ITT Inc. (ITT) Q3 2014 Earnings Report, Transcript and Summary

Welcome to ITT's Third Quarter 2014 Earnings Conference Call. On the call today from ITT is Melissa Trombetta, Vice President, 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. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Thank you. Good morning, and welcome to ITT's Third Quarter 2014 Investor Review. 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. During the course of this call, we will make forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. No forward-looking statements can be guaranteed, and actual results may differ materially from those projected. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements made on this call should be evaluated together with the risks and uncertainties that affect our business, particularly those disclosed in our SEC filings. So let's now turn to Slide #3, where Denise will discuss our results.

Good morning, everyone. I appreciate you joining us as we announce our strong financial results for the third quarter of 2014. Q3 was another solid quarter for ITT, with better-than-expected operational results and earnings. Our financial performance highlights the benefit of our diversified portfolio, which is nicely aligned around key strategic end markets, geographies and customers. So let me put our diversification in context. In the quarter, our revenue was 43% in transportation, 34% in industrial and 23% in energy. From a geographic perspective, we were also nicely diversified, with 40% in North America, 20% in other developed markets and 32% in emerging markets. Our strategically integrated operating company model has continuously delivered value across our multi-industrial platform as we've built a solid, longer-term operating foundation over the last 3 years since the spin-off. The results in the quarter and over the last 3 years also highlight our ability to effectively manage in an unpredictable economic environment by leveraging a more efficient cost structure that we drove through our relentless ongoing focus on productivity improvements, advancing our lean initiatives, strengthening our culture and driving a premier experience for our customers. As a result of this sustained operational intensity all across ITT, in Q3, we grew our adjusted segment operating margins at 190 basis points, 15.1%, which is a new record for today's ITT. This growth was driven by strong net operating productivity, strong volume gains at Motion Technologies and the result of the efforts the entire organization has been making to optimize our cost structure and to achieve our goal of a lean enterprise. The payoff from these efforts is highlighted in the 130 basis points of adjusted gross margin expansion as well as in our 190 basis points of adjusted segment margin expansion, where 3 out of 4 of our businesses delivered at least 260 basis points of improvement over prior year. These gains helped to fund our strategic growth investments that will drive future growth in target markets. This is the ITT way. We constantly drive for internal efficiencies that expand our margin of generating the funding to drive investments in our future growth. The solid Q3 operating results were also reflected in our adjusted EPS of $0.66 per share, which is 22% higher than the prior year. This includes the 18% increase in adjusted segment operating income and a lower effective tax rate versus prior year, which more than offset higher corporate costs related to internal capability building and other investments. Our focus continues to be on driving top line growth through efficient operations that align with our customers' needs, and in the third quarter, our total and organic sales grew 4%, which reflects a continuation of the strength we have been delivering in our oil and gas project pump business, market growth and market share gains in our auto brake pads and global market share gains in our KONI shock absorber business as a result of the successful turnaround. This strength has helped to more than offset some of the more economically sensitive end markets, where we have been experiencing some softness, such as our industrial valve, mining and defense. Our organic orders increased 2%, with both the automotive and KONI businesses contributing to the 13% growth at Motion Technologies, along with solid North American chemical and mining project pump activity in Industrial Process. This was partially offset by defense and anticipated declines in nonstrategic connectors. In addition, we continue to see ongoing delays in oil and gas pump projects, particularly in the emerging markets. However, it is important to note that we continue to experience solid level of bid and proposal activity in petrochemical and oil and gas markets, and while Industrial Process orders were down 1% due to difficult prior year oil and gas compares, sequential orders were up 12%, with 5% year-to-date backlog expansion. Moving on to our 2014 guidance update. From an adjusted earnings per share perspective, we are increasing the guidance range for the third time this year. The increase reflects the operational outperformance we delivered in Q3 at both Motion Technologies and Control Technologies. As a result, this quarter we are raising the midpoint of our adjusted EPS guidance range by approximately $0.03 as we expect unfavorable foreign currency to partially offset the Q3 operational performance. Therefore, our new adjusted EPS range is $2.42 to $2.47, which represents strong 21% growth at the midpoint versus prior year. In addition, we are maintaining our organic revenue guidance and lowering the high end of our total revenue guidance range by 1 point to reflect the impact of foreign currency. Both full year organic and total revenue growth are now expected to be in the range of 5% to 6% versus prior year. So I am pleased with the overall Q3 results and the tremendous progress we've made since the spin. The results we've delivered reflect the power of our diversification and our balanced portfolio and validate the strategic path that we have laid out for this company for the long term, but when looking at the near term, we