The Daily Magic Formula Stock for 11/22/2008 is ITT Corp. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75-100 %.
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ITT Corporation, with 2007 sales and revenues of approximately $9.00 billion, is a global multi-industry company engaged directly and through its subsidiaries in the design and manufacture of a wide range of engineered products and related services.
Unless the context otherwise indicates, references herein to âITT,â âthe Company,â and such words as âwe,â âus,â and âourâ include ITT Corporation and its subsidiaries. ITT Industries, Inc. was incorporated on September 5, 1995 in Indiana. On July 1, 2006, ITT Industries, Inc. changed its name to ITT Corporation. Reference is made to ââ COMPANY HISTORY AND CERTAIN RELATIONSHIPS.â
Our World Headquarters is located at 4 West Red Oak Lane, White Plains, NY 10604. We have approximately 39,700 employees based in 55 countries. Our telephone number is (914) 641-2000.
Our three principal business segments are referred to as Fluid Technology, Defense Electronics & Services and Motion & Flow Control. The principal products and services of each business segment are as follows:
Fluid Technology â pumps, water and wastewater treatment systems, mixers, heat exchangers, boiler controls and related products
Defense Electronics & Services â high-technology electronic systems and components, communications systems and engineering and applied research
Motion & Flow Control â interconnect solutions, friction technologies, flow control, energy absorption, aerospace controls, and other controls products
The table below shows, in percentage terms, consolidated sales and revenues and operating income attributable to each of our business segments for the last three years.
DESCRIPTION OF BUSINESS BY SEGMENT
Fluid Technology is a leading global provider of fluid systems and solutions, including the design, development, production, sale, and after-sale support of a broad range of pumps, mixers, controls and treatment systems for residential, municipal, commercial industrial, and agricultural and turf, applications.
Fluid Technology companies have approximately 11,900 employees, and have 337 locations in 53 countries.
Major production and assembly facilities are located in Argentina, Australia, Austria, Brazil, Canada, China, England, Germany, India, Italy, Malaysia, Mexico, the Philippines, Poland, South Korea, Sweden, and the United States.
Principal customers are in North America, Europe, the Middle East, Africa, Latin and South America, and the Asia/Pacific region. Sales are made directly to customers or through independent distributors and representatives.
Brand names include ABJ ÂŽ , A-C Pump ÂŽ , Bell & Gossett ÂŽ , F.B. Leopold Company ÂŽ , Flygt ÂŽ , Flowtronex ÂŽ , Goulds Pumps ÂŽ , Grindex ÂŽ , Hoffman Specialty tm , ITT Standard ÂŽ , Lowara ÂŽ , Marlow Pumps ÂŽ , McDonnell & Miller ÂŽ , Pure-Flo ÂŽ , Red Jacket Water Products ÂŽ , Sanitaire ÂŽ , Vogel ÂŽ , and WEDECO ÂŽ .
During the second quarter of 2007, we realigned our Fluid Technology organization, by combining its businesses serving the Advanced Water Treatment market primarily with Flygt, our principal business providing products with municipal applications. The integration is designed to leverage existing sales and distribution networks, and to combine market-facing businesses to take advantage of scale, process and market leadership. Within the realigned structure, the Fluid Technology business segment provides goods and services to the following markets: Water & Wastewater, Residential & Commercial Water, and Industrial Process.
Water & Wastewater
The principal products and services for this market include pumps, mixers and treatment equipment (biological/ozone/UV systems) with municipal, industrial and dewatering applications.
ITTâs Flygt brand is the originator and largest manufacturer of submersible pumps and mixers, which form the heart of many of the worldâs sewage and wastewater treatment facilities. Additionally, Flygt is recognized as the market leader for municipal submersible wastewater pumps. Combining Flygtâs submersible pumps and mixers with Sanitaire and ABJ products (discussed below) provides a solution to customersâ needs for complete wastewater transport and treatment systems. Dry mount pumps branded A-C Pump provide an alternative technical solution to submersible pumps. ITTâs strong position in the dewatering, drainage and service markets is generated by Flygt, Robot and Grindex.
Through the Sanitaire and ABJ brands, ITT is a leader in biological treatment systems for municipal and industrial wastewater treatment. The broad range of products includes ceramic and membrane fine bubble diffusers and stainless steel coarse bubble diffusers. ITT also provides advanced membrane filtration engineered systems, reverse osmosis systems and portable filtration technology. Flygtâs submersible mixers and Sanitaireâs diffused aeration systems play a crucial role in the biological treatment phase ensuring that incoming flows reach optimal levels of biochemical oxygen demand removal and nitrification, while preventing sedimentation in the aeration tank. ABJ offers a unique Sequence Batch Reactor concept allowing a continuous inflow. WEDECO is a leading provider of ultraviolet disinfection and ozone oxidation systems with both municipal and industrial applications.
In 2006, we acquired the F.B. Leopold Company, a leading provider of water and wastewater treatment products with municipal and industrial applications, including clarification and gravity filtration technologies.
Residential & Commercial Water
The principal products and services for this market include pumps, valves, heat exchangers and accessories with residential, commercial, light industrial, and agriculture and turf irrigation applications.
ITTâs broad range of pumps, systems, controls and accessories for residential, municipal and commercial applications, which are branded Goulds Pumps, Bell & Gossett, Lowara, Red Jacket Water Products, Marlow Pumps, and Vogel, includes water transport, wells, pressure boosters, and agriculture packages and systems.
Flowtronex provides packaged systems and solutions for turf irrigation and water booster systems for municipalities, golf courses and irrigation systems.
Leading product brands, such as Bell & Gossett, McDonnell & Miller, and Hoffman Specialty, provide a broad variety of products for environmental control in buildings and for building service and utility applications, including liquid-based heating and air conditioning systems, liquid level control, and steam trap products for boiler and steam systems. ITT services the European and Middle East building trade markets with pressure boosting pumps under the Lowara and Vogel names. A-C Fire Pump is a global UL/FM fire pump package provider.
The principal products and services for this market include pumps, valves, vessels, and treatment systems with applications in general industry, mining, chemical and pulp and paper industries.
ITT, under the Goulds Pumps brand name, offers standard as well as engineered application specific pumps for the industrial marketplace. Typical market segment applications include chemical, pulp and paper, oil refining and gas processing, power, mining and general industrial. Fabri-Valve knife gate valves are designed to handle a variety of demanding applications, including flue gas desulphurization in power plants, pulp recovery and bleaching in pulp and paper plants, and a variety of mining, oil sands and industrial applications.
ITT offers a wide array of valve and turnkey systems that are at the heart of extremely demanding manufacturing processes. Our products are used in ultra hygiene processes similar to those found in production of biological and pharmaceutical compounds.
Sales and revenues were $3.51 billion, $3.07 billion, and $2.80 billion for 2007, 2006 and 2005, respectively. Order backlog for Fluid Technology was $887.1 at the end of 2007, compared with $702.2 in 2006, and $551.2 in 2005.
As one of the worldâs leading producers of fluid handling equipment and related products for treating and recycling wastewater, ITT actively promotes more efficient use and re-use of water and endeavors to raise the level of awareness of the need to preserve and protect the earthâs water resources. ITT strives to provide its global customer base with the systems and solutions they need to meet ever increasing demands on life cycle cost control and operating efficiencies.
Management believes that Fluid Technology has a solid technology base and proven expertise in designing its products and services to meet customer needs. Management also believes that the continuing development of new products will enable Fluid Technology to maintain and build market leadership positions in the markets served.
