ITT INDUSTRIES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-5627

ITT INDUSTRIES, INC.

INCORPORATED IN THE STATE OF INDIANA 13-5158950
(I.R.S. Employer
Identification Number)

4 WEST RED OAK LANE, WHITE PLAINS, NY 10604
(Principal Executive Office)

TELEPHONE NUMBER: (914) 641-2000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

As of October 31, 2002, there were outstanding 91,803,739 shares of common
stock ($1 par value per share) of the registrant.

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ITT INDUSTRIES, INC.

TABLE OF CONTENTS

1

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The following unaudited consolidated condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, reflect all
adjustments (which include normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. Certain amounts in the prior periods'
consolidated condensed financial statements have been reclassified to conform to
the current period presentation. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-K.

ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE)
(UNAUDITED)

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The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT FOR SHARES AND PER SHARE)

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The accompanying notes to consolidated condensed financial statements are an
integral part of the above balance sheets.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

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The accompanying notes to consolidated condensed financial statements are an
integral part of the above statements.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

1) RECEIVABLES

Net receivables consist of the following:

2) INVENTORIES

Net inventories consist of the following:

3) PLANT, PROPERTY, AND EQUIPMENT

Net plant, property, and equipment consist of the following:

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

4) SALES AND REVENUES AND COST OF SALES AND REVENUES

Sales and revenues and cost of sales and revenues consist of the following:

The Defense Electronics & Services segment comprises $175.4 and $469.3 of
total service revenues for the three and nine months ended September 30, 2002,
respectively, and $113.0 and $288.3 of total cost of service revenues,
respectively, during the same period. The Fluid Technology segment comprises the
remaining balances of service revenues and cost of service revenues.

The Defense Electronics & Services segment comprises $135.2 and $383.1 of
total service revenues for the three and nine months ended September 30, 2001,
respectively, and $78.7 and $224.0 of total cost of service revenues,
respectively, during the same period. The Fluid Technology segment comprises the
remaining balances of service revenues and cost of service revenues.

5) COMPREHENSIVE INCOME

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

6) EARNINGS PER SHARE

The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share for the three months and nine months ended
September 30, 2002 and 2001:

There were less than 0.1 of outstanding antidilutive common stock options
excluded from the computation of diluted earnings per share for the three months
and nine months ended September 30, 2002 and 2001.

7) CASH FLOW INFORMATION

The change in receivables, inventories, payables and accrued expenses
listed on the Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 consist of the following:

8) RESTRUCTURING

At December 31, 2001, the accrual balance for restructuring activities was
$51.9. Cash payments of $25.6 and reversals of $1.7 were recorded in the first
nine months of 2002 decreasing the accrual balance at September 30, 2002 to
$24.6, which includes $15.8 for severance and $8.8 for facility carrying costs
and other.

During the third quarter of 2002, $1.7 of restructuring accruals were
reversed into income as a result of a quarterly review of the remaining
restructuring actions. The reversal primarily reflects less than anticipated
severance costs on completed actions related to the 2001 restructuring program
at the Fluid Technology and Motion & Flow Control segments.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

As of December 31, 2001, remaining actions under restructuring activities
announced during 2001 were to close five facilities, discontinue 21 products and
reduce headcount by 2,200. During the first nine months of 2002, the Company
reduced headcount by 966 persons and discontinued 21 products. All of the
actions contemplated under the 2001 plans will be substantially completed in
2002. Some severance run-off payments will occur in 2003 and closed-facility
expenditures will continue to be incurred through 2006.

9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, was adopted by
the Company on January 1, 2001. The nature of the Company's business activities
necessarily involves the management of various financial and market risks,
including those related to changes in interest rates, currency exchange rates,
and commodity prices. As discussed more completely in Notes 1 and 16 of the 2001
Annual Report on Form 10-K, the Company uses derivative financial instruments to
mitigate or eliminate certain of those risks. The only significant derivatives
that the Company had on January 1, 2001, were the interest rate swaps (the
"Swaps") discussed in Note 16 of the 2001 Annual Report on Form 10-K. The
adoption of SFAS No. 133 required the Company to record the total fair value of
the Swaps in the financial statements, which caused an increase to other assets
and long-term debt of $39.7, bringing the carrying value of the Swaps to $42.5.
At September 30, 2002 and December 31, 2001, the values of the Swaps were $103.9
and $46.2, including $8.2 and $3.7 of accrued interest, respectively. The
adoption of SFAS No. 133 did not have a material impact on the results of
operations or cash flows of the Company.

Additional disclosures required by SFAS No. 133, as amended, are presented
below.

HEDGES OF FUTURE CASH FLOWS

At September 30, 2002 the Company had six foreign currency cash flow hedges
that had appreciations of $1.2. At December 31, 2001, the Company had one
foreign currency cash flow hedge that had appreciations of less than $0.1 during
2001. There were no changes in the forecasted transactions during 2002 and 2001
regarding their probability of occurring, which would require amounts to be
reclassified to earnings.

The notional amount of the foreign currency forward contracts utilized to
hedge cash flow exposures were $34.1 and $1.1 at September 30, 2002 and December
31, 2001, respectively. The applicable fair value of these contracts were net
short positions of $12.4 and $1.1 at September 30, 2002 and December 31, 2001,
respectively. There were no ineffective portions of changes in fair values of
cash flow hedge positions reported in earnings for the nine months ended
September 30, 2002 and 2001, respectively, and no amounts were excluded from the
measure of effectiveness reported in earnings during these periods.

HEDGES OF RECOGNIZED ASSETS, LIABILITIES AND FIRM COMMITMENTS

At September 30, 2002 and December 31, 2001, the Company had foreign
currency forward contracts with notional amounts of $40.8 and $50.3,
respectively, to hedge the value of recognized assets, liabilities and firm
commitments. The fair value of the 2002 and 2001 contracts were net short
positions of $21.7 and $11.5 at September 30, 2002 and December 31, 2001,
respectively. The ineffective portion of changes in fair values of these hedge
positions reported in operating income during the first nine months of 2002 and
2001 were $0.0 and $0.1, respectively. There were no amounts excluded from the
measure of effectiveness.

10) GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and SFAS No. 142, Goodwill
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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 eliminates the
pooling of interests method of accounting for all business combinations
initiated after June 30, 2001 and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. The Company adopted SFAS No. 141 as of July 1, 2001.

As of January 1, 2002, the Company adopted SFAS No. 142 which addresses the
financial accounting and reporting standards for the acquisition of intangible
assets outside of a business combination and for goodwill and other intangible
assets subsequent to their acquisition. This accounting standard requires that
goodwill and indefinite-lived intangible assets be tested for impairment on an
annual basis, or more frequently if circumstances warrant, and that they no
longer be amortized. The provisions of the standard also require the completion
of a transitional impairment test in the year of adoption, with any impairments
identified treated as a cumulative effect of a change in accounting principle.
In connection with the adoption of SFAS No. 142, the Company completed a
transitional goodwill impairment test at its 12 identified reporting units and
determined that no impairment exists.

In accordance with SFAS No. 142, goodwill associated with acquisitions
consummated after June 30, 2001 is not amortized and the amortization of
goodwill from business combinations consummated before June 30, 2001 ceased on
January 1, 2002. A reconciliation of previously reported net income and earnings
per share to the amounts adjusted for the exclusion of goodwill amortization is
reflected on the face of the consolidated condensed income statements included
herein.

