ITT Inc. (ITT) Q1 2013 Earnings Report, Transcript and Summary

Welcome to ITT's First Quarter 2013 Earnings Conference Call. Starting the call today from ITT is Melissa Trombetta, Director of Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Daylight Time. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Thank you, Lori. Good morning, and welcome to ITT's First Quarter 2013 Investor Review. Presenting this morning are ITT's Chief Executive Officer and President, Denise Ramos; and ITT's Chief Financial Officer, Tom Scalera. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Please note that any remarks we make about future expectations constitute forward-looking statements under the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in ITT's 10-K and other public SEC filings. Now let's turn to Slide #3, where Denise will discuss our results.

Good morning, everyone. I appreciate you joining us as we announce our financial results for the first quarter of 2013. The first quarter results demonstrate our continued successful execution in difficult conditions. We grew total revenue 7%, driven in part by strong performance from our recent acquisition of Bornemann Pumps. Organic revenue was up 2% due to global automotive growth of 10%, fueled by our impressive market share gains and our expansion in global energy of 23%. Both of these results were driven by strategic investments we have made over the years that are now delivering high returns. The recipe for our continued success is strong productivity that funds our ongoing strategic investments and establishes the foundation for our continued long-term organic growth. We were also very pleased with our segment operating margin expansion of 130 basis points, driven by our global strategy sourcing and Lean initiatives, benefits from proactive restructuring and volume gains. As we continue to highlight, we have a lot of opportunities to drive Lean across our facilities as we advance our 5-year journey. These solid operating results are reflected in our EPS of $0.47, which was up 21% versus last year. The strongest contributor to this growth were Motion Technologies and Industrial Process. Motion Technologies' volume was particularly strong as they continued to grow their leading market position in Europe and gain market share in the U.S. and China. They also benefited from productivity actions that drove the bottom line. Also, we continued to return capital to shareholders, repurchasing $46 million of shares in the quarter. And as a reminder, we raised our dividend 10% earlier this year. Now let's turn to Slide 4. Our strategic execution is focused on 3 key areas: operational excellence; advancing the turnaround at Interconnect Solutions; and the integration of Bornemann, our recent acquisition. Operational excellence fueled our operating margin expansion this quarter. So let me provide some examples that highlight some of our value-creating activities so far this year. First, Motion Technologies further improved on its world-class production effectiveness by increasing throughput an average of 1 million brake pads per month through improved machine efficiency. We also benefited in the quarter from the proactive restructuring actions that we began last year and have continued this year. Interconnect Solutions and Motion Technologies operating income was helped in the quarter from actions taken previously to reduce indirect costs and improve operational performance. We delivered supply chain savings that exceeded our expectations and reflected the increased leverage our global strategic sourcing council drives entity-wide and business specific initiatives that reduce costs. Lastly, I'd like to share some insights from my recent visit to our valves facility in Amory, Mississippi, that began their Lean facility transformation in 2012. I'm very pleased with the significant strides the team had already made. The excitement at this facility was tangible as every employee was fully engaged in the transformation. I was able to see the improved plant flow since my last visit when I kicked off the Lean initiative back in early 2012. The changes aren't just improving operational performance, but also employee morale as employees feel real ownership of their workspace and are empowered to suggest and implement improvement. Another key area of strategic execution this year is advancing the turnaround at Interconnect Solutions. With new leaders in place, an improved focus on key end markets and Lean assessments complete cross all sites, we are progressing nicely on the turnaround of this business. The leadership team has strong operational expertise, and they plan to drive improvements, such as reducing past due inventory, optimizing the supply chain and reengineering products to improve performance and reduce costs. We have redirected the sales focus to key end markets, including medical, transportation, oil and gas and aerospace. This tighter focus allows us to serve our customers better and make sure the front end is aligned with the best opportunities. We have also reduced our global indirect cost structure through proactive restructuring. We still have a long way to go on the ICF turnaround journey, but I am pleased with the team's commitment to rebuilding a strong, sustainable foundation for this collection of great connector brand and technologies. Lastly, the Bornemann integration is another focus area, and both the integration and financial performance are in line with our expectations. Bornemann generated strong order growth, which produced a book to bill over 2.0. Our sales teams are meeting regularly and are implementing our integrated sales plans, and we are in the process of leveraging our Industrial Process service footprint, our distribution channels in North America and the Bornemann channels in Canada and Argentina. We have also started to achieve our cost synergies by consolidating sales and back-office activities. Turning now to the outlook for the remainder of 2013. We delivered solid results in Q1, and we are well positioned to meet our full year financial commitment midpoints of 10% total revenue growth, 3% organic revenue growth and adjusted EPS of $1.85. We also expect the first half to represent slightly less than 50% of earnings at our guidance midpoint. So in summary, we are on track to deliver on our strategies to grow this company through our consistently strong execution. Our employees around the world are continuing to drive productivity improvements by implementing restructuring actions and advancing our Lean initiative. And we continue to demonstrate balanced and strategic capital deployment. I'll now turn it over to Tom.

