Financial News

This is the kind of news that will at least begin the process of a true bottom.  I've been talking about the cycle of greed and fear recently and the need for a big institution to go under.  Call it what you want but Bear Stearns being taken out for 2 bucks is a [...]

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We'll see books  written about this epic battle of  the  3 tech behemoths - Microsoft, Yahoo and Google.  Another chapter was written this morning as Yahoo defiantly rejected Microsoft's bid indicating it "massively undervalued" the company and that the company isn't likely to consider an offer below 40.  There has been talk of Yahoo [...]

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According to Reuters, Vanguard Mutual Funds pulled in the most money to its stock and bonds mutual funds in 2007, eclipsing American Funds which held the top spot since 2002.  Vanguard saw net inflows of 76.2 billion last year compared to 42.7 billion in 2006 as investors poured money into its safer money market accounts [...]

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Between battling flu bugs and an exhausting move I'm just not able to get back up to speed here in 08 as quickly as I had hoped.  Posting will be light again from me this week but I fully expect to be back working my tail off next week to bring you profitable ideas.  [...]

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There is much debate about whether individuals with a self-directed portfolio can outperform the major indices as well as mutual funds, which are touted by Wall Street as the only way for the average investor to accumulate wealth.  It makes sense doesn't it?  By keeping alive the pervasive myth that a buy and hold [...]

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The hotly debated estate tax issue has been in the news again recently after the Senate Finance Committee held a hearing where Chairman and Montana Democrat Max Baucus said he supports ending the estate tax along with the Iowa Republican Senator Charles Grassley who said, ""The estate tax is unjust. … Death should not be [...]

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Kimco Realty Corp. (KIM)

Q3 2007 Earnings Call

October 26, 2007 10:00 am ET

Executives

Barbara Pooley - Vice President of Investor Relations

Milton Cooper - Chairman and Chief Executive Officer

Dave Henry - Chief Investment Officer

Mike Flynn - President and Vice Chairman

Mike Pappagallo - Chief Financial Officer

David Lukes - Executive Vice President

Analysts

Ambika - Citigroup

Jay Habermann - Goldman Sachs

Christine McElroy - Banc of America Securities

Jeff Donnelly - Wachovia Securities

Craig Schmidt - Merrill Lynch

Matt Ostrower - Morgan Stanley

Michael Gorman - Credit Suisse

Michael Mueller - JPMorgan

David Harris - Lehman Brothers

Lou Taylor - Deutsche Bank

David Fick - Stifel Nicolaus

Scott O’Donnell - MetLife

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the
KIMCO’s Third Quarter Earnings Conference Call. Please be aware today’s
conference is being recorded. As a reminder, all lines are muted to prevent
background noise. After the speakers’ remarks there be a formal
question-and-answer session (Operator Instructions).

At this time it is my pleasure to introduce today’s speaker
Mr. Barbara Pooley.

Barbara Pooley

Thank you. Thank you all joining third quarter KIMCO
earnings call. With me this morning are Milton Cooper, Chairman and Chief
Executive Officer; Dave Henry, Chief Investment Officer, Mike Flynn, President
and Vice Chairman; Mike Pappagallo, Chief Financial Officer; and David Lukes,
Executive Vice President.

Several other executives are also available to take your
questions at the conclusion of our prepared remark. As a reminder, statements
made during the course of this call represent the company and management’s
hope, intension, beliefs, expectations or projections of the future, which are
forward-looking statements.

It is important note that the company’s actual results could
differ materially from those projected in such forward-looking statements.
Information concerning factors that could cause actual results to differ materially
from those forward-looking statements is contained in the company’s SEC
filings.

During this presentation, management may make reference to
certain non-GAAP financial measures that we believe help investors better
understand KIMCO’s operating results. Examples include, but are not limited to
operation in net operating income.

Reconciliation of these non-GAAP financial are also
available on our website. Finally, during the Q&A portion of the call we
request that you respect the limit of two questions with appropriate follow-up
so all of our callers have an opportunity to speak with management. Feel free
to return to the queue if you have additional questions.

I’ll now turn the call over to Mike Pappagallo.

Mike Pappagallo

Thank you Barbara and good morning. It certainly has been an
eventful three months in the market, since our last earnings report. Perhaps we
have hope that a few billion dollars writedowns by financial institutions and
an accommodating fed will clear the decks and bring a degree of business as
usual back into real estate, sales and financing market.

But at this point, that’s probably is wishful thinking as
there still appear to be more questions than answers including those
surrounding the health of the consumer.

For KIMCO, there were three major themes for the past
quarter. First, building as much liquidity and capital availability as
possible. Focusing on the blocking and tackling of leasing and portfolio
management, and also tempering our acquisition pace in light of more
opportunistic transaction that may be available in the future.

The liquidity action took various forms, the most
significant being the renewal of our credit facility to renew four-year terms
with a one-year extension option, and upsizing it from $850 million to $1.5
billion.

Despite turbulent markets, we were encouraged by the
commitments provided by so many of our relationship banks, such that we were
able to obtain commitments of almost $2 million before we reduced it to the
desired level.

And a reduction in the spread pricing to a level of 37.5
basis points over LIBOR plus a 12.5% facility fee, and increase the covenants
flexibility was also a positive in light of what is going on in the markets.

We also issued a new series of preferred stock for $460
million, which allowed us to race a more permanent form of capital to further
increase balance sheet flexibility without issues common shares.

We also recashed our existing Canadian dollar credit
facility to include a U.S. dollar borrowing option, and in Mexico we’re in the
processing of increasing our peso facility and have begun to place U.S.-style
non-recourse financing on our complete Mexico developing project to help
recycle capital.

Overall we continue to position the balance sheet to capture
opportunities in changing markets. With respect to the third quarter operating
results, FFO per share of $0.57 were $0.02 higher than consensus, and $0.01
above last year’s third quarter.

As you are aware we captured a significant portion of our
transactional or related activity in the first half of the year, including a
significant Albertson’s distribution as well as large profits from the
monetization our preferred equity position in Canadian self-storage and our
mixed-use asset in Lower Manhattan.

This resulted in a relatively small quarter-over-quarter
increase this go-around, but on year-to-date basis FFO per share is up 26% to
$2.50. We have also tightened the full year guidance range to $2.56 to $2.59,
which represents a fourth quarter range of between $0.50 to $0.53, and the
factors include timing on merchant building sales currently under contract as
well as a few other transactional items schedule for the last couple of months.

Looking past the quarterly variation, the portfolio metrics
once again points a solid execution on asset management strategies. Portfolio
fundamentals remain intact as evidence by another increase in occupancy to
96.2%; same-site net operating income growth of 4.2%, spreads on new leases of
17%, and an overall increase of 12% once factoring in options and renewals. And
while there is real concern about the health of the consumer from the stress in
the housing market, we believe that our centers are well positioned to
withstand these issues, particularly in California and Florida, the two states
most closely associated with the subprime mortgage mess.

While those states have experienced declines in the value of
housing, the resiliency of our property type, primarily focused on consumer
essentials, and the strong demographics of our locations will mitigate any
potential issues on occupancy or rental rates.

As I noted earlier, we have not been as aggressive on
pricing in the acquisition market, which has slowed the number of transactions
closed into our investment vehicles. That said, our management business remains
on solid footing, and Dave will highlight some of the initiatives to respond to
the changing landscape.

Despite the origination slowdown, the business plans of the
existing asset base continue to move forward. Two properties were sold out of
the GE venture, one of which was acquired by the KIMCO-SEB partnership, and
those sales generated an additional $6.2 million of promote income to KIMCO.

We also continued the disposal of selected assets from the
former Pan Pacific portfolio, with six assets sold in the quarter netting to
about $110 million. KIMCO Developers sold a completed Phase II of a project in
Texas, as well as a land plan in Arizona during the quarter, and is well on the
way to delivering approximately $25 million in post-tax gains for 2007.

The operating businesses of KIMCO Capital Services did not
experience any large single transactional items in the quarter. Although, we
did receive additional distributions from the Albertson’s investment, as well
as contributions from the recent investments in the extended-stay hotel
portfolio and our structured financing of a net lease portfolio with U.S.
realty advisors.

Insofar as providing guidance for 2008 earnings per share or
FFO per share, I would much prefer to wait a bit longer to flush out timing and
extent of transaction volumes, as well as to account for any uncertainties
surrounding the consumer, but if I didn’t say anything, you might read too much
into it.

So for now, I’m providing an FFO range between $2.70 to
$2.78. Just for perspective, I’d like to point out that the midpoint of that
range tracks ahead of the average annual 10% growth rate we rolled out during
our investor day in 2006, with a target of $3.50 a share by 2011. With that,
I’ll turn it over the Dave.

Dave Henry

Thanks, Mike. As you mentioned, I think all of us in the
REIT world have had a very interesting third quarter. For KIMCO, despite the
bumpy ride, we continued to make excellent investments in a wide variety of new
business activities. For our listeners’ consideration and review, I would like
to highlight the following this morning.

Number one, Brazil. I’m pleased to report that we have
formally expanded our presence in South America by signing a joint venture
agreement with real estate partner, SA, a Brazilian shopping center developer
based in Sao Paulo, Brazil. The company developed small neighborhood shopping
centers in the Sao Paulo market. The company had a strong pipeline of
neighborhood shopping centers, and we anticipate closing on our very first
project together in December.

The planned KIMCO REP shopping center is located in
Valinhos, a city located 40 minutes north of Sao Paulo, and will contain a
total of 135,000 square feet. In Brazil, we plan to focus on acquiring and
developing small neighborhood retail properties rather than developing or
building large high-end enclosed malls.

Brazil, with a population of 186 million people, is the
world’s tenth largest economy and is projected to become the fifth largest economy
in the world by 2050. With a record trade surplus in 2006, the largest foreign
direct investment in Latin America, 3% inflation rate, a stable currency, and a
growing middle class, Brazil represents an attractive long-term investment
opportunity for KIMCO.

Wal-Mart, McDonald’s and other American retailers are
focusing on growing their presence in Brazil, and we hope to join many of our
existing tenants as they expand into Brazil.