are mindful of the continuing uncertain economic environment, stronger dollar and the volatility we are seeing. And we are accordingly focused on delivering the compounding benefits from our continuous investments in efficiencies and effectiveness over the last 3 years that have provided a solid foundation that we will leverage to drive even stronger gains in 2015. This foundation will help drive future efficiencies and growth from areas like improved large project execution with enhanced capability, improved supply chain effectiveness, improved efficiencies across all functions driven by our strong lean culture, and the full realization of the significant restructuring actions taken in 2014. Now let's turn to Slide 4 for an update on our strategic growth drivers. Our strategy is centered on 4 key areas that drive our long-term growth: focused market expansion; differentiated customer experience; operational excellence; and effective capital deployment. Looking at our market expansion. In Q3, we delivered strong growth in emerging markets, which were up 13% in total and 14% organically, while developed markets declined by 1%. Emerging markets were up due to strong oil and gas and petrochemical project pump activity in Latin America and the Middle East, in addition to automotive market growth and share gains in China. In China, we grew 42% organically in the quarter, reflecting the benefit from the strategic investments that we have been making over the last couple of years to effectively align with long-term growth drivers. This performance validates the fact that we are making the right investments for this company to help strengthen our capabilities. Developed market performance also benefited from oil and gas project pump activity, as well as mining pumps used in fertilizer applications. In addition, Motion Technologies had strong automotive aftermarket growth due to our strong OEM performance over the last several years, which is now entering the dealer service cycle, as well as strong KONI shock absorber results. This growth was more than offset by defense weakness and short-cycle base pumps, an industrial valves used in the chemical market. Another key element to our strategy is our intensified focus on differentiating with our customers. Our commitment to provide solutions to our customers through innovation, coupled with the intimacy we developed over the years with them, allows us to better understand their needs and requirements and to work with them to develop breakthrough products. This is evidenced by the Motion Technologies business, which has been able to leverage its material science expertise to successfully develop copper-free brake pads that exceed the latest regulatory standard, and I am very pleased to announce that we are now the first producer of copper-free front brake pads for a light vehicle application to a major European OE manufacturer. And we expect to continue to see new awards for our copper-free brake pads with other global customers in the future. Customer recognition is certainly one of the most direct indicators that we are focusing in the right areas. In Q3, our 2 main aerospace production facilities within Control Technologies earned gold and silver operational scorecard status from 2 major U.S. aerospace customers. This means that we have at least 98% on-time delivery performance and close to 100% quality performance for the last 12 months. So I'd like to congratulate the Control Technologies team for such outstanding results. Moving on to our next growth driver, operational excellence. We continue to capture opportunities to improve efficiency and cost. During the quarter, we took additional restructuring and realignment actions, totaling $6 million. These costs relate to the Interconnect Solutions turnaround as well as the integration of Bornemann, where we are accelerating our lean activity. We expect to continue these actions into Q4 as our total restructuring and realignment expenses for 2014 are expected to reach approximately $35 million. I would also like to take a moment, once again, to highlight the outstanding results at KONI in Motion Technologies as well as Interconnect Solutions as a result of their ongoing turnaround action. In Q3, KONI delivered organic revenue up 45%, organic order growth up 42% and adjusted segment operating margin up 930 basis points to over 15%. In Q3, Interconnect Solutions delivered 25% adjusted segment operating income growth, with adjusted segment operating margins of 14.4%, which is up 340 basis points versus prior year. And in Q3, we had another significant quarter of productivity, generating $26 million of gross savings, which brings our year-to-date total to $81 million. These savings are the result of the acceleration of our lean transformation, our global strategic sourcing initiative and benefits from restructuring actions. And finally, our last strategic focus area, capital deployment. We had another quarter of disciplined capital deployment. The organic investments we made during the quarter were focused on the ongoing efforts to rebalance, expand and lean out our Motion Technologies footprint to improve the efficiency and effectiveness of our global auto brake pad production capability as well as building out our aftermarket-reaching capabilities within our Industrial Process business. As we have seen all year, these targeted investments continue to help us build on our already strong foundation and will drive profitable long-term organic growth. And in 2014, we have repurchased $20 million in shares that more than offset option dilution. So I am pleased with our performance to date and the continued momentum that our people are generating on a daily basis, with a focus on delivering on our commitments by executing on actions that are within our control, and we continue to invest for the future through balanced and strategic capital deployment despite the current geopolitical uncertainty. We believe that we continue to have investment opportunities that will help support our future growth and create long-term shareholder value. With that, let me now turn it over to Tom to discuss the quarter.