Thanks, Denise. Now let's turn to Slide 5 for a detailed review of our first quarter results. In the first quarter, we delivered total revenue growth of 7% and organic revenue growth of 2%. Our growth was fueled by the global expansion in our oil and gas pumps businesses and continued market share capture in our automotive friction business. Over the last several years, we've continuously invested in the competitive advantages and global capabilities that have enabled us to generate above-market growth in these key markets. In oil and gas, we've invested in our portfolio of products, our global engineering capabilities and our aftermarket capture strategies. And in automotive, we've recently ramped up local production of our premium brake pads at our Wuxi, China, facility. This local presence is providing us with a rapidly expanding pipeline of new platform opportunities in the world's largest and fastest-growing automotive market. In the quarter, organic orders increased 2%. This growth was driven by a 10% increase in global automotive friction and several long-term aerospace platform wins. These strengths were partially offset by continued delays in global industrial pumps and softness in our European connectors business. Organic orders at Industrial Process were up 1%, reflecting a $13 million mining order that will not ship until 2014. Total ITT orders expanded 13%, driven by the Bornemann Pumps acquisition. Our total book to bill ratio in the quarter was 1.12 or 1.07 excluding Bornemann. And every business contributed to this result, with book to bill ratios greater than 1. So while we are encouraged by these order indicators, we are still very cautious about the pacing of key market recoveries in the second half of 2013. Q1 adjusted segment operating income of $78 million grew 18% due to strong net productivity gains and expanded global strategic sourcing benefit. Other favorable operating income impacts in the quarter included strong OEM and aftermarket volumes and a favorable mix of pump projects. These gains more than funded our key strategic investments in global oil and gas and automotive. In the quarter, we also absorbed a $1.2 million operating income hit from the Venezuela devaluation. And we are closely monitoring the various financial impacts related to the continuing uncertainty in Venezuela following the recent elections, including the potential for a further devaluation. For the quarter, our adjusted EPS of $0.47 per share grew 21% due to the strong 18% operational growth, combined with flat corporate costs and a lower share count that was driven by the $46 million in share repurchases. Turning to our total revenue growth by end market on Slide 6. Growth in the quarter reflected the diversification benefits of the various enduring end markets that we serve with our engineered solutions. Revenue in the energy market was up close to 50%, while mining was down nearly 30%. These results were generally in line with our expectations, and they continue to highlight the quarterly lumpiness of our pumps business. Also driving the strength in energy was the Bornemann acquisition. However, even excluding Bornemann, energy grew 23%, reflecting gains in all served geographies. We also delivered nearly 10% growth in chemical and industrial pump markets. Chemical revenues were up 13%, driven primarily by Bornemann and share gains in Asia. Transportation grew a solid 5%, driven by automotive growth in the U.S. and China that was only partially offset by slower global rail equipment investments. Our growth in automotive reflected recent long-term platform wins with key customers, such as Ford in North America, GM in Europe and Audi in China. Aerospace and defense revenues were slightly positive for the quarter. Commercial aerospace strength and new platform wins were nearly offset by U.S. defense weakness and the conclusion of an aerospace program. We will continue to be cautious on our outlook for the defense market, which represents about 5% of our revenue, due to the uncertainty in procurement activity. So now let's turn to revenue by geography on Slide 7. Here, the strengths of our balance and diversity were once again evident. In the quarter, we delivered revenue growth of 3% in the U.S. and Canada due to gains in the Canadian oil and gas markets, driven largely by Bornemann. U.S. automotive grew over 60% due to