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Discontinued Operations | 12 Months Ended
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Dec. 31, 2012
Discontinued Operations | NOTE 4 Discontinued Operations During 2012, the Company completed the sale of its shape cutting product lines, including the Kaliburn and Burny brands as well as the web tension control products and custom engineered systems sold under the Cleveland Motion Controls brand (collectively referred to herein as the Shape Cutting Businesses). The sale was completed on November 13, 2012, resulting in net proceeds from the sale of $38.4 which are included in investing activities on our Consolidated Statement of Cash Flows. Subsequent to this divestiture, we do not have any significant continuing involvement in the operations of these businesses, nor do we expect significant continuing cash flows. Accordingly, the financial position and results of operations of the Shape Cutting Businesses are reported as a discontinued operation in all periods presented. The major classes of assets and liabilities related to our disposition of the Shape Cutting Businesses at December 31, 2011 are provided in the table below. These amounts are presented as assets of discontinued operations within Other Assets and Other Liabilities on our Consolidated Balance Sheet.
Receivables, net |  | $ | 5.6 |
Inventories, net |  |  | 5.8 |
Other current assets |  |  | 1.0 |
Total current assets |  |  | 12.4 |
Plant, property and equipment, net |  |  | 2.6 |
Goodwill |  |  | 12.9 |
Other intangible assets |  |  | 11.2 |
Total assets |  | $ | 39.1 |
Total liabilities |  | $ | 9.4 |
Summarized operating results from the Shape Cutting Businesses presented within earnings from discontinued operations are provided in the tables below. Interest expense was not allocated to the divested businesses for any of the periods presented. Amounts presented in the “Other” column within the tables below relate to various divested ITT businesses accounted for as discontinued operations in the year of divestiture for which legacy liabilities remain, as well as certain transformation costs which were directly related to the Distribution and provided no future benefit to the Company. See Note 5, “Company Transformation” for further information.
Year Ended 2012 |  | Shape Cutting Businesses |  |  | Other |  |  | Total |
Revenue |  | $ | 30.2 |  |  | $ | – |  |  | $ | 30.2 |
Earnings from discontinued operations before income taxes |  |  | 0.6 |  |  |  | 0.4 |  |  |  | 1.0 |
Gain on sale before tax |  |  | 9.0 |  |  |  | – |  |  |  | 9.0 |
Income tax expense (benefit) |  |  | – |  |  |  | (5.9 | ) |  |  | (5.9 | )
Earnings from discontinued operations, net of tax |  | $ | 9.6 |  |  | $ | 6.3 |  |  | $ | 15.9 |
On October 31, 2011, the Company completed the Distribution of Exelis Inc. (Exelis, previously referred to as ITT’s Defense & Information Solutions segment) and Xylem Inc. (Xylem, previously referred to as the water-related businesses), from the Company into two independent, publicly traded companies via a tax-free Distribution to shareholders (the Distribution). ITT was designated as the accounting and legal spinnor with respect to the Distribution. The Distribution was made pursuant to a Distribution Agreement, dated October 25, 2011, among ITT, Exelis and Xylem (the Distribution Agreement). With the completion of these separations, the Company disposed of its water-related businesses and Defense segment in their entirety and ceased to consolidate their financial position and results of operations in its consolidated financial statements. Accordingly, the Company has presented the financial position and results of operations of its former water-related businesses and Defense segment as discontinued operations in the consolidated financial statements for 2011 and 2010. In connection with the Distribution, ITT received a net cash transfer (the Contribution) of $683.0 and $988.0 from Exelis and Xylem, respectively, which is included in financing activities on our Consolidated Statement of Cash Flows. No gain or loss was recognized in connection with the Distribution. While we are a party to a Distribution Agreement and several other agreements, including a Tax Matters Agreement, Benefits and Compensation Matters Agreement and Master Transition Services Agreement, we have determined we do not have significant continuing involvement in the operations of Exelis or Xylem, nor do we expect significant continuing cash flows from Exelis or Xylem.
