Business Overview

ITT Corporation and its subsidiaries ("ITT", "we", "us", "our" and "the Company") is a global multi-industry leader in high-technology engineering and manufacturing engaged directly and through its subsidiaries. We generate revenue and cash through the design, manufacture, and sale of a wide range of engineered products and the provision of related services. For financial reporting purposes, our businesses are aggregated and organized into three principal business segments, Defense Electronics & Services, Fluid Technology, and Motion & Flow Control.

Our growth strategy is centered on both organic and acquisition growth. Our ability to grow organically stems from our value-based product development process, new and existing technologies, distribution capabilities, customer relationships and strong market positions. In addition to our growth initiatives, we have a number of strategic initiatives within the framework of the ITT Management System aimed at enhancing our operational performance. These include global sourcing, footprint rationalization and realignment, Six Sigma and lean fulfillment.

Key Performance Indicators and Non-GAAP Measures

Management reviews key performance metrics including sales and revenues, segment operating income and margins, earnings per share, return on invested capital, orders growth, and backlog, among others.

In addition, we consider the following non-GAAP measures to be key performance indicators:

• "organic sales and revenues," "organic orders" and "organic operating income" defined as sales and revenues, orders, and operating income, respectively, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures.

• "free cash flow" defined as cash flow from operations less capital expenditures.

Management believes that these metrics are useful to investors evaluating our operating performance for the periods presented, and provide a tool for evaluating our ongoing operations and our management of assets held from period to period. These metrics, however, are not a measure of financial performance under accounting principles generally accepted in the United States of America ("GAAP") and should not be considered a substitute for sales and revenue growth (decline), or cash flows from operating, investing and financing activities as determined in accordance with GAAP and may not be comparable to similarly titled measures reported by other companies.

Executive Summary

ITT reported sales and revenues of $2.7 billion during the third quarter of 2009, a decrease of 6.3% from the $2.9 billion reported during the third quarter of 2008, reflecting challenging market conditions for our Fluid Technology and Motion & Flow Control business segments. Income from continuing operations for the third quarter of 2009 was $66.0 or $0.36 per diluted share, which includes a net after-tax charge of $138.9 or $0.75 per diluted share related to the establishment of an accrual for future asbestos claims. Income from continuing operations for the third quarter decreased $138.5 or 67.7% as compared to the third quarter of 2008. The decrease was primarily driven by the charge for asbestos claims, as well as the impact of lower sales volumes, unfavorable foreign currency and higher restructuring and employee benefit plan costs. These reductions were partially offset by improved margins from productivity improvement initiatives resulting in lower costs of sales and selling, general and administrative ("SG&A") expenses. The following are financial highlights for the quarter ended September 30, 2009.

• During the third quarter of 2009 we recognized an after-tax charge of $130.7 to income from continuing operations for the estimated cost of future asbestos claims to be filed over the next ten years, net of an estimate for related insurance recoveries. See the section entitled "Asbestos Matters" and Note 16,

"Commitments & Contingencies" in the Notes to Consolidated Condensed Financial Statements for additional information.

• The third quarter produced solid organic revenue results consistent with the first half of 2009. Organic revenue for the third quarter ended September 30, 2009 declined 4.4%, as compared to the same prior year period.

• We generated free cash flow of $454.7 and $916.3 during the third quarter and first nine months of 2009, respectively, representing increases of $106.1 and $156.9 from the same prior year periods. Strong cash flow performance resulted in a net debt to net capital ratio of 8.5% at September 30, 2009 as compared to a 27.9% ratio at December 31, 2008.

• SG&A expenses decreased during the third quarter of 2009 by 7.1%, from the comparable prior year quarter, reflecting productivity gains from various cost-saving initiatives as well as lower sales volumes. SG&A as a percentage of sales declined 10-basis points to 14.3%. In addition, we incurred $8.9 of restructuring expense during the third quarter of 2009, a $3.9 increase from the prior year.

