Welcome to ITT Corporation’s second quarter 2009 earnings conference call. Hosting the call today from ITT headquarters is Steven Loranger, President and Chief Executive Officer. He is joined by Denise Ramos, Senior Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 1 o’clock PM Eastern Standard Time. The dial-in number is 800-642-1687 and enter pin number 18217977. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. (Operator instructions). It is now my pleasure to turn the floor over to Tom Scalera, Director of Investor Relations. Tom, you may begin.

Thank you, Brandy. Good morning and welcome to ITT’s second quarter 2009 investor review. Presenting this morning are Chairman and CEO Steve Loranger and Chief Financial Officer Denise Ramos. Today, Steve will highlight second quarter 2009 results and Denise will provide a detailed review of the quarter’s performance and the 2009 earnings outlook. I’d like to highlight that this morning’s presentation, press release, and all non-GAAP financial measures provided during the call can be found on our web site at ITT.com/IR. Lastly, please note that any remarks we may make about future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in ITT’s Form 10-K as well as our other public SEC filings. And now, let me turn things over to Steve.

Thanks Tom. Good morning and thank you all for joining us today to discuss ITT’s second quarter results. Our second quarter performance nicely exceeded our expectations for three reasons. We had outstanding productivity and execution, we had outstanding sales performance versus our forecast in very volatile markets, and we had outstanding performance on corporate cost, interest and taxes. Let’s look at the second quarter highlights on slide 3, that illustrate the achievements. In the second quarter, we delivered earnings per share that was $0.26 better than the midpoint of our previous guidance. We converted our 139% of our net income to free cash flow. The $462 million in free cash flow was actually 12% better than the prior year and very nice to see some positive variances to prior years these days. We continued to execute our strategy of disciplined capital deployment. We were very, very pleased with the issuance of a $1 billion in five senior notes at very low average rate of 5.5%, which reflected a very positive reception to this ITT issuance, and we continued to win with our defense strategy, delivering solid results and important orders that validate our alignment with the future deals of our DoD customers. We remained confident that our defense team will continue to produce solid results through future defense budget cycles due to their focused execution, diversified portfolio and strong customer alignment. So as a result of our strong productivity improvement and other operating benefits, we are raising the midpoint of our 2009 earnings per share guidance by $0.20 to $3.50 to $3.70 range. This new range also includes accelerated investment in strategic initiatives and additional incremental restructuring actions. Recent strategic investments have paid nice dividends and we believe that we are going to continue to outperform on a relative basis as long as we continue to invest in our markets, new technology, improve processes, and a better and more efficient cost structure. While the global economy remains week, which has impacted our commercial markets, our teams have aggressively repositioned the company. Leaders across ITT are driving greater productivity and producing stronger than anticipated results. Their focused execution coupled with disciplined capital deployment and premium free cash flow generation affords us the flexibility to continue making investments in our future growth like we have so many times in the past. The enduring drivers of our businesses in our broad geographic and end market diversity are providing relative stability in this environment. Ultimately, however, it’s our team focus on our customers anticipating their changing needs and delivering essential solutions that drives our performance forward. And so with that very positive introduction, let’s turn it over to Denise, to take you through the details of this exceptional quarter.

Thanks Steve. As you just heard, our second quarter results on slide 4, exceeded our internal expectation due to the focused efforts of strong leaders all across ITT. Second quarter organic revenue declined only 5% for the quarter and for the year. The organic revenue performance included flat results at defense, a 7% decline at fluid, and a 19% decline at motion. Revenue results at fluid and motion were better than our internal expectation and defense revenue was in line. Sequential organic revenue improved 7% on defense and fluid side. Total organic orders were flat compared to the prior year, a 29% improvement offset commercial declines. On a sequential basis, total organic orders were up 3%, despite a 5% decline at fluid. Segment operating income decreased 15% to $346 million, while segment margins declined 100 basis points to 12.4%. Strong productivity gains helped to partially mitigate the impacts of volume, pension and restructuring expense. Our recent increase in investment and footprint realignment and integrated supply chain initiatives have been fruitful. Cost based productivity actions exceeded expectations for a second straight quarter, setting us up nicely to improve our full-year productivity target. Excluding favorable tax special items, earnings per share of $1.06 declined only 10%. The performance was $0.26 better than the midpoint of our previous guidance. Later, we will talk about how we floated performance through our revised 2009 guidance. Now please turn to slide5. Our financial position is strong. Year-to-date second quarter free cash flow of $452 million was 12% higher than 2008. Excluding $58 million of non-cash income associated with the first quarter tax special item, our free cash flow conversion of income from continuing operations rose to 139%. We are once again pleased with our working capital performance. As a percent of sales, working capital improved 110…

Thanks Denise. Brandy, I think we are ready to start the Q&A.