Number two, net lease portfolio. In a signature-structured
participating loan transaction this quarter, KIMCO invested approximately $78
million, giving us a 50% residual position in a large portfolio of 403 net
leased properties in 33 states. The portfolio is divided into 30 master leased
pools of properties with each pool leased to a single corporate credit,
collateralized by all of the assets in the pool.

The properties represent a diverse collection of
free-standing restaurants under 20 different brands and represent a very
attractive long-term investment for KIMCO due to the low market rents, low
investment per square foot, substantial amortization under the existing
mortgage loans, and generally strong corporate guarantors. As the leases expire
over time, we believe there will be substantial opportunity to create additional
value in this very large portfolio of more than 400 net leased properties.

Number 3, KIMCO Mexico retail land and development fund.
During the quarter we successfully closed and upsized twice our previously
announced Mexico retail land and development fund. The fund represents a new
product for KIMCO in that it is a fully discretionary commingled fund of $324
million.

The fund will acquire retail sites in Mexico, which are
targeted for future expansion by large U.S. and Mexican retail tenants. These land
parcels, which will either be developed within the fund or sold to third
parties over a three to seven-year period will be selected by KIMCO’s operating
partners or retail anchor tenants in Mexico.

Land which is planned for future development rather than
immediate development is comparatively inexpensive in Mexico, and we believe
that KIMCO and the fund investors will achieve attractive returns through this
investment vehicle.

Institutional investors committed to our fund include New
York common, ABP, Case Depo (ph), GE Real Estate, Northwestern Mutual and
Wellington Management. Building on the success of the Mexican fund, we are
introducing a $250 million U.S. land fund, which will be jointly sponsored by
KIMCO and the Rockefeller Group.

Combining forces, KIMCO and the Rockefeller Group will be
able to acquire large mixed-use sites and leverage KIMCO’s expertise in retail
development, and the Rockefeller Group’s experience in office and industrial
properties.

The fund will target land and specific selected markets
where either KIMCO or the Rockefeller Group have a strong track record. These
markets include Florida, California, Arizona, New Jersey and Texas. The
Rockefeller Group has an 80-year history of developing commercial real estate
and is wholly-owned by Mitsubishi Estate, one of the world’s largest real
estate companies.

We are very pleased to be working with them on this new
fund. Overall, we believe the growth of our institutional asset management
business will be based on delivery of new joint venture and commingled fund
products to meet the real estate objectives of a growing list of institutional
clients.

In 2008, we plan to introduce a new fund for South America
retail properties, and a New York urban investment and development fund. We have
reached agreement with UBS Wealth Management, a valued existing institutional
client, to form a $300 million joint venture to acquire core stabilized retail
properties in Canada.

All of these areas represent growing sources of investment
opportunities for KIMCO with attractive yields for our clients and our
partners. Now I would like to turn to Milton for his comments and thoughts.

Milton Cooper

Thanks, Dave. George Bernard Shaw once said, when I was
young and foolish, I thought that money was everything, and now that I’m older
and wiser, I know it is. Two weeks ago, Mike Flynn, Dave Henry, Mike
Pappagallo, David Lukes and I met in an off-site strategy session in a
Westchester Hotel conference room, and we agreed with George Bernard Shaw.

Our job is to deliver the money to our shareholders and our
people, and since our shareholders do not receive large annual dividends, and
since no one at KIMCO receives large cash salary, the money has to be in the
form of a growing share price. Now the fact that since our IPO, we have doubled
the price of our shares every five years is history. What do we do from here?

Our company has never, never, ever accepted the status quo.
Innovation is our mantra. And so our focus is to chart the course for future
double-digit growth over time, and here is our road map. One, our shopping
center portfolio. We constantly review each asset with the following in mind.
Where can we creatively add value? Is there growth in cash flow from the asset?

Some of our centers have substantial built-in growth.
Shopping centers that were built in the ’60s and the ’70s had then prevailing
rents under leases that are to expire within 10 years. Permit me to illustrate.
We own a 212,000-square-foot shopping center in Staten Island.

A lease for 100,000 square feet was entered into in 1970
under which the tenant paid an annual rent of $3 per square foot, gross. That
was the then-market. New leases for smaller tenants are in the mid-40s per
square foot. The 100,000-square-foot lease expires in 2011, and our estimate is
that the rental value is at least $30 per square foot.

Now, most of our income streams are generated from
properties in urban areas, and those that were developed in the ’60s, ’70s, and
’80s are in mature suburbs that do not have land for new housing and are not as
vulnerable to the slowdown in new-home construction. It is my view that
shopping centers with long-term leases with below-market grants are superb
investments with bond-like characteristics that will attack investors worldwide
who seek safety in hard assets.

David Lukes refers to some of our centers as land banks that
are carried by our tenants’ rents until leases expire. Now, there are other
centers whose growth is more appropriate for an investor with a lower cost of
capital and a more patient time horizon. And these centers will be placed in a
joint venture with such institutions. And we will sell any center that we feel
may have risk.

Two, our global expansion. Our global expansion is designed
to deliver higher yields and diversify our risks from being completely
dependent on the U.S. dollar. Our first entry into the Canadian market was six
years ago. We were and continue to be very optimistic about real estate in
Canada. By the way, at the time of our initial investments, C$1 was equivalent
to $0.66. We now have interest in over 145 properties in Canada.

Mexico. We began our acquisitions in Mexico in 2002, thanks
to Dave, and we continue to believe that Mexico has good growth prospects. We
have interests in 127 properties and anticipate continued substantial returns.
We have interest in 21 developments that should come on stream by 2009. While
we are pleased with what we own, we recognize that there now is very large
demand to own real estate in Mexico, and as a result, we now are faced with
substantial competition.

Our timing in the past was good, but it will be more
difficult to create more opportunities in the future. And in addition to Canada
and Mexico, as you have heard, we are exploring and acting on additional
investments in Chile and Brazil.

Three, our institutional investment management business.
This is a growing business, and we are adding new institutional relationships
and new products. Dave has mentioned our land fund in Mexico, and our new joint
venture on a U.S. land fund.

Four, our development business. We have a solid development
business that has been consistent in its earnings. The contribution from our
development business is a little less than 5% of our EBITDA. We do have over 20
projects that should be completed between 2008 and 2010.

Five, KIMCO retail services. Retail services provides
financing and other services for retailers. Some examples are Montgomery Ward
designation rights transaction and our Venture Stores transaction. KIMCO Select
is, in essence, an opportunity fund that takes into account the underlying
value of real estate and leases. Some examples are the Albertson transaction
and the Frank’s Nursery transaction.

Six, preferred equity. Our preferred equity program
currently is approximately $465 million invested in over 260 properties. We
expect to realize approximately $200 million in residual profit participation
out of this portfolio.

Seven, our New York City, Boston and Philadelphia urban
projects. Patrick Flynn has headed up our effort to create value and profits
with selected investments in New York City, Boston and Philadelphia. During the
year, over $15 million of profits were generated out of the sale of two
Manhattan properties.

So, we believe that we can deliver the goods over time at a
combination of these buckets and any new bucket and opportunities that we may
be able to seize upon. Our view is that the times ahead will bring some pain to
the consumer, and there will be turbulence in the markets.

We have prepared for this cycle by keeping up balance sheet
and liquidity very, very strong. We have been through cycles before and have
always found that opportunities arise out of dislocation in the marketplace.
And with that, we would be delighted to entertain any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question
from Jonathan Litt with Citigroup. Please go ahead.

Ambika - Citigroup

Hi, this is Ambika (ph)with John. Given the uncertainty on
when transaction volume will pick up, how should we think about that being
factored into 2008 guidance?

Mike Pappagallo

Ambika, this is Mike. I think historically we have looked at
transactions, separating it between core shopping center acquisitions and then
everything else. I think where we have a little struggle with visibility is
what form and structure these transactions are going to take.

In coming up with the preliminary guidance numbers that I
have provided, I am expecting somewhere over $1 billion of investment activity,
but that’s not necessarily going to be all of the core shopping center type
assets that you have seen us acquire over the past couple of years.

So that’s a generic assumption, volume assumption, but the
form and content of what business unit it falls in to, we have preferred
equity, our opportunity fund, some of the other funds that Dave has talked
about, that is to be determined.

Ambika - Citigroup

So given that is below your historical acquisition volumes
in the past couple of years, you would assume that that’s more of a
conservative target at this point that could be revised upwards if the market’s
transaction volume resumes.

Mike Pappagallo

Yes, that is true, and it has been pretty much the custom here
at this point in the year or before the year, to take a relatively conservative
view, because conditions do change, and you saw it over the past three or four
months on how dramatic the credit markets were impacted.

So we have a long-term business strategy. We have talked
about it often. We have clear objectives that Milton articulated, and strategy.
But we will continue to do is refine these assumptions set into those
components as the year proceeds.

Ambika - Citigroup

Okay. And could you give color on the marketable securities
gains in the quarter?

Mike Pappagallo

The 10 million is — 10 million for the quarter.

Ambika - Citigroup

Any breakdown on where that is coming from?

Mike Pappagallo

No, we generally don’t give a list of specific securities.

Ambika - Citigroup

Okay. Thank you.

Operator

And we’ll take our next question with Jay Habermann with
Goldman Sachs. Please go ahead.

Jay Habermann - Goldman Sachs

Hey, good morning, everyone. Just, I guess, continuing on
the ‘08 guidance front, can you just comment, are you assuming any impact there
from Albertson’s. And, I guess, Mike, as well, since you did open the subject,
can you talk about same-store NOI growth assumptions?

Mike Pappagallo

With respect to Albertson’s, I have more of a generic
assumption as it relates to our group of businesses in KIMCO Capital Services,
which is preferred equity, KIMCO Select, and Retailer Services and piecing
those together. And in looking at those three businesses, if you tally up the
2007 contribution, or expected contribution, it’s probably about $225 million
worth of transaction and flow within those three components.

And we’re expecting $30 million or so increase in our
original business plan for those three businesses together. So it’s going to
come from a variety of sources as it has traditionally, and some of it will be
Albertson’s, but at this point we don’t have an exact number, because there are
a series of financing and strategy at the Albertson’s level that haven’t been
finalized and are subject to market conditions. So, Jay, that’s how I look at
the guidance in terms of taking the three businesses together, understanding
their aggregate profitability, and then planning off of that larger base as we
go into next year.

