Altra Industrial Motion Corp (AIMC) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Altra Industrial Motion Q3 2020 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Calusdian from Sharon Merrill Associates. Thank you. Please go ahead.

Thank you. Good morning, everyone, and welcome to the call.

To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section.

Please turn to Slide 3. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors described in the company's quarterly reports on Form 10-Q and annual report on Form 10-K and in the company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in the press release under the heading discussion of non-GAAP financial measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q3 2020 financial results press release on Altra's website.

Please turn to Slide 4. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch.

I'll now turn the call over to Carl.

Thank you, David, and thank you all for joining us today. And please turn to Slide 5. We turned in another excellent quarter exceeding expectations for revenue, profitability and cash generation as we capitalized on greater-than-expected demand strength, leveraged our market leadership to outperform in several businesses and drove significant improvements to the bottom line. Since the onset of the pandemic, our focus has remained on prioritizing the safety of the Altra team, managing operations to minimize customer disruption and ensuring continuity of supply, taking actions to manage costs, maintain a strong balance sheet and manage our leverage, and finally, playing offense to position Altra to emerge a stronger company.

I remain amazed by the resilience and dedication of the Altra team to remain highly productive, consistently deliver innovative solutions to our customers, often on expedited schedules and in modified environments due to the pandemic and achieve excellent results despite the world we are all operating in. Christian will cover the results for the quarter in more detail in a few moments, but I'd like to note a few highlights.

In Q3, we exceeded our expectations on the top line with sales of $437.8 million, just shy of Q3 2019 revenue we reported a year ago. This excellent performance was due to strong outperformance in certain end markets, like Class 8 trucks and renewable energy and better overall demand in many of other end markets.

We also continue to execute on aggressive actions to reduce costs, and this resulted in excellent bottom line performance. As a result, we achieved net income of $38.3 million or $0.59 per diluted share and grew non-GAAP earnings per share by 26% to $0.87. Non-GAAP adjusted EBITDA margin was up 320 basis points to 23.3%. And finally, we once again had tremendous cash flow generation, which allowed us to continue to pay down debt and exit the quarter at 3.5x leverage on a total net debt basis.

Turning now to Slide 6. We have continued to deliver strong results through the downturn and feel extremely positive about the long-term opportunity for Altra. Last quarter, we discussed 4 reasons for this optimism, and these factors once again proved out in Q3.

First, our efficient cash-generative business model continues to be highly resilient. In fact, our cash generation this year has been phenomenal, with $172 million of free cash generated in the first 3 quarters of the year, a 20% improvement when compared to last year.

Second, the combination of our legacy PTT businesses with Fortive's Automation and Specialty, A&S businesses, is proving out to be an exceptional strategic move. As we recently passed the 2-year anniversary of the merger, we are delighted by the success of our integration from both a cultural and a business standpoint.

By expanding our exposure to several less-cyclical end markets with attractive secular trends, we have been able to largely mitigate the financial impact of the economic environment this year. In recent months, we have also accelerated our focus on leveraging the power of the new Altra to drive organic growth.

Despite pandemic-related travel restrictions that we've placed upon our sales force, we have had great momentum and have doubled the size of the opportunities in our cross-selling funnel. In addition, we are well positioned with a number of excellent organic growth opportunities as we collaborate closely with customers to develop innovative solutions that capitalize on secular growth trends in the markets we serve.

Third, we're benefiting from stronger-than-expected demand across several of our diverse end markets. This includes our exposure to medical markets benefiting from COVID-related demand growth and other short-cycle markets, like factory automation.

And fourth, Altra's value proposition continues to resonate deeply with our customer base. As a result, we are outperforming the competition in several key verticals. For example, we recently secured orders for engineered Servo Motors from 2 different defense OEMs for munitions-related systems valued at over $15 million. These orders will ship over the course of the next couple of years.