Thanks, Denise. Now let's turn to Slide 5 for a detailed review of our third quarter results. In Q3, we had total and organic revenue growth of 4%. Motion Technologies led the way with another exceptional quarter, up 11% organically. This growth included a 6% increase in auto brake pads and a 45% increase in KONI shock absorbers. The auto brake pad growth was the result of an increase in the aftermarket of 9%, mostly in our European dealer service channel as well as market growth and share gains in China and North America. The KONI performance was mostly driven by share gains in the global rail market. Industrial Process also delivered solid organic top line growth of 3%. This growth included a 17% increase in oil and gas pump projects, which was partially offset by a 1% decline in our chemical and industrial end markets due a large prior year industrial valve shipment and softness in our North American short-cycle base pump business, as well as a 5% decline in mining. The top line increases we saw in 3 out of 4 of our segments were partially offset by a 5% decline at Interconnect Solutions, that reflected defense and communication weakness and an expected decline in our other nonstrategic connector product line. Moving on to orders. Total and organic orders increased by 2%, driven by strength in automotive friction, rail shock absorbers, commercial aerospace, North American petrochemical and mining pumps, and a 5% increase in our industrial pumps aftermarket. These gains were partially offset by oil and gas pump project delays in emerging markets, a large prior year project compare and an 8% decrease in our Interconnect Solutions business due to expected declines in communications and other nonstrategic connectors. Q3 adjusted segment operating income of $99 million represents a strong 18% increase over the prior year. This outstanding performance is primarily due to solid net operating productivity, more ongoing lean transformation and accelerated benefits from our turnaround actions at ICS and KONI. In addition, we delivered higher volumes, and we benefited from favorable currency. These benefits more than funded incremental strategic investments and helped to offset negative mix as well as pricing headwinds in automotive and in our Industrial Process projects business. For the quarter, our adjusted EPS of $0.66 per share exceeded expectations and was 22% higher than the prior year. Our EPS improvement reflects the 18% growth in segment operating income, a lower effective tax rate and lower interest expense. These benefits were partially offset by an increase in corporate cost due to incremental investments and internal capabilities, increased severance and unfavorable insurance cost. Turning to our total revenue growth by end market on Slide 6. Revenue in the energy markets was up 15% in the quarter, driven by a 17% increase in oil and gas and Industrial Process related to large projects in North America, Latin America and the Middle East, with all oil and gas segments contributing to the positive results. Transportation, our largest segment, was up 6% in the quarter. Global automotive revenue grew 6% due to aftermarket expansion in Europe and OEM market growth and share gains in China. Rail was also a significant contributor in the quarter, posting an 87% increase, largely due to market share gains at KONI as a result of the recent turnaround efforts. This strength is partially offset by aerospace and defense, which was down 4%. While aerospace was up 5% due to strong commercial and aftermarket demand, our defense business was down 17% due to weak global defense spending. And finally, our broader industrial markets were down 4% in Q3. This was largely due to declines in communication and other nonstrategic connectors. In addition, mining pumps were also weak due to lower project activity in Asia and Latin America. These declines are partially offset by 6% growth in our general industrial business in both Interconnect Solutions and Control Technologies. Now let's turn to our revenue by geography on Slide 7. Revenue in the United States and Canada grew 3% in total due to a 40% increase in oil and gas project pumps and a 22% increase in mining pumps for the fertilizer market. In addition, we had solid growth in our KONI shock absorbers business as well as commercial aerospace components and connectors. These gains were substantially offset by a 7% decline in our chemical and industrial pumps markets due to softness in our short-cycle base pumps and industrial valves. We also experienced declines in the mid-teens in our defense and nonstrategic connector businesses. In Europe, total revenue was flat during the quarter. Automotive brake pad dealer service aftermarket was up 14% in Q3, and rail grew 25% due to share gains at KONI. These increases were offset by defense weakness and a 29% decline in oil and gas due to unfavorable timing of large pump projects. Total revenue in emerging markets grew an impressive 13%, mostly driven by 26% growth at Motion Technologies and 12% growth at Industrial Process. Motion Technologies performance reflects 20% growth in our China automotive friction business due to market growth and share gains, and the Industrial Process performance reflects solid oil and gas and petrochemical project activity in both Latin America and the Middle East, partially offset by a difficult prior year comparison, a large industrial valve shipment to India and weakness in the mining market. Turning to Slide 8. Here you can see that adjusted segment operating margins expanded an outstanding 190 basis points to 15.1%, and in addition, our adjusted gross margins expanded 130 basis points to 33.7%. As we've highlighted, our margin expansion was largely the result of strong operational execution that delivered $26 million of gross productivity savings in the quarter. These savings were driven by various lean transformation actions, expanded global strategic sourcing and significant benefits from the turnaround activities at Interconnect Solutions and KONI. These results also reflected very strong volume growth at Motion Technologies. Productivity gains more than self-funded 60 basis points of organic investments, which were focused on rebalancing, expanding and leaning out our Motion Technologies operations to improve the efficiency and effectiveness of our global auto brake pad production capabilities and the continued building out of our global aftermarket reach in the Industrial Process business. In addition, we experienced negative pricing impact with constant automotive industry pressures, and we have unfavorable mix impacts due to declines in defense volumes and an 8% increase in project activity in our Industrial Process business. The Industrial Process project margins reflect continued pricing pressures and some unfavorable impacts attributable to large project complexity. Let's next turn to Slide 9. As a result of our annual asbestos remeasurement, we recorded a $59 million pretax benefit in the third quarter. This adjustment reflects a significant reduction in our net liability based on various recent trends and experiences primarily related to lower legal defense cost and lower acceptance rates. In addition, from a cash flow perspective, as a result of an assumed acceleration in claims processing by the courts, we have increased our estimated net annual average after-tax cash outflows by $5 million over the next 10 years. Additional details related to these asbestos estimates will be available in our 10-Q filing later today. So finally, let's turn to Slide 10 for our 2014 guidance update. As you've heard this morning, we are very pleased with the overall Q3 results and especially our underlying operational execution. As a result of our performance this quarter, we are once again raising our adjusted EPS guidance. Our new full year adjusted EPS range of $2.42 to $2.47 per share reflects an increase of approximately $0.03 at the midpoint, generating a new growth rate of 21% compared to 2013. Provided on the slide is a roll forward from our previously issued guidance. This new adjusted EPS guidance reflects third quarter favorable operational impacts of $0.06 that were driven by higher-than-expected global automotive volumes in both OEM and dealer service aftermarket and strong operating performances from our Motion Technologies and Control Technologies businesses. The guidance increase also reflects a $0.03 to $0.04 negative impact primarily due to unfavorable foreign currency movements and other nonoperational items. In addition, we are maintaining our organic revenue guidance and lowering the high end of our total revenue guidance range by 1 point to reflect the impact of foreign currency. Both full year organic and total revenue growth are now expected to be in the range of 5% to 6% versus the prior year. And finally, I would like to provide some color into our fourth quarter expectations. We project Q4 revenue and organic revenue growth rates to be relatively in line with Q3 on a consolidated basis, but it is important to note that we expect Motion Technologies revenue to be lower than the prior year due to a very tough and anticipated compare in the independent aftermarket that was driven by a pent-up demand surge in Q4 2013. Interconnect Solutions revenue is also expected to be down versus the prior year due to weakness in defense and nonstrategic product lines. Inversely, we expect Industrial Process to be up both sequentially and versus the prior year due to large Q4 project activity mainly driven by global oil and gas. And from a segment margin perspective, we do expect a sequential decline from the record third quarter as the fourth quarter is historically the lowest margin quarter for us in the year. However, we do expect margin to improve compared to the prior year and to be more aligned with first half level. The sequential decline is mostly due to the seasonal drop in higher margin aftermarket sales at Motion Technologies. We do, however, expect Interconnect Solutions to be sequentially higher, and lower volumes due to the realization of restructuring savings from prior action. And finally, we are forecasting Industrial Process margins to be sequentially in line on high project mix. And just to round it out, we expect corporate cost to be roughly in line with the prior year levels. All added together, we expect our diversified portfolio to provide solid growth in the fourth quarter and for the full year 2014. With that, let me turn it over to Paula to start the Q&A session.