Jay Habermann - Goldman Sachs

Great. Thanks. And just one follow-up, I guess, for Milton,
in terms of the recent disruptions in the credit markets. Can you just comment
a bit on outlook for distressed store closings? Have you seen any growing signs
that might make you more nervous than before?

Milton Cooper

Nothing could make me more nervous than before. No, we
continue to worry about the consumer and there are certain retailers that we
believe may have issues in ‘08, but we really, David, couldn’t identify them.

Mike Pappagallo

Jay, I just wanted to circle back. You also asked on the
same-store, we’re forecasting 4%, and that’s based on our ground-up budget
process that we just completed with respect to our core shopping centers.

Jay Habermann - Goldman Sachs

Okay. Thank you.

Operator

And we’ll take our next question with Christine McElroy with
Banc of America Securities. Please go ahead.

Christine McElroy - Banc of America Securities

Hi, good morning. If you look at over the next few years at
your expectations for future supply growth for shopping centers, would you say
it’s coming at all in the new financing environment given that it has become
more difficult for smaller developers to obtain financing?

And does this have any impact at all on your expected yields
for projects in your future pipeline, if overall supply growth declines?

Dave Henry

It’s still early to tell, I think. The credit crunch is
relatively short-lived at this point. If it continues, I would agree with your
promise that smaller developers will have more difficulty.

Plus if Jerry is on the line, he can comment, as well, but
the projects themselves these days are much larger and take much longer to get
through entitlements and the zoning process, so retail in general is done on a
pre-leased basis. Speck projects are not generally done to any large degree.

Jerry Friedman

Dave, this is Jerry. I would agree with you. I would also
state that if the credit crunch does continue, it gives greater opportunity for
KIMCO to take over, at a later stage, those projects from smaller developers.

Christine McElroy - Banc of America
Securities

Okay. Great. And then just a follow-up on Ambica’s question
with regard to becoming more aggressive on acquisitions. What types of changes
in the private market are you looking for?

When we should expect you to become more aggressive whether
it’s pricing changes or more stability or different types of opportunities?

Dave Henry

Well, I think we, like others, are being careful today.
We’re watching with interest. We’re in the market every day. It’s still
competitive for Class A properties, which our investors want.

The bid/ask has widened a bit, and there’s been retrading
going on and the debt markets, as you know, have been a bit dicey. So our
acquisitions people are in the market every day. We continue to lose deals on
occasion, which indicate to us that the market is still competitive for the
very best properties.

Cap rates have moved around a little bit. But we’re not
exactly sure where they are settling. So, at this point, we’re trying to be
careful. But one way or another, it will settle out in due course, and KIMCO
will continue to see opportunities and we will continue to team with our
institutional partners to grow our portfolio.

Christine McElroy - Banc of America
Securities

Great. Thank you so much.

Operator

And we’ll take our next question with Jeff Donnelly with
Wachovia Securities. Please go ahead.

Jeff Donnelly - Wachovia Securities

Good morning, guys. Mike, maybe just another way of asking
about your same-store NOI growth expectation for 2008, with your occupancy in
an all-time high and retail, or appetite for your store opening, I guess, is
relatively softer than it was perhaps a year ago.

What leads you guys to be so confidant that rate growth
would be this robust now? You can argue that perhaps most aggressively seen is
KIMCO being NOI growth in sometime.

Mike Pappagallo

I think its consequence, Jeff, of many of the rollovers that
we’re seeing in terms of our projects, the ongoing programs and redevelopment
projects that David and his team have underway. Because it’s not, your point is
valid.

It’s really not going to be driven by occupancy. It’s going
to be driven more by active management, rent bumps, step-ups and the programs
we have got underway. That really is the short answer.

When we think about the same-store growth, part of that
analysis is that there are a — continues to be a group of properties that are
targeted for this position in our – in that base portfolio that are the
slower-growth assets.

And it’s incumbent upon us, as a strategy to move those out
directly or into funds that they are solid properties but just slow growth. So,
that’s really part of what makes up the number.

Dave Henry

I think, we’re particularly excited about some of the
redevelopment efforts, and the added resources that we have focused on the
redevelopment within our portfolio. With such a large portfolio, as you might
imagine, we have got some nice opportunities to create value in some of our
existing shopping centers. And that’s a great program, and that should help us
drive some nice value.

Jeff Donnelly - Wachovia Securities

Do you have a sense of what your NOI growth would be if you
excluded those assets that are benefiting from redevelopment capital?

Mike Pappagallo

I would pencil that — and every one — any one quarter,
there’s a different answer in terms of the relative impact, but as a general
matter, I would say it’s lifting the base rate from a 2.5% to 3% level up to
the 4%-plus level.

Jeff Donnelly - Wachovia Securities

One last question. Mike, I think you mentioned at the very
beginning of the call, that you guys were tempering your acquisition activity
to wait for larger, and I guess, implicitly, better deals that may come down
the road.

Are you seeing those opportunities now, or do you think they
are still a few quarters away? And who drives the decision within the funds
business to decide to buy assets or not? Is it KIMCO or its partners?

Milton Cooper

Well, there’s — we team with our partners in looking at
opportunities, especially large portfolios, either public or private. If you
recall over the last five or six years, KIMCO has bought five other public
companies, which has driven our assets under management very nicely.

I personally think, there will be some more M&A activity
coming up with smaller companies, either public or private. Those type of
opportunities do appeal to our institutional partners, because in one fell
swoop, they can get a large portfolio of properties.

That’s very difficult for Mike to factor into his numbers
when we’ll buy a small public company or something like that. So we also have a
one-off business that’s more predictable and Tom Caputo and his team have done
a nice job.

And we do have a pipeline of acquisition activities, but
it’s tougher to predict in this market, which ones will win at which kind of
cap rates and which investors have an aggressive appetite for that. But we’re
confident we’ll deliver Mike’s base case.

Jeff Donnelly - Wachovia Securities

Okay. Thanks, guys.

Operator

We’ll go next to Craig Schmidt with Merrill Lynch. Please go
ahead, sir.

Craig Schmidt - Merrill Lynch

Good morning. I was looking at your portfolio statistics by
country page and the United States has the lowest average rent per square foot
relative to Canada, Mexico and Chile. I wondered if that was because of the age
of the centers or is something else driving that statistic?

Milton Cooper

That’s the age of the centers. One of the sad realities is
that, we have been around for such a long time. We’ve been in business for 50
years, so that it distinguishes us — many of the properties I mentioned were
built in the ’60s, ’70s, ’80s, and acquisitions, so that it’s a factor of the
age of the center, and that they’re encumbered with long-term leases at lower
rents.

B>Dave Henry

And as we’ve mentioned previously, in Mexico, it’s mostly a
development game. These are new shopping centers coming on stream. The existing
inventory of shopping centers to buy in Mexico is very limited.

Craig Schmidt - Merrill Lynch

So, if I’m thinking about this correctly, it would seem to
suggest that the United States has the best opportunity for growth relative to
the four countries you primarily do business in.

B>Dave Henry

I would argue the opposite. If you look at the U.S. leases
for new properties, you are talking about very flat leases. For instance, when
we sign a Home Depot lease today, it is flat for 20 years, and sometimes flat
for the option period.

When, we sign a Home Depot lease in Mexico, we have possible
increases every single year and in some cases we have percentage rent. So, it
depends on the country and the lease structures.

Mike Pappagallo

I think your point is that on the older properties, there is
more room for growth because those rents are lower. Dave, is right on the newer
acquisitions. On the old properties, we do have below-market rents.

Craig Schmidt - Merrill Lynch

Thank you. That’s helpful understanding that Home Depot
signs different types of leases by country.

Dave Henry

Yes, it depends on where they are trying to grow. For
instance, we get very different leases from Wal-Mart in Mexico than we do in
the U.S. In the U.S. they like to own their own property.

That’s very difficult to lease a Wal-Mart in the U.S. Whereas
in Mexico, where they are tripling the number of stores they want to open, by
definition, they are forced to lease in many cases.

Craig Schmidt - Merrill Lynch

Thank you.

Operator

And we’ll take our next question with Matt Ostrower with
Morgan Stanley. Please go ahead.

Matt Ostrower - Morgan Stanley

Good morning. Could you talk about why you chose to use the
preferred market instead of the unsecured market, and specifically was it an
issue with rate or covenants there? And secondarily, at a 7.75% rate on the
preferred, isn’t that really signaling that you guys have an expectation that
cap rates are going to move up very significantly given the kind of going-in
yield you need to get to make that accretive?

Milton Cooper

We elected to go into the preferred market, because we
wanted to put a form of longer term or permanent equity on the balance sheet,
in that we felt that for an additional 100 basis points or so relative to what
we could do at the tenure at the time that it was well worth it.

And it would build capacity in the future for further
expansion on the debt side. And along with our preferred equity offering as I
mentioned, we have done a variety of other things to expand the debt capacity.

So in very basic terms, we viewed the preferred as one
element of a global capital structure, and liquidity enhancement, and did not
look at it in the view of issued this in lieu of unsecured debt and the like.
As to your other point, that assumption or that theory is just simply not the
case.

Mike Pappagallo

As we pointed out before, Matt, where we are investing most
of our own capital is places like Mexico and preferred equity in development,
where we do get higher returns, and it is accretive to our shareholders. When
we buy existing shopping centers, we are teaming up with an institutional
partner who is putting up the lion’s share of the equity.

And we make very good returns because in addition to our
share of the cash flow from the property, we are getting management fees, and
asset management fees, and acquisition fees, and construction management fees,
and leasing conversions, and a promote — and so forth. So it’s actually a very
profitable piece of business for us.

Matt Ostrower - Morgan Stanley

And if I could just follow-up real quick on the unsecured,
were you able — I know a little while back, you switched to sort of a
covenant-light structure on a whole bunch of your unsecured debt.

And I guess the question I have is would you be able to get
that today if you did go into the unsecured market today? And if the answer to
that is no, what does it mean for the money that you spent or the cost you
incurred to get the covenant-light structure on your existing debt?

Mike Pappagallo

We feel that if we wanted to go into the unsecured markets
today, we feel we could execute a bond with a similar characteristic as we
raised in April.

Matt Ostrower - Morgan Stanley

Great. Thank you.

Operator

And we’ll take our next question with Michael Gorman with
Credit Suisse. Please go ahead.

