developments including higher settlement costs significantly increased activity several highercost jurisdictions increasing number cases adjudicated expected legal costs third quarter 2010 company recorded 372 increase asbestosrelated assets based results study assets comprise insurance asset well receivables responsible parties see discontinued operations discussion information receivables parties insurers full year 2010 2009 net asbestos charge summarized follows itt corporation subsidiaries changes financial position company’s estimated asbestos exposure net expected recoveries insurers responsible parties resolution pending unasserted asbestos claims estimated filed next 10 years 642 267 december 31 2010 2009 respectively following table provides rollforward estimated total asbestos liability related assets years ended december 31 2010 2009 respectively total asbestos liability related assets december 31 2010 2009 includes 117 66 presented within accrued liabilities 105 62 presented within current assets consolidated balance sheets respectively asbestos liability related receivables based upon current known information however future events affecting key factors variables either asbestos liability related receivables could cause actual costs recoveries materially higher lower currently estimated due uncertainties well inability reasonably estimate additional asbestos liability claims may filed beyond next 10 years possible predict ultimate outcome cost resolving pending unasserted asbestos claims believe possible future events affecting key factors variables within next 10 years well cost asbestos claims filed beyond next 10 years net expected recoveries could material adverse effect financial position results operations cash flows discontinued operations december 31 2010 2009 292 75 liability 285 64 asset respectively related business disposed number years ago reported discontinued operation increase liability asset resulted amended costsharing agreement executed september 2010 entity acquired disposed business amended agreement provided sharing claims settled 2010 2019 naming itt entity acquired disposed business future years liability sharing claims gradually transitions away itt responsibility claims resolved 9 10 years prior costsharing agreement costs shared equally amended costsharing agreement also provides sharing certain insurance policies prior executing amended costsharing agreement september 2010 recorded liability discontinued operation based pending claims unasserted claims estimated filed next 10 years itt part amending costsharing agreement itt provided key data necessary estimate exposure related shared pending estimated future claims estimate additional liability asset recorded result amended costsharing agreement calculated manner consistent approach used estimate itt’s standalone asbestos liabilities assets future cash flows estimated able recover 62 asbestos settlement defense costs pending claims well unasserted claims estimated filed next 10 years insurers responsible parties however gaps insurance coverage reflecting insolvency certain insurers prior insurance settlements expect certain policies insurers exhaust within next 10 years recovery percentage expected decline potential additional asbestos liabilities insurance coverage tenth year estimate asbestos claims liability currently projected approximately 25 future recoverability rates may also impacted factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict subject qualifications regarding uncertainties previously described expected future annual cash payments net recoveries related pending claims unasserted claims filed within next 10 years extend approximately 2022 due time lag filing claim itt corporation subsidiaries resolution annual net cash outflows projected average 25 next five years compared average approximately 10 15 past three years increase average approximately 50 60 remainder projection period environmental ordinary course business subject federal state local foreign environmental laws regulations responsible alleged responsible ongoing environmental investigation remediation sites various countries sites various stages investigation andor remediation many proceedings liability considered de minimis received notification us environmental protection agency similar state foreign environmental agencies number sites formerly currently owned andor operated itt properties water supplies may impacted operations contain disposed recycled materials wastes require environmental investigation andor remediation sites include instances identified potentially responsible party federal state environmental laws regulations accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies accrued liabilities environmental matters represent best estimates related investigation remediation environmental media water soil vapor air structures well related legal fees estimates related accruals reviewed periodically updated progress investigation remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis difficult estimate final costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent investigation remediation share liability conditions selection alternative remedial approaches changes environmental standards regulatory requirements opinion total amount accrued appropriate based existing facts circumstances anticipate liabilities material adverse effect consolidated financial position results operations cash flows following table illustrates activity related accrued liabilities environmental matters following table illustrates reasonably possible low high end range estimated liability number active sites environmental matters company involved coverage litigation various insurers seeking recovery costs incurred connection certain environmental product liabilities suit filed 1991 itt corporation et al v pacific indemnity corporation et al sup ct los angeles county seeking recovery costs related environmental losses discovery procedural matters changes california law various appeals prolonged case several years case appeal california court appeals decision california superior court dismissing certain claims made itt case back superior court parties engaged discovery february 13 2003 commenced action cannon electric inc v affiliated fm ins co sup ct los angeles county seeking recovery costs related asbestos product liability losses described coverage litigation entered coverageinplace settlement agreements ace wausau utica mutual dated april 2004 september 2004 february 2007 respectively agreements provide specific coverage company’s legacy asbestos liabilities prepared pursue legal remedies remaining defendants reasonable negotiations productive itt provides indemnity us silica company uss silica personal injury suits filed prior september 12 2005 former subsidiary pennsylvania glass sand pgs itt sold stock pgs us silica company 1985 itt corporation subsidiaries past several years majority silica cases involving pgs dismissed without payment currently approximately 3000 cases pending pgs company expects majority remaining cases also dismissed addition uss currently filing insurance claims directly insurer paying claims continue seek past defense costs cases insurers believe matters material adverse effect consolidated financial position results operations cash flows silicarelated costs net expected insurance recoveries shared certain previously whollyowned subsidiaries march 27 2007 reached settlement relating investigation itt night vision division’s compliance international traffic arms regulations itar pursuant pled guilty two violations based export defense articles without license omission material facts required export reports assessed total 50 fines forfeitures penalties also entered deferred prosecution agreement us government deferred action regarding third count violations related itar pending implementation remedial action plan including appointment independent monitor also assessed deferred prosecution monetary penalty 50 reduced monies spent fiveyear period following date plea agreement accelerate development fielding advanced night vision technology management believes matters material adverse effect consolidated financial position results operations cash flows april 17 2007 itt’s board directors received letter behalf shareholder requesting board take appropriate action employees responsible violations night vision facility described 2007 2008 company also received notice four shareholder derivative actions filed us district court southern district new york july 10 2010 court granted defendants’ motion terminate proceedings matter concluded note 20 guarantees indemnities warranties indemnities since itt’s incorporation 1920 acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement liability recorded indemnifications aware claims information would give rise material payments indemnities guarantees number guarantees outstanding december 31 2010 substantial majority pertain performance longterm sales contracts recorded loss contingencies performance guarantees december 31 2010 2009 likelihood itt nonperformance itt’s subsidiaries considered remote also certain thirdparty guarantees may affected various conditions external factors could require payments made guarantees consider maximum exposure current recorded liabilities thirdparty guarantees material either individually aggregate believe payments would material adverse impact financial position results operations cash flows consolidated basis december 2007 entered sale leaseback agreement corporate aircraft leased itt fiveyear operating lease provided residual value guarantee lessor future value aircraft maximum payment 42 expiration lease however fair value aircraft less 50 payment residual value guarantee would equal difference fair value aircraft expiration lease 50 provided payment shall exceed 42 december 31 2010 projected fair value aircraft expiration lease estimated 22 less guaranteed amount estimated loss exceeds 5 gain realized deferred sale aircraft loss contingency recorded additional accrual 17 2010 consolidated financial statements warranties itt warrants numerous products terms vary widely general itt warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect interrupts production results recall table included itt corporation subsidiaries provides changes product warranty accrual december 31 2010 2009 note 21 business segment information company’s business segments reported basis used internally evaluating performance allocating resources three reporting segments referred defense electronics services defense segment fluid technology fluid segment motion flow control motion flow segment corporate consists corporate office expenses including compensation benefits occupancy depreciation administrative costs well charges related certain matters asbestos environmental liabilities managed corporate level included business segments evaluating performance allocating resources assets business segments exclude general corporate assets principally consist cash deferred tax assets insurance receivables certain property plant equipment certain assets defense businesses segment directly serve military government agencies products services products include tactical communications equipment electronic warfare force protection equipment radar systems integrated structures equipment imaging sensor equipment includes night vision goggles well weather location surveillance related technologies services include air traffic management information cyber solutions largescale systems engineering integration defense technologies us government accounted 86 defense segment revenue fluid segment provider water transport wastewater treatment systems pumps related technologies water fluid control products residential commercial industrial applications motion flow motion flow segment comprises group businesses providing products services areas transportation defense aerospace industrial computer telecommunications medical marine food beverage motion flow businesses primarily serve highend markets highly engineered products high brand recognition focus new product development operational excellence itt corporation subsidiaries revenue external customers attributed individual regions based upon destination product service delivery following table provides revenue product category net intercompany balances note 22 subsequent events january 12 2011 company announced board directors unanimously approved plan separate company’s businesses three distinct publicly traded companies following completion transaction itt continue trade new york stock exchange industrial company supplies highly engineered solutions aerospace transportation energy industrial markets plan itt shareholders shares three corporations following completion transaction anticipated completed end 2011 plan itt would execute taxfree spinoffs shareholders waterrelated businesses defense information solutions segment waterrelated business include water wastewater division residential commercial water division well flow control division currently reported within motion flow control segment industrial process division currently reported within fluid segment continue operate subsidiary new itt corporation supplemental financial data selected quarterly financial data unaudited results restated reflect sale cas inc discontinued operation b third quarter 2010 2009 results include 205 131 net aftertax charge income continuing operations respectively primarily associated reassessment initial establishment estimated asbestosrelated liability net expected recoveries claims projected filed company next ten years see note 19 “commitments contingencies” information note earnings per share computed using weightedaverage number shares outstanding quarter earnings per share fiscal year computed using weightedaverage number shares outstanding year thus sum earnings per share four quarters may equal earnings per share fiscal year signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized itt corporation registrant janice klettner janice klettner vice president chief accounting officer principal accounting officer february 24 2011 ii1 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii2 exhibit index ii3 ii4 ii5 management compensatory plan ii6nannannannannannannanitem 15 exhibits financial statement schedules reports form 8k documents filed part report 1 see index consolidated financial statements schedule appearing page list financial statements schedule filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report b reports form 8k filed itt industries last quarter period covered report index consolidated financial statements schedule itt industries inc subsidiaries report management itt industries inc responsible preparation integrity information contained consolidated financial statements sections document consolidated financial statements prepared accordance accounting principles generally accepted united states necessary include amounts based managements informed judgments estimates information herein consistent consolidated financial statements itt industries consolidated financial statements audited deloitte touche llp independent auditors whose appointment ratified shareholders management made itt industries financial records related data available deloitte touche llp believes representations made independent auditors valid complete itt industries system internal controls major element managements responsibility assure consolidated financial statements present fairly companys financial condition system includes accounting controls internal auditing program designed provide reasonable assurance companys assets safeguarded transactions properly recorded executed accordance managements authorization fraudulent financial reporting prevented detected itt industries internal controls provide careful selection training personnel appropriate divisions responsibility controls documented written codes conduct policies procedures communicated itt industries employees management continually monitors system internal controls compliance addition based upon managements assessment risk operational financial special reviews performed contracted auditors periodically test effectiveness selected controls independent auditors also consider internal controls perform tests accounting records enable express opinion itt industries consolidated financial statements also make recommendations improving internal controls policies practices management takes appropriate action response recommendation within past year itt industries established disclosure committee responsibility considering evaluating materiality information reviewing disclosure obligations timely basis disclosure committee meets regularly reports general counsel chief financial officer assists chief executive officer chief financial officer designing establishing reviewing evaluating companys disclosure controls procedures audit committee board directors composed independent nonemployee directors meets periodically management also separately privately independent auditors contracted auditors evaluate effectiveness work performed discharging respective responsibilities independent auditors report itt industries inc subsidiaries board directors shareholders itt industries inc white plains new york audited accompanying consolidated balance sheet itt industries inc subsidiaries company december 31 2002 related consolidated statements income comprehensive income changes shareholders equity cash flows year ended financial statements responsibility companys management responsibility express opinion financial statements based audit consolidated financial statements company december 31 2001 years ended december 31 2001 2000 audited auditors ceased operations auditors expressed unqualified opinion financial statements report dated january 23 2002 conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion 2002 consolidated financial statements present fairly material respects financial position itt industries inc subsidiaries december 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america discussed note 1 consolidated financial statements effective january 1 2002 company changed method accounting goodwill conform statement financial accounting standards sfas 142 discussed consolidated financial statements itt industries inc subsidiaries december 31 2001 years ended december 31 2001 2000 audited auditors ceased operations notes 6 13 17 financial statements include additional disclosures related 2001 2000 additional disclosures audit procedures performed us additional disclosures described note 6 consolidated financial statements years ended december 31 2001 2000 includes additional disclosures relating components comprising sales revenues costs sales revenues audit procedures respect disclosures note 6 respect 2001 2000 included agreeing previously reported sales revenues costs sales revenues previously issued financial statements ii agreeing product sales service revenues costs product sales costs service revenues companys underlying sales revenues costs sales revenues records obtained management iii agreeing service revenues costs service revenues segment companys underlying service revenues costs service revenues records obtained management iv testing mathematical accuracy reconciliation product sales service revenues costs product sales costs service revenues opinion disclosures 2001 2000 note 6 appropriate discussed note 13 consolidated financial statements consolidated financial statements years ended december 31 2001 2000 revised include transitional disclosures required sfas 142 adopted company january 1 2002 audit procedures respect disclosures consolidated income statement note 13 respect 2001 2000 included agreeing previously reported net income previously issued financial statements adjustments reported net income representing amortization expense including related tax effects recognized periods related goodwill intangible assets longer amortized companys underlying records obtained management ii testing mathematical accuracy reconciliation reported net income adjusted net income related earnings per share amounts iii agreeing goodwill reportable segment december 31 2001 companys underlying records obtained management iv agreeing amortized intangibles including patents intangibles accumulated amortization unamortized intangibles including brands trademarks pension related intangibles companys underlying records obtained management v testing mathematical accuracy reconciliation amortized intangibles unamortized intangibles opinion disclosures 2001 2000 consolidated income statement note 13 appropriate note 17 consolidated financial statements years ended december 31 2001 2000 includes additional disclosures relating cash flow components comprising individual changes receivables inventories accounts payable accrued expenses audit procedures respect disclosures note 17 respect 2001 2000 included agreeing previously reported cumulative change accounts receivables inventories accounts payable accrued expenses previously issued financial statements ii agreeing change receivables change inventories change accounts payable accrued expenses companys underlying records obtained management iii testing mathematical accuracy reconciliation change receivables inventories accounts payable accrued expenses opinion disclosures 2001 2000 note 17 appropriate engaged audit review apply procedures 2001 2000 consolidated financial statements company respect disclosures mentioned accordingly express opinion form assurance 2001 2000 consolidated financial statements taken whole audit conducted purpose forming opinion basic 2002 financial statements taken whole supplemental schedule listed table contents page s1 presented purpose additional analysis required part basic financial statements schedule responsibility companys management 2002 schedule subjected auditing procedures applied audit basic financial statements opinion fairly stated material respects considered relation basic financial statements taken whole 2001 2000 schedules subjected auditing procedures auditors ceased operations auditors expressed unqualified opinion financial statement schedules report dated january 23 2002 deloitte touche llp stamford connecticut january 22 2003 report independent public accountants itt industries inc subsidiaries shareholders itt industries inc audited accompanying consolidated financial statements itt industries inc indiana corporation subsidiaries december 31 2001 2000 three years period ended december 31 2001 set forth accompanying index consolidated financial statements schedule financial statements schedule referred responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position itt industries inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule listed index consolidated financial statements schedule presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp stamford connecticut january 23 2002 copy audit report previously issued arthur andersen llp connection companys 2001 annual report form 10k audit report reissued arthur andersen llp refer exhibit 232 regarding implications lack updated consent arthur andersen llp use audit report itt industries inc subsidiaries consolidated income statements accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 accounting policies consolidation principles consolidated financial statements include accounts itt industries inc majority owned subsidiaries company consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 23 business segment information description companys segments sales revenue recognition company recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings costs charged income incurred except extent recoverable existing contracts approximately 780 764 746 total rde costs expended pursuant customer contracts three years ended december 31 