Our strategy to expand across the value chain to provide better service for our customers is moving us from a product supplier to a solution provider. Through ITTâs overarching strategic Value Based Product Development program, we now have in place a company-wide system for rapid development of new offerings and technologies to augment our current offering of systems and solutions. This strategy has guided us in our acquisitions and business development efforts. For example, today ITT can extend its core offering of submersible pumps and mixers with systems to control plant operation, technologies that analyze the waste stream, and products and systems to treat water through biological, treatment, filtration, oxidation and disinfection processes.
In the industrial markets, our pump systems are now equipped with intelligent control systems. Customers engaging in our âtotal systems approachâ generally experience dramatically lower energy consumption, and reduced maintenance and operating costs.
Fluid Technology has a global network of authorized service centers for aftermarket customer care. Our aftermarket service capabilities include the repair and service of all brands of pumps and rotating equipment, engineering upgrades, as well as preventative and routine maintenance and service.
The level of activity in Fluid Technology is dependent upon economic conditions in the markets served, weather conditions and, in the case of municipal markets, the ability of municipalities to fund projects for our products and services, and other factors. See âââ COMPETITION.â
Defense Electronics & Services
Defense Electronics & Services develops, manufactures, and supports high technology electronic systems and components for worldwide defense and commercial markets, and provides communications systems and engineering and applied research.
Operations are in North America, Europe, and the Middle East. Defense Electronics & Services companies have approximately 20,500 employees and are present in 271 locations in 26 countries.
Defense Electronics & Services consists of two major areas (i) Systems and Services and (ii) Defense Electronics. Systems and Services consists of our Systems and Advanced Engineering & Sciences Divisions. Defense Electronics consists of our Aerospace/Communications Division, Space Systems, Night Vision and Electronic Systems Divisions.
Systems and Services
The Systems Division provides systems integration, communications, engineering and technical support solutions ranging from strategic command and control and tactical warning and attack assessment, to testing, training and range evaluation. The Systems Division also provides total systems support solutions for combat equipment, tactical information systems and facilities management.
The Advanced Engineering & Sciences Division provides a wide range of research, technologies and engineering support services to government, industrial and commercial customers. In addition, the division provides products and services for information collection, information processing and control, information security, homeland defense, and telecommunications systems. The division will also lead the air traffic control modernization program for the U.S. Federal Aviation Administration.
The Aerospace/Communications Division (âA/CDâ) develops wireless networking systems for tactical communications. A/CD is the creator of the core technology used in the worldâs two largest tactical digitization programs: the U.S. Tactical Internet and the U.K. Bowman program. This technology has created a family of interconnected products including the Single Channel Ground and Airborne Radio System (âSINCGARSâ). A/CD is at the leading edge of networking with its routers and algorithms. These devices permit self-organizing and self-healing connections all across the battle space. A/CD is also developing the newest ground-to-air radios for the Federal Aviation Administration.
The Space Systems Division (âSSDâ) provides innovative solutions to customers in the defense, intelligence, space science, and commercial aerospace communities to help them visualize and understand critical events anywhere on earth, in the air, or in space. SSDâs offerings include intelligence, surveillance and reconnaissance systems, image information solutions, sophisticated meteorological imagers and sounders, GPS navigation payload systems and components, commercial remote sensing and space science systems.
The Night Vision Division supplies the most advanced night vision equipment available to U.S. and allied military forces. The equipment includes night vision goggles for fixed and rotary-wing aviators; night vision goggles, monoculars and weapon sights for ground forces, and image intensifier tubes required for all of these systems. Night Vision is developing advanced technology for the digital battlefield that will allow improved mobility and situational awareness. The division is also supplying high-performance night vision devices to federal, state and local law enforcement officers in support of homeland security.
The Electronic Systems Division (âESâ) produces information and electronic warfare technologies for a broad range of military aircraft. These technologies help protect aircraft from radar-guided weapons. ES is developing the next-generation of fully integrated airborne electronic warfare systems for rotary-wing aircraft called the Suite of Integrated Radio Frequency Countermeasures (âSIRFCâ) for the United States Army and Special Operations Forces. In addition, ES has developed a SIRFC based system for fixed-wing aircraft such as the F-16, and is also the supplier for the United States Integrated Defensive Countermeasures (âIDECMâ) system for fixed-wing aircraft such as the F/A-18 E/F fighter fleet. ES is a co-developer and producer of the integrated communications, navigation and identification system for the U.S. Air Force F-22 Raptor. ES also produces military and civilian air traffic control systems and air defense radars marketed under the name Gilfillan. ESâs latest generation of air traffic control radar systems includes fixed and mobile terminal airport surveillance radars and precision approach radars for landing assistance in extreme physical environments, and produces and installs air surveillance and weapons control radars for both ship and land-based applications.
Acquisition of EDO Corporation
On December 20, 2007, we completed the acquisition of EDO Corporation (âEDOâ), a global aerospace and defense company. EDO designs and manufactures a diverse range of products for the aerospace, defense, intelligence and commercial markets. Major product groups include: defense electronics, communications, aircraft armament systems, undersea warfare, integrated composite structures, and professional and engineering services.
Sales and revenues for the Defense Electronics & Services business segment were $4.18 billion, $3.66 billion, and $3.22 billion for 2007, 2006 and 2005, respectively. Funded order backlog was $5.23 billion at the end of 2007, compared with $3.88 billion in 2006, and $3.48 billion in 2005, with the 2007 increase over the prior years reflecting the impact of the EDO acquisition.
Steven R. Loranger
Chairman, President and Chief Executive Officer,
Mr. Loranger, 56, was appointed President and Chief Executive Officer and elected a Director of ITT on June 28, 2004. He was elected Chairman of the Board of Directors on December 7, 2004. Mr. Loranger previously served as Executive Vice President and Chief Operating Officer of Textron, Inc. from 2002 to 2004, overseeing Textronâs manufacturing businesses, including aircraft and defense, automotive, industrial products and components. From 1981 to 2002, Mr. Loranger held executive positions at Honeywell International Inc. and its predecessor company, AlliedSignal, Inc., including serving as President and Chief Executive Officer of its Engines, Systems and Services businesses. Mr. Loranger is a member of the Business Roundtable and serves on the boards of the National Air and Space Museum and the Congressional Medal of Honor Foundation. Mr. Loranger received bachelors and masters degrees in science from the University of Colorado. Mr. Loranger is also a director of the FedEx Corporation.
Mr. Loranger has been a Director of ITT since 2004.
Curtis J. Crawford, Ph.D.
President and Chief Executive Officer, XCEO, Inc., a
leadership and corporate governance consulting firm
Dr. Crawford, 60, is President and Chief Executive Officer of XCEO, Inc. From April 1, 2002 to March 31, 2003 he served as President and Chief Executive Officer of Onix Microsystems, a private photonics technology company. He was Chairman of the Board of Directors of ON Semiconductor Corporation from September 1999 until April 1, 2002. Previously, he was President and Chief Executive Officer of ZiLOG, Inc. from 1998 to 2001 and its Chairman from 1999 to 2001. Dr. Crawford is a Director of E.I. DuPont de Nemours and Company, ON Semiconductor Corporation, and Agilysys, Inc. and is a member of the Board of Trustees of DePaul University. He received a B.A. degree in business administration and computer science and an M.A. degree from Governors State University, an M.B.A. from DePaul University and a Ph.D. from Capella University. Governors State University awarded him an honorary doctorate in 1996 and he received an honorary doctorate degree from DePaul University in 1999. Dr. Crawford is the author of two books on leadership and corporate governance.