Michael Gorman - Credit Suisse

Good morning. Milton, if you could just go back to the
distressed side of things again but more looking at the opportunities, can you
sort of quantify what kind of pipeline of deals you’re looking at on the
alternative investment front?

Milton Cooper

What we’re looking at is — it’s really very large. What
we’ll get is so speculative it wouldn’t be fair for me to answer it. It might
be misleading. So I don’t know. We’re looking at an awful lot. What will
happen, I don’t know.

Michael Gorman - Credit Suisse

If you look back at the history, then what is your typical
conversion rate of what you look at versus what you get?

Milton Cooper

I’m going to guess, maybe a third of or less.

Michael Gorman - Credit Suisse

And.

Milton Cooper

And it varies.

Michael Gorman - Credit Suisse

And, Dave, just a question on the Prudential joint venture,
going back to the questions about cap rates and institutional demand, it looks
like the sales volume in the third quarter slowed down. Can you just give us a
sense for what the pricing was like on those deals, and also any number of
deals that may have fallen through during the quarter?

Dave Henry

Well it’s — I think we have mentioned before, the Pan
Pacific acquisition with Peru was really divided in two portfolios. A whole
portfolio and a self portfolio. On the self portfolio, Tom, correct me if I’m
wrong, was about $1 billion.

We are about halfway through that self portfolio, and we
continue to sell those properties, which by definition are properties that we
have decided not to hold long- term. The markets have been turbulent, I would
say, and the Cap rates have been a little higher than we had hoped, but we
continue to feel that we will dispose of that, the rest of that portfolio, over
this next 12-month period.

On the other side of the coin, the whole portfolio, the
other $3 billion, has outperformed what we thought, and the rent growth has
been outstanding in these A-plus properties in California.

So, we have been very happy with the whole buckets, and the
sell bucket is going perhaps a little slower than we had hoped.

Michael Gorman - Credit Suisse

If I could just push a little bit there, I mean, last
quarter you characterized it as 6.25% — that’s 6.75% on the sale. Are you
still in that range with your third quarter sales, or are we talking north of
that?

Michael Gorman - Credit Suisse

Yes, I think we’re still in the probably 6.5% to 7% range.
It just depends on the property and the location and where it might be. And one
of the other things that we have been doing with the sale bucket is some of the
properties we actually held off the market while we released them.

If we had big anchors, we just held them off, and we’re
bringing them to the market now so.

Dave Henry

And it’s no surprise the best ones of the sell bucket go
first. So, we fully expect that for the last batch of these assets that the cap
rates are going to be higher.

I mean, in effect the blended Cap rate, when we underwrote
this portfolio, was a little north of 6.5%. And I think when the dust settles;
we’ll be roughly to that number. But certainly, as it relates to the timetable
of doing that, the best assets on that sale bucket have gone first, and the
tougher ones are going to bring up the rear.

So that will certainly — there will certainly be different
Cap rates as you go through these individual sales.

Michael Gorman - Credit Suisse

Thanks, guys.

Operator

We’ll take our next question with Michael Mueller with
JPMorgan. Please go ahead.

Michael Mueller - JPMorgan

Couple of questions, first, Mike, in terms of guidance,
should we think of the preliminary ‘08 number as kind of just a levered core
growth rate with, I think you said, maybe a $30 million year-over-year increase
in capital services. So, not a lot of external-driven spread in the numbers at
that point.

Mike Pappagallo

Mike, I think — Just rephrase the question for me. Because
I understand one of the points you are making was with respect to the basket of
our operating businesses, but maybe if you could just rephrase your question,
so that I could give you a coherent answer.

Michael Mueller - JPMorgan

Yes. I guess, first, you said, just confirming what you
said. KIMCO Capital Services, about $30 million, you were thinking, higher than
the ‘07 level. So, if we are taking your core growth and levering that up, and
just tacking that on, that kind of gets you around to where the midpoint of ‘07
to midpoint of ‘08 is.

So, is that the right way we should be thinking about the
‘08 implied guidance at this point?

Mike Pappagallo

We’ll probably assume a bit more KDI gains than the current
year’s $25 million. There will be more projects that are in their completion
phase or going to be completed in early ‘08, so I think there will be a little
bit more activity there.

And then you will certainly have to factor in that
estimation of volume, some level in some business lines, but also increase the
earnings.

So, I think it’s really a combination of that increase in
the operating business that I talked to you about, an increase in the
development profits, some volume activity, as well as the leveraged internal
growth of 54%.

So, that’s in broad terms, the four components that drive
the numbers for next year, midpoint-to-midpoint.

Michael Mueller - JPMorgan

Okay. Maybe switching gears to the preferred equity
business, can you talk about recent trends in pricing since — given what has
been happening with the debt markets over the past quarter or so, as pricing
moved back up?

And then second part of that question, if you are looking at
the $200 million of equity kickers that I think you mentioned on the call, how much
of that is split between stuff driven just by pure Cap rate compression versus
stuff that wasn’t necessarily reliant upon Cap rate compression?

It really just comes from the value creation from taking a
project from development to stabilization.

Mike Pappagallo

Sure. On the pricing side today, it’s definitely a much
better time for us. Some of our traditional mess, composition, I would call it
straight mess. We’re charging an interest rate without an equity kicker.

Those guys have all gone away for the moment, and so our
team is starting to see more opportunities with better pricing and more
conservative underwriting on our part.

So, we’re actually pretty optimistic about our preferred
equity business going into next year, and we think we’ll benefit from the
turmoil that’s happened in the credit market. Some of the crazy risk-reward
pricing has gone away.

So we think we’ll do better in terms of volume in preferred
equity both in Canada and the U.S., which are both good markets for us. In terms
of the equity kicker estimates, we have taken a look at some of them. I don’t
statistics on the whole portfolio for you, but if I were to guess, it would be
half is cap rate compression and half is growth in net income.

Michael Mueller - JPMorgan

Okay. Okay. Great. Thank you.

Operator

We’ll take our next question with David Harris with Lehman
Brothers. Please go ahead.

David Harris - Lehman Brothers

Hey, good morning. Sorry if I missed this. Dave, as you were
picking up your air miles traveling north and south, down the Americas, I
wonder if you could just give any comment as to any change in the investment
attitude of folks in the marketplace in Canada or down in Mexico in South
America?

Are people concerned in those markets about changing cap
rates and financing? And secondarily, somewhat associated with that, is there
today a more of a reserve and a caution about tenants signing up for space than
there would have been, say, three, six months ago?

Dave Henry

Let me take them in three parts. Looking at Latin America
first and I’m very proud, because American Airlines did give me a little
certificate saying I have hit three million miles with them. So I’m very proud
of that.

David Harris - Lehman Brothers

(inaudible) of the plane, doesn’t it?

Dave Henry

The investor appetite to invest in Mexico and South America
is actually escalating and increasing. Real estate investors are looking for
higher returns, given the turmoil of today and the apprehension about where the
real estate markets in the U.S. are going.

So the investor appetite, to look at markets like Mexico and
South America, is escalating, and you can see that in the number of new funds
that are being offered. Everybody from JE Roberts to O’Connor to ING to
Prudential, they are all offering Latin America funds of one type or another an
increasingly oriented towards retail, which is hard.

And as Milton mentioned in his remarks, we’re seeing more
competition in Mexico and more competition for our operating partners, and so
forth. We have such a great lead in Mexico and we have such established deal
flow that we think we’ll do rather well, but if anything, I would say it has
escalated in terms of investor activity.

Canada is a different matter. Canada, the debt turmoil has
definitely impacted. CMBS is out of business, for sure, in Canada, and
historically Canadian banks have always been rather conservative.

So I’d say there is a little more apprehension about what is
going to happen in Canada than perhaps the Latin America. Your last part of
your question in terms of the tenants, again, if anything, the Home Depots and
the Wall-Marts, and the Costco’s of the world are increasingly looking at
Mexico and South America as opportunities for growth.

Best Buy and Lowe’s have both announced going to Mexico
recently. So, if anything, that also is accelerating.

David Harris - Lehman Brothers

If you just think about the discussions you’re having today
with potential joint venture or around new joint ventures and funds, is there
any change in the fee structure promotes that you’ve been traditionally putting
in place over the last couple of years? And I guess that is probably more
focused domestically than overseas.

Dave Henry

Well, again, the fee structure today is very different than
it was five years ago, and much more attractive for the operator for our side
of the equation. We really haven’t had a lot of pushback on fee structures,
especially things like our Mexican land and retail fund.

The investors are really looking at that wonderful
opportunity to drive double-digit IRRs for themselves. So promote structures
are really not that, no that controversial and our fees are, we keep them on
the modest end. We’re not a hedge fund. We’re not even an opportunity fund in
many cases in terms of our fee structure.

So as you look at our funds, our fee structures are very
reasonable and we don’t get a lot of pushback.

David Harris - Lehman Brothers

Is the typical threshold 9 or 10?

Dave Henry

Yes, I would say that’s fair. In the US, in some cases it’s
lower, and in Mexico and Latin America, it may be higher.

David Harris - Lehman Brothers

Okay. Great. Thank you.

Operator

We’ll take our next question with Lou Taylor with Deutsche
Bank. Please go ahead.

Lou Taylor - Deutsche Bank

Thanks. Dave, can you just go back to the acquisition
activity you should think and talk about

Dave Henry

Lou, you are going to have to speak up little bit.

Lou Taylor - Deutsche Bank

Yeah. Can you just go back to the acquisitions commentary
earlier, and just talk a little bit about your return expectations? Have your
IRRs risen at all?

Dave Henry

You mean on our side of the equation?

Lou Taylor - Deutsche Bank

Yes.

Dave Henry

On our side of the equation, remember, we’re investing 15%
to 20% of the equity on a co-investment basis with our institutional partners.
So, in addition to the levered or un-leverage return from the property, which
may be 6%, 7%, 8%.

We are getting property management fees, we’re getting
acquisition fees, we’re getting asset management fees, and so forth, which
drives those returns somewhere between 15% and 20% over time.

Lou Taylor - Deutsche Bank

I mean, on your consolidated on-balance sheet acquisitions
that you do on your free flow account.

