Company Transformation

6 Months Ended

Jun. 30, 2011

NOTE 2
COMPANY TRANSFORMATION

On January 12, 2011, the Company announced that its Board of Directors had unanimously approved a plan to separate the Company’s businesses into three independent, publicly traded companies (the Transformation). Under the Transformation, ITT expects to execute tax-free spinoffs to shareholders of its water-related businesses and its Defense segment. The water-related business will include the Water & Wastewater division, including its analytical instrumentation component, and the Residential & Commercial Water division, as well as the Flow Control division that is currently reported within the Motion & Flow segment. The Industrial Process division, which is currently reported within the Fluid segment, will continue to operate as a division of ITT. After completion of the Transformation, ITT shareholders will own shares in all three corporations. Following the Transformation, ITT will continue to trade on the New York Stock Exchange as an industrial company that supplies highly engineered solutions in the aerospace, transportation, energy and industrial markets. The Transformation is anticipated to be completed by the end of 2011.

In conjunction with the Transformation, the initial Registration Statements were filed with the Securities and Exchange Commission on July 11, 2011. As a result of the Transformation, we will reorganize to a new management and segment reporting structure. As part of these organizational changes, we will assess new reporting units and perform valuations to determine the assignment of goodwill to the new reporting units based on their relative fair values. We will also test the recoverability of goodwill based on the new reporting units.

During the three and six month periods ended June 30, 2011, we recognized pre-tax expenses of $62 and $147, respectively, related to the Transformation. The components of transformation costs incurred during these periods are presented below.


	Three			Six
For the Periods Ended June 30, 2011	Months			Months
Transformation Costs:
Non-cash asset impairment	$	—		$	55
Advisory fees		22			43
IT costs		21			22
Employee retention		8			11
Other costs		11			16

Transformation costs in operating income		62			147
Tax-related separation costs		14			14

Total transformation costs before tax benefit		76			161
Income tax benefit		(30	)		(52	)

Total transformation costs, net of tax impact	$	46		$	109

The $55 million non-cash impairment charge relates to a decision to discontinue development of an information technology consolidation initiative. These costs have not been included in segment operating results. The table included below provides a rollforward of the Transformation-related accrual for the six months ended June 30, 2011.


Transformation accrual – 12/31	$	2
Charges for actions during the period		147
Cash payments		(61	)
Asset impairment		(55	)

Transformation accrual – 6/30	$	33

To execute the Transformation, we expect major areas of spending to include debt refinancing, tax impacts, information technology investments to build out independent environments for the new companies, advisory fees, and other Transformation activities. Our current estimate of the after-tax cash impact of pre-spin activities associated with the Transformation, including those initiated during the first six months of 2011, is expected to be approximately $500. In addition, as noted above, we recorded a $55 non-cash impairment charge during the first six months of 2011. The Company may incur additional cash and non-cash costs that are not currently estimable prior to completion of the Transformation.

In addition, the Company anticipates incurring material separation-related spending following the Transformation, primarily consisting of additional tax impacts, employee-related costs, continued information systems investments, and advisory fees.