SECTOR: Industrials

SECTOR HEAD: XUN YAO CHENSR. ANALYST: CHRIS KOVALIKJR. ANALYSTS: ANDREW ACCIARDO, JEFFREY YAM, VIVIAN CHEN, MICHEAL ELY, KARISHMA KOTHARI, MAXIM SKUDARNOV, JEFFREY TAYLOR, MARK ESPANOL, JUSTIN HERMAN, JADE LOH, SLAVA KP, & DAVID APPOLONIA

COMPANY: ITT‘Engineered for life…’ until it splits into three different companies

“FUTURE WATER” “FUTURE DEFENSE” “FUTURE ITT” SEGMENT SEGMENT SEGMENT

Company Definition

ITT Corporation is primarily in the Defense industry

• Communications and electronic devices. • 97% of Defense revenue from the US

government. • It is significantly undervalued as a wholly

defense company, but an announcement earlier this year will change everything.

ITT’s Fluid Technology* business• Pumps, valves and measuring and control

instruments for fluids along the entire ‘water’ value chain. 

ITT Motion & Flow Control ‘Engineering’ • Switches and valves for industrial and

aerospace applications and tubing systems, connectors, and brakes for various markets in the transportation industry. 

Management has focused on improving ITT’s Fluid business with three 2010 acquisitions and the internal development and launch of “ITT Analytics,” announced March 28th, 2011.

NYSE: ITT

Three Segments…Segment Share of ITT's $11 Billion of 2010 Revenue

Defense

Fluids

Motion & Flow

"Future Defense" Segment Share of $6 Billion Revenue

Electronic Systems

Systems

Advanced Engineering

Communication Systems

Space Systems

Night Vision

Intelligence

"Future Water" Segment Share of $3.2 Billion Revenue

Water & Wastewater

Residential & Commercial Water

Flow Control

"Future ITT" Segment Share of $2 Billion Revenue

Motion TechnologiesInterconnect SystemsControl TechnologiesIndustrial Process

into three “Future” Companies

Source: Yahoo! Finance, Industrial Sector Research Source: Yahoo! Finance, Industrial Sector Research

Source: Yahoo! Finance, Industrial Sector Research Source: Yahoo! Finance, Industrial Sector Research

Segment Products, Markets, & Geography

Breakdown by Geography

North AmericaEMEAAsia PacificLatin Amer. & Mexico

Breakdown by Market

AutomotiveEnergy & MiningIndustrial ProcessingAerospace & DefenseGeneral IndustrialBus, Truck, & Rail

Breakdown by Market

Residential & Commercial

Industrial Water

Agriculture & Irrigation

Beverage

Marine

Municpal

Analytics

Dewatering

"Future ITT" - 2011e Pro Forma Sales "Future Water" - 2011e Pro Forma Sales

Breakdown by Geography

North AmericaEMEAAsia PacificLatin Amer. & Mexico

5

Industry Snapshot

Porter’s Five Forces

Suppliers’ PowerLOW

Buyers’ Power

MODERATE

Threat of New EntrantsLOW

Threat of SubstitutesMODERATE

Intensity of CompetitionMODERATE

Engineered to Grow“Future Water”

Water TreatmentPlants

Environment PreservationCompanies

PharmaceuticalLaboratories Flood Clean-up Irrigation

HVACSystems

ServicesIrrigation, dewatering, etc.

ProductsPumps, valves, etc. for fluid

systems.

$“Future Water”

Customers

Water & Wastewater

Industrial Process

Residential & Commercial Water

Analytics

“Future Water” targets nearly every area of water handling, control, treatment, and distribution

Why ITT? – Why Spin-offs??Spin-off Provides Discount & Buyout Premium Opportunities

• Large disconnect in pricing/multiples– Where its trading:

• Defense multiple: <10x-10x P/E

– Where it will trade: • Water multiple: 16x-20x P/E• Engineering multiple: 15x-17x P/E

• Mergers & Acquisitions Season– Hoarding large sums of cash– Cheap debt– Slow recovery prompts external means

of growth

(Base Case)+ 10 – 50% Intrinsic Value

(Better Case)+ 20 – 80% Intrinsic Value“Icing on the Cake”+ 20 - 30% Buyout Premium(within two years)(Base Case with Buyout Premium)+ 30 – 80% Total Upside

40% of 2011-e revenue

Acid Test($ in MM)

“Future Defense” 2015 Projected EBIT… $707

“Future Water” 2015 Projected EBIT… $488

“Future ITT” 2015 Projected EBIT… $273

Total EBIT: $1,469EBIT Multiple*: 10xEstimated TEV: $14,600Less Net Debt: $333Market Cap: $14,267Upside: 30%

