UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

Commission file number 1-5672

 

ITT CORPORATION

 

 

4 West Red Oak Lane, White Plains, NY 10604
(Principal Executive Office)

 

Telephone Number: (914) 641-2000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ     Accelerated filer  o     Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of April 30, 2007, there were outstanding 181,723,146 shares of common stock ($1 par value per share) of the registrant.

 

ITT CORPORATION

 

TABLE OF CONTENTS

 

 

FINANCIAL INFORMATION

 

CONSOLIDATED CONDENSED INCOME STATEMENTS
(In millions, except per share amounts)
(Unaudited)

 

 

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above income statements.

ITT CORPORATION AND SUBSIDIARIES

 

 

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above balance sheets.

ITT CORPORATION AND SUBSIDIARIES

 

 

 

 

The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of the above cash flow statements.

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(In millions, except share and per share, unless otherwise stated)

 

1) Basis of Presentation

 

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules. ITT Corporation (the “Company”) believes that the disclosures made are adequate to make the information presented not misleading. The Company consistently applied the accounting policies described in the Company’s 2006 Annual Report on Form 10-K in preparing these unaudited financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

 

Certain amounts in the prior periods’ consolidated condensed financial statements have been reclassified to conform to the current period presentation.

 

2) Receivables, Net

 

Net receivables consist of the following:

 

 

3) Inventories, Net

 

Net inventories consist of the following:

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

4) Plant, Property and Equipment, Net

 

Net plant, property and equipment consist of the following:

 

 

5) Sales and Revenues and Costs of Sales and Revenues

 

Sales and revenues and costs of sales and revenues consist of the following:

 

 

The Defense Electronics & Services segment comprises $416.1 and $352.8 of total service revenues for the three months ended March 31, 2007 and 2006, respectively, and $376.4 and $289.7 of total costs of service revenues, respectively, during the same periods. The Fluid Technology segment comprises the remaining balances of service revenues and costs of service revenues.

 

6) Income Taxes

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should measure, recognize, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. FIN 48 applies to all tax positions accounted for in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” including positions taken in a previously filed tax return or expected to be taken in a future return.

 

Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

 

Prior to the adoption of FIN 48, the Company applied Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” in assessing uncertainty of income tax positions and the need for accruals to offset any exposure resulting from positions taken in its income tax returns. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in income statements as more items are recognized discretely within income tax expense.

 

The Company adopted the provisions set forth by FIN 48 effective January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $88.8. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $79.0. As a result of the implementation of FIN 48, the Company recognized an increase in liabilities of $26.1 for unrecognized tax benefits. The liabilities are classified as non-current and are included in “Other liabilities” in the Company’s Consolidated Condensed Balance Sheet. The increase was accounted for as follows:

 

 

The Company classifies interest relating to tax matters as a component of interest expense and tax penalties as a component of income tax expense in its income statement. The total amount of accrued interest and penalties as of the date of adoption of FIN 48 was $34.9.

 

As of January 1, 2007, it is reasonably possible that the amount of unrecognized tax benefits could significantly change by the end of 2007 as a result of resolution of tax authority audits of the Company’s tax returns. The Company is unable to provide an estimate of possible change to the unrecognized tax benefits related to these tax positions.

 

In many cases our uncertain tax positions are related to tax years that remain subject to examination by the relevant taxable authorities. The following table summarizes these open tax years by major jurisdiction:

 

 

There have been no material changes to the components of the Company’s total unrecognized tax benefit, including the amounts, which if recognized, would affect the Company’s effective tax rate since the adoption of FIN 48 on January 1, 2007.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

7) Comprehensive Income

 

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

8) Earnings Per Share

 

A reconciliation of the data used in the calculation of basic and diluted earnings per share computations for income from continuing operations is as follows:

 

 

Options to purchase 1,149,230 shares of common stock at an average price of $55.22 per share were outstanding at March 31, 2007, but were not included in the computation of diluted EPS because they were anti-dilutive. These options expire in 2012 and 2013.

 

Options to purchase 1,214,888 shares of common stock at an average price of $50.04 per share were outstanding at March 31, 2006, but were not included in the computation of diluted EPS because they were anti-dilutive. These options expire in 2013.

 

There were 335,077 shares of restricted common stock excluded from the computation of diluted EPS for the three months ended March 31, 2007 because they were anti-dilutive. There was no anti-dilutive restricted common stock excluded from the computation of diluted EPS for the three months ended March 31, 2006.