Dr. Crawford has been a Director of ITT since 1996.
Christina A. Gold
President, Chief Executive Officer and
Director, The Western Union Company, Inc., a
global leader in money transfer and financial services
Mrs. Gold, 60, has been President and Chief Executive Officer of The Western Union Company, a leading company in global money transfer, since September 2006. From May 2002 to September 2006, Mrs. Gold was President of Western Union Financial Services, Inc. and Senior Executive Vice President of Western Unionâs parent company, First Data Corporation. From October 1999 to May 2002, she was Chairman, President and Chief Executive Officer of Excel Communications, Inc. Mrs. Gold served as President and Chief Executive Officer of The Beaconsfield Group from March 1998 to October 1999. From 1997 to 1998, Mrs. Gold was Executive Vice President of Global Development of Avon Products, Inc., and from 1993 to 1997, she was President of Avon North America. Mrs. Gold is also a director of The Western Union Company and New York Life Insurance. Mrs. Gold is a graduate of Carleton University, Ottawa, Canada.
Mrs. Gold has been a Director of ITT since 1997.
Ralph F. Hake
Former Chairman and Chief Executive,
a home and commercial appliance company
Mr. Hake, 59, was Chairman and Chief Executive of Maytag Corporation from June of 2001 to March of 2006. Previously, he was Executive Vice President and Chief Financial Officer for Fluor Corporation, an engineering and construction firm. From 1987 to 1999, Mr. Hake served in various executive capacities at Whirlpool Corporation, including Chief Financial Officer and Senior Executive Vice President for global operations. He is also a director of Owens-Corning Corporation. Mr. Hake is a 1971 business and economics graduate of the University of Cincinnati and holds an M.B.A. from the University of Chicago.
Mr. Hake has been a Director of ITT since 2002.
John J. Hamre, Ph.D.
President and Chief Executive Officer, Center for Strategic & International Studies (âCSISâ), a public policy research institution dedicated to strategic, bipartisan global analysis and policy impact
Dr. Hamre, 57, was elected President and Chief Executive Officer of CSIS in April of 2000. Prior to joining CSIS, he served as U.S. Deputy Secretary of Defense from 1997 to 2000 and Under Secretary of Defense (Comptroller) from 1993 to 1997. Dr. Hamre is a Director of MITRE Corporation, Choicepoint, Inc. and SAIC, Inc. He received a B.A. degree, with highest distinction from Augustana College in Sioux Falls, South Dakota, was a Rockefeller Fellow at Harvard Divinity School and was awarded a Ph.D., with distinction, from the School of Advanced International Studies, Johns Hopkins University, in 1978.
Dr. Hamre has been a Director of ITT since 2000.
Frank T. MacInnis
Chairman and Chief Executive Officer, EMCOR Group, Inc., one of the worldâs largest providers of electrical and mechanical construction services, energy infrastructure and facilities services.
Mr. MacInnis, 61, has been Chairman of the Board and Chief Executive Officer of EMCOR Group, Inc. since April 1994. He was also President of EMCOR from April 1994 to April 1997. Mr. MacInnis is also a Director of The Williams Companies, Inc., The Greater New York Chapter of the March of Dimes and ComNet Communications, LLC. Mr. MacInnis received an undergraduate degree from The University of Alberta and is a graduate of The University of Alberta Law School, Alberta, Canada.
Mr. MacInnis has been a Director of ITT since 2001.
Surya N. Mohapatra, Ph.D.
Chairman of the Board, President and Chief Executive Officer of Quest Diagnostics Incorporated, the nationâs leading provider of diagnostic testing, information and services.
Dr. Mohapatra, 58, was appointed President and Chief Operating Officer of Quest Diagnostics Incorporated in June 1999, a Director in 2002, its Chief Executive Officer in May 2004, and Chairman of the Board in December 2004. Prior to joining Quest Diagnostics Incorporated in February 1999 as Senior Vice President and Chief Operating Officer, Dr. Mohapatra was Senior Vice President of Picker International, a worldwide leader in advanced medical imaging technologies, where he served in various executive positions during his 18-year tenure. Dr. Mohapatra earned a Bachelor of Science degree in electrical engineering from Sambalpur University in India. Additionally, he holds a Master of Science in medical electronics from the University of Salford, England, as well as a doctorate in medical physics from the University of London and The Royal College of Surgeons of England.
Dr. Mohapatra, who was identified by a third-party search firm, has been a director of ITT since February 2008.
Linda S. Sanford
Senior Vice President, Enterprise On Demand Transformation, International Business Machines Corporation (âIBMâ), an information technology company
Ms. Sanford, 55, was named Senior Vice President, Enterprise on Demand Transformation, IBM in January 2003. Previously, she was Senior Vice President and Group Executive, IBM Storage Systems Group, responsible for development of IBMâs Enterprise Storage Server and other storage-related hardware and software. She also has held positions as General Manager, IBM Global Industries and General Manager of IBMâs S/390 Division. Ms. Sanford is a member of the Women in Technology International Hall of Fame and the National Association of Engineers. She is on the Board of Trustees of St. Johnâs University and Rensselaer Polytechnic Institute, serves on the Board of Directors of Partnership for New York City and is Co-Chairperson of the Board of Directors for the Business Council of New York State, Inc. Ms. Sanford is a graduate of St. Johnâs University and earned an M.S. degree in operations research from Rensselaer Polytechnic Institute.
Ms. Sanford has been a Director of ITT since 1998.
Markos I. Tambakeras
Former Chairman, President and Chief Executive Officer, Kennametal, Inc., a premier global tooling solutions, engineered components and advanced materials supplier to the automotive, aerospace, energy, mining, construction and other industries
Markos I. Tambakeras Former Chairman, President and Chief Executive Officer, Kennametal, Inc., a premier global tooling solutions, engineered components and advanced materials supplier to the automotive, aerospace, energy, mining, construction and other industries
Mr. Tambakeras, 57, served as Chairman of the Board of Directors, Kennametal, Inc. from July 1, 2002 until December 31, 2006. He was also President and Chief Executive Officer of Kennametal from July 1999 through December 31, 2005. From 1997 to June 1999, Mr. Tambakeras served as President, Industrial Controls Business of Honeywell Incorporated. Mr. Tambakeras also serves on the Board of Parker Hannifin Corporation. Mr. Tambakeras received a B.Sc. degree from the University of Witwatersrand, Johannesburg, South Africa and an M.B.A. from Loyola Marymount University, Los Angeles, CA.
Mr. Tambakeras has been a Director of ITT since 2001.
MANAGEMENT DISCUSSION FROM LATEST 10K
ITT is a global multi-industry leader in engineering and manufacturing engaged directly and through its subsidiaries. In total, ITT employs approximately 39,700 individuals based in 55 countries. We generate revenue and cash through the design, manufacture, and sale of a wide range of engineered products and the provision of related services. Our businesses are aggregated and organized into the following three principal business segments: Fluid Technology, Defense Electronics & Services, and Motion & Flow Control.
ITT is a global corporation with worldwide operations. We have a diverse business portfolio, which we believe is designed to respond to the following macro-economic growth drivers: global security and infrastructure demands, population growth, environment trends and emerging markets. As a result, our business is affected by global, regional and industry-specific economic factors. However, our geographic and industry diversity, as well as the diversity of our product sales and services, has helped limit the impact of any one industry, or the economy of any single country, on the consolidated operating results. While we do have some businesses that are linked to long- and short-cycle economies such as construction, defense, mining and minerals, transportation, automotive, and aerospace as industries, a disproportionate amount of our portfolio is responsive to large-scale drivers that are less sensitive to economic cycles. Furthermore, we drive our business to have the right mix of products and services by seeking a good combination of OEM and after-market participation, a balance between products and services, and a proper global distribution.