New Management

Gretchen McClain, President of ITT Fluid

& Motion Control

Denise Ramos, ITT’s CFO

Steve LorangerChairman,

President, CEO of ITT

David Melcher, President of ITT

Defense & Information Solution

CEO of Future ITT CEO of Future Defense CEO of Future Water

Chairman of Future Water

Increasing Population and Food Prices

Global population growth is “unsustainable”

In the next 40 years, the world population is expected to grow by 40%

Industrial consumption & renewable energy causing unforeseeable water externalities

Water consumption has risen because of the drive toward renewable energy Global industrial use of water is predicted to almost double by 2030

• 4,500 cubic kilometers of water are used every year, agriculture takes up to 70%.

• By 2030, farmers will need 45% more water.

• Over the next 40 years the irrigation industry will need a cumulative investment of one trillion dollars.

Need for New Global InfrastructureIncreasing Global access to clean drinking water

• The United Nation promised to reduce the proportion of the world population in 1990 without access to clean drinking water by 50% in 2015Developing countries are reducing

poverty levels

US is built upon a deteriorating infrastructure• Majority of US water mains are 50-90 years

old, some over 100 years old• US uses roughly 7.77 trillion gallons of water

per year• More than 20% of it, is lost due to leaks• In 2009, Washington issued $7 billion to

water infrastructure

• Over the past 10 years, malnourishment levels globally reduced to 15% and water coverage increased in both rural and urban environments

• Estimated to exceed 1 billion in 2010 since the financial crisis

Developing Developed World0%

20%

40%

60%

80%

100%

120%

71%

99%

77%84%

100%87%

Total Water Coverage

1990 2008

Turkey

Sri Lanka

Malaysia

Italy

Ukraine

ChileJapan

Fance

Germany

Australia

Cyprus

05

1015202530354045 42

282624.5

22

13.51210.5 97 6 5 4 4 2.82.42.22.1 2 1.61.5

Infrastructure Leakage Index

Engineered for BUY Recommendation

ITT

Recommendation BUY

Current Price $59.10

1 Yr Target Price $75.91

% Upside 28.4%

As of February 8th

Beta 1.10*

Market Cap 10.86 Billion*Ten year average adjusted beta of 1.00

07-Feb-06

25-Feb-06

15-Mar-0

6

02-Apr-0

6

20-Apr-0

6

08-May-0

6

26-May-0

6

13-Jun-06

01-Jul-0

6

19-Jul-0

6

06-Aug-06

24-Aug-06

11-Sep-06

29-Sep-06

17-Oct-

06

04-Nov-0

6

22-Nov-0

6

10-Dec-0

6

28-Dec-0

6

15-Jan-07

02-Feb-07-20%

-10%

0%

10%

20%

30%

40%

50%

One Year Company Performance Index Comparison

Average Industrials OilUtilities ITT

Perc

ent C

hang

e

Source: Yahoo! Finance Source: Yahoo! Finance

01-Apr-0

3

08-Sep-03

15-Feb-04

24-Jul-0

4

31-Dec-

04

09-Jun-05

16-Nov-0

5

25-Apr-0

6

02-Oct-

06

11-Mar-

07-60%-50%-40%-30%-20%-10%

0%10%20%30%

Four Year Performance of S&P 500 & ITT

S&P 500 ITT

Perc

ent C

hang

e

ValuationYear 2011-e 2012-e 2013-e 2014-e 2015-e

FCF ($MM) $ 1,825 $ 1,058 $ 1,056 $ 1,082 $ 1,097

WACC 8%

Growth Rate 2.5%

DCF EV $ 18,898

1yr Target Price $ 101.06

DCF – 30%Comps – EV/EBITDA 40%

P/S 30%

EV/EBITDA 9.1x

1yr Target Price $ 79.02

P/S 0.8x

1yr Target Price $46.63

1yr Target Price$75.91+28.4%

Cross Sectional Analysis

2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%0.00

2.00

4.00

6.00

8.00

10.00

12.00

R² = 0.666814662113099

TEV/EBITDA to EBITDA Growth

Adjusted 3-Year Trailing EBITDA Growth

TEV

/EBI

TDA

Mul

tipl

e

Risks & Sensitivities• Given the negative trends seen in municipal spending- if

2011 – 2015 saw a 50% decrease in municipal spending in ITT’s products:• ITT Water revenues down by 16%• ITT total revenues down by 5.3%

• Construction accounts for 23% of ITT Water Business. If ITT were to face a 50% decrease in construction spending, it would decrease:• ITT Water revenues by 11.5%• ITT total revenues by 3.8%

• Plastic piping may attract more spending for infrastructure development

• Funds for plastic pipes may be partially drawn from spending on ITT products

• With about 50% of aggregate ITT’s revenue coming from the U.S. government management predicts an annual 2% decline in 2011, what if this is too optimistic?• If ITT faced 10% less contracts starting in 2011, ITT’s

revenue would drop by 4.5%.