 

9) Stock-Based and Long-Term Incentive Employee Compensation

 

The Company recognizes stock-based compensation in accordance with SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”). See Note 1, “Summary of Significant Accounting Policies,” and Note 20 “Stock-Based and Long-Term Incentive Employee Compensation,” within the Notes to Consolidated Financial Statements of the 2006 Annual Report on Form 10-K for complete details regarding the Company’s accounting for compensation plans and application of SFAS 123R.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

Stock-based and long-term incentive employee compensation cost reduced consolidated results of operations as follows:

 

 

Total compensation costs capitalized were immaterial for the periods presented.

 

Stock Option and Restricted Stock Compensation Plans

 

The ITT 2003 Equity Incentive Plan (“2003 Equity Incentive Plan”) was approved by shareholders and established in May of 2003. This plan provides for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units. The number of shares initially available for awards under this plan was 12,200,000. As of March 31, 2007, 2,826,462 shares were available for future grants. The Company awarded 335,077 and 390,597 of restricted shares and restricted share units during the three months ended March 31, 2007 and 2006, respectively, to employees, with restriction periods of three years. The fair market value of these awards was based on the Company’s stock price on the date of grant.

 

A summary of the status of the Company’s stock option and restricted stock awards as of March 31, 2007 and changes during the three months then ended is presented below (shares in thousands):

 

 

The intrinsic value of stock options exercised during the three months ended March 31, 2007 and 2006 was $33.8 and $75.0, respectively. For the three months ended March 31, 2007, the amount of cash received from the exercise of stock options was $31.3 with an associated tax benefit realized of $10.2. SFAS 123R requires that the Company classify as a financing activity the cash flows attributable to excess tax benefits from stock option exercises. For the three months ended March 31, 2007 and 2006, $7.3 and $7.4, respectively was classified as cash flows from financing activities in the Company’s Consolidated Condensed Statement of Cash Flows as a result of stock option exercises.

 

Based on the Company’s closing stock price of $60.32 at the end of the quarter, the aggregate intrinsic value of the stock options outstanding and stock options exercisable as of March 31, 2007 was $228.8 and $199.2, respectively. As of March 31, 2007, all of the aforementioned exercisable options were in the money.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

As of March 31, 2007, the total number of outstanding stock options expected to vest (including those that have already vested) was 9,893 thousand. These stock options have a weighted-average exercise price of $37.29, an aggregate intrinsic value of $227.9, and a weighted-average remaining contractual life of 5.3 years.

 

At March 31, 2007, there was $69.9 of total unrecognized compensation cost related to non-vested awards granted under the stock option and restricted stock plans. This cost is expected to be recognized ratably over a weighted-average period of 2.2 years.

 

The fair value of each option grant was estimated on the date of grant using the binomial lattice pricing model. The following weighted-average assumptions that were used for grants during the three months ended March 31, 2007 and 2006, respectively were:

 

 

Long-Term Incentive Plan

 

The ITT Industries 1997 Long-Term Incentive Plan (the “LTIP”), approved by shareholders in 1997, authorizes performance awards to be made to key employees of the Company. The LTIP is considered a liability plan, under the provisions of SFAS 123R. Accordingly, the Company is required to reassess the fair value of its LTIP awards at the end of each reporting period. Payment, if any, of target cash awards generally will be made at the end of the applicable three-year performance period and will be based on ITT Corporation’s performance measured against the total shareholder return performance of other stocks comprising the S&P Industrials Index.

 

The fair value of each award is calculated on a quarterly basis using Monte Carlo simulations. The three-year volatility of the outstanding awards as of March 31, 2007 was approximately 15%. The number of companies included in the applicable benchmark group range from 326 to 361 for the awards outstanding as of March 31, 2007.

 

At March 31, 2007, there was $30.3 of total unrecognized compensation cost related to non-vested awards granted under the long-term incentive plan. This cost is expected to be recognized ratably over a weighted-average period of 1.5 years. The total cash paid to settle the LTIP liability for the annual 2004 and the annual 2003 grants during the first quarter of 2007 and 2006 was $17.6 and $17.2, respectively.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

10) Restructuring and Asset Impairment Charges

 

2007 Restructuring Activities

 

During the first quarter of 2007, the Company recorded a net restructuring charge of $6.4 reflecting costs of $4.5 related to new actions and $2.2 related to prior year plans, as well as the reversal of $0.3 of restructuring accruals that management determined would not be required.