Changes in the carrying amount of goodwill for the nine months ended
September 30 by operating segment, are as follows:

Information regarding the Company's other intangible assets follows:

Amortization expense related to intangible assets for the nine months ended
September 30, 2002 was $0.8. Estimated amortization expense for each of the five
succeeding years is $1.1 per year.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

11) DISCONTINUED OPERATIONS

In September of 1998, the Company disposed of its automotive Electrical
Systems business to Valeo SA for approximately $1,700 and its Brake and Chassis
unit to Continental AG of Germany for approximately $1,930. These businesses
were treated as discontinued operations. In connection with the disposition of
these businesses, the Company established accruals for direct costs and other
($102), representation and warranty and contract purchase price adjustments
($148.8), environmental obligations ($16.1) and taxes ($972.7). In 1998, the
Company received notifications of claims from the buyers of the automotive
business requesting post-closing adjustments to the purchase prices under the
provisions of the disposition agreements. The Company assessed the claims and
determined that the probable outcome was reflected in the Company's original
estimate recorded at time of sale. In 1999, those claims were submitted to
arbitration. At the time, the Company still determined that the most probable
outcome was reflected in the Company's original estimate recorded at the time of
sale. In 2001 and early in 2002, both claims were favorably resolved.

During the fourth quarter of 2001 the Company reassessed its automotive
discontinued operations accruals and determined that it had excess accruals on
an after-tax basis of approximately $60. The Company reversed these accruals
into the Consolidated Condensed Income Statements under Income from Discontinued
Operations. The excess was primarily related to favorable foreign tax rulings.

At September 30, 2002, the Company had automotive discontinued operations
accruals of $190.3 that primarily relate to taxes of $154, product recalls of
$8, environmental obligations of $14.5, employee benefits of $11.5 and other of
$2.3. In 2002, the Company has spent 0.8. The Company expects that it will
resolve $154 of tax obligations in 2004 or 2005. The Company projects between
$3.0 and $4.0 of annual spending related to its remaining automotive
obligations.

12) COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are from time to time involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities (including toxic tort, property damage, and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos exposure,
or other product liability related matters), employment and pension matters,
government contract issues and commercial or contractual disputes, sometimes
related to acquisitions or divestitures. The Company will continue to vigorously
defend itself against all claims. Accruals have been established where the
outcome of the matter is probable and can be reasonably estimated. Although the
ultimate outcome of any legal matter cannot be predicted with certainty, based
on present information including the Company's assessment of the merits of the
particular claim, as well as its current reserves and insurance coverage, the
Company does not expect that such legal proceedings will have any material
adverse impact on the cash flow, results of operations, or financial condition
of the Company on a consolidated basis in the foreseeable future.

ENVIRONMENTAL

The Company has accrued for environmental remediation costs associated with
identified sites consistent with the policy set forth in Note 1 of the 10-K,
"Accounting Policies." In management's opinion, the total amount accrued and
related receivables are appropriate based on existing facts and circumstances.
It is difficult to estimate the total costs of investigation and remediation due
to various factors, including incomplete information regarding particular sites
and other potentially responsible parties, uncertainty regarding the extent of
contamination and the Company's share, if any, of liability for such problems,
the selection of alternative remedies, and changes in clean-up standards. In the
event that future remediation expenditures are in excess of amounts accrued,
management does not anticipate that they will have a material adverse effect on
the consolidated financial position, results of operations, or liquidity of the
Company.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

In the ordinary course of business, and similar to other industrial
companies, the Company is subject to extensive and changing federal, state,
local, and foreign environmental laws and regulations. The Company has received
notice that it is considered a potentially responsible party ("PRP") at a number
of those sites by the United States Environmental Protection Agency ("EPA")
and/or a similar state agency under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA" or "Superfund") or its state
equivalent. As of September 30, 2002, the Company is responsible, or is alleged
to be responsible, for approximately 120 environmental investigation and
remediation sites in various countries. In many of these proceedings, the
Company's liability is considered de minimis. At September 30, 2002, the Company
has $111 million accrued, which approximates its best estimate, related to the
cleanup of soil and ground water. The low range estimate for its environmental
liabilities is $87 million and the high range estimate for those liabilities is
$158 million. On an annual basis the Company spends between $12 million and $14
million on its environmental remediation liabilities.

The Company has been involved in an environmental proceeding in Glendale
California relating to the San Fernando Valley aquifer. The Company is one of
numerous PRPs who are alleged by the EPA to have contributed to the
contamination of the aquifer. In January 1999, the EPA filed a complaint in the
United States District Court for the Central District of California against the
Company and Lockheed Martin Corporation, United States v. ITT Industries, Inc.
and Lockheed Martin Corp. CV99-00552 SVW AIJX, to recover costs it incurred in
connection with the foregoing. In May 1999, the EPA and the PRPs including the
Company and Lockheed Martin, reached a settlement, embodied in a consent decree,
requiring the PRPs to perform additional remedial activities. Pursuant to the
settlement, the PRPs, including the Company, have constructed and are operating
a water treatment system. The PRPs have agreed to operate the system for an
additional 10 years. ITT and the other PRPs continue to pay their respective
allocated costs of the operation of the water treatment system. Accordingly, at
this time, ITT does not anticipate a default by any of the PRPs which would
increase the Company's allocated share of the liability. As of September 31,
2002, the Company's accrual for this liability was $11.3 million representing
its best estimate; its low estimate for the liability is $7.4 million and its
high estimate is $16.4 million.

ITT operated a facility in Madison County Florida from 1968 until 1991. In
1995, elevated levels of contaminants were detected at the site. Since then, ITT
has been investigating the site in coordination with state and federal
environmental authorities. A remedy for the site has not been selected.
Currently the estimated range for the costs of the additional investigation and
the anticipated remediation is between $5.3 million and $14.2 million with a
best estimate of $10 million. The Company has accrued $10 million for this
matter.

ITT has been involved with a number of PRPs regarding property in the City
of Bronson Michigan operated by a former subsidiary of ITT, Higbie
Manufacturing, prior to the time ITT acquired the company. ITT and other PRPs
are investigating and remediating discharges of industrial waste which occurred
in the 1930's. The Company's current estimates for its exposure are between $2.8
million and $5.9 million. It has an accrual for this matter of $4.1 million
which represents its best estimate of its current liabilities. ITT does not
anticipate a default on the part of the other PRPs.

In a suit filed in 1991 by the Company, in the California Superior Court,
Los Angeles County, ITT Corporation, et al. v. Pacific Indemnity Corporation et
al., against its insurers, the Company is seeking recovery of costs it incurred
in connection with its environmental liabilities including the three listed
above. Discovery, procedural matters, changes in California law, and various
appeals have prolonged this case. Currently, the matter is before the California
Court of Appeals from a decision by the California Superior Court dismissing
certain claims of the Company. The dismissed claims were claims where the costs
incurred were solely due to administrative (versus judicial) actions. A hearing
is expected in early 2003. In the event the appeal is successful, the Company
will pursue the administrative claims against its excess insurers. During the
course of the litigation the Company has negotiated settlements with certain
defendant insurance
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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

companies and is prepared to pursue its legal remedies where reasonable
negotiations are not productive. A portion of the recoveries from the insurance
settlements have been placed in a trust and are used to reimburse the Company
for its environmental costs.

PRODUCT LIABILITY

ITT and its subsidiary Goulds Pumps, Inc. ("Goulds") have been joined as
defendants with numerous other industrial companies in product liability
lawsuits alleging injury due to asbestos. These actions against the Company have
been managed by our historic product liability insurance carriers. All claims
paid to date, including all defense and settlement costs, have been covered by
those same carriers. These claims stem primarily from products sold prior to
1985 that contained a part manufactured by a third party, e.g., a gasket, which
allegedly contained asbestos. The asbestos was encapsulated in the gasket (or
other) material and was non-friable. In certain other cases, it is alleged that
ITT companies were distributors for other manufacturers' products that may have
contained asbestos.