2002 2001 2000 respectively cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout lifo method represent 114 132 total 2002 2001 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount losses recognized 2001 recorded restructuring asset impairments see note 4 restructuring itt industries inc subsidiaries notes consolidated financial statements continued asset impairment charges discussions losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years gains losses sale retirement assets included selling general administrative expenses goodwill intangible assets accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant january 1 2002 pursuant sfas 142 company ceased amortization goodwill indefinitelived assets 2001 2000 goodwill amortized straightline basis periods exceeding 40 years purchased intangible assets including patents trademarks noncompete agreements amortized straightline basis economic useful lives exceed 40 years see note 2 changes accounting pronouncements impact changes accounting pronouncements goodwill amortization investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value yearend investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used companys share net income losses equity investments included miscellaneous income expense consolidated income statements material period presented investments included assets consolidated balance sheets foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year gains losses foreign currency translations reflected cumulative translation adjustments component shareholders equity national currencies foreign companies generally functional currencies net gains foreign currency transactions reported currently selling general administrative expenses 03 29 25 2002 2001 2000 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustments component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas itt industries inc subsidiaries notes consolidated financial statements continued 133 accounting derivative instruments hedging activities sfas 133 derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swaps terminated unrealized gains losses would deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses would reflected net interest expense environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included liabilities consolidated balance sheets undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized stockbased employee compensation december 31 2002 company two stockbased employee compensation plans one stockbased nonemployee directors compensation plan described fully note 20 shareholders equity company accounts plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issued employees related interpretations compensation cost plans determined based fair value recognition provisions sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions grants 2002 2001 2000 dividend yield 165 189 199 respectively expected volatility 2830 2761 2679 respectively expected life six years riskfree interest rates 478 491 673 respectively itt industries inc subsidiaries notes consolidated financial statements continued value stock based compensation recognized selling general administrative expenses within consolidated income statements periods ended december 31 2002 2001 2000 06 09 12 respectively earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation note 2 changes accounting pronouncements company adopted sfas 133 amended effective january 1 2001 adoption sfas 133 required company record total fair value interest rate swaps financial statements caused increase assets longterm debt 397 bringing carrying value swaps 425 january 1 2001 carrying value swaps december 31 2001 462 425 included assets longterm debt remaining amount represents accrued interest adoption sfas 133 material impact consolidated results operations cash flows company adopted sfas 141 business combinations sfas 141 effective july 1 2001 sfas 141 requires purchase method accounting used business combinations initiated june 30 2001 prohibits use poolingofinterests method addition sfas 141 requires intangible assets goodwill identified intangibles required amortized economic useful lives adoption sfas 141 2001 significant impact companys results operations financial position june 2001 financial accounting standards board fasb issued sfas 142 changes accounting goodwill amortization method impairment approach amortization goodwill past business combinations ceased upon adoption statement january 1 2002 connection adoption sfas 142 company completed transitional goodwill impairment test compared fair value reporting unit carrying value determined impairment existed june 2001 fasb issued sfas 143 accounting asset retirement obligations sfas 143 standard requires legal obligations associated retirement tangible longlived assets recorded fair value incurred company adopted sfas 143 effective january 1 2003 adoption pronouncement material impact companys results operations financial position company adopted sfas 144 accounting impairment disposal longlived assets sfas 144 effective january 1 2002 sfas 144 outlines accounting financial reporting guidelines sale disposal longlived itt industries inc subsidiaries notes consolidated financial statements continued assets discontinued operations adoption pronouncement material impact companys results operations financial position june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities sfas 146 sfas 146 requires liability cost associated exit disposal activity recognized measured fair value period incurred applies prospectively activities initiated december 31 2002 provisions standard expected material effect companys future results operations financial condition december 2002 fasb issued sfas 148 accounting stock based compensation transition disclosure amendment fasb statement 123 sfas 148 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method reported results company adopted disclosure requirements sfas 148 effective december 2002 continues account plans intrinsic value recognition measurement principles apb opinion 25 accounting stock issues employees effective october 1 2000 company adopted staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 provides guidance recognition presentation disclosure revenue financial statements adoption sab 101 material impact companys consolidated results operations financial condition cash flows effective january 1 2000 company adopted emerging issues task force issue 0010 accounting shipping handling fees costs eitf 0010 eitf 0010 requires shipping handling costs billed customers recorded sales cost sales 2000 increased approximately 16 due adoption eitf 0010 adoption eitf 0010 effect operating income net income eps financial condition cash flows company november 2002 fasb issued interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires recognition liabilities guarantees issued modified subsequent december 31 2002 liabilities reflect fair value inception guarantors obligations stand ready perform event specified triggering events conditions occur company currently evaluating provisions interpretation however believe material effect companys future results operations financial condition fin 45 also requires disclosure accounting policies methodologies respect warranty accruals well reconciliation change accruals reporting period refer note 22 guarantees indemnities warranties additional information january 2003 fasb issued interpretation 46 consolidation variable interest entities fin 46 fin 46 requires unconsolidated variable interest entities consolidated primary beneficiaries entities effectively disperse risks rewards ownership among owners parties involved provisions fin 46 applicable immediately variable interest entities created january 31 2003 variable interest entities enterprise obtains interest date variable interest entities created date provisions effective july 1 2003 company currently evaluating provisions interpretation however believe material impact companys results operations financial position itt industries inc subsidiaries notes consolidated financial statements continued note 3 acquisitions 2002 company spent 1592 primarily acquisition nine entities eight entities additions fluid technology segment one within defense electronics services segment company believe acquisitions material individually aggregate results operations financial condition however larger acquisitions follows flowtronex psi inc flowtronex manufacturer modular pumping systems golf courses turf irrigation sports fields municipal commercial properties pci membranes provider membrane filtration chlorine disinfection systems water treatment industrial water reuse biopharm manufacturing division martin petersen company inc leading manufacturer process systems biopharmaceutical industry company recognized 1172 goodwill acquisitions approximately 69 tax deductible fluid technology segment assigned 1166 goodwill defense electronics services segment assigned remaining 06 addition 2002 company finalized purchase price allocations associated 2001 acquisition reduced goodwill 92 2001 company completed several small acquisitions total 909 none exceeded 500 aggregate acquisition costs exceeded fair value net assets acquired 721 excess recorded goodwill related acquisitions made june 30 2001 amortized periods 40 years goodwill related acquisitions made june 30 2001 amortized accordance sfas 142 2001 company also finalized purchase price allocations related acquisitions made prior 2001 resulted increase goodwill 183 2000 company completed acquisitions combined total 1920 significant acquisitions follows november 3 2000 company acquired manmachine interface mmi mobile phone switch producer trw inc 619 purchase price exceeded fair value net assets acquired 435 excess recorded goodwill amortized period 25 years mmi manufacturer multilayer switch components assemblies wireless mobile handset market annual sales mmi approximated 53 2000 june 26 2000 company acquired ck components inc ck privately held company 1069 net cash acquired purchase price exceeded fair value net assets acquired 1162 excess recorded goodwill amortized period 30 years ck annual sales approximately 113 2000 worldwide leader design manufacture switches communications computer electronic equipment markets acquisitions accounted using purchase method accordingly results operations acquired company included consolidated income statement date acquisition purchase price allocations 2002 acquisitions prepared preliminary basis changes expected evaluations assets liabilities completed additional information becomes available pro forma effect companys net income earnings per share acquisitions though acquisitions occurred january 1 year material therefore disclosed herein itt industries inc subsidiaries notes consolidated financial statements continued note 4 restructuring asset impairment charges restructuring charges year ended december 31 2002 detailed following table fourth quarter 2002 company recorded 96 restructuring charge primarily closure two facilities severance 292 persons severance 85 represents majority charge lease payments costs represent remainder actions primarily occurred fluid technology motion flow control segments actions within fluid technology segment represent reduction cost structure management deemed necessary response continued weakness within certain segments markets planned measures include closure fairfield nj facility termination 147 persons comprised 78 office workers 65 factory workers four management employees restructuring plan within motion flow control segment driven anticipated loss certain contracts fluid handling business 2003 resulting excess capacity planned actions include closure rochester ny facility consolidation manufacturing administrative processes termination 140 employees comprised 40 office workers 97 factory workers three management employees actions within electronic components segment represent cost control actions include termination five employees comprised three office workers two management employees projected cash savings 2002 restructuring plan total approximately 53 next five years comprised approximately 7 2003 approximately 46 2004 2007 savings represent lower salary wage expenditures decreased facility operating costs savings reflected cost sales revenues selling general administrative expenses 2003 company anticipates 82 restructuring payments associated 2002 restructuring plan 05 thereafter future restructuring payments funded cash operations supplemented required commercial paper borrowings restructuring asset impairment charges year ended december 31 2001 detailed following table december 14 2001 company announced restructuring program reduce structural costs improve profitability program primarily impacted electronic components segment significant decline sales volume occurred 2000 2001 management expected sales decline 2002 restructuring actions locations primarily related process improvements planned restructuring activities involved closure five facilities discontinuance 21 products termination approximately 3400 persons electronic components segment planned actions included closure two facilities discontinuance 21 older products workforce terminations 2753 persons consolidation outsourcing functions activities fluid technology segment consisted closure one facility workforce reductions 436 persons consolidation outsourcing functions motion flow control segment planned actions included itt industries inc subsidiaries notes consolidated financial statements continued closure two facilities workforce reductions 183 consolidation functions addition 28 corporate shared services positions eliminated also fourth quarter 2001 company recorded asset impairments amounting 144 machinery equipment cost based investment assets written fair values based managements projections individual future cash flows generated assets reviewed impairment fourth quarter 2001 time business events indicated carrying amounts assets may recovered management deemed market decline experienced 2001 certain products temporary recognized exists significant pricing pressure electronic components segment expected continue cash portion restructuring charge included approximately 52 severance 9 primarily facility carrying costs incurred operations cease facilities noncash portion restructuring charge represents asset impairments recorded based managements projection cash flows generated assets operations cease revised future cash savings projections period 2003 2006 approximately 281 consist decreased facility operating costs lower salary wage expenditures projected future noncash savings period approximately 25 primarily consist decreased depreciation amortization expense restructuring asset impairment charges year ended december 31 1999 detailed following table 1999 company identified facilities shut relocated lower cost areas consolidated existing facilities fourth quarter 1999 company also identified asset impairments two facilities 1999 restructuring activities involved closure facilities sales offices reduction workforce electronic components segment factory closed portion business relocated defense electronics services segment several positions two divisions eliminated fluid technology segment closed two facilities related service offices also consolidated operations one warehouse existing facilities motion flow control segment workforce reduction occurred one facility certain assets deemed impaired goodwill writeoff fluid technology segment related unprofitable far east operation calculated based managements future cash flow projections business goodwill writeoff defense electronics services segment related product line sold january 2000 fourth quarter 1999 company also assessed 1998 restructuring accruals determined activities related accruals would completed 448 less originally estimated reversed related accruals income excess primarily result favorable experience employee separations asset disposal costs required itt industries inc subsidiaries notes consolidated financial statements continued following table displays rollforward cash restructuring accruals third fourth quarters 2002 131 restructuring accruals reversed income result quarterly reviews companys remaining restructuring actions reversals applicable 2001 planned restructuring actions totaled 118 primarily reflect less anticipated severance costs completed actions segments decision transfer five product lines santa ana california weinstadt germany dole france basingstoke uk shenzhen tianjin china supply chain issues eliminated financial viability transfers decision continue partial operations one electronic components facilities addition management determined one facility within fluid technology segment would remain operational suitable outsource supplier could identified remaining 13 restructuring reversals represents accruals 1998 1999 restructuring plans management determined incurred december 31 2002 remaining actions announced 2001 close one facility termination 24 persons severance runoff occur 2003 closed facility expenditures continue 2004 december 31 2002 restructuring actions announced 1998 1999 complete note 5 discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 1998 company received notifications claims buyers automotive business requesting postclosing adjustments purchase prices provisions sales agreements itt industries inc subsidiaries notes consolidated financial statements continued 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved fourth quarter 2001 company reassessed automotive discontinued operations accruals determined excess accruals aftertax basis approximately 60 company reversed accruals consolidated income statements income discontinued operations excess primarily related favorable foreign tax rulings december 31 2002 company automotive discontinued operations accruals 1900 primarily related taxes 1542 product recalls 80 environmental obligations 145 employee benefits 115 19 2002 company spent approximately 10 company expects cash settle 1542 tax obligations 2004 2005 note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following defense electronics services segment comprises 6278 5405 4512 total service revenues years ended december 31 2002 2001 2000 respectively 3740 3252 2649 total costs service revenues respectively period fluid technology segment comprises majority remaining balances service revenues costs service revenues note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes itt industries inc subsidiaries notes consolidated financial statements continued deferred tax assets liabilities valuation allowances provided include following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 486 since amounts permanently reinvested december 31 2002 company approximately 23 foreign tax credit carryforwards credit carryforwards expire follows 05 december 31 2003 02 december 31 2004 102 december 31 2005 121 december 31 2006 shareholders equity december 31 2002 2001 reflects tax benefits related stock options exercised 2002 2001 approximately 402 308 respectively irs currently examining federal consolidated tax returns company years ended december 31 1996 december 31 1997 irs completed examination years 1995 december 31 2002 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations note 8 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 options purchase 49240 shares common stock average price 6560 per share outstanding december 31 2002 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 2 options purchase 12923 shares common stock average price 4587 per share outstanding december 31 2001 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2011 3 options purchase 3429883 shares common stock average price 3634 per share outstanding december 31 2000 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2008 2010 note 9 receivables net receivables consist following itt industries inc subsidiaries notes consolidated financial statements continued note 10 inventories net inventories consist following note 11 current assets december 31 2002 2001 current assets consist primarily advance payments contracts prepaid expenses capitalized tooling costs note 12 plant property equipment net plant property equipment consist following note 13 goodwill intangible assets june 2001 fasb issued sfas 141 sfas 142 sfas 141 eliminates pooling interests method accounting business combinations initiated june 30 2001 addresses initial recognition measurement goodwill intangible assets acquired business combination company adopted sfas 141 july 1 2001 january 1 2002 company adopted sfas 142 addresses financial accounting reporting standards acquisition intangible assets outside business combination goodwill intangible assets subsequent acquisition accounting standard requires goodwill indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant longer amortized provisions standard also require completion transitional impairment test year adoption impairments identified treated cumulative effect change accounting principle connection adoption sfas 142 company completed transitional goodwill impairment test 12 identified reporting units determined impairment exists accordance sfas 142 goodwill associated acquisitions consummated june 30 2001 amortized amortization goodwill business combinations consummated june 30 2001 ceased january 1 2002 reconciliation previously reported net income earnings per share amounts adjusted exclusion goodwill amortization reflected face consolidated income statements included herein itt industries inc subsidiaries notes consolidated financial statements continued changes carrying amount goodwill year ended december 31 2002 operating segment follows information regarding companys intangible assets follows amortization expense related intangible assets year ended december 31 2002 09 amortization expense five succeeding years approximately 1 per year note 14 assets december 31 2002 2001 assets primarily consist prepaid pension expense employee benefit plan costs investments unconsolidated companies assets held trusts receivables assets held trusts restricted specified reasons primarily environmental remediation costs employee benefits totaled 446 571 december 31 2002 2001 respectively investments unconsolidated companies consist following 2002 2001 2000 company recorded sales unconsolidated affiliates totaling 242 226 234 respectively addition company provided services unconsolidated affiliate companies 2002 2001 2000 received 05 04 respectively exchange services investments unconsolidated companies companys exposure limited amount investment investments accounted cost method represent voting right interests less 20 hisan joint venture brake fuel line supplier asian transplant oems united states annual sales hisan approximately 117 digital globe inc formerly known earthwatch inc developmental stage company recently launched satellite capable collecting highresolution digital itt industries inc subsidiaries notes consolidated financial statements continued imagery earths surface well comprehensive image collection enhancement digital archive system note 15 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 602 501 555 2002 2001 2000 respectively future minimum operating lease payments longterm operating leases december 31 2002 shown note 16 debt consists following 1 interest rate notedebenture 128 204 december 31 2002 2001 respectively 2 weighted average interest rate 524 550 december 31 2002 2001 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 173 269 december 31 2002 2001 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2002 fair value longterm debt 5179 compared fair value 4931 december 31 2001 year increase fair value reflects impact decline interest rates experienced 2002 november 2000 company entered revolving credit agreement expires november 2005 20 domestic foreign banks providing