Our growth strategy is centered on both organic and acquisition growth. Our ability to grow organically stems from our value-based product development process, new and existing technologies, distribution capabilities, customer relationships and strong market positions. Our key growth platforms include:
â˘ expanding our leadership positions in attractive water and industrial process markets through product development and innovative extensions of our current offerings, with a focus on the needs of the global water infrastructure
â˘ building a motion and flow technology platform by leveraging our technology, operational and channel capabilities, and as a result expanding our businesses into broader end markets
â˘ protecting and growing our core defense product positions through expansion into new and adjacent markets, including international defense markets
In addition to our growth initiatives, we have a number of strategic initiatives within the framework of the ITT Management System aimed at enhancing our operational performance. These include global sourcing, footprint rationalization and realignment, Six Sigma and lean fulfillment.
Overall, we expect revenues to increase to between $11.13 billion to $11.28 billion. Revenues in the Defense Electronics & Services business segment are expected to grow to between $5.95 billion to $6.00 billion led by continued growth in the Advanced Engineering & Sciences and Systems divisions and the integration of newly acquired EDO. The Fluid Technology business segment expects to grow revenues to between $3.68 billion to $3.73 billion due to continued growth in the Water & Wasterwater and Industrial Process businesses. In the Motion & Flow Control business segment, revenues of $1.53 billion to $1.58 billion are expected, with growth largely attributable to the integration of IMC into the segment.
Summarized below is information on each of our three business segments, including markets served, goods and services provided, relevant factors that could impact results, business challenges, areas of focus and selected financial data.
Fluid Technology is a leading global provider of fluid systems and solutions, including the design, development, production, sale and after-sale support of a broad range of pumps, mixers, controls and treatment systems for residential, municipal, commercial, industrial, and agricultural and turf applications. The Fluid Technology business segment provides goods and services to the following markets: Water & Wastewater (biological/ozone/UV treatment systems for municipal and industrial wastewater treatment, disinfection, and submersible pumps and mixers for sewage, wastewater treatment facilities, dewatering and drainage), Residential & Commercial Water (pumps and accessories for residential, municipal and commercial applications as well as agricultural and turf irrigation), and Industrial Process (pumps/valves for the industrial, mining and chemical industries, pulp and paper solutions for process modules, skid systems and stainless steel vessels).
Competitive advantages of the Fluid Technology business segment include selling premier brands, enjoying strong distribution capabilities, and benefiting from an installed base of over 14 million pumps worldwide, which provides a strong foundation for repair, replacement and retrofit aftermarket sales. The demand drivers of the business include population growth, urbanization, migration to coastal areas, social awareness, increased regulation, aging infrastructure, and demand from developing markets.
Factors that could impact Fluid Technologyâs financial results include: broad economic conditions in markets served, weather conditions, the ability of municipalities to fund projects, raw material prices and continued demand for replacement parts and servicing. Primary areas of business focus include: new product development, geographic expansion into new markets, facility rationalization and global sourcing of direct material purchases.
Defense Electronics & Services
Defense Electronics & Services develops, manufactures, and supports high-technology electronic systems and components for worldwide defense and commercial markets as well as provides communications systems, engineering and applied research. Defense Electronics & Services consists of two major areas: Systems and Services (Systems, Advanced Engineering & Sciences businesses) and Electronic Systems (Aerospace/Communications Division, Space Systems, Night Vision and Electronic Systems businesses).
On December 20, 2007, we completed the acquisition of EDO, a global aerospace and defense company. EDO designs and manufactures a diverse range of products for aerospace, defense, intelligence and commercial markets, and is a leader in the design and development of advanced systems at the center of the militaryâs transformation to lighter, faster, and smarter defense capabilities. We believe the acquisition will allow us to expand our core businesses through attractive adjacent markets. Furthermore, we expect to be better positioned to play an important role on some of the U.S. militaryâs vital transformational initiatives, such as the Joint Strike Fighter, the Navyâs Littoral Combat Ship, Counter Improvised Explosive Device programs, and the Coast Guard Deepwater programs.
Management believes that the Defense Electronics & Services business segment is well positioned with products and services that support our customersâ needs. In addition, we expect new product development to continue to contribute to future growth.
Factors that could impact Defense Electronics & Servicesâ financial results include: the level of defense funding by domestic and foreign governments, our ability to receive contract awards, the ability to develop and market products and services for customers outside of traditional markets, our ability to obtain appropriate export licenses for international sales and business. Primary areas of business focus include: new or improved product offerings, new contract wins, and successful program execution.
Motion & Flow Control
Motion & Flow Control comprises a diverse group of businesses, including Interconnect Solutions, Friction Technologies, Flow Control, Energy Absorption, Aerospace Controls and Controls. Interconnect Solutions designs and manufactures rugged electronic connectors for communications, industrial, transportation, military/aerospace, commercial aircraft, computer, and consumer uses. Friction Technologies designs and manufactures friction pads for braking applications. Flow Control produces pumps and related products for the leisure marine market, beverage applications, whirlpool baths and hot tub spas, along with valve actuation control systems and solenoid valves. Energy Absorption designs vibration and noise abatement technology for transportation, aerospace and industrial applications as well as compact pneumatic automation components for a variety of markets. Aerospace Controls produces valves, actuators and switches for the commercial, military, regional, business and general aviation markets; switches and regulators for the oil and gas, power generation and chemical markets; and pressure regulators and diaphragm seals for industrial applications and natural gas vehicles. Controlsâ product offerings include electro-mechanical actuators, servo motors, CNC systems, motion controller and other components for medical imaging, semi-conductor, machine tool, industrial automation, metal fabrication and aircraft seating applications.
The businesses of the Motion & Flow Control segment primarily serve the high end of their markets, with highly engineered products, high brand recognition, and a focus on new product development and operational excellence. Revenue opportunities are balanced between OEM and aftermarket customers. In addition to its traditional markets of the U.S. and Western Europe, opportunities in emerging areas such as Asia are increasing.
The Motion & Flow Control businessesâ financial results are driven by economic conditions in its major markets, the cyclical nature of the transportation industry, production levels of major auto producers, demand for marine and leisure products, weather conditions, raw material prices, the success of new product development, platform life and changes in technology. Primary areas of business focus include: expansion into adjacent markets, new product development, manufacturing footprint optimization, global sourcing of direct material purchases and lean fulfillment.
Results of Operations
For the year ended December 31, 2007, we reported sales and revenues of $9,003.3 and net income of $742.1, or $4.03 per diluted share, compared with sales and revenues of $7,807.9 and net income of $581.1, or $3.10 per diluted share for the year ended December 31, 2006. Net income for the year ended December 31, 2007 includes income from discontinued operations of $109.1 or $0.59 per diluted share compared to $81.4 or $0.43 per diluted share for the same comparable prior year period.
Further details related to these results are contained in the following Consolidated Financial Results and Segment Review sections.
Sales and Revenues
Sales and revenues for the year ended December 31, 2007 were $9,003.3, representing a 15.3% increase over 2006. During 2006, sales and revenues grew 10.9% to $7,807.9 over the prior year. Both year-over-year increases were primarily attributable to higher volumes and prices from existing businesses (âorganic growthâ) at each of our business segments. The following table illustrates the impact of organic growth, acquisitions completed during the period, and foreign currency translation fluctuations on sales and revenues during these periods.