Frequently, the plaintiffs are unable to demonstrate any injury or do not
identify any ITT or Goulds product as a source of asbestos exposure. During the
past 12 months, ITT and Goulds resolved approximately 800 cases through
settlement or dismissal. The average amount of settlement per claim has been
nominal. Based upon past claims experience, available insurance coverage, and
after consultation with counsel, management believes that these matters will not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.

The Company has received notice of a suit filed in El Paso, Texas relating
to its Gilfillian Division, Bund zur Unterstutzung Radargeschadigter et al. v.
ITT Industries et al., Sup. Ct., El Paso Texas C.A. No. 2002-4730. This
Complaint, filed by both U.S. and German citizens, alleges that ITT and four
other major companies failed to warn the plaintiffs of the dangers associated
with exposure to x-ray radiation from radar devices. The Complaint also seeks
the certification of a class of similarly injured persons. The Company's insurer
has accepted the defense of this matter. Management believes that this matter
will not have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.

The Company has received notice of a product liability suit filed in
Superior Court of New York, Danis v. Rule Industries et al., Sup.Ct. N.Y., C.A.
No. 115975-02, seeking damages for injuries sustained in a boat explosion. The
suit contains a number of causes of action against various defendants including
the boat manufacturer, the marina operator, and individuals working at the
marina. As to the Company, the Complaint alleges that a fume detector,
manufactured by ITT's subsidiary Rule Industries, Inc. prior to the date the
Company acquired Rule, malfunctioned. The Company's insurer has accepted the
defense of this matter. Management believes that this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.

OTHER

The Company has received a Notice of Claim from Rayonier, Inc., a former
subsidiary of the Company's predecessor ITT Corporation. This claim stems from
the 1994 Distribution Agreement for the spin-off of Rayonier by ITT Corporation
and seeks an allocation of proceeds from certain settlements in connection with
the Company's environmental insurance recovery litigation. Rayonier's claim is
for $58 (including interest) and 45% of all future recoveries. The parties are
currently in negotiations. The Company believes the claim is grossly overstated,
has little merit and will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

13) BUSINESS SEGMENT INFORMATION

Unaudited financial information of the Company's business segments for the
three months and the nine months ended September 30, 2002 and 2001 were as
follows:

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* Selling, general and administrative expenses and total costs and expenses
exclude goodwill amortization for comparative purposes.

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ITT INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS, EXCEPT PER SHARE, UNLESS OTHERWISE STATED)

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* Selling, general and administrative expenses and total costs and expenses
exclude goodwill amortization for comparative purposes.

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2001

Sales and revenues for the third quarter of 2002 were $1,235.1 million, an
increase of $111.5 million, or 9.9%, ($83.1 million, or 7.4%, in constant
currencies) from the same period for 2001. Costs of sales and revenues of $798.8
million for the third quarter of 2002 increased $62.5 million, or 8.5%, from the
comparable 2001 period. The increases in sales and revenues and costs of sales
and revenues are primarily attributable to higher volume in the Defense
Electronics & Services, Fluid Technology and Motion & Flow Control segments and
contributions from acquisitions made by the Fluid Technology segment.

Selling, general and administrative ("SG&A") expenses for the third quarter
of 2002 were $170.6 million, an increase of $2.0 million, or 1.2%, from the
third quarter of 2001 ($12.4 million, or 7.8%, excluding goodwill amortization).
Excluding goodwill amortization expense, the increase in SG&A expenses was
primarily due to increased marketing expense in the Fluid Technology and
Electronic Components segments and higher corporate expenses, reflecting process
improvement initiatives and increased administrative expenses. These items were
partially offset by reduced administrative expenses at the Motion & Flow Control
segment.

Research, development and engineering ("RD&E") expenses for the third
quarter of 2002 increased $29.7 million, or 29.4%, compared to the third quarter
of 2001. The increase is primarily attributable to increased spending in the
Defense Electronics & Services segment.

In the third quarter of 2002, based on management's quarterly review of the
remaining restructuring actions, it was determined that certain 2001 initiatives
would be completed for $1.7 million less than planned at the Fluid Technology
and Motion & Flow Control segments. Accordingly, the Company reversed $1.7
million of restructuring accruals into income. Refer to the section entitled
"Status of Restructuring and Asset Impairments" for additional information.

Operating income for the third quarter of 2002 was $136.7 million compared
to $117.7 million for the third quarter of 2001 ($128.1 million excluding
goodwill amortization). Excluding goodwill amortization expense, operating
income increased $8.6 million. The increase is primarily due to higher volume in
the Defense Electronics & Services, Fluid Technology and Motion & Flow Control
segments. These items were partially offset by reduced operating income in the
Electronic Components segment, reflecting increased marketing expenses, and
increased corporate expenses, as discussed above. Segment operating margin,
excluding the impact of goodwill amortization, for the third quarter of 2002 was
12.3%, which was flat with the same period in 2001.

Interest expense for the third quarter of 2002 of $5.6 million (net of
interest income of $1.2 million) decreased $8.2 million from the comparable
prior year period primarily due to lower average interest rates and a reduction
in debt resulting from higher cash from operating activities.

Income tax expense was $11.6 million in the third quarter of 2002, a
decrease of $24.8 million from the comparable 2001 period. The decrease is
primarily attributable to a $61.2 million tax refund received by the Company
during the third quarter of 2002, of which $30.6 million was reflected as a
reduction of tax expense. The Company recorded a reserve for the remaining half
of the refund to address any potential impacts from future tax audits.

Net income for the three months ended September 30, 2002 was $120.4
million, or $1.28 per diluted share. Net income for the third quarter of 2001
was $67.5 million and included $9.1 million of after-tax goodwill amortization
expense. Excluding goodwill amortization, net income increased $43.8 million, or
$0.43 per diluted share. The increase was primarily due to the recognition of a
tax refund, as discussed above, higher segment operating income and lower
interest expense.

16

Fluid Technology's sales and revenues and cost of sales and revenues
increased $37.7 million, or 8.4%, and $25.6 million, or 8.7%, respectively, in
the third quarter of 2002 compared to the third quarter of 2001. Higher organic
sales in the water/wastewater markets, acquisition revenue from the
water/wastewater and engineered valves businesses and the impact of foreign
exchange rates were the primary factors for the increases. Excluding goodwill
amortization expense, SG&A for the third quarter of 2002 increased $7.8 million,
or 9.6%, compared to 2001, mainly due to increased marketing expense in the
water/wastewater markets. During the third quarter of 2002, management reviewed
the remaining restructuring actions and reversed $1.0 million of the segment's
restructuring accruals that were deemed unnecessary (refer to the section
entitled "Status of Restructuring and Asset Impairments" for additional
information). Operating income for the third quarter of 2002, excluding goodwill
amortization, was up $4.4 million, or 7.3%, compared to the third quarter of
2001 due to the activity discussed above.

Defense Electronics & Services' sales and revenues and cost of sales and
revenues for the third quarter of 2002 increased $62.2 million, or 19.4%, and
$28.5 million, or 15.5%, from the comparable prior year period, respectively.
The increases reflect the impact and timing of new contracts. Excluding goodwill
amortization expense, SG&A expenses were flat between the third quarter of 2002
and the third quarter of 2001. RD&E expenses were $27.5 million, or 35.4%,
higher in the third quarter of 2002 compared to the third quarter of 2001,
representing increased spending in most businesses. Operating income for the
third quarter of 2002, excluding goodwill amortization expense, was $40.5
million, an increase of $6.5 million, or 19.1%, compared to the same quarter in
2001. The increase reflects the results discussed above.