Risks & SensitivitiesMunicipalitiesConstruction DownPlastic Pipes AdoptedUS Government Contracts

SuppressedWorst Case Scenario

$45.00 $50.00 $55.00 $60.00 $65.00 $70.00 $75.00 $80.00

$71.41 $72.68 $74.51 $69.90 $60.77

Price per Share

Recommendation

ITT, Inc.

Recommendation BUY

Current Price $59.10

1 Year Target Price $75.91

% Upside 28.4%

Thank you for listening!

Questions?

#2. Company Definition

#3. NYSE: ITT

#4. Segment Products, Markets, & Geography

#5. Industry Snapshot

#6. Porter’s Five Forces

#8. ITT & The Cycle of Water

#9. Why ITT? – Why Spin-offs??

#11. Increasing Population and Food Prices

#12. Need for New Global Infrastructure

#13. Engineered for BUY Recommendation

#19. Questions?

#20. Engineered to Outlast “Future Defense”#21. Engineered to Profit “Future ITT”

#22. Statistics

#23. Capitalizing on Emerging Markets

#24. Back-up Time Series

#15. Cross Sectional Analysis

#16. Risks & Sensitivities

#17. Risks & Sensitivities

#18. Recommendation

#14. Valuation

#10. New Management

#7. Engineered to Grow “Future Water”

#25. Materials

#24. Properties

#24. Asbestos Proceedings

#24. Revenue Recognition

#24. Taxation

Engineered to Outlast“Future Defense”

Customers

CommunicationSystems

ForceProtection

Night Vision &Imaging

Air TrafficManagement

Space Ground &

Range SystemsISR Systems

Commercial3%

Governmental Contracts97%

$

Electronic Systems

Mission Systems

Geospatial Systems

Information Systems

“Future Defense”

Engineered to Profit“Future ITT”

Customers

$

Aerospace

Rail Marine & RV

Automotive

Industrial Processing

“Future ITT”

• Hydrocarbon Processing

• Mining• Pumps

• Power Generation• Heat Exchangers

Industrials

Technologies

Interconnect Solutions

• Fiber Optics

• Connectors

• Filters

• Actuators• Pumps

• Switches• Engine

Coolers• Rate Controls

• Diaphragm Seals

• Brake Pads• Disc Clutches

• Shock Absorbers

Friction Engineering

Statistics

22

Year Developing Developed World1990 71% 99% 77%2008 84% 100% 87%

Environment Developing Developed WorldRural 76% 98% 78%Urban 94% 100% 96%

"Water ITT" Revenue from USYear Percentage1995 0.7722000 0.6582005 0.5442010 0.43

Year Rev % US Rev US ($ in Billions)1995 1.332 0.772 1.0283042000 1.752 0.658 1.1528162005 2.837 0.544 1.5433282010 3.258 0.43 1.40094

  Market Cap Forward P/E 52 Week Range ROEITT 10.4B 11.9 42.05-64.00 19.05%

Capitalizing on Emerging Markets• 2010 Acquisition of Canberra Pumps in Brazil• 2010 Acquisition of Godwin Pumps in US• Growth of ITT Analytic’s Business• “The SI Analytics TitroLine titrators from ITT Analytics offer a wide

spectrum of capabilities for a variety of applications across the water and wastewater, environmental, food and beverage, pharmaceutical and chemical industries.”

Cubic Kilometers of W

ater Usage / Year

500.00 520.00 540.00 560.00 580.00 600.00 620.00 640.00 660.00 680.00

Cubic Kilometers of water usage per year in US

Cubic Kilometers of wa-ter usage per year in US

1995 2000 2005 20110.6

0.8

1

1.2

1.4

1.6

1.8

ITT US Revenue

Year

ITT

"Wat

er C

ompa

ny"

From

US

Materials• Our business relies on third-party suppliers, contract manufacturing and commodity

markets to secure raw materials, parts and components used in our products. In some instances we depend on a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to a limited number of suppliers.

• All of our businesses require various raw materials, the availability and prices of which may fluctuate. Although some cost increases may be recovered through increased prices to customers, our operating results are exposed to such fluctuations. We attempt to control such costs through fixed-priced contracts with suppliers and various other programs, such as our global strategic sourcing initiative. There have been no raw materials shortages that have had a material adverse impact on our business as a whole.