During 2007 and 2006, we received orders of $9,118.1 and $8,391.7, respectively. This represents increases of $726.4 and $1,161.9 or 8.7% and 16.1%, respectively, over each prior year period. Order growth in 2007 was attributable to our Fluid Technology and Motion & Flow Control business segments, including contributions from both existing businesses and acquisitions, while the 2006 increase was attributable to contributions from each of our business segments.
Costs of Sales and Revenues and Gross Profit
Higher sales volumes and increased price drove the overall increase in gross profit for both periods. Gross margin (as a percent of sales) was higher in 2007 at 28.5% compared to 28.0% in both 2006 and 2005. This increase was driven by our productivity and cost savings initiatives, including continued efforts to improve supply chain productivity and control material costs, partially offset by unfavorable mix and the impact of foreign currency translation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (âSG&Aâ) increased $166.8, or 14.2% in 2007. The year-over-year increase was primarily attributable to higher levels of marketing expense at each of our business segments in support of product campaigns and new sales proposals. In addition, general and administrative expense increased due to higher compensation-related costs, investments in growth and process improvement initiatives, and the impact of foreign currency translation.
SG&A increased $143.9, or 13.9% in 2006. The increase reflects higher marketing costs in all segments, the recognition of employee stock compensation expense in accordance with Statement of Financial Accounting Standards No. 123R, âShare-Based Payment,â (âSFAS 123Râ), higher employee benefit costs, the impact of foreign currency translation, contributions from 2006 acquisitions, the cost of process improvement initiatives and increased environmental and legal costs, including costs to settle compliance issues in the Defense Electronics & Services business segment.
SG&A as a percentage of sales were 14.9%, 15.1% and 14.7% for the three years ended December 31, 2007, 2006 and 2005, respectively.
Research and Development Expenses
Research and development expenses (âR&Dâ) increased $21.4 and $4.1 during 2007 and 2006, respectively, over the prior year period. R&D as a percentage of sales were relatively consistent at 2.0%, 2.1%, and 2.2% for the three years ended December 31, 2007, 2006 and 2005, respectively, as we continued our efforts within each of our business segments to support product development.
Restructuring and Asset Impairment Charges, Net
During 2007, 2006 and 2005, we recorded $65.3, $56.5 and $58.9, respectively, of restructuring charges to streamline our operating structure. Additionally, $4.2, $4.8 and $5.0 of restructuring accruals were reversed into income during 2007, 2006 and 2005, respectively, as management deemed that certain cash expenditures would not be incurred. We also recognized $5.0 of charges in 2007 related to the impairment of long-lived assets. See the section entitled âRestructuring and Asset Impairment Chargesâ and Note 4, âRestructuring and Asset Impairment Charges,â in the Notes to Consolidated Financial Statements for additional information.
Interest Expense and Interest Income
During 2007, 2006 and 2005, we recognized interest expense of $114.9, $86.2 and $75.0, respectively. Interest expense increased 33.3% during 2007 primarily due to higher debt levels during the year, reflecting funding for acquisitions, common stock repurchases, capital expenditures and pension plan contributions. Partially offsetting the 2007 year-over-year increase was a decrease of $7.0 in interest expense related to income taxes as a result of the settlement of a tax examination during the second quarter of 2007. Interest expense increased $11.2 during 2006 to $86.2, or 14.9% higher than the prior year. The increase primarily reflects higher interest rates during the year.
We recorded interest income of $49.6, $25.4 and $42.7 for the years ended December 31, 2007, 2006 and 2005. The 2007 year-over-year increase of $24.2 was primarily attributable to a higher balance of cash and cash equivalents over each period. The 2006 year-over-year decrease of $17.3 reflects the recognition of interest income during 2005 associated with settlements of tax issues related to the 1998 through 2000 audit cycle.
Income Tax Expense
During 2007, 2006 and 2005 income tax expense was $265.5, $227.6 and $144.7 or 29.5%, 31.3% and 21.5% of income from continuing operations, respectively. The year-over-year variances primarily reflect the benefit of tax settlements recognized during both 2007 and 2005 associated with prior year tax examinations, mix of earnings in countries with differing statutory rates, and the impact of a penalty recognized in 2006 associated with ITT Night Visionâs compliance matters.
See Note 7, âIncome Taxes,â in the Notes to Consolidated Financial Statements for additional information.
Income from Discontinued Operations, Net of Tax
During 2007, we recognized $109.1 of income from discontinued operations, net of tax. In addition to results of operations from the Switches businesses during 2007, income from discontinued operations reflects an after-tax gain of $84.4 on the sale of substantially all of the Switches businesses during 2007.
During 2006, we recognized $81.4 of income from discontinued operations including a $41.2 gain related to the sale of the automotive brake and fuel tubing and components businesses and our industrial non-metallic lined pumps and valves businesses. The remaining $40.2 primarily relates to the operations of the Switches businesses, automotive brake and fuel tubing and components business, and industrial non-metallic lined pumps and valves businesses. Other contributors to income from discontinued operations include the adjustment of tax and other accruals associated with previously disposed businesses.
During 2005, we recognized a $162.8 loss from discontinued operations. The 2005 loss primarily relates to an after tax charge of $205.6 for the impairment of goodwill associated with our Switches businesses. Losses and asset write-downs associated with our former Network Systems & Services business and costs related to other discontinued operations also contributed to the loss.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Results of Operations
For the quarter ended September 30, 2008, ITT reported sales and revenues of $2,879.3 and net income of $216.3, or $1.18 per diluted share, compared with sales and revenues of $2,181.2 and net income of $230.1 or $1.25 per diluted share for the quarter ended September 30, 2007. Net income for the quarter ended September 30, 2008 includes income from discontinued operations of $11.8 or $0.07 per diluted share compared to $61.5 or $0.33 per diluted share for the same comparable prior year period.
For the nine months ended September 30, 2008, ITT reported sales and revenues of $8,749.8 and net income of $609.2, or $3.31 per diluted share, compared with sales and revenues of $6,474.6 and net income of $583.8 or $3.17 per diluted share for the nine months ended September 30, 2007. These results include income of $9.5 or $0.05 per diluted share from discontinued operations compared to income from discontinued operations of $79.2 or $0.43 per diluted share, during 2008 and 2007, respectively.
Further details related to these results are contained in the following Consolidated Financial Results and Segment Review sections.
Consolidated Financial Results
Sales and Revenues
Sales and revenues increased $698.1 or 32.0% to $2,879.3 for the third quarter of 2008, over the same prior year period. Excluding the impact of foreign currency translation (âconstant currency basisâ), sales and revenues for the third quarter increased $660.0. Sales and revenues from acquired companies, including EDO (acquired during the fourth quarter of 2007) and IMC (acquired during the third quarter of 2007), contributed $491.0 during the third quarter of 2008. Organic sales and revenues (defined as sales and revenues from existing businesses on a constant currency basis) contributed $169.0 to our overall revenue growth, primarily due to higher volume and price, including the impact of new products and programs.
Sales and revenues for the nine months ended September 30, 2008 increased $2,275.2 to $8,749.8, representing a 35.1% increase over the same prior year period. On a constant currency basis, sales and revenues increased $2,083.3, including contributions from acquisitions of $1,563.6. Organic sales and revenues grew $519.7 over 2007, primarily attributable to higher volume and price, and the impact of new products and programs.