• For the second consecutive quarter, the Defense Electronics & Services business segment generated record operating income, which was driven by revenue growth of 1.8% as compared to the third quarter of 2008, and strong operational performance. Operating income for the third quarter of 2009 was $203.3, an 8.3% increase from the third quarter of 2008. However, orders for the segment declined $644.9, or 33.6% to $1,275.3, mainly due to a number of large contract wins that occurred in the third quarter of 2008.

• Sales and revenues within our Fluid Technology and Motion & Flow Control business segments declined 13.0% and 22.1%, respectively, as compared to the third quarter of 2008, due to overall declines in demand and unfavorable foreign currency fluctuations. Operating income for the quarter declined 18.3% and 27.7% for these segments year over year.

2009 Outlook

The current global economic environment continued to present difficult market conditions during the third quarter and first nine months of 2009, particularly within our Fluid Technology and Motion & Flow Control business segments. We have responded to these uncertain times through various restructuring actions and other cost-saving initiatives that have generated productivity improvements and helped deliver a solid performance. We expect to incur restructuring costs of approximately $35.0 to $40.0 during the fourth quarter of 2009, in addition to the $40.0 incurred during the first nine months of 2009. Going forward in this environment, our continued strategy is to focus on the current needs of our customers, deploy our capital in a disciplined manner, focus on cost controls, and execute on our operational initiatives.

Factors impacting our 2009 performance, compared to 2008, include order and revenue declines in our Fluid Technology and Motion & Flow Control business segments, the establishment of an accrual for potential future asbestos claims estimated to be filed over the next 10 years, unfavorable foreign currency fluctuations, higher pension and other employee benefit-related costs, and benefits from productivity and other cost-saving initiatives.

Known Trends and Uncertainties

The following list represents a summary of trends and uncertainties, which could have a significant impact on our results of operations, financial position and/or cash flows from operating, investing and financing activities.

• During the third quarter of 2009, we recorded a liability for future unasserted asbestos claims estimated to be filed over a ten-year period, net of insurance and other recoveries. It is probable that we will incur additional liabilities for asbestos claims after the ten-year period and such additional liabilities may be significant. However, we are not able to reasonably estimate additional claims beyond the ten-year period, or the associated liability, at this time.

In addition, we have estimated that we have insurance which will cover 69 percent of the asbestos costs (defense and settlement costs) for pending claims, as well as unasserted claims to be filed over the next 10 years. However, because there are gaps in our coverage, reflecting certain uninsured periods and prior

insurance settlements, and we expect that certain policies from some of our primary insurers will exhaust within the next 10 years, the insurance coverage percent is expected to decline for potential additional asbestos liabilities. See Item 1A. "Risk Factors" of Part II "Other Information", included within this Quarterly Report on Form 10-Q, for additional information on asbestos-related uncertainties.

• It is difficult to determine the breadth and duration of the current economic decline and the many ways in which it may affect our suppliers, customers and our business in general. Further worsening of these difficult macroeconomic conditions could have a significant adverse effect on our sales, profitability and results of operations.

• Associated with the declines in real estate markets around the world, particularly within the United States and Europe, we have experienced a reduction in demand for portions of our Fluid Technology business segment which sell products with residential and commercial market applications. This trend could continue to adversely affect our business in future periods.

• While we have experienced relatively stable municipal market demand during the first nine months of 2009, delays or cancellations of municipality projects caused by the uncertain economic environment could adversely affect our Fluid Technology business.

• A portion of our Fluid Technology business segment provides products to end markets such as oil and gas, power, chemical and mining. Economic conditions negatively impacted this portion of our business during the first nine months of 2009. Changes in economic conditions could impact our results in future periods.

• The commercial airline industry has been significantly impacted by a decline in passenger and cargo traffic volume over the past twelve months. According to the International Air Transport Association, losses are expected to continue into 2010. Commercial airline carriers have responded through spending cuts, including the postponement of new aircraft purchases and delayed aircraft maintenance. These activities have negatively impacted our Motion & Flow Control business segment throughout 2009. Further worsening or slow recovery of the industry could continue to adversely affect our business in future periods.