aggregate commitments 10 billion interest rate borrowings agreements generally based london interbank offered rate libor itt industries inc subsidiaries notes consolidated financial statements continued plus spread reflects companys debt rating provisions agreements require company maintain interest coverage ratio defined 375 times december 31 2002 companys coverage ratio well excess minimum requirement commitment fee revolving credit agreement 125 total commitment based companys current debt ratings revolving credit agreement serves backup commercial paper program otherwise restricted assets pledged secure indebtedness amounted 399 december 31 2002 note 17 cash flow information change receivables inventories payables accrued expenses listed consolidated statements cash flows twelve months ended december 31 2002 2001 2000 consist following note 18 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure december 31 2002 2001 company interest rate swaps outstanding notional values totaling 3494 carrying value swaps december 31 2002 2001 970 462 including 40 37 accrued interest respectively swaps designed manage interest rate exposure associated certain longterm debt swaps mature various dates 2025 effectively convert much longterm debt mentioned note 16 fixed variable rate borrowings variable interest rates based threemonth libor rates plus spread reflects companys debt rating coupon underlying longterm obligations weighted average variable fixed interest rates 151 745 december 2002 ineffective portions interest rate swaps amounts excluded assessment effectiveness foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures itt industries inc subsidiaries notes consolidated financial statements continued ensures hedge contract amounts exceed amounts underlying exposures foreign currency cash flow hedges outstanding december 31 2002 december 31 2001 company one foreign currency cash flow hedge appreciations less 01 2001 changes forecasted transactions 2002 2001 regarding probability occurring would require amounts reclassified earnings notional amount foreign currency forward contract utilized hedge cash flow exposures 11 december 31 2001 applicable fair value december 31 2001 11 ineffective portion changes fair values cash flow hedge positions reported earnings twelve month periods ended december 31 2002 2001 amounts excluded measure effectiveness reported earnings twelve month periods ended december 31 2002 2001 december 31 2002 2001 company foreign forward contracts notional amounts 1091 503 respectively hedge value recognized assets liabilities firm commitments fair values contracts net short positions 423 115 december 31 2002 2001 respectively ineffective portion changes fair values hedge positions reported operating income 2002 2001 amounted 01 06 respectively amounts excluded measure effectiveness fair values associated foreign currency contracts valued using net position contracts applicable spot rates forward rates reporting date note 19 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required plans assets comprised broad range domestic foreign securities fixed income investments real estate addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 04 15 years ended 2002 2001 2000 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis plans assets comprised broad range domestic foreign securities fixed income investments real estate investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 253 239 191 years ended 2002 2001 2000 respectively itt industries inc subsidiaries notes consolidated financial statements continued changes benefit obligations changes plan assets weightedaverage assumptions components net periodic benefit cost years ended 2002 2001 2000 follows assumed rate future increases per capita cost health care health care trend rate 100 2002 rate assumed 90 2003 decreasing ratably 50 2007 increasing table health care trend rates one percent per year would effect increasing benefit obligation 338 aggregate service interest cost components 24 decrease one percent trend rate would itt industries inc subsidiaries notes consolidated financial statements continued reduce benefit obligation 298 aggregate service interest cost components 20 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable financial accounting standards review various indexes discussion consulting actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company note 20 shareholders equity capital stock company authority issue aggregate 250000000 shares capital stock 200000000 designated common stock par value 1 per share 50000000 designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement rights issued pursuant rights agreement rights currently attached trade common stock rights agreement provides among things person acquires 15 outstanding common stock rights entitle holders acquiring person affiliates associates purchase series stock significant discount market value rights beneficially owned acquiring person including affiliates associates become null void nontransferable rights generally exercisable time distribution date prior earlier 10th anniversary date rights agreement redemption date company may subject certain exceptions redeem rights provided rights agreement 11000th share series stock would entitled vote participate dividends certain distributions equivalent basis one share common stock certain circumstances specified rights agreement rights become nonredeemable period time rights agreement may amended period december 31 2002 2001 53323493 56361307 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation companys common shares nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted company makes shares available exercise stock options purchasing shares open market issuing shares treasury itt industries inc subsidiaries notes consolidated financial statements continued summary status companys stock option incentive plans december 31 2002 2001 2000 changes years ended presented shares thousands following table summarizes information companys stock options december 31 2002 shares thousands december 31 2002 5866875 shares available future grants effective january 1 2003 option shares available future grants increased 2394942 result annual limitation formulas established 1994 itt industries incentive stock plan 2002 itt industries stock option plan nonemployee directors 1994 incentive stock plan also provides awarding restricted stock subject restriction period stock cannot sold exchanged pledged 10000 restricted shares awarded 2002 restricted shares awarded 2001 2000 2002 2001 2000 pursuant itt industries 1996 restricted stock plan nonemployee directors company awarded 6098 7469 13626 restricted shares fiveyear restriction periods respectively payment annual retainer directors restrictions may lapse earlier depending certain circumstances note 21 commitments contingencies company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities including toxic tort property damage remediation intellectual property matters including patent trademark copyright infringement licensing disputes personal injury claims including injuries due product failure design warnings issues asbestos exposure product liability related matters employment pension matters government contract issues commercial contractual disputes itt industries inc subsidiaries notes consolidated financial statements continued sometimes related acquisitions divestitures company continue vigorously defend claims accruals established outcome matter probable reasonably estimated although ultimate outcome legal matter cannot predicted certainty based present information including companys assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future environmental company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 accounting policies managements opinion total amount accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability conditions selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations liquidity company ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party prp limited number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent december 31 2002 company responsible alleged responsible 104 environmental investigation remediation sites various countries many proceedings companys liability considered de minimis december 31 2002 company calculated best estimate 1130 approximates accrual related cleanup soil ground water low range estimate environmental liabilities 85 high range estimate liabilities 174 annual basis company spends 11 14 environmental remediation liabilities company involved environmental proceeding glendale california relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed operating water treatment system prps agreed operate system additional 10 years itt prps continue pay respective allocated costs operation water treatment system accordingly time itt anticipate default prps would increase companys allocated share liability december 31 2002 companys accrual liability 113 representing best estimate low estimate liability 74 high estimate 164 itt operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected site since itt investigating itt industries inc subsidiaries notes consolidated financial statements continued site coordination state federal environmental authorities remedy site yet selected currently estimated range costs additional investigation anticipated remediation 56 201 best estimate 119 company accrued 119 matter itt involved number prps regarding property city bronson michigan operated former subsidiary itt higbie manufacturing prior time itt acquired company itt prps investigating remediating discharges industrial waste occurred 1930s companys current estimates exposure 32 66 accrual matter 46 represents best estimate current liabilities itt anticipate default part prps suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including three listed discovery procedural matters changes california law various appeals prolonged case currently matter california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions hearing expected early 2003 event appeal successful company pursue administrative claims excess insurers course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive portion recoveries insurance settlements placed trust used reimburse company environmental costs product liability itt subsidiary goulds pumps inc goulds joined defendants numerous industrial companies product liability lawsuits alleging injury due asbestos actions company managed historic product liability insurance carriers claims including defense settlement costs covered carriers claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged itt companies distributors manufacturers products may contained asbestos frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure past 12 months itt goulds resolved approximately 800 cases settlement dismissal average amount settlement per claim nominal based upon past claims experience available insurance coverage consultation counsel management believes matters material adverse effect companys consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property casualty company et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 commenced december 31 2002 parties cases seeking appropriate allocation responsibility companys historic asbestos liability exposure among insurers california action filed venue companys environmental insurance recovery litigation pending several years company continuing receive insurance payments pendency actions company itt industries inc subsidiaries notes consolidated financial statements continued believe existence pendency actions impact companys consolidated financial position results operations cash flows company received notice suit filed el paso texas relating gilfillian division bund zur unterstutzung radargeschadigter et al v itt industries et al sup ct el paso texas ca 20024730 complaint filed us german citizens alleges itt four major companies failed warn plaintiffs dangers associated exposure xray radiation radar devices complaint also seeks certification class similarly injured persons companys insurer accepted defense matter management believes matter material adverse effect companys consolidated financial position results operations cash flows company received notice product liability suit filed superior court new york danis v rule industries et al supct ny ca 11597502 seeking damages injuries sustained boat explosion suit contains number causes action various defendants including boat manufacturer marina operator individuals working marina company complaint alleges fume detector manufactured itts subsidiary rule industries inc prior date company acquired rule malfunctioned companys insurer accepted defense matter management believes matter material adverse effect companys consolidated financial position results operations cash flows company received notice claim rayonier inc former subsidiary companys predecessor itt corporation claim stems 1994 distribution agreement spinoff rayonier itt corporation seeks allocation proceeds certain settlements connection companys environmental insurance recovery litigation parties currently negotiations company believes claim grossly overstated little merit material adverse effect companys consolidated financial position results operations cash flows note 22 guarantees indemnities warranties guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 however lapse time fact parties resolved certain issues december 31 2002 company accrual 8 best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability itt industries inc subsidiaries notes consolidated financial statements continued continental ag undiscounted basis 950 however lapse time fact parties resolved certain issues december 31 2002 company accrual 145 best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last seven years company provided three guarantees respect real estate development activities flagler county florida two guarantee bonds issued dunes community development district bond issuances used primarily construction infrastructure water sewage utilities bridge company would required perform guarantees district failed provide interest payments principal payments due bond holders maximum amount undiscounted future payments guarantees equal 289 december 31 2002 company believe loss contingency probable guarantees therefore accrual recorded financial statements third guaranty performance bond amount 100 favor flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments third guarantee equals 100 december 31 2002 company accrual related expansion bridge amount 100 december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 468 maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2002 company believe loss contingency probable therefore accrual recorded financial statements product warranties accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims company warrants numerous products terms vary widely general company warrants products defect specific non performance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall december 31 2002 company product warranty accrual amount 404 product warranty liabilities itt industries inc subsidiaries notes consolidated financial statements continued note 23 business segment information net sales external customers attributed individual regions based upon destination product service delivery itt industries inc subsidiaries notes consolidated financial statements continued sales revenues product category net intercompany balances follows defense electronics services sales revenues united states government 11053 11049 10236 2002 2001 2000 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains companys pump businesses including brands flygtr gouldsr bell gossettr ac pumpr lowarar vogelr richtertm making company worlds largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products brand names mcdonnell millerr itt standardr addition mentioned segment comprises approximately 39 companys sales revenues approximately 42 segment operating income 2002 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 41 sales revenues segment generated contracts technical support services company provides military government agencies approximately 73 85 77 2002 2001 2000 defense electronics services sales revenues respectively us government defense electronics services segment comprises 30 companys sales revenues 26 segment operating income 2002 motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabscor ruler flojetr danforthr fluid handling materials tubing systems connectors various automotive industrial markets specialty shock absorbers brand koni brake components transportation industry motion flow control segment comprises approximately 19 companys sales revenues approximately 20 segment operating income 2002 electronic components business consists companys products marketed cannonr brand products include connectors switches cabling used communications computing aerospace industrial applications well network services segment comprises 12 companys sales revenues 12 segment operating income 2002 corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 24 quarterly results 2002 2001 sum quarters earnings per share equal full year amounts due rounding table reflects range market prices companys common stock 2002 2001 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london midwest new york pacific paris period january 1 2003 february 28 2003 high low reported market prices companys common stock 6209 5411 respectively company declared dividends 016 per common share first quarter 2003 approximately 33243 holders record companys common stock february 28 2003 schedule ii valuation qualifying accounts millions s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc edward w williams edward w williams senior vice president corporate controller principal accounting officer march 27 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 certifications louis j giuliano certify 1 reviewed annual report form 10k year ended december 31 2002 itt industries inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses louis j giuliano name louis j giuliano title chairman president chief executive officer principal executive officer date march 27 2003 ii2 david j anderson certify 1 reviewed annual report form 10k year ended december 31 2002 itt industries inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses dave j anderson name dave j anderson title senior vice president chief financial officer principal financial officer date march 27 2003 ii3 exhibit index ii4 ii5 ii6item 15 exhibits financial statement schedule reports form 8k documents filed part report 1 see index consolidated financial statements appearing page list financial statements filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt industries inc white plains new york audited accompanying consolidated balance sheets itt industries inc subsidiaries company december 31 2005 2004 related consolidated statements income comprehensive income cash flows changes shareholders equity three years period ended december 31 2005 audits also included financial statement schedule listed page s1 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt industries inc subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness companys internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 9 2006 expressed unqualified opinion managements assessment effectiveness companys internal control financial reporting unqualified opinion effectiveness companys internal control financial reporting deloitte touche llp stamford connecticut march 9 2006 itt industries inc subsidiaries consolidated income statements 1restated twoforone stock split effective february 21 2006 accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated balance sheets 1 restated twoforone stock split effective february 21 2006 accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries consolidated statements changes shareholders equity 1 restated twoforone stock split effective february 21 2006 accompanying notes consolidated financial statements integral part statements itt industries inc subsidiaries notes consolidated financial statements dollars millions except share per share amounts unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt industries inc majority owned subsidiaries company consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 23 business segment information description companys segments sales revenue recognition company recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable research development engineering significant costs incurred year connection research development engineering rde programs expected contribute future earnings rde costs specifically covered contracts charged expense incurred rde costs incurred contracts customers charged directly related contracts reported component cost sales revenues cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout fifo market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout lifo method represent 105 111 total 2005 2004 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount see note 4 restructuring asset impairment charges discussions impairment losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office equipment three seven years five 40 years gains losses sale retirement assets included selling general administrative expenses itt industries inc subsidiaries notes consolidated financial statements continued goodwill intangible assets accordance statement financial accounting standards sfas 142 goodwill intangible assets sfas 142 goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant see note 13 goodwill intangible assets description companys goodwill intangible assets investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value yearend investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used companys share net income losses equity investments included miscellaneous income expense consolidated income statements material period presented investments included assets consolidated balance sheets foreign currency translation balance sheet accounts translated exchange rate effect yearend income accounts translated average rates exchange prevailing year gains losses foreign currency translations reflected cumulative translation adjustments component shareholders equity national currencies foreign companies generally functional currencies net lossesgains foreign currency transactions reported currently selling general administrative expenses 19 06 40 2005 2004 2003 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks changes spot rate instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustments component shareholders equity company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas 133 accounting derivative instruments hedging activities sfas 133 derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest swaps terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses reflected net interest expense environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies companys estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods itt industries inc subsidiaries notes consolidated financial statements continued may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities generally included liabilities consolidated balance sheets undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized stockbased employee compensation december 31 2005 company one stockbased employee compensation plan issuing new options restricted shares company also one stockbased employee compensation plan two stockbased nonemployee directors compensation plans options restricted shares outstanding however new awards granted plans described fully note 20 shareholders equity company accounts plans recognition measurement principles apb opinion 25 accounting stock issued employees related interpretations