 

Components of First Quarter 2007 Charge

 

 

The charges associated with actions announced during the first quarter of 2007 represent a reduction of structural costs in all segments and the closure of one facility in the Defense Electronics & Services segment. Planned position eliminations total 41, including 18 factory workers, 22 office workers and one management employee. The costs attributable to the first quarter of 2007 primarily reflect severance, lease cancellation and asset impairment costs. The costs associated with prior year plans primarily reflect an asset impairment cost for a closed facility as well as additional severance and other costs.

 

2006 Restructuring Activities

 

During the first quarter of 2006, the Company recorded a net restructuring charge of $11.9, reflecting costs of $10.8 related to new actions and costs of $1.8 related to prior year plans as well as the reversal of $0.7 restructuring accruals that management determined would not be required.

 

Components of First Quarter 2006 Charge

 

 

These charges represent a reduction of structural costs in all segments, as well as the planned closure of two facilities in the Fluid Technology segment and one facility in the Motion & Flow Control segment. Planned position eliminations total 361, including 225 factory workers, 126 office workers, and 10 management employees. The costs attributable to the first quarter of 2006 primarily reflect severance and other employee costs as well as asset impairment costs. The costs associated with prior year plans primarily reflect additional severance costs.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

The following table displays a rollforward of the restructuring accruals:

 

 

The accrual balance at March 31, 2007 of $27.6 includes $12.6 for severance and $15.0 for facility carrying costs and other.

 

The following is a rollforward of employee positions eliminated associated with restructuring activities through March 31, 2007:

 

 

As of March 31, 2007, all announced planned facility closures have been completed.

 

11) Goodwill and Other Intangible Assets

 

The Company follows the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”) which requires that goodwill and indefinite-lived intangible assets be tested for impairment on an annual basis, or more frequently if circumstances warrant.

 

Changes in the carrying amount of goodwill for the quarter ended March 31, 2007, by business segment, are as follows:

 

 

Goodwill of $21.8 and $21.7 is excluded from the table above as of March 31, 2007 and December 31, 2006, respectively, and is reflected in assets of discontinued businesses held for sale in the Consolidated Condensed Balance Sheets. These amounts related to the Switches businesses that were reported as discontinued operations beginning in the third quarter of 2006. See Note 13, “Discontinued Operations,” for additional details related to the Switches businesses.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

Information regarding the Company’s other intangible assets follows:

 

 

Amortization expense related to intangible assets for the three month periods ending March 31, 2007 and 2006 were $7.6 and $6.1, respectively.

 

Estimated amortization expense for each of the five succeeding years is as follows:

 

 

12) Other Assets

 

Other assets consist of the following:

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

13) Discontinued Operations

 

Switches

 

The Company has been preparing the Switches businesses, formerly reported as part of the previous Electronic Components segment, for sale since early 2006. During the third quarter of 2006, the Company initiated the solicitation of bids from interested parties and is proceeding with an active program for the sale of these businesses. Accordingly, commencing with the third quarter of 2006, the Switches businesses were reported as discontinued operations. The divestiture of the businesses is consistent with the Company’s strategy of concentrating its resources in core product areas and de-emphasizing products which are determined to be less strategic to the Company. The Switches businesses produce pushbutton, toggle, slide, DIP, rotary, multi-functional navigation, snap and thumbwheel switches, as well as customized rubber and plastic keypads, customized dome arrays and customized interface control products such as multifunction joystick control panels. The Switches businesses sell their products to a wide range of customers in the transportation, consumer, telecommunications, medical, and instrumentation market segments.

 

Revenues and operating income for Switches reported in discontinued operations were as follows:

 

 

Assets and liabilities of the Switches businesses as a component of the Company’s discontinued businesses held for sale were as follows:

 

 

As of March 31 2007, and December 31, 2006, the Company’s balance sheets, included $38.7 and $40.1, respectively, of cumulative translation loss adjustments related to the Switches businesses.

 

2006 Dispositions

 

Fluid Handling Systems

 

In the first quarter of 2006, the Company completed the sale of its automotive brake and fueling tubing and components business (“FHS”) to a privately held company for net proceeds of $187.7 and a gain of $19.0. The

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

business, which was a component of the Company’s Motion & Flow Control segment, manufactures steel and plastic tubing for fuel and brake lines, quick-connects, and serves the transportation industry.