• A connectors industry report, released in early 2009, forecasted a 2009 decline in sales of connectors of approximately 15%. A portion of our Motion & Flow Control business segment is sensitive to trends within the connector industry. Our results through September 30, 2009 reflect declines within the aerospace and industrial connector end-markets.

• The global automotive and marine markets declined significantly in 2008, with significant contraction in OEM production over the same period. While government automotive stimulus packages introduced during the second and third quarters of 2009 have encouraged moderate recovery within global automotive markets, the stability of the market is still uncertain. Further declines in either the global automotive or marine markets could negatively impact portions of our Motion & Flow Control business segment.

• Programs supported by our Defense Electronics & Services business segment are generally in line with the fiscal year 2010 budget recently signed by President Obama; however the future impact to our business from U.S. Defense programs will be influenced by the Quadrennial Defense Review and the development of the 2011 Department of Defense budget. Changes in the portion of the U.S. Defense budget allocated to programs supported by our Defense segment could materially impact our business. In addition, the variability of timing and size of key orders could negatively impact our future results.

• We expect to incur approximately $46.9 of net periodic pension cost in 2009. Changes to our overall pension and other employee-related benefit plans, including material declines in the fair value of our pension plan assets among others, could adversely affect our results of operations beyond 2009, as well as require us to make significant funding contributions.

The information provided above does not represent a complete list of trends and uncertainties that could impact our business in either the near or long-term. It should, however, be considered along with the risk factors identified in Item 1A of our 2008 Annual Report on Form 10-K and our disclosure under the caption "Forward-Looking Statements and Cautionary Statements" at the end of this section.

Business Segment Overview

Summarized below is information on each of our three business segments, including markets served, goods and services provided, relevant factors that could impact results, business challenges, and areas of focus.

Defense Electronics & Services

Our Defense Electronics & Services business segment is designed to serve future needs around safety, security, intelligence and communication. Management believes that the Defense Electronics & Services business segment is well positioned with products and services that support our customers' needs. In addition, we expect new product development to continue contributing to future growth.

Defense Electronics & Services consists of two major areas: (i) Systems and Services and (ii) Defense Electronics. Systems and Services consists of our Systems and Advanced Engineering & Sciences divisions. Defense Electronics consists of our Electronic Systems, Communications Systems, Space Systems, Night Vision, and Intelligence & Information Warfare divisions. The following information summarizes the goods and services provided by each business to their respective end-markets.

• Systems - Systems integration, communications engineering and technical support solutions

• Advanced Engineering & Services - Data analysis and research on homeland defense, telecommunications systems and information technology

• Electronic Systems - Force protection, integrated electronic warfare systems, reconnaissance and surveillance, radar and undersea systems, aircraft armament suspension-and-release systems and advanced composite structures

• Communications Systems - Voice and data systems, and battlefield communication technology

• Space Systems - Satellite imaging systems, meteorological and navigation payloads, related information solutions and systems

• Night Vision - Image intensifier technology, military and commercial night vision equipment

• Intelligence & Information Warfare - Intelligence systems and analysis, information warfare solutions and data acquisition and storage

Factors that could impact Defense Electronics & Services' financial results include the level of defense funding by domestic and foreign governments, our ability to receive contract awards, the ability to develop and market products and services for customers outside of traditional markets and our ability to obtain appropriate export licenses for international sales and business. Primary areas of business focus include new or improved product offerings, new contract wins, successful program execution and increasing our presence in international markets.

Fluid Technology

Our Fluid Technology business segment provides critical products and services in markets that are driven by population growth, increasing environmental regulation, global security and global infrastructure trends. Fluid Technology products include water and wastewater treatment systems, pumps and related technologies, and other water and fluid control products with residential, commercial, and industrial applications. The segment comprises three businesses; Water & Wastewater, Residential & Commercial Water, and Industrial Process. The following information summarizes the goods and services provided by each business to their respective end-markets.