compensation cost plans determined based fair value recognition provisions sfas 123 accounting stockbased compensation companys net income earnings per share would reduced following pro forma amounts fair value option grant estimated date grant using binomial lattice pricing model 2005 blackscholes optionpricing model 2004 2003 following weightedaverage assumptions grants 2005 2004 2003 dividend yield 078 139 157 respectively expected volatility 2309 2577 2872 respectively expected life 46 years 60 years 60 years respectively riskfree interest rates 402 371 337 respectively value stockbased compensation recognized selling general administrative expenses within consolidated income statements periods ended december 31 2005 2004 2003 32 16 07 respectively earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares include stock options restricted stock use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates reclassifications certain amounts prior years consolidated financial statements reclassified conform current year presentation february 21 2006 company effected twoforone stock split common stock financial statements notes references share per share data restated reflect stock split periods presented note 2 changes accounting pronouncements december 2004 financial accounting standards board fasb issued sfas 123 revised 2004 sharebased payment sfas 123r revision sfas 123 accounting stockbased compensation statement eliminates option using intrinsic value method accounting employee stock options historically utilized company generally resulted recognition compensation cost provisions sfas 123r require recognition employee services received exchange awards equity instruments based itt industries inc subsidiaries notes consolidated financial statements continued grantdate fair value awards determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award sfas 123r effective company beginning january 1 2006 november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 sfas 151 statement clarifies criteria abnormal amounts freight handling costs spoilage required expensed current period charges rather deferred inventory addition statement requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective company january 1 2006 adoption sfas 151 material effect companys financial statements may 2005 fasb issued sfas 154 accounting changes error corrections sfas 154 replaces accounting principles board apb opinion 20 accounting changes sfas 3 reporting accounting changes interim financial statements sfas 154 changes requirements accounting reporting change accounting principle applies voluntary changes accounting principles well changes required accounting pronouncement unusual instance include specific transition provisions specifically sfas 154 requires retrospective application prior periods financial statements unless impracticable determine period specific effects cumulative effect change sfas 154 change transition provisions existing pronouncement sfas 154 effective company accounting changes corrections errors made beginning january 1 2006 january 2004 fasb staff position fsp 1061 accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 fsp 1061 issued subsequently fsp 1062 issued amends fsp 1061 discusses recognition effects medicare prescription drug improvement modernization act 2003 medicare modernization act accounting postretirement health care plans sfas 106 employers accounting postretirement benefits pensions providing disclosures related plan required sfas 132 employers disclosures pensions postretirement benefits company adopted pronouncement effective july 1 2004 unable conclude whether benefits plans actuarially equivalent based proposed regulations released august 2004 company determined majority healthcare plans pass test actuarial equivalence fourth quarter 2005 made application centers medicare medicaid services cms subsidy provided medicare modernization act effect subsidy expectation retiree participation would affected shortterm given nature companys healthcare plans see note 19 employee benefit plans discussion postretirement benefits march 2005 fasb issued financial interpretation 47 fin 47 accounting conditional asset retirement obligations fin 47 requires entity recognize liability fair value conditional asset retirement obligation point time liability reasonably estimated majority conditional asset retirement obligations incurred company relate asbestos containing materials exist certain owned facilities adoption fin 47 resulted recording cumulative effect change accounting principle 65 net tax conditional asset retirement obligation liability 112 utilizing current period assumptions company would liabilities conditional asset retirement obligations 93 106 january 1 2004 december 31 2004 respectively note 3 acquisitions 2005 acquisitions 2005 company spent 690 acquisitions amount 297 paid phelps largest us distributor products sold itts flygt brand wastewater pumping treatment market company preliminarily assigned values assets liabilities phelps however allocation subject refinement company also paid purchase price adjustment totaling 285 related 2004 acquisition remote sensing systems business rss purchased additional shares wedeco ag water technology wedeco company acquired 2004 108 addition company finalized purchase price allocations related acquisitions resulted increase goodwill 111 itt industries inc subsidiaries notes consolidated financial statements continued 2004 acquisitions august 13 2004 company purchased rss 7369 cash rss business leading supplier high resolution satellite imaging systems information services management believes acquisition rss enhance companys competitive position space payload service product offering industry create full spectrum provider latest visible infrared satellite imaging technology remote sensing market december 31 2005 excess purchase price rss fair value net assets acquired 6401 recorded goodwill december 31 2005 6260 deductible tax purposes entire goodwill balance reflected defense electronics services segment intangible assets 1249 recorded part acquisition balance comprised 1200 customer relationships amortized 16 years 34 maintenance contracts amortized 15 years 15 product software amortized 10 years company also spent 2731 additional 2004 acquisitions believe material individually aggregate results operations financial condition acquisitions include wedeco worlds largest manufacturer uv disinfection ozone oxidation systems alternatives chlorine treatment allen osborne associates inc aoa leader development global positioning system receivers portable fixed sites shanghai hengtong purified water development co ltd shanghai hengtong water treatment engineering co ltd shanghaibased producer reverse osmosis membrane water treatment systems power pharmaceutical chemical manufacturing markets china cleghorn waring co pumps limited distributor pumps marine products december 31 2005 excess purchase price fair value net assets acquired transactions 2356 recorded goodwill 2293 34 29 reflected fluid technology defense electronics services motion flow control segments respectively intangible assets relating acquisitions wedeco aoa totaled 549 amount includes 262 proprietary technology identifiable intangible assets amortized 15 years 178 customer relationships amortized 10 years 109 indefinitelived tradenames 2004 company also finalized purchase price allocations related 2003 acquisitions resulted increase goodwill 15 2003 acquisitions 2003 company spent 462 primarily acquisition two entities one electronic components segment one fluid technology segment acquisitions accounted purchases accordingly results operations acquired company included consolidated income statements date acquisition company believe acquisitions material individually aggregate results operation financial condition however larger acquisitions follows veamtec division northrop grumman corporation designer manufacturer cylindrical filter fiber optic connectors militaryaerospace industrial transit entertainment nuclear markets uniservice wellpoint srl manufacturer high quality diesel electric powered vacuum primed centrifugal pumps along spear well point dewatering systems rental market sale december 31 2005 excess purchase price fair value net assets acquired transactions 310 recorded goodwill 240 59 11 reflected electronic components fluid technology motion flow control segments respectively additionally 2003 company finalized purchase price allocations related 2002 acquisitions resulted decrease goodwill 51 note 4 restructuring asset impairment charges 2005 restructuring activities 2005 company recognized 720 restructuring charge new actions represent 707 charge costs associated previous year plans represent 13 charge itt industries inc subsidiaries notes consolidated financial statements continued actions announced 2005 segment follows fluid technology segment recorded 297 severance costs termination 474 employees including 242 factory workers 208 office workers 24 management employees lease cancellation costs 09 08 respectively additionally asset writeoffs totaling 14 also recorded charges reflect reduction structural costs including closure four facilities electronic components segment recorded 258 reduction 1246 employees including 926 factory workers 286 office workers 34 management employees costs totaling 19 primarily representing contract termination costs lease costs also recognized year asset writeoffs associated restructuring actions totaled 01 actions reflect continued reorganization segment including closure three facilities motion flow control segment recognized 89 termination 274 employees including 163 factory workers 97 office workers 14 management employees costs totaling 06 lease costs 02 also recognized year headcount reductions relate workforce reductions consolidation functions transfer functions france holland outsourcing selected functions eastern europe corporate headquarters recorded 04 termination one management employee 2005 asset impairments fourth quarter 2005 company determined certain businesses within electronic components segment experiencing lower expected financial results result certain longlived assets businesses may impaired revising earnings forecast businesses reflect current business conditions company recorded impairment charge 83 million relating longlived assets events circumstances also caused company record impairment charge goodwill relating business unit see note 13 goodwill intangible assets discussion goodwill impairment charge 2004 restructuring activities 2004 company recognized 349 restructuring charges amount 348 related new actions announced 2004 primarily planned severance 1235 employees lease cancellation costs additionally 01 expenditures incurred relating actions announced prior 2004 actions announced 2004 segment follows fluid technology segment recorded 177 planned termination 211 employees including 52 factory workers 155 office workers four management employees additionally 07 lease costs 06 asset writeoffs 07 costs also recognized 2004 charges include impact two facility closures one sweden one florida electronic components segment recorded 45 charge recognition lease cancellation costs 45 charge planned termination 972 employees including 883 factory workers 84 office workers five management employees segment also recorded 11 08 disposal machinery equipment costs respectively motion flow control segment recorded 22 planned termination 49 employees including seven factory workers 37 office workers five management employees costs totaling 02 also recognized 2004 corporate headquarters recorded 18 planned termination one office worker two management employees 2003 restructuring activities 2003 company recognized 308 restructuring charges primarily related planned severance 730 employees actions announced 2003 segment follows fluid technology segment recorded 129 planned termination 161 employees including 52 factory workers 104 office workers five management employees additionally 05 lease costs 04 costs including 02 charge associated disposal machinery equipment also recognized 2003 electronic components segment recorded 117 planned termination 479 employees including 263 factory workers 199 office workers 17 management employees segment also recorded costs 05 primarily representing idle facility costs 05 asset disposal costs itt industries inc subsidiaries notes consolidated financial statements continued motion flow control segment recorded 12 planned termination 51 employees including 31 factory workers 13 office workers seven management employees lease termination costs totaling 07 asset disposal costs 01 respectively also recognized 2003 defense electronics services segment recorded 10 planned termination 35 employees including seven factory workers 19 office workers nine management employees corporate headquarters recorded 13 planned termination one office worker three management employees 2003 asset impairments 2003 company recorded 14 asset impairment charge primarily writeoff technology license utilized based managements projections future market conditions applicable assets written fair values based managements comparison projected future discounted cash flows generated asset applicable assets carrying value impairments unrelated companys restructuring activities following table displays rollforward cash restructuring accruals itt industries inc subsidiaries notes consolidated financial statements continued december 31 2004 accrual balance restructuring activities 205 cash payments 504 additional cash charges 705 recorded 2005 also management reviewed companys remaining restructuring actions determined actions totaling 62 would completed less planned accordingly restructuring accruals totaling 62 reversed income 2005 accrual balance decreased 12 due effect foreign currency translation accrual balance december 31 2005 332 includes 303 severance 29 facility carrying costs december 31 2004 remaining actions restructuring activities announced 2004 2002 reduce headcount 675 2005 company closed seven facilities reduced headcount 2444 persons related plans experienced employee attrition leaving balance 219 planned reductions actions announced 2005 completed 2006 actions announced 2004 2003 substantially completed 2005 2004 respectively note 5 discontinued operations automotive discontinued operations september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 1998 1999 company received notifications claims buyers automotive business requesting postclosing adjustments purchase prices provisions sales agreements 1999 claims submitted arbitration 2001 early 2002 claims favorably resolved 2005 company finalized irs tax settlement covered periods 1998 2000 included sale electrical systems business brake chassis unit result agreement company paid 1006 settle tax matters related sale automotive business remaining tax reserves 536 relating matter reversed included income discontinued operations december 31 2005 company automotive discontinued operations accruals 344 primarily related product recalls 78 environmental obligations 140 employee benefits 126 following tables display rollforward automotive discontinued operations accruals january 1 2003 december 31 2005 2003 company reassessed obligations related disposal automotive businesses determined would spend 22 less disposition related favorable spending professional fees adjustments environmental exposures based assessment 22 reversed 2003 consolidated income statement income discontinued operations itt industries inc subsidiaries notes consolidated financial statements continued fhs discontinued operations fourth quarter 2005 company announced signed definitive agreement sell automotive brake fuel tubing components business cooperstandard automotive privately held company 205 cash subject certain postclosing adjustments business component companys motion flow control segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry february 7 2006 company completed sale business cooperstandard automotive subject certain postclosing adjustments company expects aftertax gain transaction approximate 250 revenues associated discontinued operation 4174 4367 4473 2005 2004 2003 respectively pretax income associated discontinued operation 280 253 348 2005 2004 2003 respectively following table presents balance sheet information businesses held sale including fhs nss note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following itt industries inc subsidiaries notes consolidated financial statements continued defense electronics services segment comprises 13524 11039 7922 total service revenues years ended december 31 2005 2004 2003 respectively 11366 9651 6967 total costs service revenues respectively period fluid technology segment comprises majority remaining balances service revenues costs service revenues company changed classification rde costs incurred contracts customers research development engineering expenses costs sales revenues periods presented amount rde costs incurred contracts customers amounted 4727 4732 4304 2005 2004 2003 respectively note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards itt industries inc subsidiaries notes consolidated financial statements continued deferred tax assets liabilities include following companys deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 8079 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions december 31 2005 company approximately 38 foreign tax credit carryforwards begin expire december 31 2010 company approximately 63 general business credit carryforwards expire follows 30 december 31 2022 29 december 31 2023 04 december 31 2024 company net operating losses us subsidiaries amount 274 begin expire december 31 2020 company state net operating losses 5972 begin expire december 31 2006 company also net operating losses foreign subsidiaries amount 434 begin expire december 31 2008 december 31 2005 valuation allowance approximately 171 exists deferred income tax benefits related certain us subsidiary state net operating loss carryforwards may realized 2005 valuation allowance decreased 268 decrease valuation allowance primarily attributable resolution irs examination period ended december 31 2000 company able utilize foreign tax credits separate us subsidiary net operating loss carryforwards valuation allowance previously established decrease reduced result establishment valuation allowance certain state net operating loss carryovers shareholders equity december 31 2005 2004 reflects tax benefits related stock options exercised 2005 2004 approximately 569 264 respectively comprehensive income reflects deferred tax expense year ended december 31 2005 amount 2174 result reduction companys minimum pension liability irs currently examining federal consolidated tax returns company years ended december 31 2001 december 31 2003 itt industries inc subsidiaries notes consolidated financial statements continued irs completed examination years 2000 december 31 2005 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations third quarter 2005 company finalized irs tax settlement covered periods 1998 2000 included sale electrical systems business brake chassis unit see note 5 discontinued operations description irs tax settlement addition company contingent tax obligations jurisdictions related 1998 dispositions reorganizations approximately 850 company determined payment amount unlikely note 8 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 options purchase 208000 shares common stock average price 5286 per share outstanding december 31 2005 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 2 options purchase 255000 shares common stock average price 4151 per share outstanding december 31 2004 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2014 3 options purchase 157880 shares common stock average price 3269 per share outstanding december 31 2003 included computation diluted eps options exercise prices greater annual average market price common shares options expire 2012 2013 note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 current assets december 31 2005 2004 current assets consist primarily advance payments contracts prepaid expenses note 12 plant property equipment net plant property equipment consist following itt industries inc subsidiaries notes consolidated financial statements continued note 13 goodwill intangible assets changes carrying amount goodwill years ended december 31 2005 2004 operating segment follows goodwill 159 221 december 31 2005 2004 respectively excluded table amounts attributable companys automotive brake fuel tubing components business reflected current assets discontinued operations consolidated balance sheets 2005 activity fourth quarter 2005 company determined certain businesses within electronic components segment experiencing lower expected financial results may impaired revising earnings forecast businesses reflect current business conditions company recorded 2144 impairment charge reported within electronic components segment estimated fair value reporting unit computed principally upon present value future cash flows discounted cash flow method historical results comparative market data impairment unrelated companys restructuring activities 2005 company recorded purchase price adjustments 220 130 goodwill related acquisitions included electronic components defense electronics services segments respectively adjustments represent refinements preliminary data used original purchase price allocations 2005 company completed acquisition phelps december 31 2005 intangible assets related acquisition phelps include 177 goodwill 19 customer relationships intangibles added fluid technology segment 2004 activity first quarter 2004 company completed acquisition wedeco december 31 2005 intangible assets related acquisition wedeco include 2275 goodwill 109 intangibles tradenames 205 proprietary technology 178 customer relationships 44 patents third quarter 2004 company completed acquisition rss december 31 2005 intangible assets related acquisition rss include 6401 goodwill 1200 intangible assets related customer relationships 49 intangible assets information regarding companys intangible assets follows itt industries inc subsidiaries notes consolidated financial statements continued amortization expense related intangible assets years ended december 31 2005 2004 2003 215 104 27 respectively estimated amortization expense five succeeding years follows customer relationships proprietary technology patents amortized weighted average lives 15 years 15 years 20 years respectively note 14 assets december 31 2005 2004 assets primarily consist prepaid pension expense employee benefit plan costs investments unconsolidated companies assets held trusts receivables assets held trusts restricted specified reasons primarily environmental remediation costs employee benefits totaled 108 171 december 31 2005 2004 respectively investments unconsolidated companies consist following december 2004 company sold interest mesh networks technology company wireless telecommunications market 312 including 249 received cash 63 placed escrow company recorded sales unconsolidated affiliates 2005 2004 2003 totaling 97 118 89 respectively investments unconsolidated companies companys exposure limited amount investment investments accounted cost method represent voting rights interests less 20 note 15 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 868 811 645 2005 2004 2003 respectively future minimum operating lease payments longterm operating leases december 31 2005 shown note 16 debt consists following 1 interest rate notedebenture 435 227 december 31 2005 2004 respectively 2 weighted average interest rate 530 472 december 31 2005 2004 respectively principal payments required longterm debt next five years itt industries inc subsidiaries notes consolidated financial statements