 

Revenues and operating income for FHS reported in discontinued operations were as follows:

 

 

Richter

 

During the first quarter of 2006, the Company also completed the sale of its industrial non-metallic lined pumps and valves business (“Richter”) to a private equity investor for net proceeds of $24.8 and a gain of $22.2. The business, which was a component of the Company’s Fluid Technology segment, is a leading manufacturer of pumps and valves for selected segments in the chemical, fine chemical and pharmaceutical industries.

 

Revenues and operating income for Richter reported in discontinued operations were as follows:

 

 

Automotive

 

At March 31, 2007, the Company had automotive discontinued operations accruals of $32.3 that are primarily related to product recalls of $7.8, environmental obligations of $12.7 and employee benefits of $11.8.

 

14) Pension and Postretirement Medical Benefit Expenses

 

The components of net periodic pension cost consist of the following:

 

 

Net periodic pension cost decreased in the first quarter of 2007 as a result of the higher discount rate adopted at year end 2006 leading to a lower amortization of actuarial losses, and higher expected returns on plan assets due to increased asset levels, partially offset by higher average foreign exchange rates.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

The Company contributed approximately $66.9 to its various plans during the first quarter of 2007 including a $50.0 discretionary contribution to its U.S. Salaried Pension Plan. Additional contributions totaling between $5.0 and $10.0 are expected over the balance of 2007.

 

The components of net periodic postretirement cost consist of the following:

 

 

Net periodic postretirement cost decreased in the first quarter of 2007 as a result of the higher discount rate adopted at year end 2006 leading to a lower amortization of actuarial losses and higher expected returns on plan assets due to increased asset levels.

 

See Note 19, “Employee Benefit Plans,” in the Notes to Consolidated Financial Statements of the 2006 Annual Report on Form 10-K for additional details of pension and postretirement benefits.

 

15) Commitments and Contingencies

 

The Company and its subsidiaries are from time to time involved in legal proceedings that are incidental to the operation of their businesses. Some of these proceedings allege damages against the Company relating to environmental liabilities, employment and pension matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures. The Company will continue to vigorously defend itself against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including the Company’s assessment of the merits of the particular claim, as well as its current reserves and insurance coverage, the Company does not expect that such legal proceedings will have a material adverse impact on the cash flow, results of operations or financial condition of the Company on a consolidated basis in the foreseeable future.

 

Environmental:

 

Accruals for environmental matters are recorded on a site by site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. The Company’s environmental liability includes matters associated with properties containing disposed or recycled wastes generated by current or former properties of ITT, and nearby properties impacted by contamination caused at those properties. It is difficult to estimate the total costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the extent of contamination and the Company’s share, if any, of liability for such conditions, the selection of alternative remedies, and changes in clean-up standards. In management’s opinion, the total amount accrued and related receivables are appropriate based on existing facts and circumstances. In the event that future remediation expenditures are in excess of amounts accrued, management does not anticipate that they will have a material adverse effect on the consolidated financial position, results of operations or cash flows.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

In the ordinary course of business, and similar to other industrial companies, the Company is subject to extensive and changing federal, state, local, and foreign environmental laws and regulations. The Company has received notice that it is considered a potentially responsible party (“PRP”) at a limited number of sites by the United States Environmental Protection Agency (“EPA”) and/or a similar state agency under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) or its state equivalent. As of March 31, 2007, the Company is responsible, or is alleged to be responsible, for approximately 76 ongoing environmental investigation and remediation sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings the Company’s liability is considered de minimis. At March 31, 2007, the Company’s best estimate for environmental liabilities is $104.4, which approximates the accrual related to the investigation and remediation of ground water, soil, and soil vapor as well as related legal fees. The low range estimate for its environmental liabilities is $77.6 and the high range estimate for those liabilities is $183.8. On an annual basis the Company spends between $8.0 and $12.0 on its environmental remediation liabilities. These estimates, and related accruals, are reviewed periodically and updated for progress of investigation and remediation efforts and changes in facts and legal circumstances. Liabilities for environmental expenditures are recorded on an undiscounted basis.