• Water & Wastewater - Submersible pump systems for water and wastewater control, and biological filtration and disinfection treatment systems for municipal, industrial and commercial applications

• Residential & Commercial Water - Pumps, systems and accessories for water wells, pressure boosters, agricultural and irrigation applications, heating, ventilation and air conditioning systems, boiler controls, flood control and fire protection pumps, residential, commercial, light industrial, and agriculture and turf irrigation applications

• Industrial Process - Pumps and valves for industrial, mining, pulp and paper, chemical and petroleum processing, and high-purity systems for biopharmaceutical applications

Factors that could impact Fluid Technology's financial results include broad economic conditions in markets served, the ability of municipalities to fund projects, raw material prices and continued demand for replacement parts and service. Primary areas of business focus include new product development, geographic expansion into new markets, facility rationalization and global sourcing of direct material purchases.

Motion & Flow Control

Our Motion & Flow Control business segment comprises a group of businesses providing products and services for the areas of defense, aerospace, industrial, transportation, computer, telecom and marine and leisure. These businesses primarily serve the high-end of their markets, with highly engineered products, high brand recognition and a focus on new product development and operational excellence. Revenue opportunities are balanced between OEM and after-market customers. In addition to its traditional markets of the U.S. and Western Europe, opportunities in emerging markets such as Asia are increasing. The following information summarizes the goods and services provided within each of the segments' businesses.

• Motion Technologies - Friction pads and back plates serving global automotive and railway customers; KONI® shocks, premier adjustable shocks with car, bus, truck, trailer, and rail applications

• Interconnect Solutions - Connectors, interconnects, cable assemblies, multi-function grips, input/output card kits and smart card systems serving the defense, aerospace, industrial, transportation, computer, and telecom markets

• Flow Control - Pumps and related products for the marine and leisure market; pumps and components for beverage applications; pumps for other specialty industrial fluid dispensing applications; valve actuation control systems for harsh environments, including oil and gas pipelines, as well as solenoid valves

• Control Technologies - Valves, actuators, pumps, switches for the commercial, military, and general aviation markets; regulators, switches and diaphragm seals for natural gas vehicles, oil and gas, fluid power, power generation, and chemical markets; electro-mechanical actuators, servo motors, computer numerical control systems, motion controller and other components with medical imaging, semi-conductor, machine tool, industrial automation, metal fabrication and aircraft seating applications; a wide range of standard and custom energy absorption and vibration isolation solutions including shock absorbers, buffers, rate controls, dampers, vibration isolators and other related products serving the industrial, oil and gas, rail, aviation and defense markets

The Motion & Flow Control businesses' financial results are driven by economic conditions in their major markets, the cyclical nature of the transportation industry, production levels of major auto producers, demand for marine and leisure products, raw material prices, the success of new product development, platform life and changes in technology. Primary areas of business focus include expansion into adjacent markets, new product development, manufacturing footprint optimization, global sourcing of direct material purchases and lean fulfillment.

Consolidated Financial Results


                                                        Three Months Ended September 30                                  Nine Months Ended September 30
                                                                               Increase (Decrease)                                             Increase (Decrease)
                                              2009            2008               %/Point Change               2009            2008               %/Point Change