(Operator instructions). Thank you. Our first question is coming from Deane Dray from FBR Capital Markets.

Thank you. Good morning, everyone.

Good morning.

Good morning.

It was interesting to end the commentary regarding the municipal water market where this is the first time we are hearing folks about stability in the market especially for the second half as opposed to paralysis of customers waiting for stimulus. So let’s talk about data points within the quarter and the expectations or visibility that you have and likely there will be some stimulus commentary as well?

Thank you, Deane. Good morning. That’s a correct summary. Remember as we went into this economic crisis, with the new expectation of stimulus money, that created an enormous immediate reaction with respect to municipalities who had contemplated investments recognizing that they may get some free government money (inaudible) so everyone stopped. Now two things have happened since then. One is the stimulus money has flowed down through the state in various monetary organizations to where it is now very clearly which projects will be funded with the stimulus and which projects will not. So for those projects that were not funded by the stimulus, various municipalities have decided, well, let’s go ahead and restore the funding on our own wherewithal. And I think, the other point I wanted to make is, I think it just validates the sort of enduring nature of some components of our business where some of these projects were just delayed in terrible way. And they just had to come back at some point in time, because of things such as aging infrastructure and environmental needs and needs to deliver fresh water. So having said that, that is why we have seen in municipal market, both in Europe, particularly in Europe and less on the United States, actually stabilize and perform in the second half slightly better than our expectations. Regarding the specific stimulus funding, we are still not forecasting any significant stimulus benefit this year. The actual distribution of those funds has been very slow as you know and we certainly will expect to receive our fair benefit. I am pleased to say that we are fully qualified for all of our municipal products under Buy America Act, thanks to some really fine work that Colin Sabol and the fluid technology team did. So we will certainly get a fair share, it will be a positive, and we think it will be after the end of this year.

Thank you. And then just to clarify, within fluid, the dynamics between pricing, volume and raw material cost, please.

Sure. So within fluids for the quarter, their margin ended up at about 12.8%, it was down versus last year at 13.5%. When you split that out, we saw a 30 basis point improvement from an operational standpoint. Now they were impacted on volume side – price was a slightly positive in that gain, about 60 basis points for them. And what’s really benefiting them is on the net productivity side, where they were about 300 basis points associated with that. So net-net down about the 70 basis points.

In raw materials.

Raw materials, we saw benefits on the raw material side. They were up about a 130 basis points in raw materials. So the initiatives that we’ve had underway from a sourcing standpoint and we did have some longer-term contract that we had put into place, that has really benefited at us, and so we saw on the net materials basis up about a 130 basis points.

Great. Thank you.

Your next question is coming from John Inch with Merrill Lynch.

Thank you. Good morning, everyone.

Hi John.

Good morning, John.

Hi. Denise, could we talk, or, Steve, could you talk about if they were any restructuring benefits in the quarter, what kind of restructuring benefits you are anticipating with respect to your guidance on the earnings front in the back half? And as you, assuming you don’t do any carry forward programs in 2010 on an all-in net basis, what kind of tailwinds you have in 2010, call it from cost avoidance of restructuring coupled with incremental restructuring benefits associated with the actions that you are taking and the stepped up – the step up to $80 million this year?

Okay. So let me just give you some numbers on the – what’s being spent this year. So on this year, we are spending, we said around $80 million on restructuring, that’s split between headcount reductions, there are some facility closures, and they are moving from some high cost to low-cost region. When we look at that, the payback associated with that is about a year and a half. Some of the restructuring is occurring in Europe where you get some longer paybacks. We are going to see some benefit of that going through in ’09, around $20 million to $25 million associated with that. And then as we move into 2010, we will see significantly more savings associated with that. So total savings in 2010 associated with actions this year is around $65 million or so. In terms of expense, we are forecasting $80 million this year. Our normal run rate on restructuring expense tends to be around $45 million to $50 million. Now last year, we accelerated quite a bit of restructuring into the fourth quarter and this year we are accelerating restructuring. So obviously we have a lot more debt flowing this year and last year, but normal $45 million to $50 million.

So clearly we have got – just as I run the numbers here, we have got – you mean, we’ve almost got a $0.50 tailwind in theory, right, heading into 2010 barring doing a bunch of new restructuring programs? Is there any obvious reason why you would a bunch of new restructuring programs or do you feel based on some of the stability that you’re seeing in some of these end markets that you are kind of pretty much there and ready to sort of match where the economies out right now?

John, we really haven’t detailed 2010 restructuring. We are going through that planning process now. I would say the generality, we certainly understand the premise of the question that we would expect the year-over-year benefit from lower restructuring expenses. But having said that, I think it’s only safe to say that we are continuing to – we are going to continue to take this economic environment where we are forecasting still a relatively modest slow recovery to make sure that we are exceptionally well positioned. So I would expect that while there is still obviously opportunity from a structural architecture standpoint in this company that we want to continue to get out after and make sure that we are having very, very long-term excellent and geographically well placed cost position. So I can’t really be more specific than that, because we really haven’t detailed the plans.

John, I think the other thing to mention on that is we have various end markets and we have got some markets that are still cycling through the downturn, but there might be different pacing and sequencing associated with those. W just need to see how that plays out.

And other thing to add to your point John is that, we have not restructured in total, you need to envision all of the restructuring activity that we are doing this year. When completed, we will not have all of our factories at what would be an ideal utilization to capacity. And so, we are going to meet our obviously organic growth rate to improve that ratio. But at the same time, during additional restructuring, we would contemplate to ensure that we have the highest or I should say the most efficient best balanced utilization. So to your point, we really are positioning our cost structure nicely for 2010. We do feel good about what we are doing this year. But lean and operating excellence is a never-ending journey.

But what about higher pension, just as you kind of, I know it’s a little premature to look at 2010. But could some of the higher prospective pension cost wash a little bit with some of the benefits next year or is too early to tell?

On pension right now, John, when we look at where our pension is right now versus where we were at the end of the year, we have been getting some decent market returns. Don’t know what’s going to look like for the back half of the year. When you factor that in and you look at the discount rate, we don’t see any significant impact in 2010 on our pension. Obviously that can change as we get towards – as we get towards the end of the year depending on the assumptions that use. But in terms of the P&L for next year, we really don’t see any material impacts at this point in time. The other thing to mention from a cash standpoint is we’ve had no funding requirements this year and we don’t expect to have any material funding requirements next year either.

Just – thank you for that answer. Just lastly, is there any sign of life in these industrial process markets that are under pressure, whether it be general, industrial, chemical, pulp end markets, anything whether it be quote activity or intentions on the part of customers or something? Just a perhaps a little color as to what’s going on?

Absolutely, John, there are signs of life. And first of all, I do have to recognize the premise of your question that yes, in these industrial markets, we have seen some very significant declines. The declines are primarily been driven around general industrial, oil and mining. The general industrial and the mining are really tied to consumer demand, which is really tied to global GDP. And of course the oil has really been tied to the relatively low oil price. On the flipside, our – we have seen a very nice solid market in areas such as gas and so in that area, and in some cases in actually some of the water related projects we talked about earlier, we have actually seen some stimulus. So there are signs of life and we are responding.

Thank you.

Your next question is coming from Shannon O’Callaghan with Barclays Capital. Shannon O’Callaghan - Barclays Capital: Good morning.

Good morning

Good morning, Shannon. Shannon O’Callaghan - Barclays Capital: Actually, I want to start with a question on motion and flow, looks like things are stabilizing there, you have got the auto piece picking up a little bit, you have done a lot of restructuring there, it doesn’t seem like you are making any improvement though either on the top line or probably on the margins. Can you just give a little feel for – if you are encouraged by a chance for those to get better or you just being conservative or what do you think?

Shannon, in those market segments as you well know have turned down a little more than what we would have liked obviously. We are very, very pleased with the turnaround in the automotive business, particularly in Europe where we saw benefits not only from the automotive coming back, strengthen the aftermarket, the effects of the European cash-for-clunkers program and most importantly, Salvatore and his team’s program win that they achieved. So automotive is relatively strong. On the flipside, obviously in the aerospace business, in the marine business and general industrial business, no, I don’t think we are being conservative. I think we are seeing a lots slower recovery in those markets. Shannon O’Callaghan - Barclays Capital: Okay. How about – you got the big SINCGARS order, US SINCGARS order this quarter. I mean where does that take you on production and then in terms of how far out? And then talk a little bit more about these international shipments that are starting in the JTRS development?

The big SINCGARS orders was an enormous positive for us and a number of things – a number of things occurred obviously in communications business that really invalidated our strategy. But this order for the additional 50,000 radios takes us now well into 2010. And more importantly was we did for the first time after having answered this question for several quarters, we did deliver our Soldier Radio Waveform technology as part of the JTRS program and we received some other really nice software contracts. So what we are seeing here is continued support under the installed base to SINCGARS which I think is extremely consistent with what we have said is a benefit of this marketplace for a very long time. So the product is working and I think that’s being – our product strategy is working and it’s been validated by exceptionally strong international orders where we saw some big Q2 shipments and we continue to expect additional international orders into the late ’09 and early ’10 timeframe that will make our overall SINCGARS production relatively nice in light of the fact that that we are expecting some declines on the US Government side. Shannon O’Callaghan - Barclays Capital: Okay. And just last one is your balance sheet obviously in very strong shape and nice debt issue. How are you thinking of using that? What’s the acquisition environment look like?

Yes, thank you, Shannon. We’ve got a strong balance sheet on purpose right now. And I want to reaffirm that having the debt-to-equity ratio, the credit rating and the cash on hand is really part of our overall winning strategy to make sure that we are very well positioned. We are not expecting any additional further external environmental credit liquidity crisis like we saw last year, but we are also not planning right now. We are planning on maintaining a very, very safe position. So having said that, you can expect us to be considerably redeploying that into acquisitions, we are maintaining a very, very active pipeline. It’s too early to say that buyers and sellers expectations and evaluations have come together. We are still in a patiently waiting mode. But that’s our primarily – that’s our primary – our primary objective right now is to deploy capital outside of internal organic means where we can take advantage of the balance sheet straight. But I wanted to reaffirm that you can expect to see some discipline and conservatism and whatever we do in terms of deployment of capital in this more judicious credit agency marketplace will be such that we always maintain our credit rating. Shannon O’Callaghan - Barclays Capital: Okay, thanks.

Your next question is coming from Terry Darling with Goldman Sachs.

Thanks. A couple of follow-ups I guess on some earlier comments, Steve. First on the overall sort of netting together all of your comments on defense orders. Second half versus first half, does at all net to down slightly, but still pretty strong in absolute terms?

It’s first half to second half, Terry, is netting all these issues on defense is – actually second half is stronger than first half in defense. And there have been some – obviously we accelerated CREW. We had a delay in couple of international orders, we had some exceptional wins in information warfare and intelligence and a couple of space areas, and we have had a service contract delay. So again, netting all that out, defense is actually stronger second half and that’s also supported by very, very nice entry and exit backlog expectations. So we feel good about defense and aside from these normal sort of program puts and takes I just mentioned, that is really according to our expectations that we had communicated at the beginning of this year and at the last earnings call.

And Terry, at the end of the year, we do expect to end the year with backlogs in defense at $5 billion or more.

Okay, that’s great. And then, the defense margins were a little stronger than we thought, presumably that was part of what drove the beat versus your guidance as well. I am wondering if you can comment in kind of drivers of what happened that versus your expectations. Go-forward guidance would seem to imply you come off the second quarter highs, but you still remain well above the first quarter lows if you will. But can you flush out that for us too, please?

In Q2, what we really saw in terms of defense and the margins there, I talked about the surge in Afghanistan and the fact that we were delivering more CREW volumes than we thought and those come with decent margins, product margins associated with that. So you did see that nicely flow through in Q2 for us. You’re right. As you go into Q3 and Q4, still good margins that we are going to have back there. But slightly less on overall in the second half than what we saw in Q2, just because of the mix of services and products and how it plays out during the year.

Yes, it sounds like there is probably nothing in there to change the 11% to 11.5% long-term thought process that you’ve had?

Okay. And then just lastly in your response to Deane’s question on raw materials, it was a 130 basis point positive, I am just trying to square that with the price comment, had a 60 basis point positive effect. The 60 basis point price comment net of raw materials or growth?

No that’s growth.

Okay, growth. Thanks very much.

So you can add that 50 basis points to the 130.

Perfect. Thank you.

Your next question is coming from Jeff Sprague with Citi Investments.

Thank you. Good morning everyone.

Good morning.

Can we just – maybe a little bit more on defense, it sounds like CREW margins continued to be very strong. Steve can you give us some indication on where margins tracking that business? And also your thoughts on, kind of competition on the next version of CREW, would you think this goes to the force, how does that play out?

Yes, we are not calling out the specific margins on our products. But I think it is safe to say that our classic product night vision, electronic warfare, communication product margins on the fixed price contracts, typically, the upper end of the defense margins. And that’s offset obviously service contracts and your cost plus contracts which tend to be in the bottom, which is why we model – remodel on average about 11.5%. We are strongly in the hunt on advanced versions of next-generation CREW jamming devices. We are the industry leader today. We are completing for 3.2 and 3.3 which are the programs of choice with respect to programs that we would like to be on. But also we are continuing to invest an awful lot of our own R&D for enhancing the capability the existing our CREW 2.1 program what we call spiral upgrades. So there is an awful lot of – there is a lot of emphasis on the jamming technology today. We are seeing some for the first time ever, we see the US Government permission to sell some of these technology internationally and we are also growing the service logistics component of this. So when you add up all that up with the installed base on CREW, the spiral upgrades, the service, the international and the fact that we have got some leading technology positions from some of the new program, we feel good about this product segment. This is still the – as you have been reading unfortunately in Afghanistan, this is still the most adverse threat we have in the lives of our soldiers and our jamming technology has been extremely effective in terms of protecting our soldiers’ lives. And so when you think about doing essential things, this is right in the center piece of our strategy. So we feel good about how this is playing out. I think the other thing I want to add is that we are seeing additional vehicle applications, which in addition to the new MRAP’s, the JLTV and the Hummers, that really validates the fact that this is a very broad based technology application.

You’re going to expect the CREW volumes to grow next year off this ’09, this accelerated ’09 base?

We haven’t detailed that, but I would say, right now, probably not growing off the overall base. Remember, we are up somewhere in the 1502 range above what we had forecast through year, so – because of the Afghan ramp up that Denise mentioned. But at the end of the day, the reason I was mentioning the international and some of the services and some of spiral work is – beyond thinking about this as just units and vehicles which is awfully hard to keep track of. We just think about as a revenue base. So what we will be detailing for you for ’10 is going to be a really solid CREW revenue.

And could you just night vision also Steve, I may have missed it, but I didn’t hear anything in the prepared remarks, I would think that would be getting some lift with Afghanistan but perhaps not. Just what are the trends there?

We have been getting some very nice order backlogs both on our base PVS-14 contracts and our latest generation enhanced night vision goggle which has the additional overlaying of thermal imagery over the classic image intensification. We have back – we have over two years of backlog in night vision, so I think that's the way to answer your question, by saying that we are seeing continued support and the teams running the facility down in Roanoke 24/7. So we are actually operating at full capacity in that thing and quite frankly beyond the US backlog that we have, we actually have pent up unfulfilled demand that’s currently in past two backlog for international, simply because we’re at capacity. So what we see is a really solid future for enhanced – for the night vision. And we are going to keep that way, technology substitution. Beyond the wonderful capability of enhanced night vision that enables our soldiers to now see through dust, smoke and fog, we are digitizing the signal, which enables us to have two-way broadband intelligence connectivity between what the soldier is seeing and what’s being in every battlefield networks. And so in the digitization of this as a whole quantum level of capability that we think will be a real fuel for this product as we are giving the soldier ever more capability to own the night. So all in all, we feel good about night vision.

Terrific. Thanks a lot.

Your next question is coming from Nigel Coe with Deutsche Bank.

Thanks, good morning.

Good morning, Nigel.

So just to understand the 2009 roll forward guidance, you're assuming the $0.15 productivity that you got primarily in fluid doesn’t carry forward in to the second half, is that correct?

The productivity in the $0.15, there is some incremental productivity that we are forecasting in the second half of the year of about $0.02 or so.

$0.02. Okay. Is there a reason why productivity would decline so sharply other than just being conservative, of course?

Productivity wise declining, I remember that we have in the second half of the year, we do have strong productivity that was already baked into the guidance numbers that gave back in March and April. So we are seeing productivities ramp up throughout the year. The incremental piece is with the additional productivity that we are seeing coming through the businesses.

Okay. And I thought the sequential commentary within the period was very helpful. Can you maybe talk about how the three sub segments look second half versus first half?

Sure. So when we look at fluid and we look at the segments, what we are really seeing from an end market perspective, second half to first half, is we are seeing municipal and residential performing better in the second half than the first half. Where we are seeing some of the challenges would be in the IT markets and in the commercial markets where we are still seeing the downturn happening there. So net-net when you look at fluid and you look at the revenue base second half versus first half, you’re basically flat, but you have contained and that’s been happening in the end markets. From a margin perspective because of some of the challenges on the IT side of things, we are seeing fluid margins are going to decline slightly in the second half versus the first half of the year.

Okay. And how much of an impact is FX on that margin? Because I know that the weaker dollar tends to hurt the margins there.

Yes, what I will tell you is from an FX standpoint, what we are utilizing in our guidance is we’re utilizing $1.40 in the back half of the year. So you can use that and try to factor in what’s the impact is.

Okay. You obviously got a lot of cash in Europe. Is there any barrier to using that cash to acquire in the US, so you've got one of your European subsidiaries buying a US company or does that create tax consequences?

Yes, some of the challenge there Nigel is with the $1 billion over there is that you’ve got to be careful from a tax implication standpoint in bringing it home. So we look at strategies, we look at tax planning ideas to effectively bring that home and we will continue to do, but that’s really the talent that we have in utilizing that cash, now that’s not to say that we won’t be able find acquisitions overseas that we cannot utilize that cash for. So we think that that cash will play in to whatever we need to do from an acquisition standpoint.

Okay. And just one final one, the defense backlog has been very static now for about six quarters. And it seems very difficult to grow a business where the stock is not growing, is that a concern for 2010?

Nigel, I think we are well on our way to continuing the strong events performance as a component of our strategy. We all know that there is a top line pressures, but let’s just understand that our defense portfolio is very highly aligned to President Obama’s priorities. And so when we look how the budget’s unfolding, we actually view that as a slight overall positive. In addition to that, I will point out that our product backlogs are increasing right now. And we kind of walk through it, but all in, our defense product backlogs are up $150 million over where they were in the first quarter. And then let me just point out that the strategies we have been deploying have provided incremental support through the total defense architecture, non-DoD, where we have shipped $200 million against the $2 billion next-generation air traffic control contract and we are continuing to invest in it. We are working with NASA, Department of Homeland Security and various other agencies. We are growing our international. I had mentioned the technology substitution activities and so forth. And we’re obviously getting into some other adjacencies, we are starting to see some really super growth in cyber intelligence, cyber warfare and what not. So the non-DoD components of our budget is actually is growing to 25%. And as Dave and the team continue to drive in these sort of adjacent areas, including environment sensing which we’ve mentioned before, carbon mapping and moisture mapping, we think there is a solid base there. So that’s more of a broad question I would glad to be answer to the fact that we think our defense portfolio is working in favor of us and the backlogs continue to grow.

Okay. Great. Helpful. Thanks.

Your next question is coming from Mike Schneider with Robert W. Baird.

Okay. Wonder if you could stick with the margin topic first – moments here. If you take 5 in the guidance at $11 billion, it’s clear that the guidance assumes margins is going to be down in the second half and you called out CREW as a beneficial factor in the first half and IT being weaker in the second half and then water. But I am still struggling to figure out why margins are assumed to be down frankly so hard in the second half versus or is it conservatism?

So Mike, when we look at the margins and when we are looking at here is second half versus first half, overall, we are actually looking at margins improving by about 50 basis points. Now we are seeing some benefits of defense, which mean the challenges at fluid, but we are seeing some nice improvement in motion and flow flowing through in the second half of the year because of the productivity initiatives that we have there. So that’s how we are looking at it internally.

Okay, I will have to go back, it just strikes me that first half versus second half, the guidance actually even at the high end assumes margins will be down.

Well, we’ll probably have to take that offline, what’s happening with your margins, because that’s not what we are showing here.

Okay. And then just within water and wastewater, could you go by geography and just talk about sequential trends within water and wastewater? And I am curious if you’ve seen any stimulus benefits specifically in Asia?

Mike, my apologies, I don’t have specific geographical sequential data right here. I think what I can tell you is we are seeing a slightly stronger than expected performance in Europe on the water and wastewater and we are seeing as expected performance in North America water and wastewater. And we are seeing – which is generally flat, it’s come down quite a bit generally flat. And you are continuing see strong growth in Asia. I can add, I think – I am looking at some numbers here, so I can add that, residential is up compared to our expectations second half versus first half and commercial is slightly down to our expectations. And if you want some granularity, we will have to cover that offline with you in terms of sequence by specific product lines.

And you mentioned that Colin and his team have been qualified for the Made-In-America clause under the US stimulus package, can you give us a sense with your work around I presume on production, do you think you can preserve margins on the projects you win?

Yes, pretty well. Remember that the bulk of our fluid technology manufacturing is in the United States. And so what Colin and his team has done is taking some of the designs and some of the components that were normally manufactured in Europe and just worked out a transition of that manufacturing into a pre-existing sites, so that we can support the manufacturing, assembly and test of a sufficient number of components qualified by America. And Colin has been very, very active working at the EPA and other government regulations, to ensure that this new US content couldn’t qualify. So honestly, there is going to be a slight, maybe a slight detriment to the margins, but it’s nothing that is – nothing that’s worthy of modeling.

Okay. Thank you again and very nice quarter.

Thank you, Michael.

Your next question is coming from Steve Tusa with JPMorgan.

Hi good morning.

Good morning.

Just a question on defense, you guys gave some good detail on fluid and motion and I think you said defense up 4% for the year now, that’s I guess at the low end of the previous range. What exactly changed there in defense? I guess I wasn’t quite clear you talked about some product shipment timing, et cetera? Maybe you can just talk about that a little bit?

So when you look at the – when we look at defense, we did tweak it little bit, down slightly. We’re still in a good range of the 4% to 5%. What we have been seeing in some of our services business is as we have gotten some of these wins, we have seen more protest taking place and we have protest actions in this current environment than we have had in the past. So what that basically does is it just tends to push out those revenues associated with other services. So that’s really, that’s really what you are seeing. We are still very confident of positive outcomes for any of our current wins under protest. It’s just it makes those services get a little bit delayed.

Right. So you’re still kind of in the $6.5 billion or low $6.5 billion for the year on an absolute basis?

Yes. We are in about that range.

Okay. And then for the backlog, I think you said above $5 billion, does that mean flat with where we are now or between that $5 billion and $5.2 billion for the end of the year?

It’s hard to say. It’s $5.2 billion now. I think we ended last year about $5 billion. So it’s close to being relatively flat there.

Okay. Sorry to be so nitpicky there. And then one last question, the implied organic decline in the fourth quarter, I just wanted to make sure my math is right. Is that in kind of the high single digits or is that the right range for the implied fourth quarter organic decline?

Well, now, you have to look at defense and then you have to look at commercial. So if you look all in first for sales in the fourth quarter, it’s down probably around 2% or so. We have got an uptick in defense in the fourth quarter and then we have got fluid –

Down 2% for the organics, what's your – so your defense – maybe I'm doing my. So you are going to actually see year-over-year improvement in the fourth quarter relative to what you’re seeing now and what you’re guiding to for the third quarter, year-over-year organic declines.

For which business?

Sorry, for the whole company. I guess I am just looking at the comparable number, you said negative 5, I think it was negative 5 this quarter. You’re guiding to negative I think 4 or 5 for the third quarter, what would that number be for the fourth quarter?

So the fourth quarter will be down about 2%.

Okay. All right, thank you.

Okay, thank you, Steve. Brandy, we’ve got time for one more question.

Your final question comes from the line of John Baliotti with FTN Equity Capital Markets.

Good morning.

Good morning, John.

Good morning, John.

Steve, just first the housekeeping, I think if we tracked it right, year-to-date in defense you won about $1.2 billion to $1.3 billion of new defense contracts that seems roughly right, all options?

John that’s in the range, I don’t have that number right in front of me, because that sounds about right.

Okay. Obviously the number we are talking about for the full year is still continues to be what you have in hand before we fund a number for – as the backlog is going to finish the year.

With the way I would say that John is that, our order intake and program win rates coupled with the backlog shipment time supports the second half of the expected defense shipments. And we do that without any pulls or pushes to get to 2010, which means we leave 2009 with a nice 2010 backlog. So effectively our program wins have supported the year in a very nice way, it supports our forecast, and we’ve got a solid start – a solid start in terms of the book to ship component for the 2010 defense cycle.

Great. On the stimulus and some of the changes you’ve made for fluid to react to the government mandate on Buy American. I wouldn’t expect that ITT would adjust itself for what might a short-term phenomenon on that side of it. But I am just curious, what do you think the lasting shift or the lasting benefit will be for fluid. Obviously every quarter when currency fluctuates, you get the flip-flop of revenue growth versus margin back and forth. But is there a way to think about or do you guys thought about what – how fluid will look, how it will be positioned differently as a result of this beyond this – just a stimulus catalyst?

First of all, we’re not – as part of the Buy American, with respect to the manufacturing architecture, no, don’t think about that in permanent shift. We still got very, very excellent, highly capitalized, world leading producing manufacturing facility in Europe and Asia and we are going to continue to ensure that those are excellent facilities for global applications. Having said that, we will generate an enduring flexibility for any future events where it may be required to have these sort of indigenous manufacturing capability. Beyond the manufacturing architecture, then, as far as the enduring economic benefit of this stimulus, it’s really too early to tell. But I think our opinion on that is like so many other opinion on the stimulus activity is it’s a essentially a program, it’s essentially – it’s not creating really any incremental economic – any incremental economic benefit, it really is just an acceleration to shore up what is already a decelerated economy.

Right. What I was getting at was there – the planning of the – your company tends to be longer-term and I was just thinking that beyond the good positioning yourselves for that clause, I would expect that you’ve thought about the last thing impact of change that you have made there?

No, I think I will just reaffirm. Our strategy is to be globally well positioned with our facilities and we do have a very nice architecture in North America, in various locations in Asia and in Europe, and we are going to continue to make sure we are optimizing that global architecture. So we are not redesigning this for such – in a permanent way for such things like Buy America. We certainly are going to create the opportunity, the flexibility responsive to local indigenous requirement, but I think in the enduring global architecture, we’ll be flexible on a global basis.

Right. Okay, great. Thank you.

Okay. Well, thank you John and thank all of you for some very interesting questions. We will follow up on a couple of these specific modeling questions after the call. But before we finalize, I would just like to take a moment to publicly thank Vince Maffeo, who was our Senior Vice President and General Counsel for his 32 years of honorable service to ITT. Vince, as many of you know, was one of the founding fathers of the new ITT Corporation, when he personally negotiated the split of the three ITT Corporate entities back in the 1999 time period. But more importantly Vince’s leadership really guided this new fledgling company, called ITT Industries, through a very, very challenging post 1995 spin-off period where as you know there was a phenomenal amount of portfolio work down in the early days as well as dealing with a lot of long-term legacy issues. So Vince’s leadership, in his 32 years, all the way to the ITT Corporation of today has really been central in making ITT a recognized global leader in all the important market we serve. And so, on behalf of the ITT shareholders, those whom you represent, all of our employees and customers, we will thank Vince for his 32 years of contribution and ask him to enjoy his very, very well earned retirement. I also want to thank everyone for your interest in ITT. This quarter’s strong performance has really demonstrated that we did act quickly to respond to the changing economy and the changing needs of our customers. We are operating hard in a very volatile and uncertain environment to stay head of the game. And although this has been a challenge for us, we really view this economic environment as our opportunity to be even more proactive in directing our resources to create stronger and strategic advantages for the future. So while some organizations are really trying to develop new game plan in this environment, what we are doing is working hard at the one we have and trying to execute in the best way we can. Our strategy is sound, we are not reinventing ITT to succeed. We are just going to continue to be the ITT that we know and we are going to continue to succeed. So with that, I want to thank you all and appreciate your support for this company. Thank you.

Thank you. This concludes today’s teleconference. Please disconnect your lines at this time and have a wonderful day.