 

The Company is involved in an environmental proceeding in Glendale, California relating to the San Fernando Valley aquifer. The Company is one of numerous PRPs who are alleged by the EPA to have contributed to the contamination of the aquifer. In January 1999, the EPA filed a complaint in the United States District Court for the Central District of California against the Company and Lockheed Martin Corporation, United States v. ITT Industries, Inc. and Lockheed Martin Corp. CV99-00552 SVW AIJX, to recover costs it incurred in connection with the foregoing. In May 1999, the EPA and the PRPs, including the Company and Lockheed Martin, reached a settlement, embodied in a consent decree, requiring the PRPs to perform additional remedial activities. Pursuant to the settlement, the PRPs, including the Company, have constructed and are funding operation of a water treatment system. The operation of the water treatment system is expected to continue until 2013, at which time a separate allocation for continued operation of the plant is expected. ITT and the other PRPs continue to pay their respective allocated costs of the operation of the water treatment system and the Company does not anticipate a default by any of the PRPs which would increase its allocated share of the liability. Additionally, modification to the allowable hexavalent chromium standard is anticipated, and this change in regulatory standard may result in additional costs for modifications to the water treatment plant. As of March 31, 2007, the Company’s accrual for operation of the water treatment plant through 2013 was $9.1 representing its best estimate; its low estimate for the liability is $5.7 and its high estimate is $14.6.

 

Prior to the 1995 Distribution Agreement (See “Company History and Certain Relationships” within Part I, Item 1 of on the 2006 Annual Form 10-K for a description of the Distribution Agreement), the predecessor ITT Corporation operated a facility in Madison County, Florida from 1968 until 1991. In 1995, elevated levels of contaminants were detected at the site. Since then, ITT has completed the investigation of the site in coordination with state and federal environmental authorities and is in the process of evaluating various remedies. A final remedy for the site has not yet been selected. Currently, the estimated range for the remediation is between $3.6 and $17.4. The Company has accrued $6.2 for this matter, which approximates its best estimate.

 

The Company is involved with a number of PRPs regarding property in the City of Bronson, Michigan, operated by a former subsidiary of the predecessor ITT Corporation, Higbie Manufacturing, prior to the time ITT acquired Higbie. The Company and other PRPs are investigating and remediating discharges of industrial waste which occurred as early as the 1930s. The Company’s current estimates for its exposure are between $7.1 and $15.0, and has an accrual for this matter of $10.8 which represents its best estimate. The Company does not anticipate a default on the part of the other PRPs. ITT is pursuing legal claims against some other potentially responsible parties for past and future costs.

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

 

The Company operated a facility in Rochester, New York, called Rochester Form Machine from 1979 – 2003. Rochester Form Machine was a former subsidiary of the predecessor ITT Corporation known as ITT Higbie after ITT acquired Higbie in 1972. In August 2003, the Company, through its subsidiary ITT Fluid Handling Systems, entered into an Order on Consent with New York State Department of Environmental Conservation to investigate and remediate facility-related impacts to soil, soil vapor and ground water. As of March 31, 2007, the Company’s current estimates for this exposure are between $3.5 and $13.2 and has an accrual for this matter of $5.3 which represents its best estimate. The Company will pursue claims against certain other PRPs who may share responsibility for impacts.

 

In a suit filed in 1991 by the Company, in the California Superior Court, Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et al., against its insurers, the Company is seeking recovery of costs it incurred in connection with its environmental liabilities including the four listed above. Discovery, procedural matters, changes in California law, and various appeals have prolonged this case. This case had been on appeal before the California Court of Appeals from a decision by the California Superior Court dismissing certain claims of the Company. The dismissed claims were claims where the costs incurred were solely due to administrative (versus judicial) actions. However, in April 2007, the Superior Court vacated its earlier ruling dismissing the claims, and, as a result, the Court of Appeals dismissed the appeal as moot. Thus, the case is now back before Superior Court for another hearing applying the California Superior Court’s ruling Powerine II. In the event the Company is successful before the Superior Court, it will pursue the administrative claims against its excess insurers. During the course of the litigation, the Company has negotiated settlements with certain defendant insurance companies and is prepared to pursue its legal remedies where reasonable negotiations are not productive.

 

Product Liability and Other Matters:

 

The Company and its subsidiary Goulds Pumps, Inc. (“Goulds”) have been joined as defendants with numerous other industrial companies in product liability lawsuits alleging injury due to asbestos. These claims stem primarily from products sold prior to 1985 that contained a part manufactured by a third party, e.g., a gasket, which allegedly contained asbestos. The asbestos was encapsulated in the gasket (or other) material and was non-friable. In certain other cases, it is alleged that former ITT companies were distributors for other manufacturers’ products that may have contained asbestos.