Sales and revenues                        $  2,697.7       $ 2,879.3                       (6.3 )%         $ 8,034.8       $ 8,749.8                       (8.2 )%
Gross profit                                   774.4           810.7                       (4.5 )%           2,222.3         2,438.7                       (8.9 )%
Selling, general and administrative
expenses                                       386.1           415.4                       (7.1 )%           1,162.4         1,272.2                       (8.6 )%
Research & development expenses                 63.8            60.7                        5.1 %              174.0           172.5                        0.9 %
Asbestos-related costs, net                    222.9             1.6                          -                224.5            11.2                          -
Restructuring and asset impairment
charges, net                                     8.9             5.0                       78.0 %               40.0            15.9                      151.6 %
Operating income                                92.7           328.0                      (71.7 )%             621.4           966.9                      (35.7 )%
Interest expense                                24.4            29.3                      (16.7 )%              73.7           101.3                      (27.2 )%
Interest income                                 13.8             8.3                       66.3 %               21.9            24.6                      (11.0 )%
Income tax expense                              11.9            98.6                      (87.9 )%             104.9           279.9                      (62.5 )%
Income from continuing operations               66.0           204.5                      (67.7 )%             455.1           599.7                      (24.1 )%
Gross margin                                    28.7 %          28.2 %                     0.50                 27.7 %          27.9 %                    (0.20 )
Selling, general and administrative
expenses as a % of sales                        14.3 %          14.4 %                    (0.10 )               14.5 %          14.5 %                        -
Research & development expenses as a %
of sales                                         2.4 %           2.1 %                     0.30                  2.2 %           2.0 %                     0.20
Operating margin                                 3.4 %          11.4 %                    (8.00 )                7.7 %          11.1 %                    (3.40 )
Effective tax rate                              15.3 %          32.5 %                   (17.20 )               18.7 %          31.8 %                   (13.10 )

Sales and Revenues

Sales and revenues for the quarter and nine months ended September 30, 2009 were $2,697.7 and $8,034.8, respectively, representing decreases of 6.3% and 8.2%, respectively, as compared to the same prior year periods. Volume declines, primarily driven by global economic conditions, and unfavorable foreign currency fluctuations continued to negatively impact our Fluid Technology and Motion & Flow Control business segments, resulting in declines of 13.0% and 22.1%, respectively, for the quarter and nine months ended September 30, 2009. These declines were partially offset by modest revenue growth of 1.8% at our Defense Electronics & Services business segment.

The following table illustrates the impact of organic growth, acquisitions and divestitures completed during the period, and foreign currency translation fluctuations on sales and revenues during these periods.

                                               Three            Nine
                                               Months          Months
                                             2009/2008       2009/2008
                                              % Change        % Change

             Organic growth                        (4.4 )%         (4.6 )%
             Acquisitions and divestitures         (0.1 )%         (0.2 )%
             Foreign currency translation          (1.8 )%         (3.4 )%

             Sales and revenues                    (6.3 )%         (8.2 )%

During the third quarter and first nine months of 2009, we received orders of $2,406.2 and $7,653.2, representing decreases of $933.8 or 28.0% and $1,251.2 or 14.1%, respectively, from the same prior year periods. Foreign currency fluctuation negatively impacted both quarter-to-date and year-to-date orders by approximately 1.9% and 3.6%, respectively. Each of our business segments experienced a decline in orders during the third quarter of 2009. In the Defense segment, a decline of 33.6% was primarily impacted by inter-quarter timing of orders during both 2008 and 2009. The year-to-date decrease in orders was primarily attributable to declines in our Fluid Technology and Motion & Flow Control segments.

Gross Profit

Gross profit for the quarter and nine months ended September 30, 2009 was $774.4 and $2,222.3, respectively, representing decreases of 4.5% and 8.9%, as compared to the same prior year periods. These decreases are attributable to the decline in sales and revenues and unfavorable foreign currency fluctuations, partially offset by benefits from productivity gains, including efforts to improve supply chain productivity and control material costs. Gross margin increased 50 basis points to 28.7% during the quarter and decreased 20 basis points to 27.7% during the first nine months of 2009. The 50 basis point improvement in third quarter gross margin is due to benefits from productivity improvements and various other cost-saving initiatives, which more than offset the impacts from reductions in sales volumes. The same factors drove the year-to-date gross margin decline of 20 basis points; however, the impact of the sales decline was greater than the benefits provided from productivity improvements.

Selling, General and Administrative Expenses

SG&A decreased 7.1% to $386.1 and 8.6% to $1,162.4 for the quarter and nine months ended September 30, 2009, respectively, as compared to the same prior year periods. The year-over-year decreases for both periods were primarily attributable to cost-saving initiatives in response to declining global economic conditions, lower sales volumes and a benefit from foreign currency exchange translation, partially offset by higher pension and other postretirement plan . . .