[Operator Instructions] Your first question comes from Mike Halloran of Robert W. Baird. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: So how are you guys thinking about growth heading into next year? You've got a lot of positive internal momentum that you're driving through your portfolio today, but certainly, the end market trends are a little bit more mixed. There's certainly concerns over oil and gas related to CapEx, and if you think about it from a growth perspective, 4Q -- implied 4Q revenue is flattish to modestly positive. And so as we get towards next year, maybe if you could just talk about some of the puts and takes you're seeing in the environment as it stands today.

When we think about 2015, obviously, we're just working through those plans right now for 2015. So we're not ready to give guidance on what's happening in 2015. When you think about some of the end markets that you've got out there, China, the automotive market, we've done well this past year, and we're looking at even expanding our capacity in Wuxi next year in China because we see that that's going to be continued growth for us. We're hopeful with the oil and gas and chemical and petrochemical projects that we're going to see strengths going into next year with that, where we've seen in October some projects are now getting awarded. So we feel relatively good about that. We are -- we do -- there are some challenging markets out there when you think about defense, and what's happening with the defense market and the fact that we've declined in defense and -- it's really going to be a lot on the various programs that are out there. And mining still tends to be a challenging market, too, based on what's going to happen with capital spending that occurs there. Aerospace continues to do well for us based on the platforms that we have out there. So it's really a mix right now, very hard to talk through. Internally, what we are doing is we are driving productivity because we don't know yet where the top line is going to go. There's a lot of factors and a lot of dynamics out there, but what we do know is that we can control a lot of the productivity within this company that we've been doing for the last 3 years, which is proven in the operating margins that we've demonstrated that we've improved. So we're going to continue to do that. We're going to continue to drive that. We'll continue to make investments where it makes sense, and then we'll give you more color on 2015 when we've got our year-end call in February. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: Makes sense. And then 2 margin questions, first, on the motion side, obviously, very impressive margins there. How are you thinking about the mix within that portfolio? How much did the KONI turnaround help you? And obviously, aftermarket mix is going to help a little bit. And what kind of numbers should we be thinking about using on a forward basis from here? I obviously understand the seasonal component to the 4Q drop, but what's the right run rate when we kind of take all those things together?