Motion & Flow Control recorded sales and revenues and costs of sales and
revenues of $220.4 million and $165.5 million, respectively, during the third
quarter of 2002, reflecting increases of $12.4 million, or 6.0%, and $8.3
million, or 5.3%, from the third quarter of 2001. The increases were mainly due
to sales growth in the automotive fluid systems, beverage/marine and U.S.
spa/whirlpool businesses partially offset by volume declines at Aerospace
Controls. SG&A expenses, excluding goodwill amortization expense, declined $1.4
million reflecting a decline in administrative expenses. During the third
quarter of 2002, management reviewed the remaining restructuring actions and
reversed $0.7 million of the segment's restructuring accruals that were deemed
unnecessary (refer to the section entitled "Status of Restructuring and Asset
Impairments" for additional information). Operating income, excluding
amortization expense, was $4.8 million higher in the third quarter of 2002
compared to the third quarter of 2001 primarily due to the above mentioned
items.

Electronic Components' sales and revenues of $147.2 million and cost of
sales and revenues of $101.0 million in the third quarter of 2002, were both
flat with the same quarter in 2001. Excluding goodwill amortization expense,
SG&A expenses increased $2.2 million due to increased marketing, compensation
and administrative expenses. Operating income for the third quarter of 2002,
excluding goodwill amortization expense, was $16.4 million a decrease of $3.7
million, or 18.4%, from the third quarter of 2001. The decline was due to the
factors discussed above.

Corporate expenses increased in the third quarter of 2002 mainly due to
costs related to process improvement initiatives, including several tax
initiatives, and increased administrative expenses.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001

Sales and revenues for the first nine months of 2002 were $3,741.0 million,
an increase of $247.1 million, or 7.1%, ($219.5 million, or 6.3%, in constant
currencies) from the same period for 2001. Costs of sales and revenues increased
by $154.1 million, or 6.8%, to $2,435.4 million, for the first nine months of
2002 compared to the same period in 2001. The increases are primarily
attributable to increased volume in the Defense Electronics & Services, Fluid
Technology and Motion & Flow Control segments and contributions from
acquisitions in the Fluid Technology and Electronic Components segments. General
softness in the markets of Electronic Components partially offset these items.

SG&A expenses for the nine months ended September 30, 2002 were $523.1
million, a decrease of $17.3 million, or 3.2%, from the comparable prior year
period. Excluding goodwill amortization expense, SG&A expenses increased $13.4
million compared to the first nine months of 2001. The increase is mainly due to
increased marketing expense at Fluid Technology and higher corporate expenses,
reflecting process
17

improvement initiatives and increased administrative expenses. These items were
partially offset by an increase in other income at Defense Electronics &
Services and lower marketing and administrative costs at Motion & Flow Control.

RD&E expenses for the first nine months of 2002 were $386.8 million, which
was $76.1 million, or 24.5%, higher than the comparable period in 2001.
Increased expenditures in the Defense Electronics & Services segment comprise a
majority of the increase.

In the third quarter of 2002, management reviewed the Company's remaining
restructuring actions and determined that the 2001 actions would be completed
for $1.7 million less than planned at the Fluid Technology and Motion & Flow
Control segments. Accordingly, the Company reversed $1.7 million of
restructuring accruals into income. Refer to the section entitled "Status of
Restructuring and Asset Impairments" for additional information.

Operating income for the nine months ended September 30, 2002 was $397.4
million compared to $361.5 million in the same period of 2001 ($392.2 million
excluding goodwill amortization expense). Excluding goodwill amortization
expense, operating income increased $5.2 million, or 1.3%. The increase is
primarily due to increased volume at the Defense Electronics & Services, Fluid
Technology and Motion & Flow Control segments. These items were partially offset
by reduced operating income in the Electronic Components segment, reflecting
increased marketing expenses, and increased corporate expenses, as discussed
above. Segment operating margin for the first nine months of 2002 of 11.8% was
0.5 percentage points lower than the margin for the same period in 2001,
excluding goodwill amortization. The decline is mainly due to pricing pressures
and lower capacity utilization in the Electronic Components segment.

Net interest expense for the first nine months of 2002 of $27.5 million
(net of interest income of $3.6 million) decreased $22.8 million from the
comparable period in the prior year mainly due to lower average interest rates
and a reduction in debt resulting from higher cash from operating activities.

Income tax expense was $89.0 million for the nine months ended September
30, 2002, a decrease of $20.1 million from the first nine months of 2001. The
decrease is primarily attributable to a $61.2 million tax refund received by the
Company during the third quarter of 2002, of which $30.6 million was reflected
as a reduction of tax expense. The Company recorded a valuation allowance for
the remaining half of the refund to address any potential impacts from future
tax audits.

Net income for the first nine months of 2002 was $284.8 million, or $3.05
per diluted share. Net income for the first nine months of 2001 was $202.7
million and included $26.8 million of after-tax goodwill amortization expense.
Excluding goodwill amortization, net income increased $55.3 million, or $0.51
per diluted share. The increase was primarily due to higher segment operating
income, the recognition of a tax refund, as discussed above, and lower interest
expense.

Fluid Technology's sales and revenues and cost of sales and revenues in the
first nine months of 2002 increased $64.7 million, or 4.7%, and $46.6 million,
or 5.2%, respectively, from the comparable prior year period. The increases are
due to growth in the water/wastewater and engineered valve businesses and the
incremental contribution from acquisitions partially offset by softness in the
fluid handling business. SG&A expenses, excluding goodwill amortization
increased $9.0 million, or 3.4%, for the nine months ended September 30, 2002
compared to the same period during 2001. The increase reflects additional
marketing costs incurred by most of the segment's businesses. During the third
quarter of 2002, management reviewed the remaining restructuring initiatives and
reversed $1.0 million of the segment's restructuring accruals that were deemed
unnecessary (refer to the section entitled "Status of Restructuring and Asset
Impairments" for additional information). Operating income for the first nine
months of 2002 of $185.0 million was up $8.3 million, or 4.7%, compared to
operating income, excluding goodwill amortization, for the first nine months of
2001. The increase was due to the factors discussed above.

Defense Electronics & Services' sales and revenues and costs of sales and
revenues for the first nine months of 2002 increased $228.6 million, or 24.3%,
and $134.7 million, or 24.8%, respectively, compared to the same period of last
year. The increases were due to higher revenues in all markets. Excluding
goodwill amortization expense, SG&A expenses declined $2.3 million, or 3.2%,
during the first nine months of 2002
18

from the comparable prior year period due to an increase in other income. RD&E
expenses were $308.3 million for the nine months ended September 30, 2002, an
increase of $73.5 million, or 31.3%, over the comparable 2001 period. The
increased spending was spread across most of the segment's markets. Operating
income, excluding goodwill amortization expense, increased $22.7 million, or
25.2%, in the first nine months of 2002 compared to the same prior year period.
Refer to the discussion above for factors contributing to the increase.