gains at Ford that reflected both our recent platform ramp-ups and Ford's expanded production. These strengths were partially offset by weak U.S. defense conditions and slowing chemical and general industrial activity compared to a very strong prior year. This weakness was mostly attributable to economic uncertainty, which is driving a slowdown in investments. Revenue in Western Europe was up 10% due to the Bornemann acquisition, while organic revenue was flat. The organic result reflected solid 3% growth in our automotive friction business that was offset by connector weakness. The automotive growth reflected OEM share gains with targeted customers and increased aftermarket activity that more than offset the steep declines in European automotive production rates. Emerging markets grew 11%, primarily due to gains in the Middle East and China. These improvements were driven by 11% growth at Industrial Process and 20% growth at Motion Technologies, reflecting significant growth in China. We continue to drive growth in emerging markets, and we are on track to achieve our expected 15% growth for the year. Turning to Slide 8. You can see that segment operating margins expanded 130 basis points, reflecting significant margin growth at all 4 segments, and keep in mind that the strong ITT growth includes the 90 basis point dilutive impact from the Bornemann acquisition. As we've highlighted, this impressive expansion was largely the product of strong operational execution that was driven by various Lean initiatives and expanded global strategic sourcing programs. We also benefited from recent restructuring actions, which more than funded our current strategic investments. And for the second quarter, we expect to continue to take proactive restructuring actions in targeted markets and geographies. Volume growth and mix in automotive and high-margin pump shipments, reflecting some beneficial timing, also positively impacted margins in the first quarter. Pricing remained a slight headwind due to constant automotive industry pressures and competitiveness in large pump project pricing. So finally, let's turn to Slide 9 for an update on our financial outlook. While we do not provide quarterly guidance due to the lumpiness of our Industrial Process business, I'd like to provide some operational insights into our second quarter. We are expecting revenue to be slightly lower than the first quarter due to the seasonality associated with the profitable aftermarket at Motion Technologies, which is at peak levels in the first quarter caused by the timing of break pad replacement activity. This decline will be partially offset by the timing of lower margin project shipments at Industrial Process. As a result, second quarter adjusted operating margins are also expected to be down compared to the first quarter. And for the full year, as Denise stated, we are on track to achieve our organic revenue midpoint growth of 3% and total revenue growth of 10%. The drivers of this growth will be oil and gas, chemical and industrial pumps, as well as share gains in automotive concentrated in the U.S. and China. We also expect to deliver strong growth in emerging markets once again this year. These gains will be partially offset by mining and defense market headwinds. We continue to expect 50 basis points of adjusted segment operating margin expansion for the year, including Bornemann, and we are off to a very strong start in Q1. Margins are expected to improve in the second half compared to the first half, due to the benefits from restructuring actions, continued productivity benefits, as well as volume and mix gains. We also continue to forecast adjusted EPS of $1.85 at the midpoint, which reflects a second half weighting of slightly more than 50%. Our midpoint growth is a solid 10% compared to the prior year and reflects the continued funding of our long-term initiatives that will structurally improve our operating effectiveness and our global customer reach. So while we are pleased with our solid first quarter results and underlying operational execution, we are maintaining our prior guidance midpoint commitments due to the continuing economic uncertainty and slower-than-anticipated recoveries in key end markets and geographies. So now let me turn it back to Lori to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Matt Summerville with KeyBanc.