Yes, Mike. Just exceptional performance from Motion Technologies in Q3, really everything was hitting on all cylinders. So we did benefit from the strong aftermarket, as you pointed out, plus KONI on an upward momentum. Clearly, mix is one of the issues that is a constant -- that cycles through the year, plus there is the ever-present pricing headwind that we have on the automotive side. So when we kind of look out forward, I think the opportunity is for us to continue to drive margin expansion at Motion Technologies and kind of where we end this year. Our Wuxi facility is really powering up right now. We are likely to continue to expand our investments in Wuxi in 2015 based on the volume gains that we have projected into 2015 and beyond. So one of the areas is to continue to drive volumes through Wuxi and to start to bring the margins up from that facility to be more in line with the margins we have elsewhere at Motion Technologies. There's a tremendous operation right now in Wuxi, and they're going to benefit significantly over time as we continue to increase volumes off a strong operating foundation. We'll continue to drive lean through the operations within our core businesses in Motion Technologies, which are highly automated. We continue to find new ways to drive productivity in that environment with really solid utilization rates. When you put those 2 kind of foundational elements together, we like the jumping-off point we have at Motion Technologies right now, including some future sourcing opportunities, we think, to drive global strategic sourcing. And then lastly, just to finish off on KONI, they're getting into the mid-teen levels. We think there is even more upside. We're continuing to stay aggressive in driving KONI margins to even higher levels, and I think we're starting to target high teens for a longer-term run rate within KONI. And the restructuring activities that we've done that Denise alluded to, this year, we're going to get up to about $35 million in total restructuring, and where you're seeing this margin expansion at motion tech and elsewhere, is nicely tied to where we've been actively investing in restructuring activities and getting these businesses for future growth. I know I didn't give you a number there, Mike, but a lot of positive... Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: I wasn't really looking for a number. I was more looking for contextually how to think about those on a forward basis. So that's good for me. And then the second margin question is on the IT side. Obviously, mix has been the big pressure point on this business for -- certainly through 2014 and part of last year as well. When you look at your backlog as it stands today, when do we get to the point where, on a year-over-year basis, things feel more normalized and you've got a better path forward to see some kind of normalized mix with the volume gains and driving some operational leverage and margin gained on a year-over-year basis?

When we think about over the past year or so, we've been making investment in our IT business. So we've been investing there to have an operation that we can run in a much more efficient and effective way. We've had such tremendous growth in that business, in the highly engineered complex projects that we've got, and so what we're doing is -- so we made the investments with the expanded product portfolio that we've got. We built a new state-of-the-art facility in Korea, which is now our Eastern Hemisphere Center of Excellence. We've improved our packaging and testing facility in Seneca Falls, which we now call our Western Hemisphere Center of Excellence, and we've been building out our supply chain and our project management skills. So the goal that we have there is to be able to execute these projects in a much stronger way as we go forward because we've made these incremental investments that we've got there. Right now, there's the -- some operational complexity. There's complexity with our customers, in change orders that we have there. We've had some complexity in the supply chain, but that's all opportunity for us as we go forward and as we improve this business and as we improve the project side of the operation.

And I would just add to that, Mike, that on the mix side, the aftermarket activity is slowly starting to gain some recurring momentum. Projects that we brought online in 2008, '09, '10 are just now starting to enter the aftermarket cycle in a more repeatable way, but the recent project growth that we've had really in emerging markets and energy and chemical on a global basis, those projects have not quite yet entered the aftermarket cycle. So one of the other stabilizing factors from a mix perspective is just letting these projects that have been installed get up and running and start to drive some aftermarket part opportunities in the future.

And then when we think about the growth in North America and what's happening in North America, we have a strong North America presence and a North American business, and so when we think more of our baseline pumps that we have there, we expect to see continued improvement there also.

Your next question comes from John Inch of Deutsche Bank.

So if I recall, I think 1/3 of Industrial Process is tied to oil and gas, and obviously, with oil prices where they are, I realize there's a lot of puts and takes, but maybe, it might be helpful if you could remind us what the mix of unconventional is because I think the cost threshold of those projects is much higher. So in theory, there is risk of cancellation. Just curious how you're thinking about the outlook. I understand the aftermarket dynamic. I'm more sort of -- in terms of IP, I think, there's a lot going on. Just more concerned about -- if oil prices sustain themselves at these levels, what could be the impact? And then what's ITT's response?

Yes, good question, John. So let's first remember that this -- we believe for -- oil and gas for us is a long-term growth market. You're going to have some dislocations. You're going to have some volatility in it, but we like it is as a long-term growth market. The other thing to remember is we're very diversified. We've got global customers. We've got a higher weighting of national oil companies versus independent oil companies, and as you know, there is less risk of project cancellations with the national oil companies because they need it for their own economic benefit. And we're across all sectors in here. So we're in the upstream. We're in the midstream. We're in the downstream. We do expect what's currently producing in the upstream to stay strong, and we believe that because lower oil prices tend to lead to increased midstream and downstream oil and gas activity. We also think that there is some secondary benefit that flow from cheaper feedstock that goes into petrochemical and chemical markets. So when we look at the upstream, we don't see a huge exposure today because the majority of our activity is tied to existing production, where the goal there is to continue to increase production out of those wells. We're going to continue to watch the smaller part of our upstream business, because that's the one that's tied to new wells and new production, which we think is the area that will be most impacted by lower oil prices. But now counter to that is we're also watching the midstream and downstream exposure because we do believe that as oil prices get lower, that, that could benefit from higher refinery utilization. As of this point, we've not seen any impacts to date. There's been no cancellations, and we haven't heard that there's any challenges right there in the marketplace, but it's something that we are obviously watching very closely.

And then, well, we can obviously watch Weatherford for stock prices. You're saying -- I think that was a great answer. So just remind me though, what would be the new well, new production kind of element to this? Like what is the -- what is it in terms of the mix?