During the third quarter of 2008, we received orders of $3,339.6, an increase of $961.2 or 40.4% over the same prior year period. On a constant currency basis, orders grew $918.8 or 38.6%. This increase was attributable to organic growth of $305.9 or 12.9%, including contributions from each of our business segments, and orders from acquisitions of $612.9 or 25.7%, including the addition of EDO and IMC. Orders received during the first nine months of 2008 increased $2,443.2 or 38.2% over the prior year, including $1,319.9 or 20.6% from acquisitions, and organic growth of $920.2 or 14.4%. Foreign currency translation had a positive impact of 1.8% and 3.2% for the third quarter and nine month period ended September 30, 2008, respectively.
Costs of Sales and Revenues and Gross Profit
Costs of sales and revenues were $2,068.6 and $6,311.1 for the third quarter and nine month period ended September 30, 2008, respectively. This represents increases of $528.5 or 34.3% and $1,704.2 or 37.0% over the same prior year periods. These increases were primarily attributable to the acquisitions of EDO and IMC, higher sales volume and an unfavorable impact from foreign exchange translation.
Gross profit for the third quarter of 2008 was $810.7, a 26.5% increase compared to $641.1 during the same prior year period. Gross profit for the first nine months of 2008 was $2,438.7, a 30.6% increase compared to $1,867.7 during the same prior year period. Gross margin was 28.2% and 27.9% for the third quarter and nine month period ended September 30, 2008, respectively, compared to 29.4% and 28.8% over the same prior year periods. The year-over-year decreases were driven by higher production costs and unfavorable sales mix, but were partially offset by our productivity and strategic initiatives, including our efforts to improve supply chain productivity and control material costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (âSG&Aâ) were $417.0 and $1,283.4 for the third quarter and nine month period ended September 30, 2008, respectively, an increase of $89.4 and $304.9 over the same prior year period. The year-over-year increases were primarily attributable to the acquisitions of EDO and IMC, and a negative impact from changes in foreign currency exchange rates. SG&A as a percent of sales was 14.5% and 14.7% for the third quarter and first nine months of 2008, compared to 15.0% and 15.1% during the same prior year periods.
Research & Development Expenses
Research and development expenses (âR&Dâ) were $60.7 and $172.5 for the third quarter and nine month period ended September 30, 2008, respectively, compared to $46.8 and $129.9 during the same prior year periods. The year-over-year increases were primarily attributable to the acquisitions of EDO and IMC. R&D expense as a percentage of sales was consistent over the same periods as we continued our efforts to support product development.
Operating income increased $68.5 or 26.4% and $238.7 or 32.8% during the third quarter and first nine months of 2008 over the same prior year periods. These increases were largely due to the impact from the EDO and IMC acquisitions. In addition, organic contributions were realized at each business segment. These contributions were primarily attributable to higher sales volumes and price, benefits from operating efficiencies, and cost savings initiatives, partially offset by unfavorable sales mix, and increased SG&A expenses.
Operating margin decreased 50 basis points to 11.4% and 10 basis points to 11.1% for the third quarter and nine month period ended September 30, 2008, respectively, over the same prior year periods. These results primarily reflect the benefits from operating efficiencies and cost savings initiatives, partially offset by unfavorable sales mix, and the impact of acquisitions (higher amortization of intangible assets).
Interest Expense and Interest Income
Interest expense during the third quarter and first nine months of 2008 increased $3.5 and $32.6, respectively, compared to the same prior year periods. These increases were primarily attributable to higher levels of debt, reflecting our funding for acquisitions and capital expenditures during the periods, and tax related charges partially offset by lower interest rates during the current year. In addition, partially offsetting the nine month year-over-year variance is a decrease in accrued interest of $7.0 as a result of the settlement of a tax examination during the second quarter of 2007.
We recorded interest income of $8.3 and $24.6 for the third quarter and nine month period ended September 30, 2008, respectively. This represents year-over-year decreases of $4.3 and $6.4, respectively, which were primarily attributable to a lower average balance of cash and cash equivalents during the second and third quarters of 2008.
Income Tax Expense
Income tax expense for the quarter and nine month period ended September 30, 2008 was $98.6 and $279.9, respectively, an increase of $25.5 and $104.6 over the same prior year periods. The effective tax rate for the quarter and nine month period ended September 30, 2008 was 32.5% and 31.8%, respectively, compared to 30.2% and 25.8% during the prior year.
The year-over-year tax expense increases primarily reflect the impact of a tax benefit of $44.3 resulting from the settlement of a tax examination during the second quarter of 2007, and higher earnings during the 2008 periods, partially offset by the impact of other tax-related items.
The year-over-year effective tax rate increases primarily reflect the impact of the previously discussed 2007 tax benefit, partially offset by a change in earnings mix and the impact of other tax-related items.
Thomas Scalera - Director of Investor Relations
Thank you, Julianne. Good morning and thank you for joining us for this morning's discussion on ITT's third quarter 2008 results.
With me this morning are Chairman and CEO, Steve Loranger; and Chief Financial Officer, Denise Ramos.
Steve will start today's call with some highlights from the third quarter. Denise will then provide a detailed business review of the third quarter performance, and will also provide an update for the 2008 earnings outlook. Steve will finish up with an overview of some recent Defense wins. And then, we will move on to a Q&A session.
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 website at itt.com/ir.
In addition, let me remind you that any remarks that we may make about future expectations, plans and prospects constitute forward-looking statement for preference of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
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 annual report on Form 10-K as well as our other public SEC filings. This conference call is being webcast and the replay will be available later today on our website.
And now let me turn things over to Steve.
Steven R. Loranger - Chairman, President and Chief Executive Officer
Thank you, Tom and good morning. Today, we are very pleased to deliver a nicely balanced third quarter earnings report that reflects the underlying resiliency in ITT's portfolio.
Our dedicated teams continue to drive solid business results, accounting for another strong quarter by all financial measures. We believe our attractive portfolio addressing enduring global needs, strong leadership team and a disciplined management process has put ITT in a good position to deal with the challenging environment in the extreme market volatility that we're all seeing.
Today's ITT generates 53% of its revenue from the Defense segment, where our unique range of capabilities are well aligned with current and future customer priorities. Those priorities are in communications, sensing and surveillance, space and advanced engineering integrated services. Both Presidential candidates in the upcoming elections support force expansion and equipment modernization as their top priorities and it has been our ongoing strategy to position the Defense portfolio to address these types of needs.
And, in addition, our Defense business is not highly exposed to large development of weapon, ship or aircraft program that made these intensifying budgetary pressures due to constraints caused by our recent financial rescue programs. So, in this environment our Defense business did a very nice hedge with respect to global economics.
We also believe that our commercial businesses are more resilient in difficult market conditions. This is due to our highly diversified positions, the critical nature of our products and our high aftermarket content.
The strong geographic diversity in our commercial businesses is reflected in our balanced North American and European mix, each representing around 40% of the total. And our significant in-market diversification and 40% aftermarket content provides demand stability for our critical products.
During prior economic downturns, we saw increased aftermarket activity as customers try to extend the life of certain equipments. With a larger installed base and expanded direct distribution networks, ITT is well equipped to address these needs in this economic cycle. Our strategies remained focused on long-term growth and continued operational improvements. However, we are prepared for projected softening of the global economy.
Our better than expected third quarter results and our anticipated strong full year performance, nicely enable us to take action now to accelerate restructuring activities and advance our operational efficiencies to better weather the potential of 2009 conditions. Denise will discuss the impact of these actions shortly.
And so reviewing the third quarter performance, we're extremely pleased with the balanced results that we've delivered across the portfolio. Total revenue grew 32% on a solid 8% organic growth. Segment operating income grew 29%. Earnings per share grew 26% and exceeded the midpoint of our previous guidance by $0.07 per share.