Year Ended 2011 |  | Exelis |  |  | Xylem |  |  | Shape Cutting Businesses |  |  | Other |  |  | Total |
Revenue |  | $ | 4,916.1 |  |  | $ | 3,107.5 |  |  | $ | 33.5 |  |  | $ | – |  |  | $ | 8,057.1 |
Transformation costs |  |  | 31.2 |  |  |  | 74.8 |  |  |  | – |  |  |  | 134.1 |  |  |  | 240.1 |
Earnings (loss) from discontinued operations before income taxes |  |  | 473.0 |  |  |  | 321.5 |  |  |  | (2.5 | ) |  |  | (108.9 | ) |  |  | 683.1 |
Income tax expense (benefit) |  |  | 193.6 |  |  |  | 70.3 |  |  |  | (1.1 | ) |  |  | (26.7 | ) |  |  | 236.1 |
Earnings (loss) from discontinued operations, net of tax |  | $ | 279.4 |  |  | $ | 251.2 |  |  | $ | (1.4 | ) |  | $ | (82.2 | ) |  | $ | 447.0 |
During 2010 we sold CAS, Inc. (CAS), a component of our prior Defense & Information Solutions segment, engaging in systems engineering and technical assistance (SETA) for the U.S. Government. The sale of CAS was completed on September 8, 2010, resulting in proceeds from the sale of $236.6. Subsequent to this divestiture, we do not have any significant continuing involvement in the operations of CAS, nor do we expect significant continuing cash flows from CAS. Accordingly, the financial position and results of operations from CAS for the 2010 period are reported as a discontinued operation.
Year Ended 2010 |  | Exelis |  |  | Xylem |  |  | CAS |  |  | Shape Cutting Businesses |  |  | Other |  |  | Total |
Revenue |  | $ | 5,893.1 |  |  | $ | 3,191.7 |  |  | $ | 159.8 |  |  | $ | 17.6 |  |  | $ | – |  |  | $ | 9,262.2 |
Earnings (loss) from discontinued operations before income taxes |  |  | 718.2 |  |  |  | 395.5 |  |  |  | 13.4 |  |  |  | (3.2 | ) |  |  | 10.7 |  |  |  | 1,134.6 |
Gain on sale before tax |  |  | – |  |  |  | – |  |  |  | 125.8 |  |  |  | – |  |  |  | (0.2 | ) |  |  | 125.6 |
Income tax expense (benefit) |  |  | 250.6 |  |  |  | 51.6 |  |  |  | (0.2 | ) |  |  | (1.1 | ) |  |  | 24.6 |  |  |  | 325.5 |
Earnings (loss) from discontinued operations, net of tax |  | $ | 467.6 |  |  | $ | 343.9 |  |  | $ | 139.4 |  |  | $ | (2.1 | ) |  | $ | (14.1 | ) |  | $ | 934.7 |
In order to effect the Distribution and govern ITT’s relationship with Exelis and Xylem after the Distribution, ITT entered into a distribution agreement and several other agreements, including a Tax Matters Agreement, Employee Benefits and Compensation Matters Agreement and Master Transition Services Agreement. Information on the agreements utilized to effectuate the Distribution is provided below. Distribution Agreement The Distribution Agreement between ITT and Exelis and Xylem contains the key provisions relating to the separation of the businesses of Exelis and Xylem from ITT and the distribution of the shares of Exelis and Xylem common stock to our shareholders. The Distribution Agreement provides the framework for the allocation, transfer and assumption of assets and liabilities among ITT, Exelis and Xylem as well as the settlement or extinguishment of certain liabilities and other obligations between and among ITT, Exelis and Xylem. Under the Distribution Agreement, we agreed to indemnify Exelis and Xylem and their respective subsidiaries and affiliates, subject to limited exceptions with respect to certain employee claims, against claims and liabilities related to the past operation of ITT’s business (other than the liabilities of the divested businesses) and Exelis and Xylem agreed to indemnify us against claims and liabilities related to their respective businesses. The Distribution Agreement establishes that certain liabilities will be shared 21% to ITT, 39% to Exelis, and 40% to Xylem. In connection with the Distribution, ITT retained certain material contingent legacy liabilities involving asbestos and environmental matters. See Note 19, “Commitments and Contingencies,” for information regarding asbestos and environmental related contingencies. Tax Matters Agreement On October 25, 2011, we entered into a Tax Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of the companies after the Distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns. Exelis and Xylem have liability with ITT to the U.S. Internal Revenue Service (IRS) for the consolidated U.S. Federal income taxes of the ITT consolidated group relating to the taxable periods in which Exelis and Xylem were part of that group. However, the Tax Matters Agreement specifies the portion, if any, of this tax liability for which ITT, Exelis and Xylem will bear responsibility, and ITT, Exelis and Xylem agreed to indemnify each other against any amounts for which they are not responsible. The Tax Matters Agreement also provides special rules for allocating tax liabilities in the event that the Distribution is determined to not be tax-free. The Tax Matters Agreement provides for certain covenants that may restrict our ability to pursue strategic or other transactions that otherwise could maximize the value of our business and may discourage or delay a change of control that may be considered favorable. Though valid as between the parties, the Tax Matters Agreement is not binding on the IRS. Pursuant to the Tax Matters Agreement, as the shared income tax liabilities are settled, ITT will make payments up to certain specified thresholds, with payments in excess of those specified thresholds shared among ITT, Exelis, and Xylem. If payments to the taxing authorities are less than certain specified thresholds, ITT will make payments up to the remaining specified thresholds to Exelis and Xylem. Settlement is expected to occur as the audit process by applicable taxing authorities is completed for the impacted years and cash payments are made. Given the nature of the shared tax liabilities, the maximum amount of potential future payments is not