Yes, John, so some of that, for us, is really in Canada and it is in the unconventional space. We're talking anywhere in the neighborhood, maybe $40 million of orders, right. So we're looking out forward. We're looking at our order book and our visibility forward and into 2015. Some of those projects, generally in Canada, we would say we're watching. No indications, no signals, but I would say it's about $40 million in orders next year that is in this unconventional risk category. It's generally within Canada, and typically, these kind of large projects, as you know, have a much lower margin profile. So it has even less of a flow-through impact on the margins than the OI.

Okay. That's helpful. So then if we switch to ICS, was there any associated profit benefit from the move from California to Mexico this quarter? And if so, how much was it? And does that -- does it kind of grow into fourth quarter next year? Or is it, sort of, at steady run rate?

First, let me say that we're very happy with ICS and the performance that we're seeing out of ICS and the productivity that we're seeing out of that business. These footprint moves that we've been making and the restructuring that we've been taking there, obviously, you see flowing through the results for that business. The move out of Santa Ana into Nogales is going to be completed, I think, sometime around the first quarter of next year. So there are some benefits flowing through into this year, and we'll continue to see a full set of benefits or almost a full set of benefits that's going to impact us in 2015.

There wasn't any Venezuelan charges, were there, Tom, in the quarter?

No, not in the quarter. We're certainly watching, just -- could there be some devaluation impacts as the year progresses, but there was nothing unusual in the quarter from Venezuela.

Okay. But just lastly, SPX has decided to spin their flow business. I think there, probably, is a little bit of, perhaps, competitive overlap with ClydeUnion and maybe their valves businesses. I guess, my question is, given the risks that SPX distraction caused, do you see the opportunity for some shared gain much like when Honeywell sold its brake business to Federal Mogul or even, let's just say, an opportunity to pick up a manager or 2 from them?

John, there's always the opportunity out there because we went through this, and it was actually 3 years ago today that we were spun off. First, let me say I know the value of doing a spin because you get a lot of value creation and greater focus associated with it. I also remember, when we were going through it, we announced it in January and we completed it in October, and what basically happened is you've got a management team that just focuses on splitting up the company. So there's -- and you can't -- it's hard to make strategic decisions as you go forward because you need the breakup to occur and you've got -- you're signing people. You've got new organization structures in place. You have new assets in place, and so all of that would -- can result, in just -- from a strategic decision-making standpoint, you can't really go forward with the business until you split the organization. But to the extent that there could be some dislocations associated with it? It could be, and that's something that would -- could potentially be an opportunity for us.

Yes, I do think, John, too -- you alluded to Motion Technologies. I think our businesses today, based on the solid operating foundation, are much more in tune with these kind of market opportunities, and when we see our competitors going through some changes, our teams are very quick to identify an opportunity list and go out and make it happen, and motion tech is another example. Particularly this year, where we've been successful in doing that.

Yes -- no, I thought your experience based on your own spin would be helpful.

The next question comes from Brian Konigsberg of Vertical Research.

Just touching on Industrial Process margins. Maybe -- I don't know if this is a significant impact or if you could quantify it, but to the extent that you're experiencing under-absorption because you do have Korea and Seneca Falls kind of just starting on the ramp of volume, how much of that is kind of playing into the margins that we see today? And as that does get fully ramped, what -- how should we think about the benefits to that?

Sure. So as I said, we've been ramping up these investments that we've got. We feel really good about how we've designed the footprint IP because it's very tight. We've got the 2 main facilities that we have there. So we like the footprint that we've got. We like the investments that we've made. It is -- right now, we're trying to work through those new investments and realigning some of our facilities and some of our new processes, which is going to benefit more new orders that we have coming through the pipeline associated with that. But as a result of the investments that we've had, as a result of the customers and complexities that the customers have in their equipment and within the supply chain, we've been experiencing some additional scrap and rework and freight and customer delays, and we think that that's an impact to us that could be an opportunity for us in the future of about 100 basis points or so on the IP margins. So we look forward in the future to be able to capture that opportunity.

Actually, I was thinking more on the lines of not just the investment that you're making in there and getting up the learning curve but just having unabsorbed overhead cost because you're not fully ramped. Is that incremental to what you're referring to on the 100 basis points? Or is that inclusive?

That's inclusive, Brian, and I think the point -- the $100 million is looking back at what we expected to kind of deliver this year from efficiencies. I think when we fully continue to load these locations, that will give us even better absorption going forward that were kind of relative to what we expected this year. That's the 100 basis points, and that was -- some of that is market driven, changing with our customers and the engineering complexity. Some of it was our internal efficiencies that we're improving, but to your point, down the road, as we start to fulfill more volumes in here, I think we'll have even greater absorption. So the 100 basis points is kind of relative to the volume levels we have today. As we increase volumes in the future, that would be additive to, I think, this 100 basis points that we're articulating.