Couple questions. With all of the investment you're making into your facilities, whether they be in Industrial Process or Motion, how much inefficiency or start-up cost are you bearing in your P&L now? And at what point does that abate?

Matt, it's Denise. First, let me say in terms of the capital expansions that we have underway in Motion and in IP, the reason that we're doing those investments is because both of those businesses have had such significant growth in their markets, that we've been running at near-capacity levels. And when you look at the growth that Motion Technologies has had in China, phenomenal growth, this quarter, of 80% growth in China, and it's quite a growing market for us. So putting a facility over in China has been strategically very important for us, and it's showing up in the results on the top line. And then in IP, in terms of the Korea facility and building out Seneca Falls, has also been an important initiative for us because of the growth that, that business has experienced also.

Yes. So, Matt, as we think about the progression of the year on the start-up costs side as well, Motion Tech, you saw some start-up inefficiencies in Q1. That'll continue more in Q2 as the productions ramp up. But with each of these initiatives, they're obviously on different phasing levels of implementation. And Motion Tech now is gaining some good momentum behind their underlying operating performance. So I think you'll see that start-up drag kind of continue into Q1 into Q3. And then, really, what's going to happen is we're going to move into potentially another wave of investment in the China growth opportunity that we see. So these are the types of investment that we feel very good about. And certainly, we try to move the start-up costs as quickly as we can so they don't continue to create a drag on the margins. But the infrastructure is in place, both in -- as we think about the Korea investment, investments in Seneca Falls and the investments in Wuxi, yes, we have some start-up activities, but these are existing locations where we have a very strong work force that's pretty familiar with how to produce and deliver in those end markets. So we're maintaining our aggregate commitment to significant strategic investment this year in these key areas, but we're certainly focused on mitigating the start-up costs.

And while we have these start-up costs, we're also seeing it come through on the top line right now with the investments that we're making, and we're seeing the top line growing at IP and the top line growing in Motion. So it's a nice offset to these start-up costs.

Can you then talk about Bornemann for a few minutes in terms of book to bill being at about 2.0? That's obviously very substantial. Is that being driven by share gain, share conversion or, I guess, competitive conversions to your product? And, I guess, what's kind of the full year outlook that you have for revenue and sort of where you think backlog ends up for that business as you head into '14? Because I would imagine that's fairly long cycle.

It is a long-cycle business. And first, let me just tell you that Bornemann has been a great acquisition, and it is meeting all of our expectations. And we're really excited about the technology that it has. When you think about the growth that they're experiencing, it is all predicated on the technology that they have. It is unique technology, and it is technology that's in demand in the marketplace. That's why you're seeing this type of growth that's out there for them. And when we look at the growth rates and what we're expecting for this year, on a revenue perspective, we're looking at it growing anywhere from 25% or so, and then from an order perspective, anywhere from 10% to 20% this year. The backlog that we ended Q1 with was about $120 million, and about 75% of that backlog will be sold this year. And it's related to projects that they've had on the books for a period of time. It's a long cycle business, and the projects tend to be lumpy. So those projects are going to get delivered in the back half of the year, and it will ramp up as we go throughout the year.

Your next question comes from line of Jim Krapfel of Morningstar.

How's the acquisition pipeline looking? And would you look to up your share repurchases if there's a lack of acquisition activity over time?

Well, we're already doing share repurchases this year. We announced that we're going to do $75 million this year. We've done $46 million so far to date, so we're on track to do that. In terms of acquisitions, that is something that we're focused on. It's key for our growth as we go into the future. The focus that we've got is anywhere from $15 million to $50 million in revenue, even though we look at opportunities larger than that, we look at opportunities smaller than that. And we look at opportunities, really, across the portfolio that we have. So it's a pipeline that we've been building over the past 1.5 years or so. And it -- we continue to progress with that pipeline, and we're happy with what we're seeing right now in that pipeline.

And then second question, are you still expecting a second half pickup in oil and gas project orders? And have orders come in as expected, or are they continuing to be pushed out a little bit?

From the oil and gas standpoint, the issue has been on the project side of the business, and that's where we've been seeing some delays in orders getting placed. Quote activity still remains high. The feed still remains strong, but the orders have just not been getting placed for the large projects as we had hoped. So it's still slow. We are expecting that to come through more in the back half of the year. Some of the smaller projects are coming through, but not with the larger ones. So we've seen some -- on the oil and gas side, we've seen -- again, the activity being about what we had expected, a little bit slower in April than what we would have expected on the project side and then with some of our baseline pumps.

Your next question comes from the line of Brian Konigsberg of Vertical Research.

I just wanted to follow up on the comments regarding Industrial Process. I think you said some low-margin revenue should be hitting the books in Q2. I'm just curious, how much "low-margin" revenue do you actually have burning in 2013? Is that kind of a prolonged type of realization this year, or is that more of a one quarter type issue and then you start to see an inflection higher?