continued weighted average interest rate shortterm borrowings 437 231 december 31 2005 2004 respectively fair value companys shortterm loans approximates carrying value fair value companys longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2005 fair value longterm debt 5065 compared fair value 5557 december 31 2004 yearoveryear decrease fair value primarily reflects impact decrease longterm debt levels increase longterm interest rates november 2005 company entered fiveyear revolving credit agreement aggregate principal amount 125 billion interest rate borrowings agreements generally based london interbank offered rate libor plus spread reflects companys debt rating provisions agreement requires company maintain interest coverage ratio defined 35 times december 31 2005 companys coverage ratio well excess minimum requirements commitment fee revolving credit agreements 008 total commitment revolving credit agreement serves backup commercial paper program borrowing commercial paper revolving credit agreements may exceed 125 billion aggregate outstanding time december 31 2005 commercial paper borrowings 7288 december 31 2005 company 1074 obligation associated ten year agreement involving sale subsequent lease back certain properties terms agreement company required make annual payments principal interest end agreement company option repurchase applicable properties nominal fee transaction reflected debt book value assets pledged collateral amounted 638 december 31 2005 note 17 cash flow information change receivables inventories payables accrued expenses listed consolidated statements cash flows year ended december 31 2005 2004 2003 respectively consist following note 18 financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps limited basis commodity collar contracts means hedging exposure interest rate foreign currency commodity price risks companys credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties companys derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty financing strategies interest rate risk management company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage companys debt portfolio related financing costs interest rate structure fourth quarter 2005 company terminated interest rate swaps entered manage interest rate exposure associated certain longterm debt effectively converted 3333 longterm debt fixed variable rate borrowings fair value instruments time termination 695 accreted income remaining terms underlying debt mature various dates 2025 december 31 2004 interest rate swaps notional values totaling 3358 carrying value swaps december 31 2004 849 including 33 accrued interest variable interest rates based three itt industries inc subsidiaries notes consolidated financial statements continued month libor rates plus spread reflects companys debt rating coupon underlying longterm obligations ineffective portions interest rate swaps amounts excluded assessment effectiveness foreign currency risk management company significant foreign operations conducts business various foreign currencies company may periodically hedge net investments currencies functional currency nonfunctional currency cash flows obligations including intercompany financings changes spot rate debt instruments designated hedges net investment foreign subsidiary reflected cumulative translation adjustment component shareholders equity company regularly monitors foreign currency exposures ensures hedge contract amounts exceed amounts underlying exposures december 31 2005 company foreign currency cash flow hedges outstanding december 31 2004 company one foreign currency cash flow hedge outstanding change value 2004 changes forecasted transactions covered period regarding probability occurring would require amounts reclassified earnings december 31 2005 2004 company foreign currency forward contracts notional amounts 1205 933 respectively hedge value recognized assets liabilities firm commitments fair values contracts 01 04 december 31 2005 2004 respectively ineffective portion changes fair values hedge positions reported operating income 2005 2004 2003 amounted 05 04 03 respectively amounts excluded measure effectiveness fair values associated foreign currency contracts determined using net position contracts applicable spot rates forward rates reporting date note 19 employee benefit plans pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions companys contribution plans amounted 13 12 07 years ended 2005 2004 2003 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis itt industries inc subsidiaries notes consolidated financial statements continued investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 328 297 257 years ended 2005 2004 2003 respectively changes benefit obligations changes plan assets weightedaverage assumptions components net periodic benefit cost years ended 2005 2004 follows amounts recognized consolidated balance sheets consist 2005 company recorded total tax increase 4000 shareholders equity reflects decrease minimum pension liability itt industries inc subsidiaries notes consolidated financial statements continued information pension plans accumulated benefit obligation excess plan assets accumulated benefit obligation accumulated benefit obligation defined benefit plans 48491 45522 december 31 2005 2004 respectively table assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary plan assets pension welfare benefit plans assets comprised broad range domestic foreign securities fixed income investments hedge funds cash equivalents assets domestic pension itt industries inc subsidiaries notes consolidated financial statements continued us master trust covers domestic pension plans various welfare benefit plan trusts following asset allocations strategic asset allocation target companys domestic pension funds apportions 70 equity investments 30 fixed income instruments investment companys stock within us master trust approximates 1 2005 2004 contributions company currently anticipates making contributions pension plans range 1200 1400 2006 1023 made first quarter 2006 us master trust cash flows estimated future benefit payments following benefit payments covering domestic pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees assumed rate future increases per capita cost health care health care trend rate 90 2006 decreasing ratably 50 2010 increasing health care trend rates one percent per year would effect increasing benefit obligation 398 aggregate service interest cost components 30 decrease one percent health care trend rate would reduce benefit obligation 397 aggregate service interest cost components 28 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various indices discussion actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company december 8 2003 medicare modernization act mma signed law mma introduced prescription drug benefit medicare part provides several options medicare eligible participants employers including federal subsidy companies effective january 1 2006 elect provide retiree prescription drug benefit least actuarially equivalent medicare part significant uncertainties regarding eventual regulations required implement mma well mmas overall effect plan participants coverage choices related impact health care costs part answered regulations issued 2005 company determined majority healthcare plans pass test actuarial equivalence fourth quarter 2005 made application cms subsidy provided act companys actuary estimated effect act reduce accumulated postretirement benefit obligation subject plans approximately 410 december 31 2005 net periodic benefit cost 2006 reduced 54 effect subsidy expectation retiree participation would affected shortterm given nature companys healthcare plans itt industries inc subsidiaries notes consolidated financial statements continued note 20 shareholders equity capital stock company authority issue aggregate 300000000 shares capital stock 250000000 shares designated common stock par value 1 per share 50000000 shares designated preferred stock par stated value shares preferred stock 300000 shares initially designated series participating cumulative preferred stock series stock series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent rights agreement capitalized terms herein otherwise defined rights agreement november 1 2005 rights issued pursuant rights agreement rights attached traded common stock november 1 2005 outstanding rights expired accordance terms rights agreement provided among things person acquired 15 outstanding common stock rights entitled holders acquiring person affiliates associates purchase series stock significant discount market value rights become exercisable expired december 31 2005 2004 52829048 52853895 shares common stock held treasury respectively stock incentive plans companys stock option incentive plans provide awarding options common shares employees exercisable seven tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation companys common shares six nine years date grant options become exercisable upon earlier attainment specified market price appreciation companys common shares threeyear period commencing date grant exercise price per share fair market value date option granted company makes shares available exercise stock options purchasing shares open market issuing shares treasury summary status companys stock option incentive plans december 31 2005 2004 2003 changes years ended presented shares thousands itt industries inc subsidiaries notes consolidated financial statements continued following table summarizes information companys stock options december 31 2005 shares thousands 2003 equity incentive plan established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 12200000 december 31 2005 4315918 net shares available future grants 2005 2004 company awarded 12996 12388 restricted shares fiveyear restriction periods respectively payment annual retainer nonemployee directors 2005 company awarded 104000 restricted shares employees weighted average restriction period 37 years 2003 equity incentive plan replaces 2002 itt industries stock option plan nonemployee directors itt industries 1996 restricted stock plan nonemployee directors 1994 itt industries incentive stock plan prospective basis awards granted prior plans continue vest exercisable accordance original terms however future grants made prior plans note 21 commitments contingencies company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures company continue vigorously defend claims accruals established outcome matter probable reasonably estimated although ultimate outcome legal matter cannot predicted certainty based present information including companys assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future environmental company accrued environmental remediation costs associated identified sites consistent policy set forth note 1 summary significant accounting policies managements opinion total amount accrued related receivables appropriate based existing facts circumstances difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination companys share liability conditions selection alternative remedies changes cleanup standards event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations cash flows itt industries inc subsidiaries notes consolidated financial statements continued ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party prp limited number sites united states environmental protection agency epa andor similar state agency comprehensive environmental response compensation liability act cercla superfund state equivalent december 31 2005 company responsible alleged responsible approximately 58 environmental investigation remediation sites various countries many proceedings companys liability considered de minimis december 31 2005 company calculated best estimate 930 approximates accrual related cleanup soil ground water low range estimate environmental liabilities 674 high range estimate liabilities 1492 annual basis company spends 80 110 environmental remediation liabilities estimates related accruals reviewed periodically updated progress remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company involved environmental proceeding glendale california relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed operating water treatment system operation water treatment system expected continue 2013 itt prps continue pay respective allocated costs operation water treatment system company anticipate default prps would increase allocated share liability december 31 2005 companys accrual liability 99 representing best estimate low estimate liability 65 high estimate 154 itt corporation operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected site since itt completed investigation site coordination state federal environmental authorities process evaluating various remedies remedy site yet selected currently estimated range remediation 44 183 company accrued 70 matter approximates best estimate company involved number prps regarding property city bronson michigan operated former subsidiary itt corporation higbie manufacturing prior time itt acquired higbie company prps investigating remediating discharges industrial waste occurred 1930s companys current estimates exposure 65 139 accrual matter 101 represents best estimate current liabilities company anticipate default part prps suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including three listed discovery procedural matters changes california law various appeals prolonged case currently matter california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions hearing expected 2006 event appeal successful company pursue administrative claims excess insurers course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive product liability matters company subsidiary goulds pumps inc goulds joined defendants numerous industrial companies product liability lawsuits alleging injury due asbestos claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt industries inc subsidiaries notes consolidated financial statements continued companies distributors manufacturers products may contained asbestos frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2005 itt goulds resolved excess 16000 claims settlement dismissal average amount settlement per plaintiff nominal substantially defense settlement costs covered insurance based upon past claims experience available insurance coverage consultation counsel management believes matters material adverse effect companys consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property casualty company ace et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 parties cases seeking appropriate allocation responsibility companys historic asbestos liability exposure among insurers california action filed venue companys environmental insurance recovery litigation pending since 1991 new york action stayed favor california suit itt ace nationwide indemnity successfully resolved matter company working parties suit resolve matter insurers addition utica national goulds negotiating coverage place agreement allocate goulds asbestos liabilities insurance policies issued utica issued others company continuing receive benefit insurance payments pendency proceedings company believes actions materially affect availability insurance coverage material adverse effect companys consolidated financial position results operations cash flows company one several defendants suit filed el paso texas irwin bast et al v itt industries et al sup ct el paso texas ca 20024730 complaint filed us german citizens alleges itt four major companies failed warn plaintiffs dangers associated exposure xray radiation radar devices complaint also seeks certification class similarly injured persons late 2005 court dismissed bund zur unterstutzung radargeschadigter case also dismissed claims relating medical monitoring numerous motions currently pending court hearing class certification expected 2006 october 5 2004 company filed action itt industries inc et al v firemans fund insurance company et al superior court county los angeles ca bc 322546 various insurers issued historic aircraft products coverage company seeking declaration liable costs defense el paso matter parties resolved matter whereby company receive 825 cost defense matter insurers company pursuing insurers remaining costs management believes el paso suit material adverse effect companys consolidated financial position results operations cash flows company provides indemnity us silica personal injury suits former subsidiary pennsylvania glass sand filed prior september 12 2005 itt sold stock pennsylvania glass sand us silica 1985 companys indemnity paid part historic product liability carrier however september 2005 carrier communicated itt would longer pay share costs october 4 2005 itt filed suit insurer itt v pacific employers insurance co ca 05cv 5223 seeking defense costs indemnity carrier pennsylvania glass sand product liabilities silica related costs net insurance recoveries shared pursuant distribution agreement see company history certain relationships within part item 1 annual report form 10k description distribution agreement management believes matters material adverse effect companys consolidated financial position results operations cash flows defense electronics services company subject export control regulations us department state department commerce currently us attorney western district virginia investigating itt night visions compliance international traffic arms regulations company cooperating investigation recently governments consent began investigation night visions compliance federal laws utilizing outside counsel data information derived investigation shared us attorney company continue assist government investigation however time possible predict outcome investigation action government may take conclusion investigation itt industries inc subsidiaries notes consolidated financial statements continued note 22 guarantees indemnities warranties guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 however lapse time fact parties resolved certain issues december 31 2005 company accrual 78 best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 950 however lapse time fact parties resolved certain issues quantification certain accepted itt december 31 2005 company accrual 140 best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last ten years company provided performance bond guarantee amount 100 related real estate development activities flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments equals 100 december 31 2005 company accrual related expansion bridge amount 100 december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2005 company believe loss contingency probable therefore accrual recorded financial statements company number individually immaterial guarantees outstanding december 31 2005 may affected various conditions external forces could require payments made guarantees company believe payments material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future product warranties accruals estimated expenses related warranties made time products sold services rendered accruals established using historical information nature frequency average cost warranty claims company warrants numerous products terms vary widely general company warrants products defect specific itt industries inc subsidiaries notes consolidated financial statements continued nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall december 31 2005 company product warranty accrual amount 456 product warranty liabilities itt industries inc subsidiaries notes consolidated financial statements continued note 23 business segment information net sales external customers attributed individual regions based upon destination product service delivery itt industries inc subsidiaries notes consolidated financial statements continued sales revenues product category net intercompany balances follows defense electronics services sales revenues united states government 26683 20982 14547 2005 2004 2003 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains companys pump pumping system businesses including brands flygtr gouldsr bell gossettr ac pumpr marlowr flowtronexr lowarar vogelr richterr making company worlds largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products well systems municipal industrial residential agricultural commercial applications brand names mcdonnell millerr hoffman specialtytm itt standardr addition mentioned additionally fluid technology segment produces wastewater aeration diffuser systems brands sanitairer abjr ultraviolet ozone water disinfection systems wedecor brand membrane filtration bioreactor systems aquioustm brand water wastewater treatment markets segment comprises approximately 38 companys sales revenues approximately 65 segment operating income 2005 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 42 sales revenues segment generated contracts technical support services company provides military government agencies approximately 83 87 81 2005 2004 2003 defense electronics services sales revenues respectively us government defense electronics services segment comprises 43 companys sales revenues 72 segment operating income 2005 motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabscor ruler flojetr danforthr system components whirlpool baths hot tub spa markets hydroairr brand specialty shock absorbers brand konir brake components transportation industry motion flow control segment comprises approximately 9 companys sales revenues approximately 24 segment operating income 2005 electronic components business consists companys products marketed cannonr brand products include connectors switches cabling used communications computing aerospace industrial applications segment comprises 10 companys sales revenues 2005 segment recorded operating loss 2167 primarily result 2227 asset impairment charge switches component corporate primarily includes operating results assets corporate headquarters itt industries inc subsidiaries notes consolidated financial statements continued note 24 quarterly results 2005 2004 unaudited sum quarters earnings per share equal full year amounts due rounding table reflects range market prices companys common stock 2005 2004 prices reported consolidated transaction reporting system new york stock exchange principal market companys common stock traded symbol itt companys common stock listed following exchanges frankfurt london new york pacific paris period january 1 2006 february 28 2006 high low reported market prices companys common stock 5500 4985 respectively company declared dividends 011 per common share first quarter 2006 25985 holders record companys common stock february 28 2006 index schedule ii valuation qualifying accounts s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt industries inc robert j pagano jr robert j pagano jr vice president corporate controller principal accounting officer march 10 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 management compensatory plan ii5item 15 exhibits financial statement schedule documents filed part report 1 see index consolidated financial statements appearing page list financial statements filed part report 2 see exhibit index appearing pages ii2 ii3 ii4 list exhibits filed incorporated herein part report index consolidated financial statements report independent registered public accounting firm board directors shareholders itt corporation white plains new york audited accompanying consolidated balance sheets itt corporation subsidiaries “company” december 31 2006 2005 related consolidated statements income comprehensive income cash flows changes shareholders’ equity three years period ended december 31 2006 audits also included financial statement schedule page s1 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position