determinable. Any such cash payments, when they occur, will reduce the liability for uncertain tax positions as such payments represent an equivalent reduction of risk. At December 31, 2012, ITT’s accrual for uncertain tax positions includes amounts related to certain shared tax liabilities; however, no receivables from Exelis or Xylem have been recorded as our estimate of their portion of the shared tax liabilities is not more than the amounts currently accrued for the uncertain tax position. If our estimate of exposures to the shared tax liabilities increases above the specified threshold, a receivable would be recorded. At December 31, 2012, the financial statements include a net tax-related liability $0.8 due to Exelis and Xylem in the aggregate. Adjustments in the future for the impact of filing final income tax returns in certain jurisdictions where those returns include a combination of ITT, Exelis and Xylem legal entities and for certain amended income tax returns for the periods prior to the Distribution may be recorded to either shareholders’ equity or the statement of income depending on the specific item giving rise to the adjustment. During 2012, $7.0 was recorded directly to shareholders’ equity as part of the Distribution of Exelis and Xylem. Benefits and Compensation Matters Agreement On October 25, 2011, we entered into a Benefits and Compensation Matters Agreement with Exelis and Xylem that governs the respective rights, responsibilities and obligations of Exelis, Xylem and ITT after the Distribution with respect to transferred employees, defined benefit pension plans, defined contribution pension plans, nonqualified pension plans, employee health and welfare benefit plans, incentive plans, corporate-owned life insurance, stock equity awards, foreign benefit plans, director plans and collective bargaining agreements. The Benefits and Compensation Matters Agreement provides for the allocation and treatment of assets and liabilities arising out of incentive plans, pension plans and employee welfare benefit programs in which Exelis and Xylem employees participated prior to the Distribution. Generally, Exelis and Xylem assumed or retained sponsorship of, and liabilities relating to, employee compensation and benefit programs relating to Exelis and Xylem current employees. The Benefits and Compensation Matters Agreement also provided that outstanding ITT equity awards would be equitably adjusted in connection with the Distribution. All outstanding ITT equity awards held by employees of Exelis as of the Distribution Date were substituted for Exelis equity awards and all outstanding ITT equity awards held by employees of Xylem as of the Distribution Date were substituted for Xylem equity awards. As described in Note 17, “Long-Term Incentive Employee Compensation,” the substitution preserved the economic value of the cancelled ITT equity awards for employees of Exelis and Xylem as of the Distribution Date. Subject to the applicable transition period with respect to certain benefit plans or programs, after the Distribution, employees of Exelis and Xylem no longer participate in ITT’s plans or programs, and Exelis and Xylem have established or maintained plans or programs for their employees. Master Transition Services Agreement On October 25, 2011, we entered into a Master Transition Services Agreement with Exelis and Xylem, under which each of Exelis and Xylem or their respective affiliates provide us with certain services (including information technology, financial, procurement and human resource services, benefits support services and other specified services), and we or certain of our affiliates provide each of Exelis and Xylem certain services (including information technology, human resources services and other specified services). These services will initially be provided at cost with scheduled, escalating increases to up to cost plus 10% and generally extended for a period of 3 to 24 months from the Distribution Date and are intended to help ensure an orderly transition for each of Exelis, Xylem and ITT following the Distribution. During 2012, we billed Exelis and Xylem a total of $10.7 associated with activities performed under the Master Transition Services Agreement. During November and December of 2011, we billed Exelis and Xylem a total of approximately $22.0, primarily relating to active employee health benefits which continued to be administered by ITT. On January 1, 2012, the administration of the employee health benefit plans was transferred to Exelis and Xylem. Total billings by Exelis and Xylem to ITT during 2012 amounted to $1.3. As of December 31, 2012, we have an aggregate receivable and payable, associated with transactions related to the Master Transition Services Agreement, of less than $0.1 each. Subcontract Pending Novation On October 31, 2011, we entered into a Subcontract Agreement Pending Novation with Exelis through which ITT engaged Exelis as a subcontractor for approximately 425 contracts with the U.S. Government. Pursuant to the Subcontract Agreement Pending Novation, Exelis was obligated to perform to the contract specifications to the satisfaction of the U.S. Government as if the contracts had been novated. As of December 31, 2012, the novation process has been completed with the U.S. Government for substantially all of the agreements in which ITT engaged Exelis as a subcontractor. Following the novation, all rights and benefits conferred or accruing under the U.S. Government contracts inure to Exelis. Exelis has indemnified ITT against claims and liabilities related to the U.S. Government contracts in connection with performance under the contracts while the novation was pending.

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