Mike Pappagallo

As general matte, Lou, we’re generally not acquiring for our
own balance sheet anymore for those very reasons. Now, that said, the growth in
the balance sheet at any one point in time will generally be due to two things.
One, that we do continue to take on inventory in anticipation of the placement
into those programs, and there certainly is that phenomena in our current
balance sheet.

And secondly, there are assets on what is called the
opportunities side, where we’re going direct, because we see an arbitrage
opportunity. Of course, the example is some of the things we’ve done in Lower
Manhattan, as well as some of the most recent investments in the Philadelphia
metro markets. And those assets are on the books.

There’s a high IRR, 15%, 20%, and beyond if we can execute
on our strategy, and those assets are on our balance sheet as well. At this
point you think about on-balance sheet, that’s primarily what we’re focused on.

Lou Taylor - Deutsche Bank

As a follow-up, in terms of your merchant development
pipeline, in terms of cap rate on those dispositions, if you will, have you
seen any movement in those cap rates?

Dave Henry

Jerry, I’ll let you answer, but we only have a few
properties that are in the market today. There is a good list of people bidding
on these properties, and I would say that the bid/ask is a bit wider than it
has been in the past.

But we have sold properties and continue to sell properties
in the 6’s that we developed in the 10% to 11% on leverage return on cost. So
the profit margin is still pretty wide in development, and we like that
business. It’s a got room, if necessary, for cap rates to move up a bit.

Jerry Friedman

Dave, you are correct. We have — All of our properties have
been selling in the 6’s in the cap rates, the ones we have marketed. And there
is aggressive — several bidders for all of the properties.

Lou Taylor - Deutsche Bank

Okay. Thank you.

Operator

(Operator Instructions) And we’ll go next with David Fick
with Stifel Nicolaus. Please go ahead.

David Fick - Stifel Nicolaus

Yes, good morning. Can you talk a little bit about your
external partner relationships, and what you are seeing in terms of them
approving deals, where we’re hearing from some of your peers that there’s more
pushback on proposed transactions?

Milton Cooper

I think it’s fair to say that core investors have taken a
hard look at the markets today, and are being careful about what they are going
after. They are taking a look at the credit markets. They are trying to
carefully price transactions. They are working with us.

They want to know what we think is going to happen with
pricing. They want to understand carefully the upside of properties as we work
with them in looking at opportunities. The same way we are.

We’re not exactly sure where these markets are going to
shake out. So we’re both being very careful as we look at opportunities. I
think that’s fair. But whether it shakes out with cap rates being a little
higher, or it settles back down to where it was, we’ll just have to see.

But we do have great relationships and a great roster of
partners that we continue to work with looking at all kinds of opportunities,
whether they are large portfolios or one-off transaction.

David Fick - Stifel Nicolaus

How big a factor is that external appetite in your external
acquisition guidance, which is obviously pretty conservative?

Milton Cooper

Yes, Mike has made a very conservative number, so it’s our
job, Tom and mine and others, to beat that number.

David Fick - Stifel Nicolaus

Okay. Thank you.

Milton Cooper

Sorry for giving them such a low bar, David. I’m going to
rethink it.

Operator

And we’ll take our next question with Scott O’Donnell with
MetLife. Please go ahead.

Scott O’Donnell - MetLife

Yes. Hi. Good morning. A question for Milton, please.
Milton, you have been around a long time, you have seen many financial crises
in the past, and whatever the flavor of financial crisis, you can always point
to the root of it being poor underwriting.

And I guess in that context, whether you are looking at the
financial sector or the REIT sector, they do share several characteristics over
the last few years. It seems that people are paying too much for assets,
they’re financing more and more of these risks off-balance sheets, and they are
trying to generate returns that may not be sustainable in the long run.

So with that as a background, can you comment on the
appropriateness of, and also in the context of Mike’s earlier comments that
more and more of KIMCO’s balance sheet will be represented by joint venture
investments, can you comment on the appropriateness of being an unsecured
lender to a company like KIMCO from an underwriting perspective?

Milton Cooper

Well, let’s analyze that for a moment. One, the ratio of
debt to total debt and equity is very, very small, and we have kept it that way.
Two, the portfolio is a portfolio that has pretty solid income streams. And
three, you have a very conservative management, who have their lifeblood,
estates and wealth in KIMCO.

So the combination of all of that factor, diversified
sources of income, since so many sources and geographic sources, it makes it as
good a bed as I know. And if I’m comfortable with the equity, I would imagine
that unsecured lenders should be very comfortable with the debt.

Scott O’Donnell - MetLife

Thanks. Okay.

Barbara Pooley

Daryl?

Operator

And there are no further questions. This does conclude our
question-and-answer session. I like to turn it back over to management for any
additional or closing remarks.

Barbara Pooley

Thanks, everybody, for participating today. Just a remind, a
supplemental is on our website at www.kimcorealty.com. Thanks.

Operator

And once again, ladies and gentlemen, this will conclude
today’s conference. We thank you for your participation. You may now disconnect.

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ITT Corporation (ITT)

Q3 2007 Earning Call

October 26, 2007 9:00 am ET

Executives

Peter Milligan - Director of Investor Relations.

Steve Loranger - Chairman and CEO

Denise Ramos - Chief Financial Officer

Analysts

Deane Dray - Goldman Sachs

Jeff Sprague - Citigroup

Shannon O’Callaghan - Lehman Brothers

Michael Schneider - Robert W. Baird

John Inch - Merrill Lynch

John Balotti - FTN Midwest

Steve Tussa - JPMorgan

Presentation

Operator

Good morning, ladies and gentlemen. My name is Natasha. I
would like to welcome everyone to the ITT Industry Third Quarter 2007 Earnings
Conference Call. All lines have been placed on mute to prevent background
noise. After the speakers’ remarks there will be a question-and-answer period
(Operator Instructions).

We do ask that you limit yourselves to one question and one
follow-up.

Thank you. It is now my pleasure to turn the floor over to
your host, Peter Milligan, Director of Investor Relations.

Peter Milligan

Thanks, Natasha. Good morning everybody and thanks for
joining us to discuss our third quarter 2007 results. With me this morning are
our Chairman and CEO Steve Loranger, and our CFO Denise Ramos.

Steve will provide some highlights for the quarter, Denise
will take us through a detail financial review including a review of each
segment. So then talk about our updated guidance and Steve will sum up before
we move to the Q&A.

And the highlight of 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 remind you that our
discussion will contain forward-looking statements, which involve risks and
uncertainties and actual results could differ materially from projections.

Please refer to our annual report on Form 10-K for a full
discussion of these risks. This conference call is being webcast and a replay
will be available later today on our website.

With that, I will turn things over to Steve.

Steve Loranger

Good morning, thanks for joining us. We’re pleased to report
this morning that we have executed another extraordinarily productive quarter
for ITT. On top of continued strong organic growth and operational
productivity, we made very important changes to our portfolio, including the
closing of the IMC transaction, the definitive agreement to purchase ITO
Corporation, and the sale of our switches business.

We also continued to run the existing business with a high
level of operating performance, which resulted in 19% earnings growth. Our
third quarter EPS of $0.92 was led by a well-balanced revenue growth of 9% and
outstanding profitability expansion.

Our geographic and end market diversification both among and
within our segments, continues to enhance our ability to deliver consistent
financial performance because of the good balance of economic and secular
drivers.

This diversification enables solid top-line expansion as
strong growth across most of our end markets more than offsets softness in the
U.S. residential and marine markets. In Fluid Technology, our business
delivered solid top-line growth in strong operating margin expansion despite
the drag of foreign exchange.

Revenue increased 6% organically, driven by growth in all
Fluid Technology value centers, reflecting solid global end market demand and
share gains. Over half of our fluid sales were from outside North America, and
notably, in Asia, where organic sales increased 20%.

This was also the first full quarter where our advanced
water treatment business was aligned with our flight business. We are quickly
implementing a seamless transition to a market facing water/waste water
platform.

Our legacy treatment business is still facing difficult
operating challenges. However, we are confident that we will be effective in
turning around this important piece of our water business.

As you’ve come to know about the ITT management team, when
we have issues in our businesses, you can count on to us step subpoena and
drive our IMS and our operating excellence processes to fix them.

Finally, Gretchen McClain and her team made great progress
advancing several large and challenging factory challenges. In Poland, Nanjing,
and Shenyang, were in the quarter we now have production up and running as well
as furthering our global leverage strageties by integrating our China sales
team.

Within our defense unit, revenue increased 6%, inline with
our forecast versus a strong third quarter of 2006. The defense-operating
margin continued to expand and reached another high point this quarter, thanks
to our excellent performance in fixed price contracts.

We also had some very significant contract wins, most
notably the FAA’s ADFB contract. This contract represents the initial phase of
the next-generation air-traffic control system. As you know, upgrading the
air-traffic control infrastructure in the United States is an enormous and
vital job. And it puts us in a nice position for follow-on phases of the
program. This is an essential program to upgrade the air-traffic control architecture
within the United States and it’s going to provide greater air traffic
productivity in the future, and for the longer term, it positions us as a prime
systems integrator in the marketplace which expands the type of projects we can
pursue.

We’re extremely proud of the defense team on this win and we
want to acknowledge the extraordinary efforts to develop a competitive solution
with outstanding global partners. That coupled with the Ito agreement and
continued high performance represents a great quarter for Steve Gaffney and the
defense team.

Turning to motion and flow, Nick Hill and his team continues
to deliver outstanding results. This quarter organic revenue increased 9%, and
their operating mar again expanded by 70 basis points, which led to an increase
in operating income of 24%. The performance of motion flow control is
admirable. We benefit strongly from geographic diversification and this
performance has been generated despite weakness in the marine and leash mark.

Our cone knee business has turned around their top line by
leveraging their technological positions into adjacent markets. Our friction
business continues to win platform after platform in a very competitive
automotive mark and our aerospace and connectors business continue to gain
market share.

As you know, we made the decision earlier this year to make
a substantial investment in our motion flow business when we made the IMC
acquisition. This was driven by our objective to build on our attractive motion
and flow control technologies in both horizontal and vertical dimensions.