itt corporation subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 company changed method accounting share based payments defined benefit pension post retirement plans 2006 also audited accordance standards public company accounting oversight board united states effectiveness company’s internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 26 2007 expressed unqualified opinion management’s assessment effectiveness company’s internal control financial reporting unqualified opinion effectiveness company’s internal control financial reporting deloitte touche llp stamford connecticut february 26 2007 itt corporation subsidiaries consolidated income statements 1 restated twoforone stock split effective february 21 2006 accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements comprehensive income accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated balance sheets 1 shares outstanding include unvested restricted common stock 04 million december 31 2006 accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements cash flows accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries consolidated statements changes shareholders’ equity 1 restated twoforone stock split effective february 21 2006 accompanying notes consolidated financial statements integral part statements itt corporation subsidiaries notes consolidated financial statements dollars millions except per share amounts unless otherwise stated note 1 summary significant accounting policies consolidation principles consolidated financial statements include accounts itt corporation majority owned subsidiaries “company” company consolidates companies owns 50 voting shares results companies acquired disposed fiscal year included consolidated financial statements effective date acquisition date disposal intercompany transactions eliminated see note 24 “business segment information” description company’s segments sales revenue recognition company recognizes revenues services rendered title transfers products subject special terms conditions specific contracts defense electronics services segment generally recognizes sales anticipated profits longterm fixedprice contracts based units delivery completion scheduled performance milestones estimated contract profits recorded earnings proportion recorded sales performance contracts estimated final contract prices costs periodically reviewed revisions made required effect revisions estimates included earnings period revisions made sales costreimbursement contracts recorded costs incurred include estimated earned fees profits calculated basis relationship costs incurred total estimated costs timeandmaterial contracts revenue recognized extent billable rates times hours incurred plus material reimbursable costs incurred anticipated losses contracts recorded first identified company revenue arising claims process recognized either income offset potential loss reliably estimated realization probable accruals estimated expenses related warranties made time products sold services rendered recorded component cost sales revenues accruals established using historical information nature frequency average cost warranty claims estimates future costs research development engineering significant costs incurred year connection research development engineering “rde” programs expected contribute future earnings rde costs specifically covered contracts charged expense incurred rde costs incurred contracts customers charged directly related contracts reported component costs sales revenues cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents inventories valued lower cost firstin firstout “fifo” market full absorption policy employed using standard cost techniques periodically reviewed adjusted required potential losses obsolete slowmoving inventories recorded identified domestic inventories valued lastin firstout “lifo” method represent 118 112 total 2006 2005 inventories respectively would material difference value inventories fifo method used company value inventories longlived asset impairment losses company records impairment losses longlived assets used operations events circumstances indicate assets may impaired undiscounted net cash flows estimated generated assets less carrying amounts undiscounted net cash flows less carrying amount losses recorded difference discounted net cash flows assets carrying amount see note 4 “restructuring asset impairment charges” discussions impairment losses plant property equipment plant property equipment including capitalized interest applicable major project expenditures recorded cost financial reporting purposes depreciation provided straightline basis economic useful lives assets involved follows buildings improvements five 40 years machinery equipment two 10 years furniture office itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated equipment three seven years five 40 years goodwill intangible assets accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” goodwill excess cost fair value net assets acquired indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant see note 13 “goodwill intangible assets” description company’s goodwill intangible assets investments company ability exercise significant influence readily determinable market value accounted cost method accounting company periodically evaluates carrying value investments accounted cost method accounting investments recorded lower cost estimated net realizable value end period investments company owns controls 20 voting shares exerts significant influence operating financial policies equity method used company’s share net income losses equity investments included miscellaneous expense material period presented investments included assets foreign currency translation balance sheet accounts translated exchange rate effect end period income accounts translated average rates exchange prevailing period gains losses foreign currency translations reflected cumulative translation adjustments component shareholders’ equity national currencies foreign companies generally functional currencies net lossesgains foreign currency transactions reported currently selling general administrative expenses 07 12 11 2006 2005 2004 respectively derivative financial instruments company uses variety derivative financial instruments including interest rate swaps foreign currency forward contracts andor swaps means hedging exposure interest rate foreign currency risks company subsidiaries endusers utilize instruments speculative purposes company rigorous standards regarding financial stability credit standing major counterparties additionally derivative instruments recorded balance sheet fair value derivative assets derivative liabilities subject certain specific qualifying conditions sfas 133 “accounting derivative instruments hedging activities” amended “sfas 133” derivative instrument may designated either hedge fair value asset liability fair value hedge variability cash flows asset liability forecasted transaction cash flow hedge derivative instrument qualifying fair value hedge fair value gains losses derivative instrument reported net income together offsetting fair value gains losses hedged item attributable risk hedged derivative instrument qualifying cash flow hedge fair value gains losses associated risk hedged reported comprehensive income released net income periods effect net income hedged item recorded fair value gains losses derivative instrument qualifying hedge reported net income interest rate swaps involve periodic exchange payments without exchange underlying principal notional amounts net payments recognized adjustment interest expense swaps terminated unrealized gains losses deferred amortized shorter remaining original term hedging instrument remaining life underlying debt instrument gains losses reflected net interest expense employee benefit plans company accounts defined benefit pension plans postretirement benefit plans using actuarial models required sfas 87 “employers’ accounting pensions” sfas 106 “employers’ accounting postretirement benefits pensions” respectively models use attribution approach generally spreads individual events service lives employees plan examples “events” changes actuarial assumptions discount rate compensation increase mortality effective december 31 2006 company adopted sfas 158 “employers’ accounting defined itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” effectively changed company’s balance sheet classification disclosures plans see note 2 “new accounting pronouncements” note 19 “employee benefit plans” detail stockbased compensation company adopted sfas 123r “sharebased payment” “sfas 123r” effective january 1 2006 prospective basis accounting stockbased compensation accordingly company recognizes employee services received exchange awards equity instruments based grantdate fair value award determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award see note 2 “new accounting pronouncements” note 20 “stockbased longterm incentive employee compensation” detail periods prior 2006 accounted using intrinsic value method accounting employee stock options prescribed accounting principles board opinion “apb” 25 “accounting stock issued employees” “apb 25” generally resulted compensation cost recognized exercise price company’s stock options granted employees directors equaled fair market value underlying stock grant date income taxes company determines provision income taxes using asset liability approach deferred income taxes represent expected future tax consequences temporary differences carrying amounts tax basis assets liabilities company records valuation allowance reduce deferred tax assets uncertainty regarding reliability exists company required adopt fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” effective january 1 2007 see note 2 “new accounting pronouncements” note 7 “income taxes” detail commitments contingencies company records accruals commitments loss contingencies probable amount reasonably estimated addition legal fees accrued fees probable payment reasonably estimated environmental remediation costs accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies company’s estimated liability reduced reflect anticipated participation potentially responsible parties instances probable parties legally responsible financially capable paying respective shares relevant costs accruals adjusted periodically assessment remediation efforts progress additional technical legal information becomes available actual costs incurred identified sites future periods may vary estimates given inherent uncertainties evaluating environmental exposures accruals environmental liabilities primarily included liabilities undiscounted amounts exclude claims recoveries insurance companies third parties recoveries insurance companies third parties included assets probable claim realized earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding potentially dilutive common shares includes stock options restricted stock use estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates revised additional information becomes available actual results could differ estimates itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated reclassifications certain amounts prior years’ consolidated financial statements reclassified conform current year presentation february 21 2006 company effected twoforone stock split common stock financial statements notes references share per share data restated reflect stock split periods presented note 2 new accounting pronouncements december 2004 fasb issued sfas 123r revision sfas 123 “accounting stockbased compensation” statement eliminates option using intrinsic value method accounting employee stock options historically utilized company generally resulted recognition compensation cost exercise price company’s stock options granted employees directors equaled fair market value underlying stock date grant provisions sfas 123r require recognition employee services received exchange awards equity instruments based grantdate fair value awards determined option pricing models calculated compensation cost recognized period employee required provide services per conditions award company adopted sfas 123r january 1 2006 using modified prospective method requires application accounting standard first day company’s fiscal year 2006 company’s consolidated financial statements year ended december 31 2006 reflect impact sfas 123r accordance modified prospective transition method company’s consolidated financial statements prior periods restated reflect include impact sfas 123r incremental stockbased employee compensation expense recognized sfas 123r 2006 134 see note 20 “stockbased longterm incentive employee compensation” detail march 2005 fasb issued financial interpretation 47 “fin 47” “accounting conditional asset retirement obligations” fin 47 requires entity recognize liability fair value conditional asset retirement obligation point time liability reasonably estimated majority conditional asset retirement obligations incurred company relate asbestos containing materials exist certain owned facilities company adopted fin 47 december 2005 resulted charge 65 net tax cumulative effect change accounting principle result recording conditional asset retirement obligation liability 112 capitalization asset retirement costs net depreciation 47 may 2005 fasb issued sfas 154 “accounting changes error corrections” “sfas 154” replaces apb 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” sfas 154 changes requirements accounting reporting change accounting principle applies voluntary changes accounting principles well changes required accounting pronouncement unusual instance include specific transition provisions specifically sfas 154 requires retrospective application prior period financial statements unless impracticable determine period specific effects cumulative effect change sfas 154 change transition provisions existing pronouncement sfas 154 effective company accounting changes corrections errors made beginning january 1 2006 pronouncement material affect company’s financial statements june 2006 fasb issued fin 48 effective company beginning january 1 2007 fin 48 prescribes comprehensive model company recognize measure present disclose financial statements uncertain tax positions company taken expects take tax return fin 48 substantially changes applicable accounting model likely cause greater volatility income statements items recognized discretely within income tax expense company assessing impact adoption fin 48 consolidated financial statements company expects impact new interpretation decrease shareholders’ equity approximately 20 35 inclusive interest penalties september 2006 fasb issued sfas 157 “fair value measurements” effective fiscal years beginning november 15 2007 interim periods within years statement defines fair value establishes framework measuring fair value expands related disclosure requirements company currently evaluating potential impact statement itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated september 2006 fasb issued sfas 158 effective company december 31 2006 except measurement date provisions effective year ending december 31 2008 statement requires company recognize overfunded underfunded status pension postretirement benefit plans asset liability balance sheet recognize changes funded status year changes occur comprehensive income addition sfas 158 requires measurement date plan assets benefit obligation measured company’s fiscal year end consistent company’s current practice sfas 158 requires application provisions end year initial application cumulative effect adjustment accumulated comprehensive loss permit retrospective application company’s adoption sfas 158 december 31 2006 resulted aftertax reduction accumulated comprehensive loss within shareholders’ equity 4350 resulting 2844 reduction assets 1506 increase liabilities incremental impact adopting sfas 158 individual line items consolidated balance sheet december 31 2006 follows see note 19 “employee benefit plans” additional details september 2006 fasb issued fasb staff position aug air1 “accounting planned major maintenance activities” effective fiscal years beginning december 15 2006 position statement eliminates accrueinadvance method accounting planned major maintenance activities expect pronouncement material effect company’s financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” statement provides company option elect carry certain financial assets liabilities fair value change fair value recorded earnings sfas 159 effective company beginning january 1 2008 company currently evaluating potential impact statement itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated note 3 acquisitions 2006 company spent 895 acquisitions believe material individually aggregate results operations financial condition acquisitions included • privately held company included defense electronics services segment leading provider semiconductor design services intellectual property product management believes technology help company lead way providing new generation radios modern soldier • fb leopold company included fluid technology segment primarily serves municipal industrial water wastewater treatment facilities management believes acquisition expand company’s ability provide pretreatment filtration technology surface water reuse desalination • sota corporation included motion flow control segment manufacturer fuel boost override pumps potable water pumps aerospace applications management believes acquisition enhances capability positions reach strategic goals becoming potable water waste water fuel systems integrator company preliminarily assigned value assets liabilities 2006 acquisitions however allocations subject refinement december 31 2006 excess purchase price fair value net assets acquired transactions 533 recorded goodwill 149 290 94 reflected defense electronics services fluid technology motion flow control segments respectively 94 reflected motion flow control segment deductible tax purposes intangible asset relating acquisitions totaled 376 december 31 2006 amount includes 79 customer relationships 197 proprietary technology 51 trademarks 49 patents identifiable intangible assets intangible assets amortized weighted average lives 10 years 8 years 10 years 8 years respectively 2006 company material changes resulting finalization purchase price allocations related prior period acquisitions 2005 company spent 690 acquisitions believe material individually aggregate results operations financial condition amount 297 paid phelps largest us distributor products sold itt’s flygt brand within fluid technology segment wastewater pumping treatment market company also paid purchase price adjustment totaling 285 related 2004 acquisition remote sensing systems business “rss” purchased additional shares wedeco ag water technology “wedeco” company acquired 2004 108 addition company finalized purchase price allocations related prior period acquisitions resulted increase goodwill 111 acquisitions august 13 2004 company purchased rss 7369 cash rss business leading supplier high resolution satellite imaging systems information services december 31 2006 excess purchase price rss fair value net assets acquired 6403 recorded goodwill 6260 deductible tax purposes entire goodwill balance reflected defense electronics services segment intangible assets 1249 recorded part acquisition balance comprised 1200 customer relationships amortized 16 years 34 maintenance contracts amortized 15 years 15 product software amortized 10 years company also spent 2731 additional 2004 acquisitions believe material individually aggregate results operations financial condition acquisitions include • wedeco world’s largest manufacturer uv disinfection ozone oxidation systems alternatives chlorine treatment • allen osborne associates inc “aoa” leader development global positioning system receivers portable fixed sites • shanghai hengtong purified water development co ltd shanghai hengtong water treatment engineering co ltd shanghaibased producer reverseosmosis membrane water treatment systems itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated power pharmaceutical chemical manufacturing markets china • cleghorn waring co pumps limited distributor pumps marine products december 31 2006 excess purchase price fair value net assets acquired transactions 2628 recorded goodwill 2560 35 33 reflected fluid technology defense electronics services motion flow control segments respectively intangible assets relating acquisitions wedeco aoa totaled 606 december 31 2006 amount includes 292 proprietary technology identifiable intangible assets amortized weighted average life 123 years 192 customer relationships amortized 10 years 122 trade names amortized 20 years 2004 company also finalized purchase price allocations related prior period acquisitions resulted increase goodwill 15 note 4 restructuring asset impairment charges restructuring activities 2006 company recorded net restructuring charge 517 reflecting costs 527 related new actions 38 related prior year plans well reversal 48 restructuring accruals management determined would required components 2006 charge charges associated actions announced 2006 represent reduction structural costs segments closure three facilities fluid technology segment two motion flow control segment one defense electronics services segment planned position eliminations total 816 including 427 factory workers 360 office workers 29 management employees costs attributable 2006 plans primarily reflect severance lease cancellation costs associated prior year plans primarily reflect additional severance costs restructuring activities 2005 company recorded net restructuring charge 539 reflecting costs 587 related new actions costs 02 related previous plans well reversal 50 restructuring accruals management determined would required components 2005 charge itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated charges represent reduction structural costs closure four facilities fluid technology segment addition activity motion flow control segment reflected closure two facilities continued reorganization including workforce reductions consolidation functions transfer functions france holland outsourcing selected functions eastern europe planned position eliminations total 941 including 485 factory workers 402 office workers 54 management employees restructuring activities 2004 company recorded net restructuring charge 293 reflecting costs 302 related new actions costs 01 related previous plans well reversal 10 accruals management determined would required components 2004 charge charges represent reduction structural costs closure two facilities fluid technology segment continued reorganization reduction structural costs motion flow control segment planned position eliminations total 592 including 335 factory workers 246 office workers 11 management employees following table displays rollforward restructuring accruals accrual balance december 2006 346 includes 202 severance 144 facility carrying costs itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated following reconciliation employee position eliminations associated restructuring activities 2006 end 2006 announced planned facility closures completed note 5 discontinued operations fluid handling systems first quarter 2006 company completed sale automotive brake fueling tubing components business “fhs” privately held company net proceeds 1877 gain 190 business component company’s motion flow control segment manufactures steel plastic tubing fuel brake lines quickconnects serves transportation industry revenues operating income fhs reported discontinued operations follows assets liabilities fhs component company’s discontinued businesses held sale follows richter first quarter 