Yes. A couple points there, Brian. So the shipment patterns of IP are going to dictate a lot of the quarterly margin profile. So Q1, we did see some good, profitable, call it, small-, medium-sized activities and a good healthy aftermarket in parts activity flowing through our facilities. In Q2, our deliveries have a little bit higher weighting towards larger projects, medium-sized projects that have a different margin profile, as you know. The other factor is Bornemann. And Bornemann is going to impact margins in a more negative way in Q1 and Q2 because of some of the lower volume shipment periods for the year. As we go into the back half of the year, the margins at the Industrial Process segment will improve based on the additional contributions from Bornemann that will start to come through, in addition to the mix that we see in the back half of the year relative to what we're expecting in the front half. So you put all that together, the IP second half margins would be indicating stronger than first half of the year margins. Bornemann plus timing of shipments are the 2 contributing factors.

Got you. And just following on Industrial Process. I'm not sure if you saw this morning, actually, one of the major EPC contractors announced they received the EPC for Dow's petchem ethane cracker down in Freeport. So I'm just curious, I don't want to suggest that maybe you're on that project or not. But just as far as the timing relative to when those EPC contracts are coming out, would that be a benefit for ITT 1 to 2 quarters later? Or how do we kind of think about where you are in that sales process?

Yes. Just a couple comments there, Brian, without getting into specific order trends. I mean, obviously, chemical market in North America is a stronghold for ITT and our Goulds Pumps business. So that's one of areas that we're very competitive and have good strong relationships in North America. So we certainly would be targeting opportunities on all projects in the chemical market. Inside of the question is really the timing of the procurement cycles around the different types of equipment. So it does vary. And I think on -- generally speaking, we tend to be in the second half of the procurement cycle, given the nature of the equipment that we provide. So you may see some earlier activities being let from the EPCs as contracts come online and big projects. We may be coming online in the kind of the middle to second part of a larger order buildout.

So does that mean if it's a 4-year project, you're 2 years beyond the EPC contract being awarded?

I think it's going to vary significantly based on the complexity of equipment that's being ordered. But I think, by and large, we tend to be in the middle to -- we kind of start in the middle of the project or the tail end, in some cases.

I think the good news on that announcement is that we're beginning to see projects now start coming forward, and that's what we been wanting to see, especially on the chemical side of things. So that's good. We're starting to see some investment dollars being placed there.

Got you. And if I could just ask one more, just on Interconnect. So sequentially, the margin took a dip down from what we saw in Q4. Revenues were down just modestly. I think kind of the margin decline probably was a little bit more than I would expected, given the volumes. Maybe can you just touch on what transpired there? And how should we think about the pace of that moving through the year?

Yes. Let me just say, I think it's important when we think about ICS, that we're in the process of working ICS on a number of different fronts. So we've been refocusing the front end, the focus on certain end markets, such as aerospace, oil and gas, some of the other ones that we've got into place, medical. So we've been looking at that and refocusing the front end. We've also been working on the operations and looking at the footprint and optimizing that and looking at some ways that we can produce more efficiently than we have in the past, and we've taken some proactive restructuring in 2012 and 2013 associated with that. So we've been working ICS on all fronts. I think it's important to note that this is a journey that we're on, that we are expecting improvement throughout ICS as we go through the year. But what we're trying to do is build a foundation and build it very systematically. So we expect margins to improve on a year-over-year basis. You just might see some fluctuation as you get in from quarter-to-quarter with that.

Yes. And some of the drag in the quarter, Brian, was really mix weighted. So we're in a number of end markets, as Denise articulated, and different contribution margins based on the volumes that we're producing. And I think what we saw in Q1 was unfavorable mix, not only compared to Q4 but compared to Q1 of the prior year. So we're encouraged by the drop-through that we did have, and we're targeting these key end markets where we see stronger margin profiles for the long term.

And I think it's important to note that, when we look at Q1 and we look at what our expectations were, it was very much in line with our expectations.

Your next question comes from the line of Ajay Kejriwal of FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So maybe if we can talk a little bit about the free cash flow. So negative in the quarter and last year was nice positive, so it does not look like this is seasonality. Are there any onetime items driving the cash flow performance in the quarter?