The leadership we’re seeing from the motion and flow team
gives us hey level of confidence that this will turn out to be a well-placed
investment. In September, we were thrilled to transition from the great IMC
business that Patrick Lee built to officially welcome the international motion
control team into the ITT family, and we’re pleased that tippet gracious is off
to great start. We have two new value center presidents from IMC. Wayne Foley,
who leads our controls business, and Mike leads our energy absorption value
center.

And finally, as we move into the last quarter of what has
been an excellent year for our company, we remain optimistic about our
continued performance is and we are increasing our full-year EPS forecast from
$3.44 to $3.50 range, now to a new range of $3.50 to $3.53. The midpoint of
this new full-year range yields a very strong earnings growth this year of 23%.

And with that we’ll turn it the over to Denise to go through
the financial results. Thanks, Steve. Let’s turn to the results for the quarter
starting on slide two. On a consolidated basis revenues grew 9% in the third
quarter, 6% organically, driven by continued strength across all of our
segments. Segment operating income increased by 18%, and margins expanded by
100 basis points driven by margin improvements throughout each of the operating
segments.

EPS on an adjusted basis grew 19% for the third quarter, to
$0.92, which is $0.02 above the high end of our guidance range. Also please
note that the IMC transaction closed earlier than anticipated and resulted in a
$0.02 drag on the $0.92 number I just mentioned.

I do want to remind everyone that the $0.05 full-year
dilative impact has not changed. We are now essential expecting $0.03 of it to
hit in the fourth quarter. Through the third quarter, free cash flow was $432
million. We remain confident in our guidance of achieving full-year free cash
flow greater than or equal to our net income.

Now let’s discuss the results of fluid tech on slide three.
Total segment revenue grew 10%, or 6% on an organic basis. Total fluid sales
were driven by excellent international growth of 14% organically. Sales in
central and South America grew more than 50%, and it’s becoming an important
part of the revenue base. We also experienced tremendous growth in Asia, where
sales were up close to 20%. Organic revenue increased by 2% and our water,
wastewater group. And as Steve mentioned this is the first quarter, where AWT
has been combined into flight.

The legacy flight business grew in the high single digits on
an organic basis driven by continued growth in the dewatering market and by the
sale of large submersible pumps used in municipal application.

Unfortunately, the strength was masked by weakness in the
legacy AWT business which saw double-digit revenue declined on an organic
basis. This piece of the business had positive performance in Europe, but
continued to struggle in the U.S.

Our residential and commercial water business experienced
very solid 7% organic sales growths overall which was comprised of 4% growth in
the U.S., 9% in Western Europe, and double-digit gains in Asia and Eastern
Europe.

The commercial side of the business saw double-digit growth
driven by strong aftermarket sales, and continued demand in the commercial
construction market, partially offset by weakness on the residential side of
this business particularly in the U.S.

Our industrial process business continues to deliver
outstanding results. This business grew 17% organically, driven by very strong
growth in the mining and hydrocarbon processing markets.

Moving to profitability, fluid tech’s operating margins
increased 40 basis points over the prior year, as we benefited from volume
driven operating leverage.

Let me highlight a few additional points with respect to
operating margins. First, similar to last quarter, the operating margin was
constrained by the FX impact of the dollar that continued to weaken throughout
the quarter. This quarter the impact was approximately 20 basis points.

Remember that the nature of our sales and production
footprint causes us experience lower operating margins with little impact on
total operating income, when the dollar weakens.

Then secondly, as we mentioned last quarter, our newly opened
plant in Poland continues to increase output and the level of duplicative cost
experience as we ramp down production in a number of our legacy plants is
decreasing in line with our forecast. We are also seeing greater raw material
price pressure than anticipated, which is masking strong productivity
improvements.

And finally, turning to orders, fluid experienced a 9%
increase on an organic basis, led by double-digit increases in water,
wastewater and industrial process.

Let’s turn to slide four and review the results of our
defense business. Defense delivered 6% revenue growth, which was in line with
our expectations. This growth was led by our systems business, which increased
sales by 16%, driven by a number of U.S. military contracts around the globe.

Our advanced engineering and sciences business continued its
outstanding performance and third quarter sales increased by 37% on the
strength of contracts with the joint spectrum task force.

On the product side, our night vision business grew in the
mid-teens, while our electronics systems and ACD businesses were essential
flat. You recall that by the middle of last year, we had ramped our production
to the current levels at the customers’ request and we have maintained that
level of production since then.

And lastly, our space business saw sales drop. However, the
majority of this related to a tough compare to the third quarter of 2006, which
included a large favorable contract settlement.

Looking at profitability, on a year-over-year basis, defense’s
operating margin of 13.5% was up 160 basis points, driven by the continued
productivity performance seen in the product side of the business allowing to
us once again raise our full-year margin target.

Turning to third quarter orders and backlog for our defense
businesses, orders increased 7%, moving the backlog to $3.5 billion. It is
important to note that as we entered the year, our expectation was for our
backlog to remain flat versus 2006 levels. And while the exact timing of orders
makes the next three months difficult to predict, we do believe that we will
enter 2008 with a strong backlog that is somewhere in the $3.8 to $3.9 billion
range.

Let’s turn now to the next slide and let’s look at the
results in the motion and flow control segment. As Steve said, this segment had
another outstanding quarter, with revenues up 18%, 9% on an organic basis, much
of the growth was from overseas, where we posted double-digit revenue
increases.

Within aerospace controls, revenue grew 26% organically as
we continued to deliver excellent products into a very strong market segment.
Our friction business delivered 14% organic revenue growth as it continues to
win new platforms, particularly in the European market.

Within marine and lee sure, organic revenue grew 3% led by
very strong export sales in our marine business. And strong industrial flow
control devices in the construction and medical markets. However, offsetting
this strength was continued pressure in the spa and whirlpool business.

This is very consistent with overall market trends
experienced in the U.S., where the whirlpool bath and spa market continue to
decline. Our KONI business has delivered its second straight quarter, where
organic revenue growth approached 11%. This has largely resulted from our
successful penetration into the bus, truck, and railway markets.

Lastly, our connectors business had another strong quarter
with sales increasing 7% organically. In addition, bookings in Asia and North
America added to the strong backlog and drove a book to bill greater than one
in the quarter.

Looking at profitability, segment margins of 14.3%
represented an increase of 70 basis points on a year-over-year basis as we
continue to deliver productivity improvements. In addition, it is important to
note that the three weeks of IMC results was comprised of $11 million of
revenue and $2 million of net operating loss.

This had the effect of lowering margins by 130 basis points
in the quarter. Finally, the motion and flow segment saw its organic orders
increase by more than 13% during the quarter, led by growth in KONI and
friction, which both saw orders increase by more than 20%.

Now let’s turn to slide 6, where I’ll review the company’s
revised earnings outlook. We expect ITT’s fourth quarter revenue to increase
11%, which translates into full year revenue growth of 12%. This does include
the full fourth quarter impact of IMC revenue, which was not in the base
period.

We anticipate fourth quarter segment operating margins to be
between 13.1% and 13.3%, and believe our full year margins will be in the 13.2%
to 13.4% range. Our fourth quarter EPS target is $0.90 to $0.93 and the
midpoint of our full year target has increased by more than $0.04, bringing the
full year to a range of $3.50 to $3.53.

Looking at the changes in the full year outlook for our
segments, we are forecasting an increase in revenue of nearly $50 million in
fluid, more than half of which relates to the impact of foreign currency.

In the defense business, the midpoint of our revenue
forecast has increased by $30 million based on the strength in systems and
advanced engineering and sciences. On the margin side in defense, we have
increased our forecast by 20 basis points to reflect the better than expected
performance we saw this quarter.

In our motion and flow business, we are increasing the
midpoint of our revenue forecast by $80 million. This reflects the full impact
of IMC revenue, which should be in the range of $60 million, including the $11
million it contributed in the third quarter.

The remaining increase is essentially split between the FX
benefit and some incremental demand we are seeing across the base business. The
full-year margin is now being adjusted down to a range of 14.4% to 14.6%, and
this change is entirely attributable to the impact of the IMC acquisition.

As we have mentioned previously, the up-front integration
costs and intangible amortization drive this dilutive effect. Now, I would like
to turn things back to Steve for a few additional comments before we move to
the Q&A.

Steve Loranger

Thank you, Denise. Let me close by saying that we’re pleased
with the performance of that our organization has achieved year-to-date. We are
delivering on what we’ve set out to do, which is to generate strong organic
revenue growth, increase productivity, and effectively reinvest our capital in
a balanced way.

In short, our overall corporate strategy is working. This
was an extremely busy and productive quarter, and we’re now working hard to
detail our 2008 operating plans, which we’re going to share with you at our
upcoming analyst meeting in a few weeks.

And at that time, we’ll have the opportunity for ITT’s
senior leadership team to share the strategies behind their business success
and discuss what they see in terms of future opportunities.

So, let me turn things back over to Peter, and we’ll begin
the Q&A session.

Denise Ramos

Thanks, Steve. Natasha. IF you could introduce the
instructions for placing a question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Deane
Dray of Goldman Sachs.

Steve Loranger

Good morning, Dean. Dean, you are maybe on mute?

Deane Dray - Goldman Sachs

Yeah.

Steve Loranger

All right.

Deane Dray - Goldman Sachs

Sorry. Can you hear me now?

Steve Loranger

Yes.

Deane Dray - Goldman Sachs

Sorry.

Steve Loranger

All right.

Deane Dray - Goldman Sachs

Steve, could we go to your prepared remarks we talk about
the operating challenges in the legacy water and wastewater businesses? So, it
sounds like we’re not going to get a chance to talk about the AWT going forward
as it’s combined with flight, so while it goes into the segment or into the
business, on a consolidated basis 2% organic revenue growth is very healthy,
but there’s still some legacy issues in it.

If you could just step through those, how much of that is a
portfolio change that you might do, as a productivity initiative that you might
address, and are there any specific end-market topics, you think will be a head
wind?

Steve Loranger

Okay, Dean, we’re going to still, despite the fact that we
are integrating this into three market-facing platforms, we’ll still break out
treatment as to be able to discuss those technology platforms.

So walking through it, keep in mind that treatment is, for
the most part, a series of technologies. In the biological segment, we’re
operating very well. We’re well positioned in continuing to invest there.

We do need to invest more to upgrade our technology in
ultraviolet and ozone. And in the fresh water filtration segment, notably
Leopold, we’re extremely well positioned in North America and we’re going to
continue to invest in those technologies for global expansion.