2006 company also completed sale industrial nonmetallic lined pumps valves business “richter” private equity investor net proceeds 248 gain 222 business component company’s fluid technology segment leading manufacturer pumps valves selected segments chemical fine chemical pharmaceutical industries revenues operating income richter reported discontinued operations follows assets liabilities richter component company’s discontinued businesses held sale follows itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated switches company preparing switches businesses previously reported part previous electronic components segment sale since early 2006 third quarter 2006 company initiated solicitation bids interested parties proceeding active program sale businesses accordingly commencing third quarter 2006 switches businesses reported discontinued operations divestiture businesses consistent company’s strategy concentrating resources core product areas deemphasizing products determined less strategic company switches businesses produce pushbutton toggle slide dip rotary multifunctional navigation snap thumbwheel switches well customized rubber plastic keypads customized dome arrays customized interface control products multifunction joysticks control panels switches businesses sell products wide range customers transportation consumer telecommunications medical instrumentation market segments revenues operating income switches reported discontinued operations follows assets liabilities switches businesses component company’s discontinued businesses held sale follows december 31 2006 company’s balance sheet included 401 cumulative translation loss adjustments related switches businesses automotive september 1998 company completed sales automotive electrical systems business valeo sa approximately 1700 brake chassis unit continental ag germany approximately 1930 dispositions treated discontinued operations 2005 company finalized irs tax settlement covered periods 1998 2000 included sale electrical systems business brake chassis unit result agreement company paid 1006 settle tax matters related sale automotive business remaining tax reserves 536 relating matter reversed included income discontinued operations december 31 2006 company automotive discontinued operations accruals 323 primarily related product recalls 78 environmental obligations 127 employee benefits 118 itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated following tables display rollforward automotive discontinued operations accruals january 1 2004 december 31 2006 note 6 sales revenues costs sales revenues sales revenues costs sales revenues consist following defense electronics services segment comprises 14754 13524 11039 total service revenues 2006 2005 2004 respectively 12881 11366 9651 total costs service revenues respectively periods fluid technology segment comprises majority remaining balances service revenues costs service revenues amount rde costs incurred contracts customers amounted 4993 4720 4705 2006 2005 2004 respectively itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated note 7 income taxes income tax data continuing operations follows reconciliation tax provision us statutory rate effective income tax expense rate reported follows deferred income taxes established temporary differences amount assets liabilities recognized financial reporting purposes tax reporting purposes carryforwards deferred tax assets liabilities include following itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated company’s deferred taxes consolidated balance sheets consist following provision made us taxes payable accumulated undistributed foreign earnings certain subsidiaries amounting approximately 10221 amounts permanently reinvested amount federal income taxes earnings distributed future cannot determined taxes may reduced tax credits deductions company net operating losses us subsidiaries amount 260 begin expire december 31 2020 company state net operating losses 15221 begin expire december 31 2007 company also net operating losses foreign subsidiaries amount 1473 begin expire december 31 2008 december 31 2006 valuation allowance approximately 794 exists deferred income tax benefits related certain us subsidiary state net operating loss carryforwards certain foreign net operating loss carryforwards may realized december 31 2005 valuation allowance approximately 171 existed deferred income tax benefits related certain us subsidiary state net operating loss carryforwards may realized 2006 valuation allowance increased total 623 resulted follows increase 84 attributable foreign net operating loss carryforwards increase 539 attributable state net operating loss carryforwards expected realized shareholders’ equity december 31 2006 2005 reflects tax benefits related stock options exercised 2006 2005 approximately 231 569 respectively irs currently examining federal consolidated tax returns company years ended december 31 2001 december 31 2003 irs completed examination years 2000 december 31 2006 company believes accrual income taxes payable sufficient cover potential liabilities arising examinations discussed fully note 2 “new accounting pronouncements” company expects adoption fin 48 result decrease shareholders’ equity approximately 200 350 inclusive interest penalties addition company contingent tax obligations various jurisdictions related 1998 dispositions reorganizations approximately 850 company determined payment amount unlikely note 8 earnings per share reconciliation data used calculation basic diluted earnings per share computations income continuing operations follows 1 restated twoforone stock split effective february 21 2006 options purchase 806940 shares common stock average price 5260 per share outstanding december 31 2006 included computation diluted eps options’ exercise prices greater annual average market price common shares options expire 2012 2013 options purchase 208000 shares common stock average price 5286 per share outstanding december 31 2005 included computation diluted eps options’ exercise prices greater annual average market price common shares options expire 2012 itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated options purchase 255000 shares common stock average price 4151 per share outstanding december 31 2004 included computation diluted eps options’ exercise prices greater annual average market price common shares options expire 2014 amount antidilutive restricted common stock excluded computation diluted eps 2006 2005 2004 insignificant note 9 receivables net receivables consist following note 10 inventories net inventories consist following note 11 current assets december 31 2006 2005 current assets consist primarily advance payments contracts prepaid expenses note 12 plant property equipment net plant property equipment consist following note 13 goodwill intangible assets company follows provisions sfas 142 requires goodwill indefinitelived intangible assets tested impairment annual basis frequently circumstances warrant company completed annual goodwill indefinitelived intangible asset impairment tests january 1 2006 2005 concluded impairment charges required dates 2006 company changed date annual goodwill impairment testing january 1 october 1 selection october 1 annual testing date impairment goodwill intended move testing date outside company’s annual financial reporting process reporting resources constrained company believes change alternative accounting principle preferable circumstances addition company changed date annual indefinitelived intangible impairment testing october 1 accordingly goodwill impairment intangible assets tests performed october 1 2006 impairment existed itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated changes carrying amount goodwill years ended december 31 2006 2005 operating segment follows goodwill 217 december 31 2006 excluded table reflected current assets discontinued operations consolidated balance sheet december 31 2006 amount relates switches businesses reported discontinued operations beginning third quarter 2006 goodwill 425 december 31 2005 excluded table reflected current assets discontinued operations consolidated balance sheet december 31 2005 information regarding company’s intangible assets follows amortization expense related intangible assets 2006 2005 2004 267 215 104 respectively estimated amortization expense five succeeding years follows customer relationships proprietary technology trademarks patents amortized weighted average lives 15 years 11 years 18 years 20 years respectively note 14 assets consist following company recorded sales unconsolidated affiliates 2006 2005 2004 totaling 160 97 118 respectively additionally company purchased 51 products unconsolidated affiliates 2006 investments unconsolidated companies company’s exposure limited amount investment investments accounted cost method represent voting rights interests less 20 itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated note 15 leases rentals company leases certain offices manufacturing buildings land machinery automobiles aircraft computers equipment leases expire various dates may include renewals escalations company often pays maintenance insurance tax expense related leased assets rental expenses operating leases 851 816 803 2006 2005 2004 respectively future minimum operating lease payments longterm operating leases december 31 2006 shown excludes 67 operating leases associated company’s switches businesses discontinued operations note 16 debt consists following 1 interest rate notedebenture 531 435 december 31 2006 2005 respectively 2 weighted average interest rate 535 532 december 31 2006 2005 respectively principal payments required longterm debt next five years weighted average interest rate shortterm borrowings 529 437 december 31 2006 2005 respectively fair value company’s shortterm loans approximates carrying value fair value company’s longterm debt estimated based comparable corporate debt similar remaining maturities december 31 2006 fair value longterm debt 4825 compared fair value 5063 december 31 2005 yearoveryear decrease fair value primarily reflects impact decrease longterm debt levels increase longterm interest rates book value assets pledged collateral amounted 644 december 31 2006 november 2005 company entered fiveyear revolving credit agreement aggregate principal amount 125 billion interest rate borrowings agreements generally based london interbank offered rate “libor” plus spread reflects company’s debt rating provisions agreement requires company maintain interest coverage ratio defined 35 times december 31 2006 company’s coverage ratio well excess itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated minimum requirements commitment fee revolving credit agreements 008 total commitment revolving credit agreement serves backup commercial paper program borrowing commercial paper revolving credit agreements may exceed 125 billion aggregate outstanding time december 31 2006 commercial paper borrowings 5533 december 31 2006 company 973 obligation associated ten year agreement involving sale subsequent lease back certain properties terms agreement company required make annual payments principal interest end agreement company option repurchase applicable properties nominal fee transaction reflected debt note 17 cash flow information change receivables inventories payables accrued expenses listed consolidated statements cash flows 2006 2005 2004 consist following note 18 derivative instruments hedging activities nature company’s business activities necessarily involves management various financial market risks including related changes interest rates currency exchange rates commodity prices company uses derivative financial instruments mitigate eliminate risks company’s credit risk associated derivative contracts generally limited unrealized gain contracts positive fair market value reduced effects master netting agreements counterparty fail perform contracted counterparties company’s derivative contracts consist number major international financial institutions company continually monitors credit quality financial institutions expect nonperformance counterparty reconciliation current period changes contained accumulated comprehensive loss component shareholders’ equity required material activity occurred 2006 2005 2004 additional disclosures required sfas 133 presented hedges future cash flows december 31 2006 2005 company foreign currency cash flow hedges outstanding december 31 2004 company one foreign currency cash flow hedge outstanding change value 2004 changes forecasted transactions covered period regarding probability occurring would require amounts reclassified earnings hedges recognized assets liabilities firm commitments company maintains multicurrency debt portfolio fund operations company times uses interest rate swaps manage company’s debt portfolio related financing costs interest rate structure fourth quarter 2005 company terminated interest rate swaps established manage interest rate exposure associated certain longterm debt terminated swaps effectively converted much longterm debt mentioned note 16 “debt” fixed variable rate borrowings fair value instruments time termination 695 accreted income remaining terms underlying debt mature various dates 2025 december 31 2006 2005 remaining balance accreted income 639 687 respectively december 31 2006 2005 company foreign currency forward contracts notional amounts 1154 1205 respectively hedge value recognized assets liabilities firm commitments fair values contracts 02 loss 01 gain december 31 2006 2005 respectively ineffective portion changes fair values hedge positions reported expense operating income 2006 2005 2004 amounted 03 05 04 respectively amounts excluded measure effectiveness itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated fair values associated foreign currency contracts determined using net position contracts applicable spot rates forward rates reporting date note 19 employee benefit plans discussed note 2 “new accounting pronouncements” company adopted sfas 158 december 31 2006 requires application provisions sfas 158 end year initial application permit retrospective application result certain disclosures within note different 2006 2005 investment savings plans company sponsors numerous defined contribution savings plans allow employees contribute portion pretax andor aftertax income accordance specified guidelines several plans require company match percentage employee contributions certain limits matching contributions charged income amounted 356 325 293 years ended 2006 2005 2004 respectively pension plans company sponsors numerous defined benefit pension plans company funds employee pension benefits except countries outside us funding required addition company sponsored pension plans certain employees company participate multiemployer pension plans sponsored local national unions company’s contribution plans amounted 12 13 12 2006 2005 2004 respectively postretirement health life insurance plans company provides health care life insurance benefits certain eligible retired employees company prefunded portion health care life insurance obligations prefunding accomplished tax effective basis changes benefit obligations changes plan assets weightedaverage assumptions years ended 2006 2005 components net periodic benefit cost amounts recognized comprehensive loss years 2006 2005 2004 follows itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated 1 adoption sfas 158 prospectively december 31 2006 components benefit obligation plan assets deferred recognized component net periodic benefit cost longer recorded balance sheet deferred assets liabilities instead recognized component shareholders’ equity within accumulated comprehensive loss amounts recognized consolidated balance sheet december 31 2006 accordance sfas 158 consist amounts recognized consolidated balance sheet december 31 2005 consist itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated 2006 company recorded increase 889 pretax 581 aftertax comprehensive income reflect decrease minimum pension liability effect adopting sfas 158 upon adoption sfas 158 december 31 2006 company recorded reduction accumulated comprehensive loss within shareholders’ equity 6663 pretax 4350 aftertax reflect cumulative effect accounting change resulted accumulated comprehensive loss related pension postretirement benefit plans pretax balance 7599 4973 aftertax december 31 2006 amounts recognized accumulated comprehensive loss december 31 2006 consist estimated net loss prior service cost amortized net periodic benefit cost next fiscal year follows accumulated benefit obligation defined benefit plans 48678 48327 december 31 2006 2005 respectively information pension plans accumulated benefit obligation excess plan assets table assumptions weightedaverage assumptions used determine benefit obligations december 31 weightedaverage assumptions used determine net periodic benefit cost years ended december 31 management develops assumption using relevant company experience conjunction market related data individual country plans exist assumptions reviewed periodically third party actuarial consultants adjusted necessary itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated components net periodic benefit cost amounts recognized comprehensive loss pension welfare benefit plans’ assets comprised broad range domestic foreign securities fixed income investments hedge funds cash equivalents assets domestic pension us master trust covers domestic pension plans various welfare benefit plan trusts following asset allocations strategic asset allocation target company’s domestic pension funds apportions 70 equity investments 30 fixed income instruments investment company’s stock within us master trust approximates 1 2006 2005 contributions company currently anticipates making contributions pension plans range 65 75 2007 606 made first quarter itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated cash flows estimated future benefit payments following benefit payments covering pension benefit plans projected based benefits earned date expectation certain future service earned currently active employees assumed rate future increases per capita cost health care health care trend rate 80 2007 decreasing ratably 50 2013 increasing health care trend rates one percent per year would effect increasing benefit obligation 452 aggregate service interest cost components 30 decrease one percent health care trend rate would reduce benefit obligation 374 aggregate service interest cost components 29 extent actual experience differs inherent assumptions effect amortized average future service covered active employees determination assumptions shown table discussion health care trend rates based provisions applicable accounting pronouncements review various indices discussion actuaries review competitive surveys geographic areas plans sited changes assumptions would affect financial condition results operations company effective january 1 2006 medicare modernization act “mma” provides companies elect provide prescription drug benefits meeting certain requirements retirees eligible receive subsidy medicare end 2005 company determined majority healthcare plans met requirements mma subsidy filed applicable application december 31 2005 company’s actuary estimated effect mma reduction accumulated postretirement benefit obligation 410 2006 company received 36 payments mma effect subsidy expectation retiree participation affected shortterm given nature company’s healthcare plans note 20 stockbased longterm incentive employee compensation december 31 2006 company one stockbased employee compensation plan issuing new stock options restricted shares common stock company one stockbased employee compensation plan two stockbased nonemployee director’s compensation plans stock options restricted shares outstanding grants made plans company also one longterm incentive plan eligible levels management company adopted sfas 123r january 1 2006 using modified prospective method described accounting standard sfas 123r requires cost stock options issued equity awards measured fair value grant date recognized income statement company’s consolidated financial statements year ended december 31 2006 reflect impact sfas 123r accordance modified prospective transition method company’s consolidated financial statements prior periods restated reflect include impact sfas 123r total stockbased longterm incentive employee compensation cost recognized operating income 2006 2005 2004 402 311 120 respectively total tax benefit related thereto 141 109 42 respectively total compensation costs capitalized immaterial periods presented incremental stockbased compensation recognized income continuing operations sfas 123r compared prior accounting policy caused net income year ended december 31 2006 decrease 134 basic diluted earnings per share decrease 007 cash provided operating activities decreased cash provided financing activities increased 167 year ended december 31 2006 related excess tax benefits stock options stockbased compensation expense recognized consolidated income statement year ended december 31 2006 based awards ultimately expected vest accordingly expense reduced estimated forfeitures sfas 123r requires forfeitures itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company’s pro forma information required sfas 123r periods prior fiscal 2006 company accounted forfeitures occurred stock option awards granted retirement eligible employees prior january 1 2006 fully vested provisions sfas 123r date grant expensed expected service period compensation expense awards retirement eligible employees would otherwise recognized immediately december 31 2006 33 unrecognized compensation expense related awards 2006 company modified vesting conditions stock option awards retirement eligible employees aligned vesting period service period company continue recognize compensation expense stockbased awards ratably expected service period provisions sfas 123r prior adoption sfas 123r company applied apb 25 account stockbased awards following table details effect net income diluted net income per share compensation expense employee stockbased awards recorded 2005 2004 based fair value method sfas 123r 1 net income net income per share include stockbased compensation expense employee stock options sfas 123r company adopt recognition provisions sfas 123r 2 stockbased compensation expense calculated based pro forma application sfas 123r 3 amount includes total stockbased longterm incentive employee compensation expense entities presented discontinued operations 4 net income net income per share represents pro forma information based sfas 123r prior january 1 2006 stock option restricted stock compensation plans company’s stock option restricted share award incentive plans provide awarding options common shares restricted common shares employees options exercisable seven tenyear periods except certain instances death retirement disability certain options become exercisable upon earlier attainment specified market price appreciation company’s common shares six nine years date grant options become exercisable upon earlier attainment specified market price appreciation company’s common shares threeyear period commencing date grant exercise price per share fair market value underlying stock date option granted restricted shares typically vest threeyear period commencing date grant company makes shares available exercise stock options vesting restricted shares purchasing shares open market issuing shares treasury 2006 company policy repurchasing shares open market offset itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated dilutive impact stock option exercises stockbased awards employees fourth quarter 2006 company announced 1 billion share repurchase