Yes. There were onetime items last year in Q1 that probably give you a little bit of a comparative challenge year-over-year. So we did have about $100 million tax refund last year that kind of cascaded off of the spin. And this year, what you're seeing in Q1, Ajay, is probably pretty consistent with the ebb and flow of our free cash going forward. So we would expect Q1 to be a potential use of cash, typically a time of bonus payments and other factors where you have some cash outflows that are seasonal, and also the ramp in our business probably even more impacted by the flow of Bornemann. So we do have heavier investments in working capital in the beginning of the year, and then we do see a bigger run of shipments in the back half of the year. So there's even a little bit more pressure on Q1 going forward and Q2, most likely, based on the timing of Bornemann. I think as we progress through the year, we do expect capital spending to increase for us in the second quarter and the third quarter, because we did have lighter-than-planned capital expenditures in Q1. We expect to get back on track in Q2 and Q3 at a much higher rate. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So -- and I know you don't have free cash flow guidance for the year. How should we think about your conversion for the full year? Will it be in line with adjusted net income?

We had indicated based on the capital expenditures that we have planned for this year, which, again, we're talking about the Wuxi, China, automotive buildout, which is really kind of driving our results; the expansion that we've been working through in Korea; and our Lean transformation activities at our Seneca Falls facilities, those 3 big investments are going to bring our conversion down below 100%. I would think somewhere -- we've indicated in the past, somewhere between 80% and 90%, depending on how much of the investments we're able to put through the year. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it. And this is on the adjusted net income, right?

Correct. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Good. And then on the gross share repurchases, nice number, but looks like the diluted share count has moved barely sequentially. So is it that the purchases happen towards the end of the quarter? Is there's options being exercised that's offsetting share repurchases?

Yes, those are all the factors, definitely, that played through the quarter. And you'll see the share count start to move down sequentially in Q2 from where we were in Q1, where you'll have the benefits in Q2 of the previous repurchases and the continuation of the program. The other factor to keep in mind, in addition to option exercises, is the higher share price has increased our dilutive shares outstanding in the calculation. And that's just simply a function of where the share price is today relative to where it was last year. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: How should we think about the full year diluted share count? I mean, kind of what's baked into your EPS range?

Yes. We've guided from the initial projections at 92.5 million -- 90 million to 92.5 million shares outstanding diluted, and we are on track for that outcome.

[Operator Instructions] Your next question is a follow-up from Matt Summerville of KeyBanc.

Can we talk a little bit more? I think you mentioned a little bit on maybe 1 or 2 of the IP markets what you saw in April. Maybe can you speak just more broadly across the businesses if there's been any discernible change in trend relative to your experience in Q1?

Sure. So with the other 3 businesses, what we basically saw is that the orders tended to improve or were strong throughout Q1. And then as we headed into April, they were very much in line with our expectations, and they continued to be at reasonable levels in April. So we were happy with what we've seen in the order front on all 3 of the other businesses. As I said before, the -- what we're watching carefully is, in the IP side of the business, the project business and baseline pumps.

And then how would you talk about -- you mentioned some of the projects in Industrial Process sort of getting pushed to the right. How would you characterize your rate of backlog conversion to revenue now versus a year or 2 ago?

In IP, basically, our backlog, we've got about 60% of the backlog to be delivered in 2013. And when we look at it versus a year ago, a year ago it was probably a little bit higher than that, maybe 63%, 64%. So a little bit softer. I think that's a reflection of what we've been seeing with the project activity, but still at good levels at 60%.

And, Denise, where is the IP backlog? I don't know if you gave that or not. I don't see it. Do you have that number?

Sure. The IP backlog, which includes Bornemann, is about $630 million. And when you look at it on a year-over-year basis, it's up 25% than what it was a year ago. That's with Bornemann. Without Bornemann, we're up about 1%, and it's about 4 or 5 10 [ph].

And if you compare to year end, Matt, those numbers, the backlog is up 9% in total IP, and it's up 5% excluding Bornemann.

Great. And then just one more on the restructuring. Can you sort of provide a roll forward in terms of what -- maybe recap what you've spent in '12, what the anticipated savings are for this year, what you're spending in '13 and how much of that gets realized this year?

Yes, sure, Matt. So we are looking at -- last year, we spent about $14 million on restructuring, and this year, we've targeted between $10 million and $20 million of additional actions. So as we flow through, this year's total savings, really, from the 2 sets of activities that we've had, on an incremental basis year-over-year, is adding about $13 million to $15 million of incremental benefit to us in 2013 compared to 2012. When we look across the 2 years of activity, the payback on this combined number of investments we have is around 1.5. So we're seeing good payback. A lot of the focus that we have is on the indirect cost and, really, kind of bringing our cost structure in line with where we think it needs to be for long term. We've been focusing our activities, both last year and this year, at the connector business, as you would expect, and at our Motion Technologies business, primarily focusing around some activities on the shock absorber side of the business. So we are seeing good flow-through of these restructuring actions. We would expect to continue to have some targeted actions throughout the course of the year. And this is really as we're resetting our footprint and thinking about the long-term strength of the operations. We're being very thoughtful and targeted in how we progress those activities.