Motion & Flow Control's sales and revenues and costs of sales and revenues
for the nine months ended September 30, 2002 increased $23.1 million, or 3.4%,
and $20.6 million, or 4.1%, respectively, compared to the same period of 2001.
The increases were primarily due to sales growth in the automotive fluid systems
and U.S. spa/whirlpool businesses partially offset by volume declines at
Aerospace Controls. SG&A expenses, excluding goodwill amortization, declined
$1.8 million, or 2.7% from the comparable 2001 period primarily due to lower
marketing and administrative expenses. During the third quarter of 2002,
management reviewed the remaining restructuring actions and reversed $0.7
million of the segment's restructuring accruals that were deemed unnecessary
(refer to the section entitled "Status of Restructuring and Asset Impairments"
for additional information). Operating income, excluding goodwill amortization,
increased $2.6 million, or 2.9%, to $93.0 million between the first nine months
of 2001 and the first nine months of 2002. Refer to the discussion above for
factors contributing to the fluctuation.

Electronic Components' sales and revenues and cost of sales and revenues
decreased $70.2 million, or 13.9%, and $48.1 million, or 14.3%, respectively, in
the first nine months of 2002 compared with the same period of 2001. The
declines are due to general softness in all markets of Electronic Components.
Excluding goodwill amortization, SG&A expenses for the nine months ended
September 30, 2002 were flat compared to the same period during 2001. Excluding
goodwill amortization, operating income for the first nine months of 2002 was
down $21.1 million, or 28.9%, from the comparable prior year period due to the
items discussed above.

Corporate expenses increased in the first nine months of 2002 primarily due
to costs related to process improvement initiatives, including several tax
initiatives, and increased administrative expenses.

STATUS OF RESTRUCTURING AND ASSET IMPAIRMENTS

2001 RESTRUCTURING ACTIVITIES

On December 14, 2001, the Company announced a restructuring program to
reduce structural costs and improve profitability whereby the Company recorded a
charge of $83.3 million related to the closure of five facilities, the
discontinuance of 21 products (10 in the Switch product group and 11 in the
Connectors group), the severance of 3,400 persons and other asset impairments.
The cash portion of the charge of $61.0 million primarily relates to severance
and lease termination costs. The non-cash portion of the charge of $22.3 million
primarily relates to machinery and equipment that became impaired as a result of
the announced plans.

Listed below, by business segment, is background information on the 2001
restructuring plan (in millions).

In 2001, sales in the Electronic Components segment decreased $127.6
million, or 16.5%, and operating income, excluding restructuring, decreased
$13.1 million, or 13.2%. Excluding the contribution of acquisitions

19

made in 2001, sales decreased approximately $192 million. The decrease was
primarily due to a downturn in the communication and industrial markets. In
addition, management expected further sales declines in 2002, specifically in
the communications, industrial, and commercial aircraft markets.

The combination of the downturn in these markets and the businesses
acquired in 2000 and late 1999 resulted in excess capacity and prompted
management to seek opportunities to reduce costs. As a result of this review,
management decided to consolidate manufacturing functions as well as other
administrative tasks throughout the segment. These actions included the
outsourcing of production operations from Weinstadt, Germany to third party
suppliers in Poland and Hungary, the transfer of 10 product lines from 5
locations in North America and Europe (Loveland, Colorado; Santa Ana,
California; Weinstadt, Germany; Basingstoke, UK; and Dole, France) to 2
locations in China (Shenzhen and Tianjin), the consolidation of European
administrative functions, the transfer of production operations from Santa Ana,
California to Nogales, Mexico, the closure of manufacturing facilities in Eden
Prairie, Minnesota and Watertowne, Massachusetts and other smaller actions
consisting primarily of the elimination of administrative functions. In
addition, management also decided to discontinue 21 older connector and switch
products. Revenue in 2001 from these products totaled $29.3 million.

The above actions resulted in the planned termination of 2,753 persons,
comprised of 2,395 factory workers, 348 office workers and 10 management
employees, and resulted in a cash charge of $37.0 million (which included $33
million for severance) and an asset impairment charge of $18.2 million
(primarily for machinery and equipment that will be disposed of as a result of
the restructuring activities).

Actions within the Fluid Technology segment, the Motion & Flow Control
segment and Corporate Headquarters were identified as cost improvement
opportunities. Processes and functions were identified that could be outsourced,
performed at other existing facilities, or eliminated as redundant. These
measures were prompted by management's projections of slower growth in the
water/wastewater businesses, no expected recovery in the Industrial Pumps
businesses, declines in worldwide automotive build rates and weakness in the
leisure marine markets.

The actions within the Fluid Technology segment included the outsourcing of
manufacturing functions in City of Industry, California, Seneca Falls, New York
and Ashland, Pennsylvania to third party suppliers in the United States, Mexico
and China, the consolidation of tasks throughout the segment and the closure of
a foundry in Nanjing, China. These actions resulted in the planned termination
of 436 persons, comprised of 236 factory workers, 189 office workers and 11
management employees, and resulted in a cash charge of $13.1 million (which
included $10.5 million for severance) and asset impairment charges of $2.9
million (primarily for machinery and equipment that was scrapped).

The actions in the Motion & Flow Control segment included the closure of a
manufacturing facility in Costa Mesa, California, where the operations were
consolidated into three existing facilities, the closure of a manufacturing
facility in Saffron Walden, England, where the operations were consolidated into
a facility in Denmark, the closure of a sales office in Germany and the
consolidation of other administrative tasks. These actions resulted in the
planned termination of 183 persons comprised of 144 factory workers, 28 office
workers and 11 management employees and resulted in a cash charge of $7.3
million (which included $4.9 million for severance) and asset impairment charges
of $0.8 million (primarily for machinery and equipment that was discarded).

The actions at the Company's corporate headquarters and other shared
service facilities consisted of the consolidation of administrative tasks which
resulted in the planned termination of 28 persons comprised of 26 office workers
and 2 management employees and resulted in a cash charge of $3.6 million (which
included $3.5 million for severance) and an asset impairment charge of $0.4
million.

The Company funded the 2001 restructuring activities with cash from
operations. Additionally, the Company plans to fund future cash requirements for
restructuring activities with cash from operations, supplemented, as required,
by commercial paper borrowings.

20

The following table displays a rollforward of the restructuring accruals
for the 2001 restructuring program (in millions):

As of December 31, 2001, remaining actions under restructuring activities
announced during 2001 were to close five facilities, discontinue 21 products and
reduce headcount by 2,200. During the first nine months of 2002, the Company
discontinued 21 products and reduced headcount by 966 persons. The actions
announced during 2001 will be substantially completed in 2002. However,
severance run-off payments will occur in 2003 while closed facility expenditures
will continue to be incurred in 2002 through 2006.

During the third quarter of 2002, $1.7 million of restructuring accruals
were reversed into income as a result of a quarterly review of the Company's
remaining restructuring actions. The reversal primarily reflects less than
anticipated severance costs on completed actions related to the 2001
restructuring program at the Fluid Technology and Motion & Flow Control
segments.

As of September 30, 2002, there were no material revisions to the 2001
restructuring plan.

OTHER ASSET IMPAIRMENTS

Also in the fourth quarter of 2001, the Company initiated a full review of
long-lived assets in the Electronic Components segment because of significant
volume declines and pricing pressures in the business and because management
expected further volume declines in 2002, specifically in the communications
market and the industrial and commercial aircraft markets. As a result of this
review, the Company recorded impairments on machinery and equipment of $13.9
million and an impairment of $0.5 million on a cost based investment. The
applicable assets were written down to their fair values based on management's
comparison of projected future discounted cash flows generated by each asset to
the applicable asset's carrying value. These impairments were unrelated to the
Company's restructuring activities.

