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Q4 2010 Earnings Call

February 03, 2011 9:00 am ET


Thomas Scalera - Director of IR

Denise Ramos - Chief Financial Officer and Senior Vice President

Steven Loranger - Chairman, Chief Executive Officer, President and Head of Human Resources


John Inch - BofA Merrill Lynch

Peter Skibitski - SunTrust Robinson Humphrey Capital Markets

James Lucas - Janney Montgomery Scott LLC

Nicole Deblase - Deutsche Bank

Scott Gaffner - Barclays Capital

C. Stephen Tusa - JP Morgan Chase & Co

David Rose - Wedbush Securities Inc.

Deane Dray - Citigroup Inc



Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITT Corporation's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Tom Scalera, Vice President of Finance and Investor Relations. Mr. Scalera, please go ahead.

Thomas Scalera

Thank you, Jackie. Good morning, and welcome to ITT's fourth quarter 2010 investor review. Presenting this morning are ITT's Chairman and CEO, Steve Loranger; and ITT's Chief Financial Officer, Denise Ramos.

I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at

Please note that any remarks we may make about future expectations, plans, prospects and 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 Form 10-K, as well as our other public SEC filings.

Let's now turn to Slide 3 where Steve will provide the 2010 highlights.

Steven Loranger

Good morning, and thank you all for joining us. We're thrilled today to discuss our record-breaking 2010 performance and to provide an update on ITT's transformation into three attractive stand-alone public companies.

2010 was yet another outstanding year for ITT. Our collective strength was once again driven by our leading market positions, our intense focus on customers, our shared culture of operational excellence and our highly skilled workforce. This is also the same foundation that's going to enable our 2011 results and that which will propel our three new entities into the future.

For 2010, our adjusted EPS of $4.41 grew an impressive 18% compared to 2009. This performance included another year of incremental $50 million of organic growth investments in emerging markets, commercial excellence in innovation that's going to better position all of our businesses for the future. Excluding these additional investments, our adjusted EPS would've grown 24%. And in addition, our 2010 adjusted EPS has improved 11% compared to the pre-crisis 2008 levels, which reflects the strong productivity we've generated in the aggregate demand strength in our key markets.

In 2010, our dedicated operational workforce and leadership once again delivered over $500 million in gross productivity gains, an amount that greatly exceeded our initial 2010 plan. These gains were primarily the result of our strong processes and our deep culture of operational excellence. As a result, in 2010, we once again delivered a very strong free cash flow of $937 million, representing a very high quality 104% conversion of net income.

A particular area of pride in 2010 was our very successful deployment of over $1 billion in capital towards strategic growth acquisitions in Dewatering, Analytics, Oil & Gas, Air Traffic Management and Space-Based Surveillance. These acquisitions added $0.08 of earnings in 2010 and they were accretive to our Q4 margins, and each further expanded our strong position in growth markets.

In 2010, Defense and Information Solutions executed a strategic transformation to drive significant cost savings, greater efficiencies and better technical alignment with our customers' Network Solutions strategy. This transformation provides a solid foundation for our Defense business that will continue to generate important strategic wins despite the intensifying competitive and budgetary pressures. These strategic significant wins included the CREW 3.3, the counter IED jamming system, the Systems Engineering 2020 contract on the FAA's Air Traffic Management System and several important service wins in theater.

And lastly, we're proud of the optionality that our strong balance sheet has afforded us over the years to continuously invest in organic and inorganic opportunities. And as of today, we're pleased to report that at the end of 2010, we had over $1 billion in cash and cash equivalents.

So to summarize. The successes we achieved in 2010 nicely positioned all of our businesses to compete aggressively in their respective markets in 2011 and well beyond.

Now let me turn the call over to Denise.

Denise Ramos

Thanks, Steve. Let's turn now to Slide 4. For the full year, we delivered solid revenue growth of 3% as Motion and Flow Control strength and the Fluid acquisitions more than offset the decline at Defense. Motion's 15% improvement reflected balanced, double-digit strength across all four of its businesses. Fluid grew 9%, reflecting the contribution from the acquisitions, coupled with growth at Residential and Commercial Water and Water and Wastewater.

In the fourth quarter, we delivered total revenue growth of 8% and organic growth of 5%. The organic improvement included 4% growth across the commercial businesses due to general industrial, mining, chemical and global residential strength. Defense grew 5% in the fourth quarter due to strong global SINCGARS shipments.

Operating margin improved 230 basis points in the quarter due to 290 basis points of operating productivity. For the full year, operating margins improved 90 basis points as 180 basis points of operating productivity was partially offset by higher pension and incremental growth investments.

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