In industrial conglomerate ITT Corp's (NYSE:ITT) opinion, the market is not realizing the value of its disparate operations. As a result, it has decided to split into three different firms in a transformation that it hopes to complete by the end of 2011. Its second quarter financial results continued to demonstrate they are growing strongly as a group, and their potential a standalone firms could be even stronger. Plus, there will be takeover potential once the new firms start to trade on their own.
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Second Quarter Recap
Revenue advanced 10.4% to $3 billion. The defense segment accounted for just less than half of total sales and reported flat sales. Fluid technologies saw its top line jump 26.4% and it grew to nearly 37% of total sales. Growth was attributed to higher activity for oil and gas clients. Motion and flow control made up the rest of sales and also grew briskly with an increase of 14.4%. The unit gained share in the automotive market as well as aerospace and the general industrial market.

Total divisional company operating income fell 1.6% to $360 million as a 26.8% decline in defense profits offset 23.8% growth in fluid technologies and a 35.7% profit jump at motion and flow controls. Backing out corporate overhead, reported operating income fell 19.8% to $260 million. However, management took $62 million in charges to prepare for the coming breakup of the firm.

Reported net income declined nearly 26% to $168 million, or 90 cents per diluted share. But on a recurring basis, management detailed that earnings grew 3.5% to $1.18 per share to beat analyst projections by two pennies. (For related reading on the manufacturing industry, see Vital Link: Manufacturing And Economic Recovery.)

ITT raised its full year sales guidance and now expects $11.5 billion in revenue. It attributed the increase to new defense contract wins. It kept its profit guidance steady and projects between $4.70 and $4.82 in earnings per share. This excludes one-time charges related to splitting into three firms.

Bottom Line
ITT expects to break into three by the end of the year. The current plan is to spin off the defense firm and call it ITT Exelis. The water business will also be spun off and called Xylem. The motions and control unit will remain as the parent firm. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)

ITT has managed to leverage 8.2% average annual sales growth into 17.6% annual earnings gains over the past five years. With the coming corporate split, each independent unit should have an even stronger chance to boost sales and profit growth. As each business will now be a pure play, there is also the potential for a buyout from a rival at a hefty premium to market value. Potential suitors include Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN) in defense, American Water Works (NYSE:AWK) in the water business and Illinois Tool Works (NYSE:ITW) in the fluid and controls unit.

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Tickers in this Article: ITT, LMT, RTN, ITW, AWK

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