program itt 2003 equity incentive plan “2003 equity incentive plan” approved shareholders established may 2003 plan provides grant stock options stock appreciation rights restricted stock restricted stock units number shares initially available awards plan 12200000 december 31 2006 3899100 net shares available future grants 2006 2005 company awarded 440551 104000 restricted shares respectively employees weighted average restriction periods 30 37 years respectively 2003 equity incentive plan replaces 2002 itt stock option plan nonemployee directors itt 1996 restricted stock plan nonemployee directors 1994 itt incentive stock plan prospective basis awards granted prior plans continue vest exercisable accordance original terms however future grants made prior plans summary status company’s stock option restricted stock shares december 31 2006 2005 2004 changes years ended presented shares thousands 1 table excludes 250000 restricted stock units granted fair value 4152 unrecognized compensation cost associated units 61 cost expected recognized ratably 35 years intrinsic value options exercised amount stock price exceeded exercise price options date exercise 2006 2005 2004 1008 1737 816 respectively outstanding restricted shares include 25716 shares issued nonemployee directors payment annual retainer cost expected recognized ratably weighted average period 39 years 2006 amount cash received exercise stock options 690 associated tax benefit realized 231 itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated following table summarizes information company’s stock options december 31 2006 shares aggregate intrinsic value thousands aggregate intrinsic value preceding table represents total pretax intrinsic value based company’s closing stock price 5682 december 31 2006 would received option holders option holders exercised options date total number inthemoney options exercisable december 31 2006 7397 december 31 2006 total number stock options company expects vest including already vested 10498 stock options weightedaverage exercise price 3539 aggregate intrinsic value 224929 weightedaverage remaining contractual life 54 years december 31 2006 506 total unrecognized compensation cost related nonvested awards granted stock option restricted stock plans cost expected recognized ratably weightedaverage period 17 years fair value option grant estimated date grant using binomial lattice pricing model 2006 2005 blackscholes optionpricing model 2004 following weightedaverage assumptions 2006 2005 2004 expected volatilities based company’s stock price history including implied volatilities traded options company’s stock company uses historical data estimate option exercise employee termination behavior within valuation model separate employee groups option characteristics considered separately valuation purposes expected life represents estimate period time options expected remain outstanding expected life provided represents weighted average expected behavior certain groups employees historically exhibited different behavior riskfree rate based us treasury yield curve effect time option grant longterm incentive plan itt 1997 longterm incentive plan “ltip” approved shareholders 1997 authorizes performance awards made key employees company ltip considered liability plan provisions sfas 123r accordingly company required reassess fair value ltip awards end reporting period payment target cash awards generally made end applicable threeyear performance period based company’s performance measured total shareholder return performance stocks comprising sp industrials index fair value award calculated quarterly basis using monte carlo simulations threeyear volatility outstanding awards december 31 2006 approximately 24 number companies included applicable benchmark group range 324 350 awards outstanding december 31 2006 itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated december 31 2006 188 total unrecognized compensation cost related nonvested awards granted ltip cost expected recognized ratably weightedaverage period 13 years total cash paid settle ltip liability 172 157 153 years ended 2006 2005 2004 respectively note 21 capital stock company authority issue aggregate 300000000 shares capital stock 250000000 shares designated “common stock” par value 1 per share 50000000 shares designated “preferred stock” par stated value shares preferred stock 300000 shares initially designated “series participating cumulative preferred stock” “series stock” series stock issuable pursuant provisions rights agreement dated november 1 1995 company bank new york rights agent “rights agreement” capitalized terms herein otherwise defined rights agreement november 1 2005 rights issued pursuant rights agreement “rights” attached traded common stock november 1 2005 outstanding rights expired accordance terms rights agreement provided among things person acquired 15 outstanding common stock rights entitled holders acquiring person affiliates associates purchase series stock significant discount market value rights become exercisable expired december 31 2006 2005 26608305 52829048 shares common stock held treasury respectively note 22 commitments contingencies company subsidiaries time involved legal proceedings incidental operation businesses proceedings allege damages company relating environmental liabilities employment pension matters government contract issues commercial contractual disputes sometimes related acquisitions divestitures company continue vigorously defend claims although ultimate outcome legal matter cannot predicted certainty based present information including company’s assessment merits particular claim well current reserves insurance coverage company expect legal proceedings material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future except noted environmental accruals environmental matters recorded site basis probable liability incurred amount liability reasonably estimated based current law existing technologies difficult estimate total costs investigation remediation due various factors including incomplete information regarding particular sites potentially responsible parties uncertainty regarding extent contamination company’s share liability conditions selection alternative remedies changes cleanup standards management’s opinion total amount accrued related receivables appropriate based existing facts circumstances event future remediation expenditures excess amounts accrued management anticipate material adverse effect consolidated financial position results operations cash flows ordinary course business similar industrial companies company subject extensive changing federal state local foreign environmental laws regulations company received notice considered potentially responsible party “prp” limited number sites united states environmental protection agency “epa” andor similar state agency comprehensive environmental response compensation liability act “cercla” “superfund” state equivalent december 31 2006 company responsible alleged responsible approximately 74 ongoing environmental investigation remediation sites various countries many proceedings company’s liability considered de minimis december 31 2006 company’s best estimate environmental liabilities 1045 approximates accrual related remediation ground water soil well related legal fees low range estimate environmental liabilities 736 high range estimate itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated liabilities 1738 annual basis company spends 80 120 environmental remediation liabilities estimates related accruals reviewed periodically updated progress investigation remediation efforts changes facts legal circumstances liabilities environmental expenditures recorded undiscounted basis company involved environmental proceeding glendale california relating san fernando valley aquifer company one numerous prps alleged epa contributed contamination aquifer january 1999 epa filed complaint united states district court central district california company lockheed martin corporation united states v itt industries inc lockheed martin corp cv9900552 svw aijx recover costs incurred connection foregoing may 1999 epa prps including company lockheed martin reached settlement embodied consent decree requiring prps perform additional remedial activities pursuant settlement prps including company constructed funding operation water treatment system operation water treatment system expected continue 2013 time separate allocation continued operation plant expected itt prps continue pay respective allocated costs operation water treatment system company anticipate default prps would increase allocated share liability additionally modification allowable hexavalent chromium standard anticipated change regulatory standard may result additional costs modifications water treatment plant december 31 2006 company’s accrual operation water treatment plant 2013 91 representing best estimate low estimate liability 57 high estimate 146 prior 1995 distribution agreement see “company history certain relationships” within part item 1 annual report form 10k description distribution agreement predecessor itt corporation operated facility madison county florida 1968 1991 1995 elevated levels contaminants detected site since itt completed investigation site coordination state federal environmental authorities process evaluating various remedies final remedy site yet selected currently estimated range remediation 36 174 company accrued 62 matter approximates best estimate company involved number prps regarding property city bronson michigan operated former subsidiary predecessor itt corporation higbie manufacturing prior time itt acquired higbie company prps investigating remediating discharges industrial waste occurred early 1930’s company’s current estimates exposure 69 146 accrual matter 105 represents best estimate company anticipate default part prps itt pursuing legal claims potentially responsible parties past future costs company operated facility rochester new york called rochester form machine 1979 2003 rochester form machine former subsidiary predecessor itt corporation known itt higbie itt acquired higbie 1972 august 2003 company subsidiary itt fluid handling systems entered order consent new york state department environmental conservation investigate remediate facility related impacts soil vapor ground water december 31 2006 company’s current estimates exposure 31 117 accrual matter 47 represents best estimate company pursue claims certain prps may share responsibility impacts suit filed 1991 company california superior court los angeles county itt corporation et al v pacific indemnity corporation et al insurers company seeking recovery costs incurred connection environmental liabilities including four listed discovery procedural matters changes california law various appeals prolonged case currently matter california court appeals decision california superior court dismissing certain claims company dismissed claims costs incurred solely due administrative versus judicial actions hearing expected early 2007 event appeal successful company pursue administrative claims excess insurers course litigation company negotiated settlements certain defendant insurance companies prepared pursue legal remedies reasonable negotiations productive itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated product liability matters company subsidiary goulds pumps inc “goulds” joined defendants numerous industrial companies product liability lawsuits alleging injury due asbestos claims stem primarily products sold prior 1985 contained part manufactured third party eg gasket allegedly contained asbestos encapsulated gasket material nonfriable certain cases alleged former itt companies distributors manufacturers’ products may contained asbestos frequently plaintiffs unable demonstrate injury identify itt goulds product source asbestos exposure 2006 2005 2004 itt goulds resolved approximately 8200 16000 4200 claims respectively nearly claims dismissed settlement small percentage claims average amount settlement per plaintiff nominal substantially defense settlement costs covered insurance based upon past claims experience available insurance coverage consultation counsel management believes matters material adverse effect company’s consolidated financial position results operations cash flows company involved two actions cannon electric inc et al v ace property casualty company “ace” et al superior court county los angeles ca case bc 290354 pacific employers insurance company et al v itt industries inc et al supreme court county new york ny case 03600463 parties cases seeking appropriate allocation responsibility company’s historic asbestos liability exposure among insurers california action filed venue company’s environmental insurance recovery litigation pending since 1991 new york action stayed favor california suit itt ace nationwide indemnity successfully resolved matter company working parties suit resolve matter insurers addition utica national goulds finalizing coverage place agreement allocate goulds’ asbestos liabilities insurance policies issued utica issued others company continuing receive benefit insurance payments pendency proceedings company believes actions materially affect availability insurance coverage material adverse effect company’s consolidated financial position results operations cash flows company involved suit filed el paso texas irwin bast et al v itt industries et al sup ct el paso texas ca 20024730 complaint filed us german citizens alleged itt four major companies failed warn plaintiffs dangers associated exposure xray radiation radar devices complaint also seeks certification class similarly injured persons september 2006 court denied plaintiffs’ motion class certification motion amend complaint court also determined plaintiffs failed identify persons injured itt products dismissed itt action september 2006 plaintiff attorneys filed el paso action filed companion action state court california company alone seeking certification class persons exposed itt radar products yet exhibited symptoms injury parties reached settlement principle resolve matters settlement expected finalized first quarter 2007 management believes matters material adverse effect company’s consolidated financial position results operations cash flows company provides indemnity us silica company silica personal injury suits former subsidiary pennsylvania glass sand filed prior september 12 2005 itt sold stock pennsylvania glass sand us silica company 1985 company’s indemnity paid part historic product liability carrier however september 2005 carrier communicated itt would longer pay share costs october 4 2005 itt filed suit insurer itt v pacific employers insurance co ca 05cv 5223 seeking defense costs indemnity carrier pennsylvania glass sand product liabilities silica related costs net insurance recoveries shared pursuant distribution agreement see “company history certain relationships” description distribution agreement management believes matters material adverse effect company’s consolidated financial position results operations cash flows defense electronics services segment subject export control regulations us department state department commerce currently us attorney western district virginia investigating itt night vision’s compliance itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated international traffic arms regulations company cooperating investigation government’s consent conducted investigation utilizing outside counsel night vision’s compliance federal laws data information derived investigation shared us attorney company continuing assist government investigation company negotiations government resolve matter settlement expected spring 2007 company recorded best estimate liability matter including charge net income 25 fourth quarter 2006 management believe expected payment government remedial obligations corrective actions government likely require material adverse effect company’s consolidated financial position results operations settlement may material impact cash flow period payment made note 23 guarantees indemnities warranties guarantees indemnities september 1998 company completed sale automotive electrical systems business valeo sa approximately 1700 part sale company provided valeo sa representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified valeo sa losses related misrepresentation breach representations warranties limited exceptions indemnity periods within valeo sa may assert new claims expired terms sales contract original maximum potential liability valeo sa undiscounted basis 680 however lapse time fact parties resolved certain issues december 31 2006 company accrual 78 best estimate potential exposure september 1998 company completed sale brake chassis unit continental ag approximately 1930 part sale company provided continental ag representations warranties respect operations business including conveyance title employee benefits tax product liability product recall contracts environmental intellectual property etc company also indemnified continental ag losses related misrepresentation breach representations warranties limited exceptions indemnity periods within continental ag may assert new claims expired terms sales contract original maximum potential liability continental ag undiscounted basis 950 however lapse time fact parties resolved certain issues december 31 2006 company accrual 127 best estimate potential exposure since incorporation 1920 company acquired disposed numerous entities related acquisition disposition agreements contain various representation warranty clauses may provide indemnities misrepresentation breach representations warranties either party indemnities address variety subjects term monetary amounts indemnity defined specific agreements may affected various conditions external factors many indemnities expired either operation law result terms agreement company liability recorded historic indemnifications aware claims information would give rise material payments indemnities company separately discussed material indemnities provided within last ten years company provided performance bond guarantee amount 100 related real estate development activities flagler county florida company would required perform guarantee certain parties satisfy aspects development order significant aspect expansion bridge maximum amount undiscounted future payments equals 100 december 31 2006 company accrual related matter amount 100 december 2002 company entered salestype lease agreement corporate aircraft leased aircraft back operating lease agreement company provided agreement residual value guarantee counterparty amount 448 maximum amount undiscounted future payments company would make payments residual value guarantee fair value aircraft less residual value guarantee upon termination agreement december 31 2006 company believe itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated loss contingency probable therefore accrual recorded financial statements company number individually immaterial guarantees outstanding december 31 2006 may affected various conditions external forces could require payments made guarantees company believe payments material adverse impact cash flow results operations financial condition company consolidated basis foreseeable future product warranties company warrants numerous products terms vary widely general company warrants products defect specific nonperformance automotive businesses liability product defects could extend beyond selling price product could significant defect shuts production results recall december 31 2006 company product warranty accruals follows product warranty liabilities itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated note 24 business segment information business segment results restated periods presented reflect consolidation electronic components segment motion flow control segment 1 includes amortization stock compensation itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated net sales external customers attributed individual regions based upon destination product service delivery sales revenues product category net intercompany balances follows defense electronics services sales revenues united states government 32440 26683 20982 2006 2005 2004 respectively apart united states government commercial customer accounted 10 sales revenues company fluid technology segment contains company’s pump pumping system businesses including brands flygt® goulds® bell gossett® ac pump® marlow® flowtronex® lowara® vogel® company world’s largest pump producer businesses within segment also supply mixers heat exchangers engineered valves related products well systems municipal industrial residential agricultural commercial applications company goes market brand names mcdonnell miller® hoffman specialtytm itt standard® addition mentioned additionally fluid technology segment produces wastewater aeration diffuser systems brands sanitaire® abj® ultraviolet ozone water disinfection systems wedeco® brand membrane filtration bioreactor systems itt advanced treatment name addition company also supplying rough filtration pressure filtration clarification systems water wastewater treatment utilities segment comprises approximately 39 company’s sales revenues approximately 40 segment operating income 2006 defense electronics services businesses segment directly serve military government agencies products services include air traffic control systems jamming devices guard military planes radar guided missiles digital combat radios night vision devices satellite instruments approximately 40 sales revenues segment generated contracts technical support services company provides military government agencies approximately 89 83 87 2006 2005 2004 defense electronics services sales revenues respectively us government defense electronics services segment comprises 47 company’s sales revenues 44 segment operating income 2006 motion flow control businesses motion flow control segment produce switches valves industrial aerospace applications products marine leisure markets brands jabsco® rule® flojet® danforth® system components whirlpool baths hot tub spa markets hydroair® brand specialty shock absorbers brand koni® brake components transportation industry connectors used communications computing aerospace industrial applications marketed cannon® brand motion flow control segment comprises approximately 14 company’s sales revenues approximately 16 segment operating income 2006 corporate primarily includes operating results assets corporate headquarters itt corporation subsidiaries notes consolidated financial statements continued dollars millions except per share amounts unless otherwise stated note 25 quarterly results 2006 2005 unaudited sum quarters’ earnings per share equal full year amounts due rounding table reflects range market prices company’s common stock 2006 2005 prices reported consolidated transaction reporting system new york stock exchange principal market company’s common stock traded symbol “itt” company’s common stock listed following exchanges frankfurt london new york euronext period january 1 2007 january 31 2007 high low reported market prices company’s common stock 6026 5630 respectively company declared dividends 014 per common share first quarter 2007 23014 holders record company’s common stock january 31 2007 index schedule ii valuation qualifying accounts s1 signatures pursuant requirements section 13 securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized undersigned capacity indicated itt corporation registrant janice klettner janice klettner chief accounting officer principal accounting officer february 28 2007 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated ii1 exhibit index ii2 ii3 ii4 ii5 management compensatory plan ii6nan