In The News
Diverse ITT Holds Onto Defense Military, Civil Products Help Firm Weather Cyclical Markets
By Gopal Ratnam
Defense News
During the last two decades, many diversified U.S. corporations sold their defense activities to specialized armament makers. But ITT Industries, White Plains , N.Y., intends to buck the trend, said Henry Driesse, president of ITT Industries Defense.
A diversified $5.6 billion company, ITT views its military business as key to its growth.
The nature of the defense business, whose fortunes depend on changes in the U.S. defense budget, is offset by the cyclical nature of ITT's other businesses, Driesse said. Defense is a "long-cycle business, unlike electronics," he said.
With sales of $1.79 billion, ITT Industries Defense generated 32 percent of the company's 2003 revenues. ITT's other divisions are Motion & Flow Control, Electronic Components, and Fluid Technology, the largest, which in 2003 sold $2.25 billion of pumps, valves and heat exchangers for business and residential use.
The ITT Industries of today, diversified as it may seem, is only a fraction of the size of its original parent firm, which was carved up into three firms in 1995 by Rand Araskog, then ITT's chief executive. The other two companies are ITT Hartford Insurance and ITT Corp., involved in entertainment, hotels and information services.
The diversified portfolio of ITT Industries is based on a sound strategy, said John Baliotti, an analyst at Fulcrum Global Partners, a New York equity research firm.
While traditional investor wisdom holds that defense stocks are attractive buys only when the rest of the economy is weak, ITT's defense business is a perennial favorite, Baliotti said. He rates ITT's stock as a buy; his firm does not engage in investment banking activities.
ITT has delivered consistent double-digit growth in defense sales, much more than the average increase in U.S. defense spending, because its products are in high demand, and the Pentagon's investments in areas of interest to the company have exceeded the average defense budget increases, Baliotti said.
ITT Industries Defense comprises activities in avionics, communications, electronics, night vision gear, systems engineering and support services.
"We have proved successful" in working to raise profit margins and returns, Driesse said. The defense division's return on invested capital - a broad measure of how a company uses its own capital and loans to generate income - has risen from 25 percent to 30 percent in recent years.
Profit margins from the defense business are about 7 percent, Driesse said. He added that he did not rule out more investment by ITT in the defense division, in the form of acquisitions that could increase its share of the company's overall revenues to 40 percent.
In February, the company announced it would acquire Eastman Kodak's Remote Sensing Systems business, which provides large-scale optical and electro-optical satellite imaging services. ITT paid about $725 million for the acquisition, which is expected to substantially broaden the type of satellite sensor payloads that ITT can offer the Pentagon.
But Driesse ruled out large acquisitions that would alter ITT's defense portfolio. "I doubt if ITT will buy a real large defense business that will outswamp the rest of the company," he said.
Baliotti agreed. ITT concentrates on attractive market niches, he said, and the company is unlikely to enter a new defense sector through acquisitions. Instead, Baliotti predicted that ITT's future acquisitions are likely to be add-ons to its current portfolio.
Unlike some defense companies that depend on one or two platforms, ITT's products and services are designed for several different weapon systems.
"We are not vulnerable to the ups and downs of various [defense] programs," Driesse said. "Our single largest program is not more than 4 to 5 percent" of defense sales.
ITT focuses on a few specialties within each category of equipment rather than spreading itself thin, he said. For example, the company supplies radio frequency gear for military planes and helicopters, but it focuses on developing such equipment for the roles of protection, sensing and situational awareness, rather than for jamming enemy communications.
For example, the company's AN/ALQ-21 Integrated Radio Frequency Countermeasure suite provides advanced radar warning, situational awareness and countermeasure capabilities, according to ITT's Web site. The suite is on board helicopters such as the U.S. Army's AH-64D Apache Longbow and the MH-60K, flown by the U.S. Special Operations Command.
In the field of night vision devices, instead of providing all the elements of the goggles, ITT Industries Defense focuses on the image intensification subsystem, which clarifies and highlights the image received by the goggles, Driesse said. The next generation of ITT's night-vision goggles will provide panoramic, peripheral vision to aircraft pilots, he added.
By developing a new generation of night vision and Global Positioning System (GPS) satellite navigation gear, ITT is creating new markets for both defense and civilian applications, Baliotti said. While advanced night-vision equipment and GPS receivers would be useful to the U.S. military, the older versions, with some modifications, can be sold to allies, commercial customers and for recreational uses, he said.