The next question is a follow-up from Brian Konigsberg of Vertical Research.

Just on -- so tax. So your sister company was able to drive that down very substantially through planning. I know you don't want, possibly, to get into real specifics. But what is the opportunity to replicate the tax structure that we've seen elsewhere within some of the ITT pieces within your business?

Well, Brian, we just -- we're targeting 31% rate in our guidance, just to provide that additional context, which is what we had in Q1. For the long-term tax planning, we really look at the business, the operations of our activities in Europe and internationally. We are more than 60% outside of the U.S. So when we think through the efficiency and the operations of our businesses, we're always contemplating kind of new ways to be more efficient and more effective. And those activities could generate tax benefits over time. But these things, I think, especially in the current environment, need to be thoughtfully planned out and would take several years to implement potentially. So it's something that we certainly look at. We're mindful of what others have done. We certainly have an international presence. But I think as we kind of continue to work through the post spin environment, we're going to think about how we can best operate these businesses overseas, and then we'll see which tax strategies may be available to us.

Great. And just secondly, on Bornemann, I'm not sure -- and I apologize if I missed this. But what markets is driving the order profile in the quarter? As far as -- and specifically just to Canada, there's been discussions of, particularly kind of on the oil sands work, some potential slowdown or recontemplation of some of these projects, given the economics and what's happening in the U.S. Maybe just -- if you could give us a sense of how exposed you are to oil sands projects, and are you seeing any potential disruptions there?

Well, first off, with Bornemann, when you look at the portfolio that Bornemann has, about 80% is in oil and gas, about 13% in general industry and about 7% on the chemical side. They do have some nice project opportunities in Canada. And in Canada, those continue to be strong for us. So the project activity that they've got this year that's being delivered this year is in the -- primarily in the oil and gas side, a little bit on the chemical side. And that's what we're seeing in terms of the nice growth that's going to get delivered in the back half of the year.

Yes. The other interesting point, too, Brian, is that Bornemann has a bigger set of opportunities in the Canadian oil sands than our -- than the Goulds business has historically been able to participate on. So it's one of the areas where we do see opportunities for us to really target that portfolio and bring it through into Canada, leveraging off of what Bornemann has been able to do in establishing a really strong presence in Canada. About 15%, roughly, of the Bornemann revenue is in Canada. So they are well established and have a good presence, and there's obviously a nice aftermarket cycle, given the type of equipment we already have up in place.

And that Canadian work, is that oil -- all oil sands, or does that extend beyond oil sand to gas, which I would assume it does?

It's primarily in the oil sands. But certainly, we would have opportunities to grow on the gas side as well.

And you're not seeing disruptions in any of the projects that you're addressing or pursuing?

Not at this point.

No.

Okay. And just secondly, on aftermarket, and I apologize if you discussed this as well, but I don't recall -- just as far as your ability to capture incremental aftermarket opportunities, I know the legacy business was farming out some of that work to third parties. Do you expect you'll be able to capture those opportunities fairly quickly, or do you need to run out existing contracts before ITT gets the opportunity to execute that work?

Aftermarket's been a key initiative for us on the IP side of the business. In fact, we've hired a new leader who's running aftermarket for us in IP, and so we've structured all those activities under one leader who's driving it on a global basis. Obviously, when you have new projects, what we're targeting is tying the aftermarket into those new projects that we have. And we are going after the aftermarket that is already out there on existing projects and anything else that we can do. And part of that's building out our service, our service activities and our service capabilities that we have. So we're being aggressive on that front, and we're doing it through some new service arrangements and agreements that we have in place and really focusing on it as an organization.

Yes. So I don't think you'll see a quick move upward on -- from the Bornemann margin profile. It will take us time, Brian, to work through some of those relationships and really plug them into the network that Denise is describing. So that is more of an additional benefit as we look forward in 2014. The lift that we expect in the second half from Bornemann is going to be largely around the shipments of some of their larger pump projects.

