ITT Corporation (ITT)

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ITT Corporation (ITT)

Q3 2009 Earnings Call

October 30, 2009 09:00 am ET

Executives

Tom Scalera - Director of IR

Steve Loranger - Chairman and CEO

Denise Ramos - CFO

Analysts

John Inch - Merrill Lynch

Jeff Sprague - Citi Investment Research

Shannon O'Callaghan - Barclays Capital

Deane Dray - FBR Capital Markets

Nigel Coe - Deutsche Bank

Steve Tusa - JPMorgan

Gautam Khanna - Cowan and Company

John Baliotti - FTN Equity Capital

Presentation

Operator

Welcome to the ITT Corporation's third quarter 2009 earnings conference call. Hosting the call today from ITT headquarters is Steven Loranger, President and Chief Executive Officer. He is joined by Denise Ramos, Senior Vice President and Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 1 p.m. Eastern Standard Time. The dialing number for the replay is 1-800-642-1687 and enter pin number, 33971518. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions]

It is now my pleasure to turn the floor over to Tom Scalera, Director of Investor Relations. Tom, you may begin.

Tom Scalera

Thank you, Christy. Good morning and welcome to ITT's third quarter 2009 investor review. Presenting this morning are Chairman and CEO, Steve Loranger and Chief Financial Officer, Denise Ramos. Today, Steve will highlight third quarter 2009 results and Denise will provide a detailed review of the quarter's performance and the 2009 earnings outlook.

I'd like to highlight that this morning's presentation, press release, and reconciliations of GAAP and non-GAAP financial measures provided during the call and during this presentation can be found on our website at itt.com/IR.

Lastly, please note that any remarks we may make about future expectations, plans and prospects as well as other circumstances set out in our Safe Harbor Statement constitute forward-looking statements for purposes of the Safe Harbor Provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in ITT's third quarter 2009 earnings press release and Form 10-K as well as our other public SEC filings.

Now, let me turn things over to Steve

Steve Loranger

Thank you, Tom. Good morning and thanks to all of you for joining us to review our strong third quarter operating results. When this economic crisis began, I encouraged our management teams to focus on controlling what we could control and to make sure that their actions preserved and protected the strategic future of this portfolio.

Now, through three quarters of 2009, I'm extremely proud and confident to say that our teams have been successful on both fronts. The proof is in our consistently solid 2009 results. Our teams had outperformed their markets and achieved ambitious business targets through an excellent customer focus, strong productivity initiatives, and very disciplined cash management. Most importantly, we have continued to invest strategically in our premier portfolio.

Notwithstanding a tough economic environment, this year we've continued to invest in new product developments key programs such as the ADS-B and expanded R&D activity and new market reaching opportunities that better leverage the power of the ITT brand. These investments continue to pay off.

Let me highlight some strategic wins that demonstrate the unique scope and reach of ITT. We won a system implementation award for a plant to treat wastewater for agricultural irrigation in Peru. We won an important development award for the next-generation counter-IED jammer system CREW 3.3.

We won our largest ever international customer award in space and we had another nice North American rail win. I could name a number of more of these kinds of examples, but the point is that our portfolio and investment focus continued to produce results.

Let's turn to the third quarter on slide three. From an operating perspective in the third quarter, we delivered earnings per share that was $0.18 better than our previous guidance midpoint primarily due to strong productivity. We're raising our adjusted full year EPS guidance once again representing only an 8% decline versus the prior year, which as you recognize is among the best in our peer group.

We delivered solid organic revenue that declined only 4% versus the prior year. We're increasing our full year organic revenue forecast for both Fluid and Motion and Flow Control. Finally, in the quarter, we delivered $916 million of free cash flow that represents 174% conversion of continued net income. I think this cash performance is a strong testimony to the underlying quality of our 2009 operating results.

From a non-operating perspective, we recorded a third quarter net liability for future asbestos-related claims. As we've indicated in our recent SEC filings, we did complete our estimation process related to future asbestos claims in the second half of 2009. The resulting charge to continuing earnings of $0.71 per share is classified as a special item. Denise is going to provide a lot more details shortly.

In my mind, it's very important to note two things. This charge does not represent any change or increase to our exposure. It's simply an accounting charge to recognize a liability for future claims. Most importantly, the forecasted net annual cash outflows over the 10-year period are not projected to be material to our financial position.

So with that overview, let me now turn it to Denise to go through the quarter's exceptional performance.

Denise Ramos

Thanks, Steve. Our third quarter results on slide four were stronger than our internal expectations due accelerated productivity benefits mix and timing of investments. We delivered organic revenue that only declined 4% compared to the prior year, a relatively strong outcome in current market conditions. That performance included a 2% improvement at defense a 10% decline at fluid and a 16% decline at motion.

On a sequential basis, organic revenue also declined 4% primarily due to defense timing and some seasonality in the commercial businesses. Total third quarter organic orders declined 26% on weakness at defense and that reflected the lumpiness of current year orders and the difficult comparison to a record quarter that we had in 2008. Fluid declined 15% compared to the prior year but they did improve 1% sequentially.

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