And then finally, we participate in the small-scale reverse
osmosis filtration and desalination markets, and that’s an area also where we
will continue to invest in our systems and explore further desalination into
commercial and industrial markets.

So underneath this, what I’m saying is we have a number of
technology investments to ensure that the technologies in the treatment area
can be flowed into the municipal, industrial, and commercial market segment. In
addition, we also have some product line activity in place, where we’ll be
migrating some production from various locations to others to ensure that we’re
leveraging our scale.

And that’s all part of the www or water/wastewater
integration plan.

Deane Dray - Goldman Sachs

Great. That’s very helpful. And just a follow-up Denise that
I hear correctly when you walked through the integrated water business the
residential piece in the U.S. was up 4%?

Steve Loranger

No, did you not hear that Deane. The residential portion in
the United States is obviously off. Off in the business, but when you walk
through the math, since we all know that U.S. housing is down, that is
effectively; that’s effectively impacting us in the order of $10, $15 million.

So it’s of top line in residential. Because the — because
even though we participate in that business, it’s only about 5% of Fluid
Technology and two-thirds of that 5% is roughly aftermarket. And so it is down
a couple of percent on a year-over-year basis, but we’re absorbing it.

On the flip side, our commercial businesses in North
America, in terms of buildings, are up about in the 10 to 15% range. Yeah,
Deane, just it’s a so you know, it’s down 4% in the U.S. and the residential is
down 1% globally.

Deane Dray - Goldman Sachs

Got it. Thank you.

Operator

Thank you. Your next question comes from Jeff Sprague of
Citigroup.

Jeff Sprague - Citigroup

Thank you. Good morning. I guess, two sets of questions.
First, defense margins obviously, very impressive again. Just wonder if you
could give us a little more color on kind of the mix underscoring that
obviously looking at the very strong systems and services growth that would
kind of technically blend you lower.

You talked about good fixed price contract performance, but
if could you give us a little more color on that, and if there’s some positive
contract developments or something else in the quarter that underscored those
results?

Denise Ramos

Let me comment on that. There was nothing unusual in the
quarter that would have produced a higher number than we would have expected.
It really does have to go — is focused on all of the strong productivity
initiatives that we’ve had on the product side of our business.

So we’re very, very happy with what we saw in the third quarter
on the margin. As you’ve indicated, though, as the portfolio begins to shift
more to the services side we do expect to see the margins come down from these
very high levels and we have articulated a long-term margin rate of about 10.5
to 11.5%.

While we don’t see that immediately, we will trend to that,
and we do expect that the defense margins in Q4 will come down from the level
that we’re seeing in Q3.

Jeff Sprague - Citigroup

Should we putting the mix issue aside, if we look at systems
and services themselves, is there any change in the underlying margin in those
businesses around the type of contracts you’re doing or where you’re doing it
or anything like that?

Denise Ramos

No, nothing of significance. Every now and then we’ll see a
shift in terms of what makes up that service business, but in general it’s
about 7 to 8% and we really don’t see any change in that.

Jeff Sprague - Citigroup

And just to go back to AWT, I know this is kind of the tail
that always seems to wag the dog on the call here, but, Steve, your answer
sounded maybe a little bit different than what I heard before, in that I think,
previously it seemed like the issue was just the sales force wasn’t oriented
and maybe you had kind of these group of businesses that weren’t acting
co-recently in the marketplace.

Now, what kind of sounds like maybe they don’t have kind of
the products and technologies that you think they need to really succeed. Is it
both of those issues now, or is it really just more of a product issue at this
point?

Steve Loranger

Jeff, it’s safe to say that it is in the aggregate both of
those issues, but keep in mind that as we think about how to drive businesses
for operating performance, we’re always addressing all of those issues.

When you think about the fact that Gretchen and her team
have been organizing into three market-facing segments that, in and of itself,
is very responsive to the sales force issue that we were facing the sales force
as well as customer access issue that we were facing in treatment.

We had 140 sales people in treatment that we integrated with
over 1,000 sales people inflect as well as our residential and industrial sales
forces, and that’s giving us a good participation.

So we’re still working that side of it. We’re looking at
making the business the back-end business processes leveragable with some of
the base capabilities inflict and now we are turning our attention to insuring
that our engineering investments continue to make the products viable in the
marketplace.

And I would say that’s a very selective statement,
principally around our ultraviolet and ozone technology. In the balance of the
technologies we’re pretty well positioned, but as we think about the future, we
want to make sure that we’ve got the best products for the marketplace.

Jeff Sprague - Citigroup

Great. And maybe just update on the process with Ito, if
there’s anything you could add, obviously, the stock is trading above your
offer. I don’t know if there’s anything you clearly say that, but…

Steve Loranger

No, Jeff, we obviously very much like the acquisition. It is
very complimentary to our existing defense businesses, and we think the
combination with the ITT and Ito properties is going to be excellent.

Things are progressing on schedule. We filed the proxy, as
you may know, on Wednesday, and the Hart-Scott-Rodino filings were made by both
companies in early October.

What’s to happen next is once the proxy is finalized, which
should happen in the next week or so, the vote, the shareholder vote, will be
scheduled, and we sort of — we would just maintain what we said before as we
can’t obviously predict the exact timing, but we’re pretty confident the
transaction will close in early 2008.

So, all-in-all things are on track, and we feel good about
the — feel good about this acquisition.

Jeff Sprague - Citigroup

Thanks a lot.

Operator

Thank you. Your next question comes from Shannon O’Callaghan
of Lehman Brothers.

Shannon O’Callaghan - Lehman Brothers

Good morning, guys.

Steve Loranger

Hello, Shannon.

Shannon O’Callaghan - Lehman Brothers

Can you give a little more detail, in this quarter we had
some of the pieces of defense move around with the space down big, you mentioned
the comp issue. I mean, just as you think about fourth quarter next year, can
you give little over view in terms of the relative pieces — you’re expecting
to be down big or up big?

Steve Loranger

No, no…

Denise Ramos

Let me just answer.

Steve Loranger

Go ahead.

Denise Ramos

Let me just answer, something and Steve, you can jump in.
We’re going to be talking more in a couple of weeks about next year, so a lot
of that commentary you will hear at that point in time.

From a sales perspective, we’ve always talked about an 8% to
10% growth in our sales rate. And we have no reason to change that at this
point in time. And what we’ve also said is that as a product-side of our
business ramps down we’re ramping up the services side.

And you saw that in Q3 with some of the very strong results
that we had in the services side of our business. So, from that perspective
there’s — we still expect the 8% to 10% range. Steve, do you want to add
anything?

Steve Loranger

No, Shannon. No major shifts. Denise and I just reviewed
with Steve Gaffney and the team the 2008 revenue and backlog plans, and as is
typical this year we sit in pretty good situation in terms of booked,
authorized, and probability to be authorized that gives us confidence in the 8
to 10 zone next year, and no major mix shifts are anticipated.

Shannon O’Callaghan - Lehman Brothers

Okay, great, thanks. And then on — I guess just on the ACD
business, I mean, the production has find matters, is there any pressure, that
you’re seeing to take that higher and just also maybe a comment on side.

Steve Loranger

No, right now we’re lockstep with our customer, and we think
we’re going to maintain that production rate for a while. And actually, I think
with respect to side yet, no orders parse, but we believe that this overall
situation is constructively unfolding about the way that we’ve been
communicating for the past several years.

And that is that our customer, the U.S. military is
continues to contemplate the best path to achieve the advanced intraoperability
and the overall communication integration of the jitters framework.

They continue to explore innovative ideas from a lot of
industry participants, obviously, including ITT. And as you know, then, that
with respect to our advanced technology, such as the Side Hat and the Soldier
Radio Wave Form, we already offer much of the desired interoperability and
capability in our segment of the Jitters piece.

So as this evaluation is ultimately unfolded, we’re
confident that we’re going to participate meaningfully in the future designs.
And I think that that strategy has been validated by continued high production
rates of singers the last several years and the fact that we’ve got good
backlog in place for next year validates that strategy.

Shannon O’Callaghan - Lehman Brothers

Okay. Thanks. Just one more from me. On fluid tech you
mentioned material costs there. Can you give us a sense, are you getting price
now? Is there more you can get? What kind of contribution are you looking for
there in terms of offsets?

Denise Ramos

Let me comment. In terms of material costs we are seeing
fluid getting hit harder than our other segments with fluid costs because of
the specialty metals that go into this even product. So they’ve been impacted
pretty hard, especially on some of the commodities with nickel and chrome and
copper.

We’ve been able to offset some of that through the global
sourcing initiative we’ve had underway for a couple of years, so that has
helped. We have also seen some price increases that we’ve been able to flow
into that marketplace to help offset some of that also.

So on balance we’re seeing some hit associated with that,
but we’ve taken advantage of supply chain and some pricing.

Shannon O’Callaghan - Lehman Brothers

Okay. Is there more to come, you think, or is this it for
now?

Denise Ramos

In terms of what?

Shannon O’Callaghan - Lehman Brothers

In terms of pricing.

Denise Ramos

In terms of pricing or it’s something that we always look
at, whether or not we’re going to take any, I’m not certain at this point in
time.

Shannon O’Callaghan - Lehman Brothers

Okay. Thanks very much.

Steve Loranger

Thanks Shannon.

Operator

Thank you. Your next question comes from Michael Schneider
of Robert W. Baird.

Michael Schneider - Robert W. Baird

Good morning.

Denise Ramos

Good morning.

Steve Loranger

Hello, Michael.

Michael Schneider - Robert W. Baird

Wonder if we could start with the orders in fluid tech. I
guess the surprising element is that you did 9% organic growth against the
comparison of last year, which I think is the toughest. Did you 5% a year ago.
Can you walk through what changed?

Because it seems to be substantially stronger than the 6%
revenue growth you reported for the quarter. Did something accelerate during
the quarter? Were there any enormous project booked at IPG? Just some color.

Denise Ramos

The one thing I would point to is just what you said. A lot
of it is on IT side. We’ve been seeing a lot of strength there in the large
project sales, and that really has to do because of the strength that we’re
seeing on commodity front in mining and the oil and gas market.