SUMMARY OF 2001 RESTRUCTURING ACTIVITIES AND OTHER ASSET IMPAIRMENTS

The total impact of the restructuring initiative and the asset impairment
review was a charge of $97.7 million, or $63.5 million after tax. The projected
aggregate future cash and non-cash savings of the above mentioned actions are
$360 million and $36 million, respectively, for the period 2002 to 2006. These
figures include total savings of $65.4 million in 2002 and $82.2 million in
2003. The savings will be reflected primarily in "Cost of Sales and Revenues"
and "Selling, General and Administrative Expenses".

In connection with the restructuring activities and the asset impairment
charge, the Company has identified assets with a total book value of $26.2
million, primarily machinery and equipment, for disposal. The Electronic
Components segment will dispose of $22.0 million, the Fluid Technology segment
will dispose of $3.4 million and the Motion & Flow Control segment will dispose
of $0.8 million. The assets will be disposed of during 2002 and 2003.

21

1999 RESTRUCTURING ACTIVITIES

In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to restructuring activities, primarily for the closure of four
facilities and severance of 324 persons. Listed below, by business segment, is
background information on the 1999 restructuring plan (in millions).

In the fourth quarter of 1999 management in the Fluid Technology segment
concluded that continued weakness in the industrial markets represented more
than a temporary decline. As a result, to reduce excess capacity, factories in
Guelph, Canada and Maracay, Venezuela were closed, along with related sales
offices, with the functions moved to existing facilities. In addition, a
warehouse in Nottingham, England was closed and consolidated into other European
warehouses. Other positions were also determined redundant and were eliminated.
These actions resulted in the termination of 175 persons comprised of 80 factory
workers, and 95 office workers and resulted in a cash charge of $6.9 million
(which included $5.1 million for severance) and an asset impairment charge of
$3.2 million (primarily to reduce the building and related equipment to their
fair market value).

In the Electronic Components segment, a facility was closed in Meaux,
France with the operations consolidated into existing facilities or outsourced.
The closure decision was based primarily on two factors. First, sales levels for
two of the major products manufactured at the facility had dropped 24% and 15%
per year, respectively. Secondly, management determined that it would be more
cost effective to transfer the production of another product line to a third
party.

The closure of the Meaux facility resulted in the termination of 103
persons, comprised of 76 factory workers, 26 office workers and 1 management
employee, and resulted in a cash charge of $5.7 million (which included $5.4
million for severance) and an asset impairment charge of $1.1 million (primarily
for machinery and equipment that will be disposed of as a result of the
restructuring activities).

The restructuring actions at Defense Electronics & Services segment amount
to $0.3 million and related to severance of 5 individuals whose positions were
deemed redundant and were eliminated.

The actions within the Motion & Flow Control segment primarily related to
headcount reductions at the Hockenheim, Germany factory and other headcount
reductions. The decisions were part of an ongoing effort to reduce costs through
consolidation of functions. The actions resulted in the termination of 43
persons comprised of 42 factory workers, and 1 office worker and resulted in a
cash charge of $1.9 million (which included $1.3 million for severance) and an
asset impairment charge of $1.1 million.

22

The following table displays a rollforward of the restructuring accruals
for the 1999 restructuring program (in millions):

As of December 31, 2001, the 1999 restructuring plan was substantially
complete. The remaining $0.8 million accrual primarily related to contractual
commitments for severance run-off in Europe and remaining lease payments which
will be paid through 2005. During the first nine months of 2002, the Company
made lease payments totaling $0.1 million. The Company has determined that the
effects on future operations are minimal.

There were no material modifications to the 1999 restructuring plan.

OTHER ASSET IMPAIRMENTS

In addition, during the fourth quarter of 1999 the Company recorded $20.0
million of goodwill impairments at the Fluid Technology and Defense Electronics
& Services segments. The goodwill impairments at the Fluid Technology segment
related to an unprofitable Far East operation. The goodwill impairments at the
Defense Electronics & Services segment related to a product line ultimately sold
in January 2000. Both impairments were calculated based on management's future
cash flow projections of the businesses.

SUMMARY OF 1999 RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES

In the fourth quarter of 1999, the Company recorded $20.2 million of
charges related to restructuring activities, primarily for the closure of four
facilities and severance of 326 persons. The Company also recorded $20.0 million
of goodwill write-offs at the Fluid Technology and Defense Electronics &
Services segments.

In the fourth quarter of 1999, the Company determined that $44.8 million of
accruals relating to 1998 restructuring plans was not going to be utilized and
should be reversed into income during the quarter. The major components of the
reversal amounts consisted of savings related to severance payments ($14.9
million), asset disposal costs ($15.4 million), and professional fees ($10.3
million) and other ($4.2 million). As of September 30, 2002 the 1999 and 1998
restructuring plans were substantially complete.

23

DISCONTINUED OPERATIONS

In September of 1998, the Company closed the sales of its automotive
Electrical Systems business to Valeo SA for approximately $1,700 million and its
Brake and Chassis unit to Continental AG of Germany for approximately $1,930
million. These businesses were treated as discontinued operations. In connection
with the sale of these businesses, the company established accruals for taxes of
$972.7 million, representation and warranty and contract purchase price
adjustments of $148.8 million, direct costs and other accruals of $102 million
and environmental obligations of $16.1 million. In addition, the Company
recorded a receivable due from Valeo SA of approximately $70 million that
related to a purchase price adjustment in the contract that called for the
Company to pay or receive additional cash consideration depending upon the
actual net assets sold as compared to a target of net assets specified in the
contract.

In 1998, the Company received notifications of claims from the buyers of
the automotive businesses requesting post-closing adjustments to the purchase
prices under the provisions of the sales agreements. The Company assessed the
claims and determined that the probable outcome was reflected in the Company's
original estimate recorded at the time of sale. During 1999, those claims were
submitted to arbitration.

The following tables display a rollforward of the automotive discontinued
operations accruals from January 1, 1999 to September 30, 2002 (in thousands):

In 1999, the Company disbursed $264.1 million primarily on federal and
foreign tax obligations and direct costs of the transaction. The Company also
paid $3.0 million to settle two automotive product recall issues.

In 2000, the Company made payments of $7.5 million for direct costs
incurred in conjunction with the sale of the automotive businesses and for
defense costs related to the claims filed by the buyers.

During the fourth quarter of 2000, with assistance from outside counsel,
the Company determined that it was no longer probable that it would collect
approximately $70 million from Valeo SA. The Company also determined that it was
probable that it would not have to make payments to settle the outstanding Valeo
SA claim. As a result, the Company reversed approximately $70 million of
automotive discontinued operations accruals coincident with the reversal of the
Valeo SA receivable. The net of these actions had no impact to the Consolidated
Income Statement and resulted in the reduction of Other Liabilities and
Short-Term Receivables.

24

In 2001, the Company disbursed approximately $15.8 million primarily for
defense costs related to the claims filed by the buyers and for settlements. In
the second quarter of 2001, the Continental AG claim was resolved.

The Company reassessed its obligations related to the disposal of the
automotive businesses and determined that it would spend $63.3 million less on
the disposition, primarily due to favorable foreign tax rulings. Based on this
assessment, $63.3 million was reversed into the 2001 Consolidated Income
Statements under Income from Discontinued Operations.

In 2002, the Company disbursed approximately $0.8 million primarily for
defense costs related to the claims filed by the buyers. The $12 million listed
in other activity is related to a workers' compensation issue with Valeo S.A.
that remains unresolved. In the first quarter of 2002, Valeo SA's claim related
to the sale of the Electrical Systems business was settled.