Okay. And then just on to motion tech in China, so I think you entered the year at a run rate of around 4 million brake pads, maybe 2 million to 4 million in that range, or you're looking maybe 10 million to 12 million. Maybe can you just give us an update on kind of where you stand on that volume and maybe your preliminary look into 2015, where you think that could go?

So we've been ramping up, as you indicate, all year in Wuxi. We're -- at the end of the year, we will be close to a forward-looking run rate of about 18 million brake pads going forward, which is -- and the capacity of the facility that we have today, what we've built out, is about 20 million or so brake pads, which is why we're now looking at expanding the facility from where we are today because we've won so many new platforms in China. We have visibility into the fact that we're going to need more production capability going forward. So that's about where we are right now. We'll continue to ramp up as we go into next year, and it will just be a slow climb. It's what we've been doing to date.

Yes, and, Brian, we -- the facility we have today, we'd just be adding additional equipment into it. So it's not a brick-and-mortar investment. It's more about the equipment and the processes that we use. And just to kind of put the motion tech China opportunity into some context, right now, we're on 5 of the top 20 platforms in China. We have visibility to awards at this point that would bring us to 10 of the top 20 platforms in China. So we're going to continue to scale up that motion tech production rate in anticipation of those wins that, quite frankly, are probably coming sooner than we had initially planned. So for 2015, one of the biggest areas of CapEx investment will absolutely be to significantly increase the amount of brake pads we produce in Wuxi in 2015.

The market continues to stay strong there. We see increasing demand for premium automotive. We also -- they've put in a government program where they're going to be scrapping 5 million cars there for environmental reasons, and that's going to create additional opportunity for us in China.

If I could just sneak one more in, just on the point on CapEx. I mean -- so you're coming in 2014 around a little bit over 5% of sales. Should it take a meaningful step lower in '15? Or do you anticipate that, that remains at kind of these elevated levels into next year based on the opportunities you just mentioned?

Yes. We were expecting it to step down, and then I think the counterbalance has been the acceleration at Motion Technologies. So we've always kind of viewed the base businesses, if you will, that we have made most of the foundational investments in the Industrial Process production capabilities and Interconnect Solutions and CT. So a lot of the foundational investments have been put in place. So those rates of investment will start to come down in a meaningful way over the next year or 2. Where you will see the continued investment, where you have the counterbalance, is certainly accelerating Motion Technology. So our view is to probably get this expansion done in about half the amount of time that we initially planned. So we will continue to see a high level of investment in Motion Technologies next year with a ROIC profile on that investment, which is very, very solid. So I would say, Brian, it would step down. The reason why I wouldn't say meaningfully is because we're going to significantly increase our investment in Wuxi next year, which is a counterbalance of those other forces, but that's an investment with good visibility and great return profile.

Do you know where your natural run rate is after kind of these extraordinary investments are made?

I would say motion tech is the anomaly from the calculation. I think at this point, on a go-forward run rate, we're looking between 2.5 million to, I would say, 4 million, and the flex is really the amount of Motion Technology investment that we're making at different points in the cycle. It is a very highly automated business for us. We do invest significantly in that platform. So it's a different business model, but I think the normal run rate, once we get through this wave of build out, comes back between 2.5 million to 4 million based on how much investment we're making in any given year for Motion Technologies.

Your next question comes from Joe Ritchie of Goldman Sachs.

So my first question, maybe kind of broader, if you take a look at your growth this quarter, it decelerated a little bit across your portfolio, and I know that there's some pretty significant margin expansion opportunities as well. I just wanted to get a sense, by segment, how much of your margin expansion is dependent on revenues maintaining at current levels? And maybe you can start there.

Sure. Joe, on the 2 turnaround businesses, ICS and KONI in particular, the turnaround model was predicated on a dramatically lower top line expectation. So we reset breakeven levels for those businesses dramatically below volume levels that we were projecting. So that has been the philosophy that we've been using, and that is, I think, pretty well incorporated into the way that we're building out the long-term footprint and processes for ICS. So the connector business is kind of advancing through this journey. As Denise mentioned, we'll be moving out of California more so into Mexico next year. We still have some important activities in California, but we'll have some production moving into Nogales next year. So we're going to start to have that blueprint continuing to play through but with a focus on driving higher-margin performance on volumes that we expect to come down because the other part of the equation for us, Joe, is we want to focus in the key end markets where we see the most margin opportunity, and that opportunity kind of create value for our customers. So in addition to that cost structure rebalancing, we are aligning the end markets in all of these businesses to make sure that we have market-facing leaders that are really going after where we can create the highest value, which is another opportunity for us to drive higher-margin volumes into the future. And I would say lastly, Industrial Process, we're still kind of going through the digestion of these investments, as Denise mentioned, and I think we're kind of recalibrating those operations for the longer-term margin expansion as we incorporate this more complex mix.

Is it fair to say, I guess, in Industrial Process that you do still continue to need to see the volumes come through in order to get your absorption levels to a higher level to really drive the strong margin expansion over the long term? I think you guys have talked about a mid-teens-type operating margin in that business over the long term, at least as an aspirational target.