 

Frequently, the plaintiffs are unable to demonstrate any injury or do not identify any ITT or Goulds product as a source of asbestos exposure. During 2006, 2005 and 2004, ITT and Goulds resolved approximately 8,200, 16,000 and 4,200 claims, respectively. Nearly all of these claims were dismissed, with settlement on a small percentage of claims. The average amount of settlement per plaintiff has been nominal and substantially all defense and settlement costs have been covered by insurance. Based upon past claims experience, available insurance coverage, and after consultation with counsel, management believes that these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

The Company is involved in two actions, Cannon Electric, Inc. et al. v. Ace Property & Casualty Company (“ACE”) et al. Superior Court, County of Los Angeles, CA., Case No. BC 290354, and Pacific Employers Insurance Company et al., v. ITT Industries, Inc., et al., Supreme Court, County of New York, N.Y., Case No. 03600463. The parties in both cases are seeking an appropriate allocation of responsibility for the Company’s historic asbestos liability exposure among its insurers. The California action is filed in the same venue where the Company’s environmental insurance recovery litigation has been pending since 1991. The New York action has been stayed in favor of the California suit. ITT and ACE and Nationwide Indemnity have successfully resolved the matter and the Company is working with other parties in the suit to resolve the matter as to those insurers.

 

In addition, Utica National (“Utica”) and Goulds have negotiated a coverage-in-place agreement to allocate the Goulds’ asbestos liabilities between insurance policies issued by Utica and those issued by others. The terms of

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

the settlement will provide the Company with substantial coverage from Utica for asbestos liabilities. The Company will continue to seek coverage from its other insurers for these liabilities.

 

The Company has been involved in a suit filed in El Paso, Texas, Irwin Bast et al. v. ITT Industries et al., Sup. Ct., El Paso, Texas, C.A. No. 2002-4730. This Complaint, filed by both U.S. and German citizens, alleges that ITT and four other major companies failed to warn the plaintiffs of the dangers associated with exposure to x-ray radiation from radar devices. The Complaint also seeks the certification of a class of similarly injured persons. In September 2006, the Court denied the plaintiffs’ motion for class certification and motion to amend the complaint. The Court also determined that the plaintiffs failed to identify any persons who had been injured by ITT products and dismissed ITT from the action. In September 2006, the same plaintiff attorneys who filed the El Paso action, filed a companion action in state court in California against the Company, alone, seeking certification of a class of persons who were exposed to ITT radar products but who have not, as yet, exhibited symptoms of injury. The parties have finalized a settlement within the Company’s expected range and, as a result, the matter is concluded.

 

The Company provides an indemnity to U.S. Silica Company for silica personal injury suits against its former subsidiary Pennsylvania Glass Sand filed prior to September 12, 2005. ITT sold the stock of Pennsylvania Glass Sand to U.S. Silica Company in 1985. The Company’s indemnity had been paid in part by its historic product liability carrier, however, in September 2005, the carrier communicated to ITT that it would no longer pay a share of the costs. On October 4, 2005, ITT filed a suit against the insurer, ITT v. Pacific Employers Insurance Co., CA No. 05CV 5223, seeking its defense costs and indemnity from the insurance carrier for Pennsylvania Glass Sand product liabilities. In April 2007, the Court granted the Company’s motion for summary judgment on the carrier’s duty to defend the silica cases. The Company will seek its past and future defense costs for these cases from its carrier. All silica related costs, net of insurance recoveries, are shared pursuant to the Distribution Agreement. See “Company History and Certain Relationships” within Part I, Item 1 of the 2006 Annual report on Form 10-K for a description of the Distribution Agreement. Management believes that these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

On March 27, 2007, ITT Corporation reached a settlement relating to an investigation of its ITT Night Vision’s compliance with International Traffic in Arms Regulations (ITAR). As part of the settlement, ITT Corporation pleaded guilty in the United States District Court for the Western District of Virginia to one ITAR violation relating to the improper handling of sensitive documents and one ITAR violation involving making misleading statements. The Company will pay a total of $50.0 in fines, forfeitures and penalties, including a payment of $30.0 made in the first quarter of 2007. This liability was fully accrued at December 31, 2006. The Government has agreed to defer action regarding a third count of ITAR violations, pending the Company’s implementation of a remedial action plan. The Company has also agreed to invest $50.0 over the next five years in research and development and capital improvements for its Night Vision products. As a result of the guilty plea, ITT Corporation became subject to automatic statutory “debarment” from future export licenses. However, because the debarment will be applicable to only a portion of the Company’s Night Vision business, it is expected that the net effect of the debarment will restrict less than 5% of total Night Vision sales for a period of not less than one year. The Company can seek restatement of export privileges after one year. The Company anticipates negotiating administrative agreements with the Departments of State and Defense during the second quarter of 2007. Management believes that this matter will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