• For most of our products, we have existing alternate sources of supply, or such sources are readily available. We typically acquire materials and components through a combination of blanket and scheduled purchase orders to support our materials requirements for an average of four to eight weeks, with the exception of some specialty material. From time to time, we may experience price volatility or supply constraints for materials that are not available from multiple sources. Frequently, we are able to obtain scarce components for somewhat higher prices on the open market, which may have an impact on gross margin but does not disrupt production. We also acquire certain inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the priority, price and availability of supply.

PROPERTIES • We have 575 locations, in 51 countries on 6 continents. These properties total 22 million square feet, of

which 499 locations, or 12 million square feet are leased. We consider the many offices, plants, warehouses, and other properties that we own or lease to be in good condition and generally suitable for the purposes for which they are used. The following table shows the significant locations by segment and division.

Asbestos Proceedings • ITT, including its subsidiary Goulds Pumps, Inc. (Goulds), has been joined as a defendant

with numerous other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims allege that certain of our products sold prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it 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 identify any ITT or Goulds product as a source of asbestos exposure. In addition, in a large majority of the claims against the Company, the plaintiffs are unable to demonstrate any injury. Many of those claims have been placed on inactive dockets. Our experience to date is that a substantial portion of resolved claims have been dismissed without payment by the Company.

• We record a liability for pending asbestos claims and asbestos claims estimated to be filed over the next 10 years. While it is probable that we will incur additional costs for future claims to be filed against the Company, a liability for potential future claims beyond the next ten years is not reasonably estimable due to a number of factors. As of December 31, 2010, we recorded an undiscounted asbestos-related liability for pending claims and unasserted claims estimated to be filed over the next 10 years of $1,676, including expected legal fees, and an associated asset of $1,034, which represents estimated recoveries from insurers and other responsible parties, resulting in a net asbestos exposure of $642.

Revenue Recognition • Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has

occurred or services have been rendered. For product sales, other than long-term construction-type contracts, we recognize revenue at the time title and risks and rewards of ownership pass, which is generally when products are shipped. Certain contracts with customers require delivery, installation, testing, certification or other acceptance provisions to be satisfied before revenue is recognized. We recognize revenue on product sales to channel partners, including resellers, distributors or value-added solution providers at the time of sale when the channel partners have economic substance apart from ITT and ITT has completed its obligations related to the sale. Service revenue is recognized as services are performed. For agreements that contain multiple deliverables, we recognize revenue for a delivered element when it has stand-alone value to the customer, there is objective and reliable evidence of fair value of the undelivered elements, and, in arrangements that include a general right of return relative to the delivered element, performance of the undelivered element is considered probable and substantially in the Company’s control.

• The Defense segment and certain businesses within the Fluid segment enter into long-term construction-type sales contracts for which revenue is recognized under the percentage-of-completion method based upon units of delivery, percentage of costs incurred to total costs, or the completion of scheduled performance milestones. For units of delivery, revenues and profits are recognized based upon the ratio of actual units delivered to estimated total units to be delivered under the contract. Under the cost-to-total cost method, revenue is recognized based upon the ratio of costs incurred to estimated total costs at completion. Revenue is recognized under the milestone method, based upon accomplishing a clear deliverable output of contract performance with value to the customer. Revenue under cost-reimbursement contracts is recorded as costs are incurred and includes estimated earned fees or profits calculated on the basis of the relationship between costs incurred and total estimated costs. Revenue and profits on time-and-material type contracts are recognized based on billable rates times direct labor hours incurred plus material and other reimbursable costs incurred. The completed contract method is utilized when reasonable and reliable cost estimates for a project cannot be made. Amounts invoiced to customers in excess of revenue recognized are recorded as deferred revenue, until the revenue recognition criteria are satisfied, and is recorded as a component of accounts payable. Revenue that is earned and recognized in excess of amounts invoiced is recorded as a component of trade receivables.

• During the performance of long-term sale contracts, estimated final contract prices and costs are periodically reviewed and revisions are made as required and recorded in earnings in the period in which they are determined. Additionally, the fees under certain contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue when there is sufficient information to reasonably assess anticipated contract performance. Our claims on contracts are recorded only if it is probable the claim will result in additional contract revenue and the amounts can be reliably estimated. Provisions for estimated losses, if any, on uncompleted long-term contracts, are made in the period in which such losses are determined and are recorded as a component of costs of revenue.

• We record a reduction in revenue at the time of sale for estimated product returns, rebates and other allowances, based on historical experience and known trends. Additionally, accruals for estimated expenses related to warranties are made at the time products are sold or services are rendered and are recorded as a component of costs of revenue. These accruals are established using historical information on the nature, frequency and average cost of warranty claims and estimates of future costs.

• Revenue is reported net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.