So that is really strong with us, and on a year-over-year
basis we’re seeing very strong order growth for that. On the other thing, just
the legacy www, the flight business, that continues to be strong with us for us
organically also.

Michael Schneider - Robert W. Baird

Okay. And did AWT make some progress during the quarter just
on orders?

Denise Ramos

No, you know, AWT continues to struggle. They’re strong in
Europe. It’s weak in the U.S. And so, you know, we’re still having some
challenges from an order perspective there.

Michael Schneider - Robert W. Baird

Okay. And then just industrial process and Asia
specifically, it seems like that’s hit an inflection point and that market has
been strong for sometime. Is there some new strategy or some new presence that
you’ve got in Asia to explain the acceleration there?

Steve Loranger

Well, we’ve been, Michael, we’ve been doing a lot of work in
Asia. We have been hiring a number of new sales people, and we’ve continued to
transition some of our products, so I would say that particularly in the
premium segment of the business, we’ve been succeeding pretty well. In Asia, we
are seeing very strong markets in the chemical, oil, and gas components. So we
feel good about our industrial position there.

Michael Schneider - Robert W. Baird

Okay. Then final question. When I was in Stockholm meeting
with the flight management, it seemed clear that there is, now that they’re
responsible for this AWT division, a renewed emphasis on R&D spending and
maybe closing some of the technology gaps that you’ve at least alluded to
earlier.

Does that spending cycle impact your margin goals in fluid
tech to improve the margin? I believe it’s 80 to 100 basis points a year?

Steve Loranger

Michael, first of all, we are going to invest to ensure that
we sustain high levels of organic growth. But I think you can always expect
from me that we hold our businesses accountable for an equal component of
productivity.

And so as we’ve been detailing these operating plans, we
have been asking for our Fluid Technology business units to increase
engineering investment, as well as increasing some selective selling and
marketing investments where we want to put capability in emerging markets.

But at the same time, we hold — we’re doing a lot of
repositioning, global sourcing, a lot of lean activity, and all in all we’re
going to continue an appropriate level of margins and earnings growth in the
process.

Denise Ramos

And just to add into that, in terms of a margin impact for
additional R&D spending, we’re not looking at anything that would be really
– that would be really significant.

Michael Schneider - Robert W. Baird

Okay. Thanks and great quarter.

Denise Ramos

Thank you.

Operator

Thank you. Your next question comes from, John Inch of
Merrill Lynch.

John Inch - Merrill Lynch

Thank you good morning.

Denise Ramos

Good morning.

John Inch - Merrill Lynch

Hi Denise why again do defense margins come down in the
fourth quarter? Can you just sort of a remind us was there any thing I know you
– I know — I heard your comments, but was there anything that was pulled from
fourth into third?

Denise Ramos

No, John, there was nothing that was pulled from fourth into
third to produce the high margins into Q3. It really is a mix shift where we’re
going to see more of the services business as being part of the revenue there
than we saw on the — in Q3.

John Inch - Merrill Lynch

And is that specific to 2007, or do you traditionally see
this mix shift occurring in the fourth quarter?

Denise Ramos

No, you know, I would say in general we’ve been talking
about this shift that’s going to occur in the defense business as we win more
on the services side. So, it’s nothing that happens from an — on an annual
basis. It’s just a shift that we’ve been talking about that we’re going to be
seeing.

John Inch - Merrill Lynch

If I read between the lines, I mean it sounds like the side
hat could be in 2008 event. Is that reasonable, and, you know, presumably it’s
going to be prospectively very accretive to your defense margins is that also
the way we should be thinking about this?

I know that’s not what your guidance is going to be, but if
we’re looking for some up side next year from obviously the defense margin that
are very high could that be one of those catalogs?

Steve Loranger

John, we are — I can’t speculate on that because I think
what I was saying earlier was that the timing of the side hat orders is quite
frankly involved with the overall U.S. Government’s evaluation of various
interoperability options in the overall jitters framework.

Clearly if it happens, the side hat would be an upside, but
we can’t speculate on the timing because at the evaluation in terms of the best
path towards the ultimate goal of jitters is quite frankly fairly complicated,
a lot of government constituents and technologies are involved. So we can’t
really speculate on the timing.

John Inch - Merrill Lynch

But, are there — Steve are there milestones? It just seems
to me that this whole jitters versus side hat debate has actually gone on for
quite a long time. Is why just part of the bureaucratic process, or are there
things that to have get worked through that, perhaps, as external parties we
could benchmark or think about?

Steve Loranger

Well would look at it this way. Not part of bureaucratic
process, but obviously in its ultimate and clean sheet of paper form, the
jitters as it was envisioned several years ago is a massive expensive
undertaking.

And what used evident to the user community is that a number
of adaptive hybrid technologies from not only ITT but other industry
participants are indeed available that could ultimately be better value, lower
cost type options.

And so the U.S. government in my view is being very
responsible in terms of trying to evaluate what the best path is through this
to see how they can ultimately achieve the goals of a fully networked
integrated communication system and use some of the existing technology.

So, I’m just saying it is a big undertaking, and it’s
complicated, involves a lot of different components besides just the radio.
Remember, there’s vehicle’s communication center there’s airborne issues
there’s data processing issues. A lot more to jitters than just the radio
component.

John Inch - Merrill Lynch

Yes hey, last for me, Steve, with Ito, your mix of defense
is going to be well over the 50% mark. Or you guys after lot of great market
positions and technologies there’s still going to be this view I suppose, by
several people that, feeder operations in the Middle East are going to be
winding down.

I mean does this put strategic pressure on you, perhaps, or
ITT to redress that balance and look to some industrial M&A activities to
perhaps put ITT back on more of an industrial.

Steve Loranger

Let me answer in this way. We recognized the increase in the
defense component, but in that and of itself is going to continue to be a very,
very strong value creator, particularly with the combined acquisition,
independent of the current activity that we have.

The reason is that the world has changed, and that when we
think about how contemporary defense and intelligence networks are being operated,
those technologies that are around sensing, surveillance, communications,
information technology are going to continue to be more vital. So we feel good
about that platform.

On the flip side, we are through this process, intending to
maintain, a strong balance sheet and economic currency to be able to continue
to grow our industrial and commercial markets, particularly globally. We’ll do
so on a strategic and value based analysis, but nonetheless, I think would you
expect that’s where our — that’s where our next activity would be.

John Inch - Merrill Lynch

Understood. Thank you.

Steve Loranger

Thanks, John.

Operator

Thank you. Your next question comes from John Balotti of FTN
Midwest.

John Balotti - FTN Midwest

Good morning, Steve.

Steve Loranger

Hello, John.

John Balotti - FTN Midwest

How are you?

Steve Loranger

Great, thank you.

John Balotti - FTN Midwest

I got a couple just a quick questions. Denise, I believe you
mentioned when you went over the updated segment revenue and profitability that
you mentioned that the increase in fluid was currency related. Is that correct?

Denise Ramos

Yes, that had to do with the guidance that we gave for the
full year.

John Balotti - FTN Midwest

Right.

Denise Ramos

We increased our revenue, and most of that was FX related.

John Balotti - FTN Midwest

Right and since, we know there’s a natural hedge between
revenue and margins at Fluid Technology, the fact that the margins stay the
same with higher revenue with FX, and also you mentioned the headwinds with
material costs, can you just characterize the underlying profitability in terms
of how you see it now versus how you see lets say it in the beginning of the year?

Denise Ramos

You mean in terms of their margin…

John Balotti - FTN Midwest

In terms of, if you have higher revenue with currency and
there’s an offset on the margin, does it imply that the underlying business
you’re seeing, because of actions you’ve taken before, that you’re seeing
improved margin underlying the currency and underlying the material costs?

Denise Ramos

Well, we are see going productivity improvements there,
which is why when you look at the margin improvement that we saw in this
quarter what we indicated is that we were hit by about 20 basis points
associated with that.

So, everything else being the same, if the foreign exchange
was the same as what it was a year ago we would have seen 20 basis points in
addition to the 40 basis points that we saw. It is true that when you look at
it on a net income basis, it’s basically a wash, just because of their
footprint and how the sales and production flows from how they’re structured.

So, yes we see something on the top line. It does it impact
our margins but from a net income perspective it’s basically flat.

John Balotti - FTN Midwest

Okay. And then return on invested capital, I assume that it
was basically flat because of the timing of the closure of IMC.

Denise Ramos

We were about 17% ROIC on how we look at it. IMC does impact
ROIC to some degree, roughly 40 to 50 basis points.

John Balotti - FTN Midwest

Okay. And then, finally, on the share repurchase, I think,
if my numbers are right that there’s about roughly $700 million or so left tin
authorization, and I would imagine the third quarter was quiet because of Ito
and IMC. Is that fair?

Denise Ramos

Yeah, that’s fair. In fact we — we have the billion dollar
program. Under that billion-dollar program, we’ve repurchased about $350
million to-date.

John Balotti - FTN Midwest

Okay.

Denise Ramos

All right. So, we have about 650 left to go. And, yes, Q3
was — we only repurchased $5 million in Q3, and that was because of the ITO
acquisition and the transaction we were working on.

John Balotti - FTN Midwest

Okay. Great. Thanks, very much.

Steve Loranger

Thanks. Natasha, we have time for one more question.

Operator

Thank you. Your final question comes from Steve Tussa of
JPMorgan.

Steve Tussa - JPMorgan

Hi, good morning. Just two quick questions. The first one,
I’m still not quite clear, been a lot of good questions asked on defense but
the margin there longer-term, it’s continued to surprise to the upside is and
you guys have a good backlog there and you talk about how visible it is.

What are you missing might be at the beginning of the year
when you forecast this thing, and then obviously coming out on the good side of
it, so we’re not going to ding you for that. Then what is really the risk here
as you go forward, you’re flattish now object the Syncar stuff and there are
some very interesting and attractive opportunities coming up.

Is there any potential for your customer to come back and
say, you guys are making great money on this stuff, give us a little back on
that, so we’ll be a little more favorable to you going forward on some of these
contracts?

I’m not sure how that stuff works, but I’m just curious as
to, I guess, just to longer-term sustainability of this defense margin. I’m not
quite clear why it continues to surprise to the upside.

Steve Loranger

Steve, I think the answer is really simple. We have an
excellent operating team in