And we're very pleased with our free cash flow performance. We grew free cash flow 76% to $759 million, driven substantially by working capital management in EDO performance. This represent a 127% conversion of income from continuing operations.
And so with this solid Q3 report, we'll now turn over to Denise for a more detailed review.
Denise L. Ramos - Senior Vice President and Chief Financial Officer
Thanks Steve. Starting on slide two; we demonstrated strong financial results in Q3. Consolidated revenues were 32% with acquisitions contributing 23 percentage points. We delivered solid organic revenue growth at 8%, Defense grew 9%, Fluid grew 8%, and Motion grew 6%.
Total organic orders improved 13% and that was led by a 21% increase at the span [ph]. Segment operating income increased 29% to $376 million. This was due to solid organic growth and incremental contribution from the EDO and IMC acquisitions.
Segment operating margins declined 30 basis points. Favorable productivity, tension in foreign exchange was more than offset by negative impact from acquisitions and escalating material costs.
So third quarter EPS of a $1.12 improved 26% compared to the prior year, and was $0.07 higher than the midpoint of our previous guidance range. This improvement was primarily due to higher operating performances at Fluid and Defense and lower interest in taxes.
Turning to slide three; in today's challenging credit environment, we thought it would be appropriate to highlight our strong free cash flows generation in current financial position.
Year-to-date free cash flow of $759 million represents 127% conversions of net income. For a third straight quarter on year-to-date free cash flow of conversion exceeded 100%; this strong performance was due to higher earnings, lower pension contributions, improved working capital and significant contributions from the acquired EDO businesses. The consistent cash performance reflects the nature of our customer base and the strong efforts of our shared service organization.
Keep in mind that the federal government currently represents nearly 50% of our revenue base.
The strong 2008 cash flows generations and our disciplined capital deployment strategies together lowered our net debt to net capital ratio to 21.2% at the end of September. Compared to the first quarter of 2008 after all of the financings related to the EDO acquisition that we put in place, net debt declined $389 million to $1.2 billion.
During this time, outstanding commercial paper was reduced by $326 million. Keep in mind that at the end of September, cash and cash equivalents were $957 million, of which $197 million is in U.S. investments.
Let me comment for a minute on how we see the current situations impacting ITT. For the current volatility of rates for short-term borrowing is expecting us like everyone else, we do continue to get good reception in the market for our commercial paper because of our strong cash generation and balance sheet. Our commercial paper program is backed up by variable revolving credit agreements, totaling $2.75 billion. And as of the end of September, only 60% of funds available to us under our credit facilities supported outstanding commercial paper. So said another way, our commercial paper was 160% backed up by available revolving credit agreement.
In this environment, our short-term financing objectives are clearly focused on preservation of liquidity. And to that end, we will intensely focus on our free cash flow performance.
We will slowdown our share repurchase activity, discretionary capital expenditures in domestic acquisitions. We will continue to closely monitor customer receivables, and we will continue explore tax efficient strategies to repatriate our foreign cash holdings.
Turning to Fluid Technology on slide four; Fluid 8% organic revenue growth reflected balanced global performance. In North American businesses, which represent 44% of Fluid Q3 revenues, grew 7% in the quarter. International businesses grew 8%, led by emerging market expansion of 14%. Total Fluid organic orders grew 6%.
Fluid's operating margins improved 100 basis points to 13.9%. Pricing, lower restructuring, foreign exchange, and pension benefit more than offset higher material cost and investment.
At the Fluid value center level, our industrial process team grew organic revenue by 14% and this is the sixth straight quarter from double-digit growth. Demand in the oil and gas and power and chemical markets remains strong. And industrial process organic orders improved 26% in the quarter.
Water and waste water grew 8% organically due to global, municipal and de-watering product growth. The de-watering businesses were strong due to increased global mining. Water and waste water experienced mid-single digit growth in both the North American and international municipal market.
In the treatment businesses benefited from de-salination projects in the Middle-East region, but despite the strong third quarter performance flat orders suggested further slowing in municipal demand. We have been anticipating such softening and we will continue to monitor any developments in this market. Presidential and commercial water grew 4% organically as global, commercials and agriculture strength more than offset soft North American residential market.
Global commercial markets grew in the 6% range, with North America up 5% and international up 7%. Growth in these markets is expected to slow in the fourth quarter.
So in summary, Fluid balanced third quarter performance exceeded our expectations. However, we are reducing four year Fluid revenues by approximately $40 million due to preliminary indications of additional softening in certain markets. The recent significant change in foreign exchange rate causes an additional $120 million reduction to our 2008 revenue forecast. But overall, organic revenue growth for the year is projected at 5%.
Moving on to Motion & Flow control on slide five; total revenues, including the acquired IMC businesses grew 25%. Organic revenues increased 6% on strength at aerospace, friction, and Interconnect Solutions and that more than offset the continued weakness we're seeing at Flow Control.
Segment organic orders grew 4%. Motion & Flow Control's margins improved by 10 basis points to 14.2%. Productivity, foreign exchange, and pension favorability were partially offset by acquisitions, investments and footprint actions.
At the Motion & Flow Control value center level, the Aerospace Controls unit was strong again with organic revenue growth of 11%. And this performance was fueled by strong aftermarket activity.
Friction Technologies had another solid quarter, growing 9% on an organic basis. This was driven by balance OEM and aftermarket strength. During the quarter, our Friction team won another five new platforms, adding to an already impressive 2008 total. In addition to new wins, friction's aftermarket represented 47% of year-to-date sales.
Interconnect Solutions grew 8% on an organic basis. This was driven by strength in the North American military, aerospace and oil exploration market. We remained challenged though by our Flow Control business, which declined $6 million or 9% organically, due to continued deterioration in the Marine and Spa & Whirlpool markets in North America. And we are now seeing slowing activity in European markets.
The acquired IMC businesses delivered another strong quarter of revenue growth compared to the prior year, led by improvements in the oil and gas, derails and the aerospace market. The IMC businesses grew more than 9% on a pro forma basis.
So in summary, the Motion & Flow Control group delivered a solid third quarter that reflected the segment's geographic and end market diversity. Recalibrating our fourth quarter foreign exchange assumptions, results in an approximate $50 million reduction to the midpoint of our previous 2008 revenue guidance. Overall, organic revenue growth for the year is projected at 4%.
Turning to slide six, Defense Electronics and Services grew 52%. This was due to organic revenue growth of 9% and strong Fluid 2.1 performance from the acquired EDO operations.
Organic orders were 21% with significant contributions from the core product businesses of communication systems, electronic systems, Night Vision and space. The strong orders flow growth drove backlog up to $5.1 billion, and that's an increase of $438 million from the second quarter.
Defense margins at 12.2%, declined 140 basis points and this is due to favorable pensions and net cost productivity, offset by the EDO acquisition and mixed impact.
Our Advanced Engineering and Sciences business grew organic revenue by 40%. Increased activity on the data analysis contract and FAA air traffic modernization program drove the quarter's growth. Our Systems business grew 12%. And this was due to increased activity on sensor programs involving missile defense and state control programs.
Communication systems improved 6%. And this was due to increase in international sales for the Iraqi and Saudi military, an increased JTRS development activity.
Electronic systems declined 12% organically and that was due primarily to program timing. Organic orders though increased 218% in the quarter on strong demand for airborne counter measures.
We remained confident in our ability to deliver continued revenue strength at Defense. And we are once again raising the mid point of our 2008 Defense revenue guidance by $50 million. This improvement is largely attributable to increased customer demand for CREW 2.1 ID/IQ agreement.