Yes, we have talked about that, Joe, and that's what -- that's still what the target is for Industrial Process. There's the 2 elements to Industrial Process that we've talked about. One is just getting the operation functioning now with these new facilities and new investments that we've made, which is some benefit that we would have associated with that, and then as we go out into the future, that's where you would see some volume then that would come into play, that would drive the margins even more than that, along with some mixed adjustment as we're investing in the aftermarket capabilities of this business, which is also going to tend to drive higher margins at IP.

Okay. And how do I square the commentary on the project activity? It seems like the fourth quarter in IP had started to pick up. You guys had mentioned large project activity in Q4, and squaring that with your initial comments that you're continuing to see project delays in oil and gas and that there was also some softness in your base pump business. So can you just provide a little bit more color there?

Yes, sure. Just on the base pump business, Joe, what we've been seeing all year is this destocking and restocking phenomenon that is really taking place throughout that business. So we had a weak Q1, a strong Q2 and then a little weaker Q3, but our baseline business was up 5% in Q3, with some international strength there as well. So it's a little weaker in North America, little stronger overseas, if you will, but it's still relatively healthy. But what we've been experiencing is just some unusual quarter-to-quarter variation in that business. So that was kind of one of the areas. The project backlog remains strong. We're continuing to see good order activity, as Denise mentioned, and we're going to -- these are lumpy, the delays are for a whole host of reasons. It could be engineering delays, other complexity that are rolling through the system. We haven't seen our customers pull back on activities based on the economic environment. So we're expecting some of the activities that are late into the process to continue to move forward. So what you hear, I think, us talking about Q3 into Q4 is just the timing of those activities coming through, which could be hard to predict.

Just to clarify that one last -- the one last clarification. So in Q4, as we've started Q4, you've already started to book some work or you see work on the horizon in IP?

We're seeing good activity in October, and we expect to see some nice projects continue to come through. And just to remember, from an order perspective, Q3 of last year was Industrial Process's largest order quarter ever. So we do face a pretty tough compare, and we actually got really close with some nice wins in Q3 on the project side. We would expect to see some continued, good activity in -- on the project side. That's oil and gas, petrochemical and chemical, in particular.

Our final question comes from the line of Nathan Jones of Stifel. Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division: I guess I'll start with another one on the China motion tech facility. I know you've built that with additional capacity in mind and a modular structure so it doesn't cost as much to ramp that up. What could you potentially produce out of the facility that you have there now?

Out of the existing facility, without any more investment, it's the 20 million brake pads. Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division: I mean, under that roof, yes?

Under that roof. And then under that roof, the next investment that we're making takes us up to 40 million brake pads in that same facility, just building it out with additional equipment. At that point, that's -- maybe 40 million, maybe 45 million brake pads depending on efficiency and lean and applying all of that, but then we've really maxed out that facility and we'd have to look at where we go next. Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. You guys have been pretty consistently investing that 50, 60 basis points into growth investments. How long is the runway for you to continue to invest at that level?

Yes. Nathan, we think it's kind of the operating rhythm that we have. Our strategic plan generates that level of growth opportunities each year, quite frankly, there are more ideas out there. I would certainly say going into 2015, as we go into our operating plan process, we'll certainly be looking at those investments very closely and trying to determine which ones we think makes sense in the current environment, but I would tell you naturally, that is about the run rate that's requested. And certainly, we'll use our processes to determine what we'd greenlight this year. We'll probably want to stage-gate some ideas and see how the year unfolds in 2015 and then move more systematically through the investments as we get more clarity around 2015. Nathan Jones - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And just one on the M&A outlook. I know, Denise, you hired a new M&A guru and that your focus was shifting towards M&A. Can you talk about how the pipeline is developing and what you see out there that is possibly executable next year?

Yes. We have been -- as you indicate, Nathan, we've been improving our cultivation capabilities really throughout ITT. So we've hired some new individuals here at corporate. We have dedicated some business development folks at the different businesses that we have. So we've got dedicated resources associated with that, with the goal of really opening up the aperture in all of our core markets, and it's really time for us to do more of that because we're well underway with these operational turnarounds we've talked about at KONI and ICS. We've built a very strong functional foundation and balance sheet, and so what we're doing now is building out more opportunities for us. There are some smaller-sized deals that are out there right now. As you know, the timing is very -- always -- it's always hard to predict with these things. We've been very active in the process. We've walked away from a handful of deals that we've been engaged in because we're remaining disciplined, and we see that there is still pretty high multiples that are out there right now. So we've got the team focused on this. We're looking at a number of different opportunities, as I said, we've been engaged in a number of different processes, and when the right thing comes along with the right price, then we'll let you know, and we'll be able to execute on it.

This concludes the question-and-answer portion of today's conference. I would now like to turn the floor back over to Denise Ramos for any additional or closing remarks.

Well, let me just thank everyone for joining us on the call today. You've heard this morning, we are very pleased with our Q3 performance and how we have been able to once again deliver on our commitments even in these uncertain market conditions. This really is the result of very strong focus and strong execution, and that's going to continue to propel our strategy forward and it's going to continue to create ongoing long-term value for all of our stakeholders. And I look forward to updating you on our progress next quarter. Until then. Thank you.

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