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Q1 2011 Earnings Call

April 29, 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 and President


Robert Stallard - RBC Capital Markets, LLC

Gautam Khanna - Cowen and Company, LLC

Terry Darling - Goldman Sachs Group Inc.

James Lucas - Janney Montgomery Scott LLC

David Rose - Wedbush Securities Inc.

Peter Skibitski - SunTrust Robinson Humphrey, Inc.

Deane Dray - Citigroup Inc



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Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITT Corporation First Quarter 2011 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Tom Scalera, Vice President of Corporate Finance. Please go ahead.

Thomas Scalera

Thank you, Melissa. Good morning, and welcome to ITT's First Quarter 2011 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 were Steve will provide the first quarter 2011 overview.

Steven Loranger

Thank you, Tom. Good morning, and thanks to all of you for joining us today. Back in February, I shared with you 2 simple messages that have been repeatedly delivered during our transaction preparation. And that is one, we've asked our organization to really focus on all of our customers and to deliver on their operating plans. Well, so far this year, we're really pleased to report that despite some difficult Defense conditions, we've been successful, overall, on both fronts. We've also made tremendous progress around the spin transactions itself.

First quarter adjusted EPS grew 18% due to exceptional operating execution. Leaders all across ITT have risen to the challenge and are delivering tremendous results while they simultaneously advance the value-creating objectives of the spin transactions. During this transition period, our strong operating culture in the integrated management system have helped all of our employees maintain their intense focus on the customer and on delivering improved productivity.

For example, Motion's strong focus on execution generated an 11% increase in organic revenue growth and nice operating margin expansions. The Fluid businesses delivered 24% total revenue growth along with nice margin expansion. And they did so while they successfully integrated the 2010 acquisitions. Let me note that the strategic rigor in the integration intensity that we've put into all of our recent acquisitions really demonstrate the high caliber of our leadership teams across the company. And lastly, on a combined basis, Fluid and Motion drove an impressive 19% growth rate in emerging markets.

Further, we're encouraged by the strong double-digit order demand we saw across every one of our segments. Fluid's total orders were particularly strong at $1.1 billion, and this generated an outstanding book-to-bill ratio of 1.14. And in addition, Defense maintained its funded backlog at $4.1 billion on strong orders along with some nice program wins.

I'm also pleased to report that we are increasing the midpoint of our adjusted EPS range, $4.76, due to the strength in commercial markets. We're revising our full year 2011 revenue guidance to reflect the very challenging market and budgetary conditions at Defense. However, a large part of this Defense decline is expected to be offset by improved topline and operating margin performances in our Fluid and Motion & Flow Control businesses. And in fact, I want to compliment the Defense team because they have already recovered a substantial portion of the operating income impact from these sales declines through some very proactive expanded productivity and restructuring activity.

The final point is that we are making tremendous progress on the spin transaction, and we are on track to close by the end of this year. And we'll talk about those details shortly. And before we get to those, we'll turn it over to Denise to discuss the details of the Q1 business performance.

Denise Ramos

Thanks, Steve. Let's turn now to Slide 4. In the first quarter, we delivered total revenue growth of 7% and organic growth of 2%. The organic improvement was led by Motion & Flow Controls' impressive 11% growth. This reflected strength in Motion's major end markets and in the emerging markets.

Fluid's 8% organic growth was due to strength in global transport and treatment, commercial building services and light industrial markets. Defense declined 4% due to expected reductions in domestic SINCGARS and jammers. This was partially offset by significant growth in our Defense Service business that benefited from a ramp up of activities on several recently awarded long-term contracts.

The first quarter total organic order growth of 20% was simply outstanding. Including acquisitions and foreign exchange, total orders improved 26%. Motion's organic orders grew 20% due to strong global industrial aerospace, auto and rail demand. Fluid organic orders grew 12% due to the strength across all end markets. And Defense orders increased 26% due to recent service contract wins and the receipt of an anticipated 12-month funded order for the Communications service contract known as Tax Welcome [ph] .

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