On April 17, 2007, the Company’s Board of Directors received a letter on behalf of a shareholder requesting that the Board take appropriate action against the employees responsible for the actions described in the Company’s agreements with the United States Attorney’s Office for the Western District of Virginia, which were disclosed on Form 8-K filed on March 30, 2007. The request is being evaluated.

 

On April 20, 2007, the Company received notice of a shareholder derivative action, Sylvia Piven trustee under trust agreement dated April 3, 1973 f/b/o Sylvia B. Piven, derivatively on behalf of ITT Corporation v. Steve Loranger et al. and ITT Corporation, U.S. District Court for the Southern District of New York, Civil Action

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

No. 07-V-2878, alleging that the Company’s Board of Directors breached their fiduciary duties in connection with the Company’s compliance programs at its Night Vision business. The Complaint seeks compensatory and punitive damages for the Company from its Directors, the removal of the Directors, and the election of new directors. The Company intends to file a motion to dismiss the Complaint at the appropriate time. Management believes that the suit will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

16) Guarantees, Indemnities and Warranties

 

Guarantees & Indemnities

 

Since its incorporation in 1920, the Company has acquired and disposed of numerous entities. The related acquisition and disposition agreements contain various representation and warranty clauses and may provide indemnities for a misrepresentation or breach of the representations and warranties by either party. The indemnities address a variety of subjects; the term and monetary amounts of each such indemnity are defined in the specific agreements and may be affected by various conditions and external factors. Many of the indemnities have expired either by operation of law or as a result of the terms of the agreement. The Company does not have a liability recorded for the historic indemnifications and is not aware of any claims or other information that would give rise to material payments under such indemnities. The Company has separately discussed material indemnities provided within the last ten years.

 

The Company provided a performance bond guarantee in the amount of $10.0 related to its real estate development activities in Flagler County, Florida. The Company would be required to perform under this guarantee if certain parties did not satisfy all aspects of the development order, the most significant aspect being the expansion of a bridge. The maximum amount of the undiscounted future payments equals $10.0. At March 31, 2007, the Company has an accrual related to this matter in the amount of $10.0.

 

In December of 2002, the Company entered into a sales-type lease agreement for its corporate aircraft and then leased the aircraft back under an operating lease agreement. The Company has provided, under the agreement, a residual value guarantee to the counterparty in the amount of $44.8, which is the maximum amount of undiscounted future payments. The Company would have to make payments under the residual value guarantee only if the fair value of the aircraft was less than the residual value guarantee upon termination of the agreement. At March 31, 2007, the Company does not believe that a loss contingency is probable and therefore does not have an accrual recorded in its financial statements.

 

In connection with the coverage in place agreement between Goulds and Utica described in Note 15, “Commitments and Contingencies,” the Company has provided a short-term standby letter of credit in the amount of $10.0 to secure repayment by Goulds of sums previously advanced by Utica under that settlement.

 

Product Warranties:

 

The Company warrants numerous products, the terms of which vary widely. In general, the Company warrants its products against defect and specific non-performance. In the automotive businesses, liability for product defects could extend beyond the selling price of the product and could be significant if the defect shuts down production or results in a recall. At March 31, 2007 and 2006, respectively, the Company has product warranty accruals as follows:

 

 

ITT CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

(In millions, except share and per share, unless otherwise stated)

17) Acquisitions

 

2007 Acquisitions

 

There were no material acquisitions during the first quarter of 2007.

 

2006 Acquisitions

 

During the first quarter of 2006, the Company spent $23.7 for the acquisition of a company within the Defense Electronics & Services segment. As of March 31, 2007, the excess of the purchase price over the fair value of net assets acquired of $14.9 was recorded as goodwill. Intangible assets relating to the acquisition totaled $17.5 of proprietary technology at March 31, 2007.

 

18) Business Segment Information

 

Unaudited financial information of the Company’s business segments for the three months ended March 31, 2007 and 2006 were as follows: