Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the ITT Corporation First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now turn the call over to Mr. Tom Scalera, Director of Investor Relations.

Thank you, Kelly. Good morning, and welcome to ITT's First Quarter 2010 Investor Review. Presenting this morning our Chairman and CEO, Steve Loranger; and Chief Financial Officer, Denise Ramos. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. As always, please note that any remarks we may make about future expectations, plans and prospects, as well as other circumstances set out in our Safe Harbor statement constitute forward-looking statements for 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 the things over to Steve.

Good morning, and thank you all for joining us today. Well, 2010 is definitely off to a great start for ITT. Even beyond some very welcome economic tailwinds, our performance is once again attributable to a focused strategic execution and effective organic growth plan. In the first quarter, our adjusted earnings per share of $0.84 exceeded the prior year by 17% and our prior guidance by $0.10. Of particular pride was the outstanding performance of Motion & Flow Control that delivered a 96 % increase in operating income on a 25% improvement in organic revenue. As a result of improved volume and our relentless pursuit of productivity, Motion's margins improved 500 basis points to 14.2%. This was a truly spectacular quarter for Motion & Flow Control that proved that this segment is capable of delivering very big results after years of restructuring and repositioning. Significant productivity gains were also delivered by Fluid Technology, driving an operating income increase of 32%. The great results in Fluid and Motion, both are a testimony to the hard work of Gretchen McClain in Munish Nanda and the thousands of Fluid and Motion employees that really bore down in the face of the economic crisis and reset our cost structure. And likewise, we're very proud of Dave Melcher in the Defense & Information Solutions team who also made great progress during the quarter with the strategic realignment of Defense & Information Solutions. Our three new platforms, Electronic Systems, Geospatial Systems and Information Systems are already lowering their cost structure, leveraging their leading technology and providing integrated solutions to our key customers. And I'm very pleased that our team is nicely ahead of its challenging implementation schedule. As a result of these strong Q1 performances, improving conditions in end markets and productivity plans for the balance…

Thanks, Steve. So on Slide 5, you'll see that first quarter 2010 revenues improved 3%. Now when you exclude the positive benefit from foreign exchange and acquisitions, our organic revenue improved 1%. The quarter's performance was driven by Motion & Flow Control's 25% growth from recent share gains and improving end market conditions. In Fluid, organic revenue was flat due to difficult comparison in our late cycle industrial process business that did show signs of recovery during the quarter. In addition, Emerging Markets, which represents more than 21% of our total commercial revenue, grew a solid 9% in the quarter. Total organic orders declined 5%. Defense organic orders were down 16% due to strong prior year comparisons. However, Motion & Flow grew 32% and Fluid's book-to-bill improved to 1.11 on 3% organic order growth. Segment operating income improved 12%, and margins improved 90 basis points due to 150 basis points of operational productivity that more than offset unfavorable pension and restructuring expenses. Free cash flow of $25 million was ahead of expectations and in line with our full-year target conversion of 100% of net income. Higher cash taxes and an unfavorable timing of large receivable collections at Defense contributed to the decline compared to the prior year. Our balance sheet is strong. We have $880 million of cash and a net debt to net capital ratio of 16.5%, and that does follow the funding of the first quarter Nova acquisition. Lastly, our adjusted continuing earnings per share grew 17% to $0.84 per share, excluding the net impact of prior year's special tax items and the $0.05 unfavorable impact primarily due to the Healthcare Reform Act's change. Fluid Technology's first quarter results are in Slide 6. Total Fluid revenues improved 8%. When you exclude favorable foreign exchange and acquisition benefits, organic…

Thanks. Kelly. We're now ready to start the Q&A session.

[Operator Instructions] Your first question comes from Jim Lucas of Janney Montgomery Scott.

I was wondering if you could expand a little bit more within the Fluid on the Europe muni business. What are you seeing there? Is this tough comps or is there something underlying in the market that you began to see?

I think what we're seeing primarily is just a slower than expected recovery in a generalized sense in Europe. We are seeing slow muni market, but I think that's consistent with a lot of the other economic indicators in Europe. So it's just going to be a slow recovery. The other thing to, keep in mind, is that while United States has been upgrading according to some environmental regulatory standards, a lot of those upgrades are already in place in Europe. So on a relative comparison between the two continents, you're going to expect to see slower total growth.

With the credit issues that are going on throughout the European continent, do you think that's weighing at all on what you're seeing over there or is it too early to tell?

It's too early to tell specifically, but I don't think any of us who are reading the newspapers would conclude that these credit issues are going to slow things down a bit in Europe.

And then with regards to your thoughts about stimulus dollars in the U.S. and the impact on the Water, I thought it was interesting that the only place stimulus was mentioned in the prepared remarks was within Motion and Flow and European Auto. I was wondering if you could give us an update on what you're seeing in terms of the stimulus spending.

Well, I think we're just seeing a continuing very, very slow distribution of the stimulus throughout the municipal and other industrial markets in the United States. I think as we've consistently tracked this and communicated, Jim, over the last year, the fact of the matter is, it has trickled down slowly in our markets. And in many cases, it really was just replacing the funding source for projects that were already more or less in the plan. That said, we are expecting to see about a $20 million incremental benefit from stimulus in the Fluid Tech businesses.

Finally, bigger picture from an M&A standpoint. Nova seems like a very good strategic acquisition for you and you still have a lot of capacity on the balance sheet. Could you just give us an update of how the pipeline is looking these days and what you're seeing in terms of the expectations that are out there from a multiple standpoint?

The pipeline is strong, and it is also competitive. We've seen the private equity market get more active again, which means that multiples are certainly not bouncing around the industry lows. In fact, they are more traditional than what we've seen over the last several years. As we've mentioned, our pipeline is still principally focused in expanding into our commercial segments. Beyond the ITT Analytics, we do have a nice pipeline that we're looking at right now to be able to build that out. And as I mentioned in some of the activities around industrial, dewatering and in other global Fluid Technology segments, we continue to feel pretty active about that. That's principally our pipeline. We're also looking at some adjacency ideas, as I've mentioned before in the areas we're growing, in Information Solutions, most notably around cyber technology and air traffic management technology. So we feel good about the pipeline. We're very active. We're in due diligence on a couple of opportunities right now and hopefully, if they come to fruition, which means their actionable and financially acceptable in terms of our metrics, we should have a really good year in this regard.

Your next question comes from Terry Darling of Goldman Sachs.

I wanted to follow up first on the MoFlow kind of implied go forward guidance. Obviously, very strong first quarter. I think on the guidance on organic, it implies that you're dropping back into the kind of 2% to 4% range, if we got the math right, then that you're not carrying the strong margins forward. I was just wondering if you could talk a little bit more about that.

So in Motion & Flow Control what you're seeing is in Q1, we had such strong results related to Motion Technologies and that's the automotive on platform that we have, and that was due to the stimulus program in Europe primarily. So we saw very strong orders and very strong sales in Q1 on the Automotive business. We expect that to come down as we go throughout the back half of the year, but that's on the Automotive side. When you look at some of the other markets, we are seeing some upward trends in those markets. So when you look at like general industrial, in fact we're feeling pretty good about what's happening there yet. On the Aerospace side, we're somewhat cautious on that. We've seen some upside, but we're just not ready to call that yet.

Denise, can you help quantify what that auto desell [ph] piece could be? And can you share with us what the 2Q organic expectation for MoFlow is?

For MoFlow, organically in Q2, we're looking sales being up about 7% or so.

Which would imply second half is actually down year-over-year or pretty close to zero?

It's pretty close to zero, down a little bit in the back half. So we've seen a lot of the strength coming in the first half of the year. But again, remember overall, we're looking at 7% growth for them on a full year basis.

But why would second half be flat or down? Is there continued difficult comps on auto or something else I'm missing?

There's a little bit of restocking that's taking place in the first half versus the second half. And we saw some pull forward that came into Q1 versus last year. But overall, we're still feeling pretty good about the markets that we have.

I just want to add to that Terry. We probably will have some more discussion on this on the phone call. But we planned for a robust year overall. But to be sure, there's still some volatility in this global economy. We are looking at some dynamics, in terms of short cycle restoration as a result of restocking and project starts that were not financially stopped, but they were confident stock. We're maintaining a cautious outlook for the second half.

On the margin question there, on MoFlow again, not carrying forward the strength from Q1, is that all of the auto piece again? Or is their something else I'm missing?

It's primarily the auto piece of it, Terry.

Did you make any other acquisitions in the quarter than Nova?

No, we did not.

One really small distributor that was in Finland, where we're expanding our Water Wastewater Residential business. But it was very small and that's on track. It's done. And we've moved the offices and we're growing the business in Finland.

So just the implied multiples then, around 3x revenues, and if we assume kind of high EBITDA, high teens EBITDA margins, you have pretty high multiples there, which would suggest you're looking for some synergies to make the economics there really compelling. And you've talked qualitatively a little bit about it. But if we think about the financial performance of Nova into '11, '12 and beyond, what kind of upside from a growth and a margin perspective do you think there can be?

Okay, Terry, with respect to your assessment, yes, 3x high EBITDA multiples. Again, we're looking at probably a slightly lower number. We're in the 2.5 kind of x with most of these multiples. But there's no question that even in this economy to make these acquisitions work, we need to find the right level of sales and cost synergies. This is why staying pretty close, in terms of related in a standpoint from our portfolio is good because we do have, as an example, in Fluid Technology, a fabulous global distribution architecture, in terms of sales/marketing/engineering. And when we buy these companies like Nova Analytics, we're able to flow. And I could say the same thing with Leopold and several other acquisitions. We're able to flow these technologies through our pre-existing channels. So as a consequence, we actually have a very nice tool in our box with respect to Fluid Technology to achieve these synergies. And then on the cost side, of course, anything we can do to streamline the internal cost or things that we go after. And quite frankly, by the time we assess the conservative level of synergies and cost, we're able to make these acquisitions work.

Any numbers you could put on those synergies, Steve, for us at this point? Or are you still working through it all?

It really depends market-by-market. It depends on how related they are. In some cases, we leave the channels alone. So no, I really have to say, Terry, that it really just depends on what the architecture is of the acquired company as well as how we're going to make it fit.

Your next question comes from Nigel Coe of Deutsche Bank.

Steve, you provided some good detail on, kind of, the M&A backlog. Could you maybe talk about whether Nova -- whether you're happy with the cluster of analytics that you got with Nova? Or do you see that as a nucleus of some of the deals in that area? And secondly, related to that points, what do you think about maybe branch into new areas, like med tech for example?

Absolutely, we were happy enough with the acquisition that we bought it. And quite frankly, everything that we've seen so far is positive. Monday, I'm actually going to go visit our two major sites over in Europe to take a closer look and meet with Chris McIntyre and the new team. So the strategy is exactly as you outlined, Nigel. This has a high level of relatedness to Fluid Technology. And so it is through the Fluid Technology lens that we can grow the Nova Analytics product line, particularly in emerging markets and through our adjacent sales and marketing distribution capabilities. But having said that, you can take these same technologies and expand into other segments such as Life Sciences and Healthcare. And so when we talk about ITT analytics as a new platform, while we will be growing initially through the lens of Fluid Tech, we fully anticipate to be able to expand into other segments. And so I think it's a really nice way to grow a new platform in areas in Beverage, Healthcare, Life Sciences, Environmental Testing and Monitoring and so forth. So yes, we fully intend to openly growing out that area. And keep in mind that Nova Analytics already has about 40% of their business outside of water. They're in Food and Beverage. They're in Pharmaceutical and so forth. So both organically and inorganically, we should be able to achieve that vision and build on that platform.

You mentioned pharma, do you have any appetite or desire to acquire in areas where maybe ITT isn't currently focused, for example, Med Tech, Pharma?

No, not really. I think the substantial benefit that we have is our current portfolio, where we have arguably 75%, 80% of our business segments are highly investable. They're already aligned to emerging market trends. And so we, quite frankly, think that we've got a menu of possibilities well within our current portfolio to build on exactly as I mentioned with the ITT analytics. I could argue the same with air traffic management, with cyber security and other components of global Fluid Technology. So it's really within that landscape that we'll be building. I think that's a real positive in our portfolio because it says we can deploy capital in near-related adjacencies without taking out substantial amount of acquisition risk.

Denise, on the food outlook, you've kept it at 1% core for the full year. But in terms of the sub-segments, the three sub-segments, how has that changed?

So when we look at organic revenue on a full year basis then, Nigel, that's your question?

Right.

What we've done is, we've taken our Motion & Flow business. We took it up, as I indicated, 7% organic growth versus 0%. Part of what we've seen in Q1 and then what we're anticipating for the back half of the year.

Denise, but are the sub-segment within Fluid?

Within Fluid, what we're seeing is, we're seeing Commercial and Residential being better than what we had thought about three months ago. We've seen some nice upward trends there. We're seeing, on the industrial side, relatively flat with what we've been assuming. And on the municipal side, because of the European softness, we're seeing that being a little softer than we thought before.

Finally, in Defense, the Afghan Radio deal, is that a one-off? And then do you see any impact from the proposed OCI rules, which was announced last week?

On the Afghan deal, which we believe you're talking about the CREW 2.1 Band C upgrade, no, it's not a one-off. The initial contract is $21 million for 400-and-some vehicles. But all of the vehicles that are currently envisioned under the original 2.1, the 2.1 IED IDIQ program would theoretically be subject to the opportunity. So it would -- the practical matter is probably around a 1/3 to 1/2 of the total IDIQ, just simply in terms of the vehicles that are in theater. And that actually lead the Band C upgrade. But fundamentally, the program has legs beyond that. And just to be clear, Nigel, I'm answering the question on jammers. Was your question on radios?

It's radios, yes. I think you called out [indiscernible].

I think it was an initial order. I don't have it in my hand right now what the long term is. But obviously, like any of these radio orders, once you start shipping, you have opportunity for ongoing installations around leveraging that installed base. So we think it's the beginning of a long partnership. And your final question on OCI is, quite frankly, I don't know how to answer it. I've not personally digested it. The government has been trying to define in seeking equilibrium with respect to OCI rules and engagement from corporations. We have been urging the government to be more clear with it. So when we get more visibility, even having digested the most recent input, we'll get back with you on that.

Your next question comes from Scott Davis of Morgan Stanley.

I just wanted to talk a little bit about this Chongqing project and the water project. I mean when you go into a market like that, does it need to be with a JV partner or some sort of technology share? How do you go to market there?

It is important to establish local partnerships. And we do work with local partners both in China as an example and in India. So for Chongqing, we did partner with the Chongqing Water Group, which is a group of quasi-government, quasi-private industry that will be building some of the infrastructure. And we're working with them, obviously, on the development of the engineering suite of products and technology that meet their needs. So local partnerships are really an important part of the way we go to market. It's part of the plans that Mike Kuchenbrod and Sam Yamdagni, who lead our China and India activities drive all the time.

Does that include some, sort of, technology share with your local partner?

In these initial partnerships, no. Although I would say that technology sharing and to the intimation of your question, equity participation, is always present in front of us. To date, because of some uncertainties in receivable risks, we've not chosen to engage in those equity relationships.

I think it's still a little bit unclear on, kind of, the timing of full recovery in Fluid. I understand generally late cycle business, but do you keep a book to bill, if you will, in that business that would help us, kind of, track how orders versus revenues are coming through?

So when we looked at -- So Fluid Technology, at least, as I indicated for Q1, we have a book to bill of 1.11. And when you look at it between the various segments, Water, Wastewater, RCW and IT, they all exceeded one. So we're feeling good about the order trends that we're seeing in those businesses.

And is your average, kind of, order to delivery time, somewhere between four to six months? Or is it longer than that?

It depends on whether it's a large project or not. So if you look at some of the -- on the municipal side, some of the pumps and some of the RCW side, you may see delivery times of 60 to 90 days, 30 days. When you get into some of these large projects that we have on the IP side, that can go up to 12 to 18 months. So it can stretch out for quite a bit.

Lastly just on the dividend raise, 18% is a really big number, obviously. And I guess my question really being, given that taxation's probably going to go up, is there any kind of thought process behind future cash deployment? I know we talked about bolt-on acquisitions, but the balance between share buybacks and dividend increases?

Scott, we feel really good about the dividend increase and quite frankly, in light of our terrific cash flow generation capacity, when we took a look at it, we did not contemplate that as any alternative or we did not contemplate that in light of what could be increased taxation in the future. We just simply said that this company has the capacity to return a substantial amount of value to shareholders. And we wanted to get our payout ratio up. And it's easily affordable over the long term and is not, at this point, a tax-related issue. Having said that, we obviously asked the question, what kind of balance sheet capacity do we have for additional capital and acquisitive activity? And we concluded that with these dividend increases, we have more than enough balance sheet capacity to execute our strategy.

Your next question comes from Jeff Jeffrey Sprague of Vertical Research.

It's actually Nicole, pinch-hitting for Jeff. First, just on the restocking, you cited it on MoFlow and Fluid, could you give us a sense of how big a contributor it was to volume in the first quarter? And how you're actually thinking about it in the second and third?

Nicole, that's a question we ask ourselves. And honestly, we even, ourselves, cannot find a detailed answer to it. It could be in the quarter, somewhere in the 25% to 35% range. Those are just lags that we, kind of, think could be a third. We think it's going to sustain through Q2 and Q3 and then solely, be waning out. But it's going to be difficult to really tell. It is not a precisely verifiable number. But there's obviously some impact that we're getting now. And it's going to last a little bit for the next quarter or so.

And then with respect to cash flow, could you quantify the amount of the defense collections that got pushed into the second quarter?

The Defense, as we've said before, that business on receivables, it can easily shift from one quarter to another quarter. Just a day or two can easily make that shift. If I had to guess, I would say, there's about $70 million or $80 million that slipped from Q1 into Q2 associated with account receivable collections.

Steve, big picture. Within the commercial businesses, what are you, kind of, seeing geographically right now, just as you step back and, kind of, think about U.S. recovering in some of the businesses, Asia and then Europe?

The big picture, I think what we're seeing is very common with what is actually being reported widely. We're seeing a cautious recovery in the United States for reasons of confidence and so forth that we're all aware of. So something on the order of two or maybe two plus in the United States. Europe is actually recovering a little bit lower and a little bit slower. There's obviously current day concerns, with respect to some of the credit issues we're all reading about. On the flip side, we're seeing substantial growth in the emerging markets, most notably Brazil, couple of the economies in the GCC, certainly India and China. Our team just returned from a fairly expensive series of trips in the Middle East, China and India. And one of my observations on that, Nicole, was that while these economies slowed down as an example, China was quoted to slow down from 9% to the 7% range. The fact is, there is an unstoppable transition from lower class to middle class, unstoppable population growth. And in these economies, you're just seeing a continued very, very strong demand. They're going to be tripling their power generation capacity in India over the next five years. It is a phenomenal amount of infrastructure that's being put in. And I think everyone knows the Chinese numbers where we're going to have, in the next 15 years, we're going to increase the middle class population in China to a number, which is in excess of the amount of people that actually live in the United States, over 350 million people. So these dynamics -- I mean, having been there real time over the past month, these dynamics are giving us a great deal of confidence in some of these emerging markets. So that's our summary. I think that the only concern is ultimately going to be the flow of money and the efficiency of these capital markets.

For Denise, what are you using for the tax rate for this year?

We're using 29.6%. So that's the best guess to use at this point in time for the rest of the year. That's what we used in the first quarter.

We have time for one more question. Our final question comes from Steve Tusa of JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: The second quarter organic revenue guidance, I could understand that MoFlow is slowing. And I guess Defense is, kind of, in-line with what you saw in the first quarter. But that would imply that, I guess, Fluid is down versus the flat performance in the first quarter. Is that just the lead times on the orders you booked in the first quarter, kind of, stretching in the back half?

So if you look sequentially at what's happening between Q1 and Q2, Fluid's going up about 10%, MoFlow down about 15% and Defense is up about 7%. So sequentially, we're growing about 5%. What you're seeing within the Fluid segment is you're seeing municipal, commercial and residential doing better. But Industrial, we're seeing some declines between Q2 and Q1. We had very strong aftermarket activity in IP in the first quarter. So you're seeing that trailing off a little bit in Q2. C. Stephen Tusa - JP Morgan Chase & Co: But the year-over-year comp organically for Fluid, is that negative or positive?

The year-over-year comp for Fluid in the second quarter is roughly down about 2%. C. Stephen Tusa - JP Morgan Chase & Co: And again, that's because it is -- the comp is a little bit easier just looking at last year. So that's just maybe industrial stuff that still has yet to, kind of, play its way through the revenue base?

The thing to remember last year when you looked at IP, the first quarter and the second quarter for IP was very, very strong because we were delivering a lot of the large projects that we were pulling from backlog. So you're getting that from a comparison standpoint. C. Stephen Tusa - JP Morgan Chase & Co: Just on Defense, so you did a little bit better on the revenues this quarter than we were expecting. Is this just a timing shift that second quarter's down? So all in, you're still looking for, kind of, a similar back half recovery?

Yes, Steve, I would say that there is obviously some timing shifts. But we still feel good about our Defense forecast for the year. We're tracking for the full year, not withstanding some changes in quarters. We're still tracking in the high 6 4s to 6 5 range. And that envisions any program timing variations that we're thinking about through the '10 and '11 timeframe. So we feel good about the Defense forecast for the year. C. Stephen Tusa - JP Morgan Chase & Co: What worries you most in that business as far as timing in the back half? Is it still the services stuff that's moving around a bit? I just want to be able to, kind of, keep an eye on. . .

There's only two things. I mean, the Defense team has already factored all of this in. But we obviously have some timing issues on the international SINCGARS that we're pursuing. And we still have one contract that's been under protest. A contract we've won, five protests in a row. But nonetheless, it's still up in the air. So the timing on those two things are really what we're talking about for the year. The balance of the Defense ambitions for the year are reasonably on track. And so the consideration of timing risk has already been factored into our forecast. There's also -- the other thing I'll talk about in some of the other contracts is there's some fielding requirement changes that are still up in the air. So we may see things wiggle around a little bit. But all in, this is a conversation we have among ourselves and the forecast that we've given you contemplates all these risks. C. Stephen Tusa - JP Morgan Chase & Co: And no change to the '11, kind of -- I think you said '11 is going to be flattish? There's no change in that either, right?

Yes, we're on track. We're going to finish the year in the $5 billion backlog range. Based on our ambitions now and the, sort of, certainty around our probabilistic weighted contract wins, we think that we'll see another year in defense in the 2011 timeframe. That's in the same range as what we're seeing this year. And now before we close, I guess I'll just take this opportunity to offer an overarching thought, just somewhat consistent or somewhat as a follow-on to Nicole's question. And it's really all about our growth strategy and where we find ourself in this journey through this economic recovery. I think to begin with, our performance this quarter validates the fact that we do have a razillion [ph] portfolio. Thanks to some of the diversification and really put our investments. I'm going to try to frame that for you. Over the past several years, we've really aggressively repositioned this portfolio to better address these growing global trends, such as global safety and mobile network society and water scarcity. And we've also been working for several years to offset these anticipated declines in some of these core arm services budgets that we understand, I think you all understand, are creating a significant headwind for us this year. Notwithstanding those headwinds on the Defense budget, if you, sort of, take out these major core arm service budget changes, the balance of our Defense business is actually growing in the 9%, 10% range. So what you can see is that this company was a company that performed well in the economic downturn. In fact, our earnings and revenue growth numbers were among the best in our peer group. So I think it's safe to conclude that this strategy is working for us. And just to reflect that our…

Thank you. This concludes today's conference call. You may now disconnect.