Your next question is a follow-up from -- I'm sorry. You now have a question from John Inch of Deutsche Bank.

It's Karen Lau dialing in for John. So with Motion having a decent start in Europe in 1Q, where do you stand in terms of your expectations for Motion in Europe for the year?

We're really happy with what Motion Technologies is doing. I mean, it is just a testament to the position that we have in that marketplace. We solve problems quickly. We've got good quality that's there. We have good delivery rates. So we're happy with that. In terms of Europe, what we're expecting is that our brake pad business is going to be up about 2% this year. We're looking at the European production being down about 4% this year. Aftermarket's growing nicely for us. Aftermarket is up 7%, and so we continue to gain some nice share in the aftermarket, along with the European production. So that focus will continue for us with our brake pad business. On the other side of it, we've got the rail business, which gets consolidated into Motion Technologies' results. And that rail business, from a top line perspective, we've -- it's not where we expect it to be, but we've been working on a lot of operational improvements within the rail business. So we're looking for some recovery in the economic conditions around rail for that.

And if we look at the year-over-year Motion margin expansion, the 260 basis points driven by volume and productivity, is that -- I realize first quarter is usually a high-margin quarter for Motion. Is that 260 year-over-year going to be sustainable, given all the productivity work and machine efficiency that -- work that you have done, or is it more mix driven by higher aftermarket business in 1Q?

We do expect to have nice margin expansion in Motion Technologies for the year, because they are driving operational improvements throughout the business. A large portion of that is with our KONI business, which is the shock absorber business, where we've been going in there and doing a lot of work from an operational perspective with that business. At the same time, when you look at the friction business and what the team there has been able to do in terms of the efficiency of our main facility in Barge, Italy, where I've indicated that we've increased the efficiency there by producing another million brake pads per month. You think about that and how they're able to do that with the capital base that they currently have, that's what's helped driving their margin on a year-over-year basis. So we do expect the nice margin improvement to be there when you look at it year-over-year.

Just prospectively, we could be looking at over a 200 basis point of margin expansion year-over-year for the year for Motion?

I wouldn't to target 200 per se. In Q1, you did have some of the nice aftermarket business that came in to that, but you will see some nice improvement on a year-over-year basis.

Okay. And just lastly, could give us an update on the progress in terms of winding down some of the ICS noncore businesses?

That's a process that's underway right now, and so it -- I think we had targeted about 12 product lines or something that we were looking at exiting or getting out of over time. But that is all part of the refocus that we have for ICS and focusing on those markets and those product lines that are going to be most relevant to us going out into the future. So that's not significant. It's not something that is going to really move their revenue number much. But yet it's progress, and it's work that we've got underway there. So it'll just bleed out through time.

Your next question is a follow-up from Jim Krapfel of Morningstar.

Can you comment on your aftermarket trends in Industrial Process? And are you still expecting aftermarket growth in the 5% to 10% range for 2013?

Aftermarket, we had some nice aftermarket activity that took place in Q1. What we're watching closely is we're watching North America. And what we want to see in North America is we want to see some improvement from an economic perspective. And so we're watching closely our baseline comps. We're watching closely the parts activity. That's where we've seen some softness in April. And so we're looking to see some pickup in that as we get into the back half of the year. And that will then impact the aftermarket that we end up with by the end of the year.

And one of the factors we're looking at, Jim, is just utilization rates in our key customer locations. The pacing of economic activity is one of the key drivers that we're watching to see how the aftermarket develops throughout the course of the year. We have brought a lot of projects online going back to 2010, when we had real ramp-up in some of these larger investments of bigger pump projects. So we're getting into that cycle. But the other X factor that we're watching is, certainly, the capacity and utilization rates within -- primarily within North America at this point.

We appear to have no further questions. I will now turn the call over to Denise Ramos for any additional or closing remarks.

Well, thank you, everyone, for participating on the call today. Let me just quickly summarize what you've heard. So we continue to grow and meet our commitments even in difficult market conditions. We are going to deliver on our strategies to grow through our strong execution, and the first quarter execution was solid. But we are mindful of the uncertainty that remains in the market, so we're maintaining our prior guidance. Thank you, again, for joining us today and I do look forward to our next call.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.