At September 30, 2002, the Company has automotive discontinued operations
accruals of $190.3 million that primarily relate to the following: taxes $154
million -- which are related to the original transaction and are recorded in
Accrued Taxes; product recalls $8 million -- related to nine product recall
issues which are recorded in Accrued Expenses; environmental obligations $14.5
million -- for the remediation and investigation of groundwater and soil
contamination at thirteen sites which are recorded in Other Liabilities;
employee benefits $11.5 million -- for workers compensation issues which are
recorded in Accrued Expenses; and other $2.3 million -- for professional fees of
which $0.8 million are recorded in Other Liabilities and $1.5 million are
recorded in Accrued Expenses. The Company expects that it will settle $154
million of tax obligations in 2004 or 2005. The Company projects between $3.0
and $4.0 million of annual spending related to its remaining automotive
obligations.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows: Cash from operating activities during the nine months ended
September 30, 2002 was $429.7 million, an increase of $147.7 million from the
same period of 2001. The increase is primarily attributable to lower tax and
interest payments and greater payment of accrued expenses in 2001. These items
were partially offset by the liquidation of non-operating assets in 2001,
increased working capital levels, and higher restructuring payments.

Status of Restructuring Activities: Restructuring payments during the
first nine months of 2002 totaled $25.6 million and were comprised primarily of
expenditures related to the 2001 restructuring plan. The Company forecasts
restructuring payments of $18.8 million for the fourth quarter of 2002 and
fiscal 2003, with closed facility costs occurring through 2006. All payments are
projected to be paid with future cash from operations supplemented, as required,
by commercial paper borrowings.

25

Additions to Plant, Property and Equipment: Capital expenditures during
the first nine months of 2002 were $83.7 million, a decrease of $17.8 million
from the first nine months of 2001. The decrease reflects reduced spending at
the Fluid Technology, Motion & Flow Control, and Electronic Components segments.

Divestitures: During the first nine months of 2002, the Company sold its
interest in a defense-related joint venture for approximately $6 million and
other plant, property, and equipment for $2.6 million. During the first nine
months of 2001, the Company sold two corporate aircraft for $30.7 million and
other plant, property, and equipment for $5.3 million. The aircraft are being
leased by the Company in the form of operating leases.

Financing Activities: External debt at September 30, 2002 was $806.0
million, compared with $973.4 million at December 31, 2001. Cash and cash
equivalents were $186 million at September 30, 2002, compared to $121.3 million
at year-end 2001. The maximum amount of borrowing available under the Company's
revolving credit agreement, which provides back-up for the Company's commercial
paper program, at September 30, 2002, was $1.0 billion. Borrowing through
commercial paper and under the revolving credit agreement may not exceed $1.0
billion in the aggregate outstanding at any time. The Company received proceeds
of $88.4 million from exercised stock options in the first nine months of 2002.
Expenditures of $29.2 million were made to repurchase shares to partially offset
the dilutive effect of the issued shares.

Status of Discontinued Operations: During the first 9 months of 2002, the
Company spent $0.8 million on matters attributable to discontinued operations.
Tax obligations of $154 million are expected to be resolved in 2004 or 2005. In
addition, the Company projects between $3.0 million and $4.0 million of annual
spending related to its remaining automotive obligations. All payments are
forecast to be paid with future cash from operations supplemented, as required,
by commercial paper borrowings.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported value of assets and liabilities and the
disclosure of contingent assets and liabilities.

The Company has identified three accounting policies where significant
estimates are used that require assumptions or factors that are of an uncertain
nature, or where a different estimate could have been reasonably utilized or
changes in the estimate are reasonably likely to occur from period to period.

Environmental: Accruals for environmental matters are recorded on a site
by site basis when it is probable that a liability has been incurred and the
amount can be reasonably estimated. The Company calculates the liability by
utilizing a cost estimating and weighting matrix that separates costs into
recurring and non-recurring categories. The Company then uses internal and
external experts to assign confidence levels based on the site's development
stage, type of contaminate found, applicable laws, existing technologies, and
the identification of other potentially responsible parties. This methodology
produces a range of estimates, including a best estimate. These estimates are
reviewed periodically and updated for progress of remediation efforts and
changes in facts and legal circumstances. At September 30, 2002, the Company has
a $111 million accrual, which approximates the best estimate, related to the
remediation of ground water and soil. The low range estimate for environmental
liabilities is $87 million and the high range estimate is $158 million. On an
annual basis the Company spends $12 million to $14 million on its environmental
remediation liabilities. Liabilities for environmental expenditures are recorded
on an undiscounted basis.

The Company is currently involved in the environmental investigation and
remediation of approximately 120 sites, including certain instances where it is
considered to be a potentially responsible party by the United States
Environmental Protection Agency ("EPA") or similar state agency.

At present, the Company is involved in litigation against its insurers for
reimbursement of environmental response costs. Recoveries from insurance
companies or other third parties are recognized in the financial statements when
realized.

26

In the event that future remediation expenditures are in excess of the
amounts accrued, management does not anticipate that they will have a material
adverse effect on the consolidated financial position, results of operations or
liquidity of the Company.

See Note 12, Commitments and Contingencies, in the notes to the
Consolidated Financial Statements for additional details on environmental
matters.

Employee Benefit Plans: The Company sponsors numerous employee pension and
welfare benefit plans. These plans utilize various assumptions in the
determination of projected benefit obligations and expense recognition related
to pension and other postretirement obligations. These assumptions include:
discount rates, expected rates of return on plan assets, rate of future
compensation increases, mortality, termination and health care inflation trend
rates, some of which are disclosed in Note 17 to the consolidated financial
statements in the ITT Industries, Inc. Form 10-K Annual Report for the fiscal
year ended December 31, 2001.

Management develops each assumption by using relevant company experience in
conjunction with market related data for each individual country in which such
plans exist. All assumptions are reviewed periodically with third party
actuarial consultants and adjusted as necessary.

The 2002 pension plan review is nearly complete and has provided insight
related to funded status, minimum pension liability, cash contributions and net
periodic benefit cost.

FUNDED STATUS

The annualized, ten year rolling average return on plan assets for the U.S.
Salaried Pension Plan, which represents about 82% of the Company's pension
obligations, equals approximately ten percent. This includes an estimated loss
of approximately 11% for 2002. This assumption was utilized in the calculation
of the projected funded status at December 31, 2002.

Based on the recent decline in long-term interest rates, which are used in
the formulation of the discount rate, and the downward revision in the equity
risk premium expected for U.S. equities, which is used in the calculation of the
future expected return on plan assets, the Company will revise both assumptions
at December 31, 2002. The table shown below sets the likely range for both
factors used by the Company's domestic pension plans.

The Company's 2001 weighted-average discount rate was 7.14%. The Company's
2001 weighted-average expected return on plan assets equaled 9.61%. These rates
reflect all of the Company's pension plans, including foreign affiliate plans.

Given the negative projected return on plan assets in 2002 and the downward
revision to the discount rate, the Company estimates that total projected
benefit obligations will be under-funded at December 31, 2002 by approximately
$1,100 million to $1,200 million.

MINIMUM PENSION LIABILITY

Pension accounting requires that a minimum pension liability be recorded if
a plan's market value of assets falls below the plan's accumulated benefit
obligation. Based on the projected reduction in the discount rate at December
31, 2002 and the current year's weak market performance, it is expected that a
minimum pension liability will be recorded for many of the Company's pension
plans, including the U.S. Salaried Pension Plan, in the fourth quarter of 2002.
The after-tax reduction to the Company's total equity is projected to be between
$650 million and $750 million due to the recognition of the additional minimum
pension liability. The anticipated recognition of the additional minimum pension
liability will not impact the Company's compliance with its debt covenants.