Now, let's move on to the well forward of our EPS guidance, which is on slide seven. We are increasing our 2008 guidance before incremental effect to restructurings by $0.07 per share. This increase represents the amount that our third quarter performance exceeded the midpoint of our previous guidance.
We then adjusted this amount to reflect the unprecedented recent movements in foreign exchange rates, compared to our prior guidance. The adjustment negatively impacts full year earnings per share by $0.04 per share.
Lastly, in response to anticipated global market conditions in 2009, we are accelerating restructuring activities across our businesses during the fourth quarter of 2008. And these incremental actions of approximately $48 million or $0.17 per share primarily relates to reductions in headcount in both U.S. and European operations.
In total, our revised full year 2008 earnings per share from continuing operations excluding special item, is now in $3.97 to $4.03 per share range. Keep in mind that our earnings per share guidance fully reflects all restructurings and foreign exchange impact.
Turn to slide eight and you'll see our detailed 2008 guidance. In total, we now forecast full year revenue at $11.45 billion to $11.55 billion. And that's approximately 28% higher than reported 2007 full year revenue.
Total 2008 organic revenues are projected well in a 6% to7% range. We are increasing the midpoint of our defense revenue guidance by $50 million. And this increase was primarily due to higher CREW 2.1 deliveries requested by the customers.
Resetting our revenues forecast to reflect current foreign exchange rates, resulted in approximately $170 million reductions at our commercial unit. Assuming an average euro rate of $1.29 compared to the $1.58 rate using our previous guidance resulted in $120 million revenue reduction of Fluid and a $50 million reduction at Motion & Flow Control.
We are also reducing Fluid revenue by an additional $40 million due to anticipated softening in certain municipal and commercial markets. We'll provide any updates to our guidance and an overview of 2009 results during our December 12, 2009 guidance call. So, please hold your 2009 questions until that time.
Now, I'll turn back to Steve for some thoughts on recent Defense development and then wrap up.
Steven R. Loranger - Chairman, President and Chief Executive Officer
Thank you, Denise. If you move on to slide nine, please. You know that our Defense team just keeps on winning and we'd like to highlight some of those accomplishments. On the right side of the slide, you'll see an updated summary, of just some of the most recent and significant strategic development and contract wins since July 1st.
Defense in strong third quarter financial performance was accompanied by some very significant wins. These wins include a $177 million of Night Vision orders, including $24 million for Enhanced Night Visions guidance, another sole source position for ITT under the $560 million ID/IQ contract.
We signed the JTRS or Jitters teaming agreement with General Dynamics, enabling an opportunity for us to correlate the installed base of SINCGAR's in with advanced JTRS technology. And that led to a $117 million win of the JTRS Solider Radio Waveform Development program.
We received $490 million award for Foreign Military sales in our Communication Systems business. The CREW program continues on track with a $1 billion CREW 2.1 ID/IQ award electronic systems; $433 million of which is already been included in new orders. What's particularly significant about these CREW orders is that $206 million of this 2.1 award was for non-MRAP vehicles, which plays into our strategy to deploy the 2.1 technology to a much larger install based of vehicles beyond the MRAP. So, we're quite thrilled with the continued direction with the CREW program as it's been earning its right by performing exceptionally well in the field.
And finally, we got a $1.3 billion NASA contracts to perform telemetry tracking and command services for near earth missions, which coupled with our already cemented position with the Jet Propulsion Laboratory, Deep Space Network, now enabled ITT to manage all of spacecraft activity that we hear outside of the earth.
Highlighted in light green on this slide are the non-DoD and international awards which reflect three key strategic growth priorities: international expansion, cross value centre proceeds and customer diversification.
In total, we see future non-DoD and international opportunities from this list, totaling over $4 billion. And the significance is that this is validating that our strategy of customer diversification and adjacency diversification within Defense is working quite well.
It should also be noted that the recent $1.3 billion NASA win reflects not only our customer diversification efforts, but also cross values center strategies. For the second time in less than a year, our advanced engineering and systems value centers teamed up to win a significant new incremental multiyear contract.
The last such win you recall was the $1.9 billion FAA air traffic control modernization program, where we continued to reach new milestones on schedule and under budget, which has recently enabled the FAA to move more decisively on certifying our installations or application in the air traffic arena.
Many of these third quarter wins have been added towards this backlog, which increased 13% from the second quarter to $5.1 billion. It should be noted that we would include funded orders in our backlog calculations.
Product backlog has increased during 2008 due to strong funded order activity. Our increasing product backlog provides good visibility to future requirements and is currently funded at a 100% of our projected 2008 product revenue.
Service awards typically fund over a shorter time period usually less than nine months. So, as a result, the unfunded portions of many of our new long-term service opportunities listed will not be fully reflecting in the current backlog. And as we continued to execute these programs, additional follow on funding will be provided in short increments.
Our current service backlog stands at about 50% of our projected 2008 revenues as this does not calculate... as this calculation does not fully reflect the follow on opportunities. But all in all this feels about right from a traditional book-to-shift point of view and we feel good about our position going into 2009.
So, moving out of Defense and just to wrap-up some comments on Q3; during the last several years of relative stability, our dedicated leadership teams have taken their necessary steps to position us for this down cycle, well before its arrival. We aggressively divested shorter cycle businesses, primarily in North American auto and global consumer driven electronic markets.
We then redeployed this capital in the long cycle businesses such as EDO, increasing our Defense leading to over 50% in the process. And it should be noted that EDO's year-to-date operating and cash flow performance has far exceeded our higher expectations. And as I mentioned earlier, we're thrilled with the recent successes of our CREW 2.1 product.
We've also invested in new strategic growth opportunities that penetrated new geographies and markets with our essential products. These efforts will reflect it in the nearly double-digit organic revenue growth rate we have delivered consistently since 2004. This growth is greatly expanded our installed base, which continues to fuel our exceptionally high levels of aftermarket demand.
Our growth initiatives in investments have expanded the scope and reach of our portfolio of critical products that support during global needs. We've also, over the years, invested heavily in our internal operating excellent conditions in the combined power of the ITT world. We've assembled a world class leadership team and devoted necessary resources to critical areas such as global sourcing, value-based moves Six Sigma and value-based product development.
Today, our balance sheet is strong. And we've generated record free cash flow every quarter in 2008. These strengths provide us with the financial flexibility required to respond a challenging current conditions as well as position for future strategic opportunities. We will continue to utilize a very disciplined capital allocution strategies that got us to where we are today.
We will not rest on the collective laurels of our past successes. As always, we are going to move aggressively to accelerate restructuring activities and remained focused on strategic long-term growth initiatives and the deployment of the operating processes contributing to our continuous improvement. We're going to focus on the preservation of our liquidity, while we prioritizing our internal investment activities based on new hurdle rates.
We're going to again remain conservative in our future outlook and very disciplined in our discretionary spending. These actions are not new to our cultural in ITT, but during these volatile and uncertain times they dare repeat it.
We think that ITT's best days are ahead and we're going to continue the drive our operations towards that future growth.
And the final point I'd like to make is that times like this, really call upon our leadership to be focused and I want to tell you how proud I am of our collective leadership teams throughout ITT. Our managers are stepping up to face a new reality by constraining costs, being decisive on the appropriate decisions to ensure that ITT's long-term business success continues.
And so with that, let's turn things over to Tom and we'll take questions.
Thomas Scalera - Director of Investor Relations
Julianne, I think we're now ready to start the Q&A session.