27

PENSION FUNDING

The Company does not have a substantial mandatory funding requirement in
2002 or 2003. Given recent market conditions, the Company may be required, under
ERISA rules, to contribute $500 million to $600 million in the 2004 to 2006
timeframe, depending on pension asset returns, interest rates and applicable
legislation. In anticipation of the possible funding requirements, the Company
will contribute approximately $200 million to the plan by 2003.

The Company's Defense Electronics & Services segment represents
approximately 50% of the active U.S. Salaried Plan participants. As a result,
the Company will seek reimbursement from the Department of Defense for a portion
of its pension costs.

PENSION (INCOME) EXPENSE

The Company's pension expense is projected to increase in 2003 due to the
various factors described above. The Company projects 2002 pension income to be
between $11 million and $14 million. Pension expense for 2003 is expected to be
between $1 million and $5 million.

Revenue Recognition: The Company recognizes revenue as services are
rendered and when title transfers for products, subject to any special terms and
conditions of specific contracts. For the majority of the Company's sales, title
transfers when products are shipped. Under certain circumstances, title passes
when products are delivered. In the Defense Electronics & Services segment,
certain contracts require the delivery, installation, testing, certification and
customer acceptance before revenue can be recorded. Further, some sales are
recognized when the customer picks up the product.

The Defense Electronics & Services segment typically recognizes revenue and
anticipated profits under long-term, fixed-price contracts based on units of
delivery or the completion of scheduled performance milestones. Estimated
contract costs and resulting margins are recorded in proportion to recorded
sales. During the performance of such contracts, estimated final contract prices
and costs (design, manufacturing, and engineering and development costs) are
periodically reviewed and revisions are made when necessary. The effect of these
revisions to estimates is included in earnings in the period in which revisions
are made. There were no material revisions to estimates in the covered periods.

Accruals for estimated expenses related to warranties are made at the time
products are sold or services are rendered. These accruals are established using
historical information on the nature, frequency, and average cost of warranty
claims and estimates of future costs. Management believes the warranty accruals
are adequate. However, actual warranty expenses could differ from estimated
amounts. The accrual at December 31, 2001 was $37.6 million. The accrual at
September 30, 2002 was $35.4 million.

STATUS OF FLUID HANDLING SYSTEMS STRATEGIC REVIEW

During the second quarter, the Company completed the strategic review of
its automotive Fluid Handling Systems (FHS) business, a review that had been
previously announced and initiated in October 2001. FHS is a profitable market
leader that supplies specialty tubing and connections for use in automobiles and
light trucks. Based on a comprehensive review of alternatives, and with the
support of a team of internal and outside advisors, the Company has determined
that continuing to own and operate FHS is the best option for continued
shareholder value creation.

ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"), which addresses the financial
accounting and reporting standards for the acquisition of intangible assets
outside of a business combination and for goodwill and other intangible assets
subsequent to their acquisition. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment only approach. In connection with
the adoption of SFAS 142, the Company completed a transitional goodwill
impairment test that compared the fair value of each reporting unit to its
carrying value and determined that no impairment exists.
28

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and is effective for the Company on January
1, 2003. The Company is currently reviewing the provisions of SFAS No. 143 to
determine the standard's impact upon adoption.

The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), effective January 1, 2002. SFAS
No. 144 outlines accounting and financial reporting guidelines for the sale or
disposal of long-lived assets and discontinued operations. The adoption of the
pronouncement did not have a material impact on the Company's results of
operations or financial position.

FORWARD-LOOKING STATEMENTS

Certain material presented herein consists of forward-looking statements
which involve known and unknown risks, uncertainties and other important factors
that could cause actual results to differ materially from those expressed in or
implied from such forward-looking statements. Such factors include general
economic and worldwide political conditions, foreign currency exchange rates,
competition and other factors all as more thoroughly set forth in Item 1.
Business and Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Forward-Looking Statements in the ITT Industries,
Inc. Form 10-K Annual Report for the fiscal year ended December 31, 2001 and
other of its filings with the Securities and Exchange Commission, to which
reference is hereby made.

29

ITEM 4. CONTROLS AND PROCEDURES

(a) The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date
within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, the Company's disclosure controls and procedures are
effective in identifying, on a timely basis, material information required to be
disclosed in our reports filed or submitted under the Exchange Act.

(b) There have been no significant changes in our internal controls or in
other factors that could significantly affect such controls since the Evaluation
Date.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following should be read in conjunction with Note 12 to the unaudited
interim condensed consolidated financial statements in Part I of this Report, as
well as Part I Item 3 of our Annual Report on Form 10-K for the year ended
December 31, 2001 and Part II Item 1 of our Quarterly Reports on Form 10-Q for
the quarters ended March 31, 2002 and June 30, 2002.

The Company and its subsidiaries are from time to time involved in legal
proceedings that are incidental to the operation of their businesses. Some of
these proceedings allege damages against the Company relating to environmental
liabilities (including toxic tort, property damage, and remediation),
intellectual property matters (including patent, trademark and copyright
infringement, and licensing disputes), personal injury claims (including
injuries due to product failure, design or warnings issues, asbestos exposure,
or other product liability related matters), employment and pension matters,
government contract issues and commercial or contractual disputes, sometimes
related to acquisitions or divestitures. The Company will continue to vigorously
defend itself against all claims. Accruals have been established where the
outcome of the matter is probable and can be reasonably estimated. Although the
ultimate outcome of any legal matter cannot be predicted with certainty, based
on present information including the Company's assessment of the merits of the
particular claim, as well as its current reserves and insurance coverage, the
Company does not expect that such legal proceedings will have any material
adverse impact on the cash flow, results of operations, or financial condition
of the Company on a consolidated basis in the foreseeable future.

ITEM 5. OTHER INFORMATION

In 2002, the Securities and Exchange Commission (the "SEC") announced that
it would review the annual reports on Form 10-K submitted by all Fortune 500
companies during the year. As a result, the Company's annual report on Form 10-K
for the year ended December 31, 2001 was reviewed by the SEC and we received a
comment letter from the SEC following its review. The comments in the SEC letter
focused on supplemental disclosure for items related to the divestiture of the
majority of our automotive components business in 1998, an expanded discussion
of restructuring activities, references to non-GAAP measures and further
segmentation of revenues and working capital. The Company submitted a detailed
response to the SEC for its review. The SEC's response (received November 12,
2002) appears to resolve many of the comments and requests additional
disclosures and certain supplementary information.

30

The Company has included additional disclosures in this filing intended to
address the matters raised by the SEC. However, there can be no assurance that
the SEC will not have further comments or request that we disclose additional
information or make additional filings. The Company will seek to expeditiously
resolve the remaining issues in the SEC's response or any additional matters the
SEC may wish to address.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) See the Exhibit Index for a list of exhibits filed herewith.

(b) ITT Industries did not file any Form 8-K Current Reports during the
quarter for which this Report is filed.

31

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

ITT Industries, Inc.

(Registrant)

By /s/ EDWARD W. WILLIAMS
------------------------------------
Edward W. Williams
Senior Vice President and Corporate
Controller
(Principal accounting officer)

November 14, 2002

32

CERTIFICATIONS

I, Louis J. Giuliano certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Industries,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ LOUIS J. GIULIANO
--------------------------------------
Louis J. Giuliano
Chairman, President and Chief
Executive Officer

Date: November 14, 2002

33

I, David J. Anderson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Industries,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

/s/ DAVID J. ANDERSON
--------------------------------------
David J. Anderson
Senior Vice President and Chief
Financial Officer

Date: November 14, 2002

34

EXHIBIT INDEX