Now turning to Slide 7 and a review of the markets in more detail, starting with those that performed well in the quarter. Renewable energy was up low single digits in Q3 as we continue to see strength in wind. The Q4 growth rate may not be as strong as a result of tough comps and some possible industry supply chain issues unrelated to Altra that began to emerge early in the year that could constrain customer build rates. Factory automation and specialty machinery was up high single digits year-over-year and low single digits sequentially.

The semiconductor market was particularly active in the quarter, and we expect to see continued positive momentum as the COVID-19 situation accelerates the need for automation. Defense was up low single digits as we continue to see strong performance with many of our OEM customers. Exacerbated by the struggles facing the airline industry, commercial aerospace, which is the smallest piece of our overall A&D business, continues to struggle. We expect both trends to continue into 2021.

Transportation was up single digits year-over-year. This reflects excellent demand for Class 8 trucks in China, combined with an improving environment for Class 8 trucks in North America and some pent-up auto demand. We expect continued strength in this market in Q4 as the Chinese market benefits from a government-sponsored program to reduce pollution by incentivizing heavy-duty truck operators to replace their existing high-emission trucks with new lower-emission vehicles.

Turf and Garden was a pleasant surprise, with sales up low double digits after a difficult beginning to the year. This was driven by customers accelerating purchasing in Q3 after delaying builds earlier in the year.

Medical equipment was up low double digits year-over-year and was even stronger sequentially after a weak Q2. Demand has been very strong for COVID-related medical equipment, such as ventilators and respirators. The remaining markets we serve faced headwinds in Q3.

Distribution was down mid-single digits for the quarter. However, it was up slightly sequentially. We expect the distribution markets to track in line with the general industrial economy.

Metals was down double digits, driven primarily by weakness in the oil and gas and construction industries. We're seeing some improvements in capacity utilization at the mills from the trough in May, but there is still a long way to go before demand comes back and customers start buying new equipment.

In mining, demand was down high single digits for the quarter as a result of low commodity prices, and we expect this will be a tough market for the near term.

Oil and gas was down double digits for the quarter. And we don't see any positive near-term signs given the significant decline in rig counts from last year. Keep in mind that oil and gas is now a very small component of our business at less than 5% of overall sales for the last 12 months.

The ag market was down high single digits for the quarter, with uneven demand across the businesses. Net farm income this year is on track to surpass 2019, and we are hopeful this will translate into increased equipment spending in the coming year.

And with that, I'll turn the call over to Christian.

Thank you, Carl, and good morning, everyone. The strong third quarter results demonstrate 2 things: how resilient and balanced our portfolio of opcos is but also how difficult it is to forecast during times of pandemic. Auto, of course, outperformed our expectations for the quarter led by a very strong performance of the A&S segment.

Let's start with a review of our top line performance. Excluding FX effects, sales declined 2.4% compared with the prior year period. Foreign exchange rates had a positive effect of 120 basis points, while price had a strong positive impact of 100 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were down 11.3%, while net sales for the A&S segment were up 6.4% compared with the same quarter last year.

Taking a closer look at our performance by geography. Asia and the rest of the world was a strong performer, with revenues up 32.9%. This performance was primarily driven by strong sales into the Class 8 truck market in China as well as another excellent quarter in the Chinese wind market. In Europe, we saw a decline in demand with sales down 8.5%, 13.3% excluding the effect of FX. And in North America, revenues declined 7.9%.

As a result of the actions we took in the quarter to manage cost, we are able to grow gross profit margins, reduce SG&A expenses as a percentage of sales, and as a result, increased non-GAAP operating margin by 310 basis points on 1% lower sales. Non-GAAP income from operations increased by $12.8 million or 18%. This reflects the incredible job by our teams reducing costs and effectively managing cash in this environment. We believe that we achieved annualized cost reductions of approximately $60 million of which we believe approximately $28 million are permanent. We continue to benefit from lower LIBOR rates and lower outstanding debt levels.

As a result, interest expense for the third quarter, excluding the impact of the terminated interest rate swap declined $3.6 million year-over-year. Recent rate changes related to tax reform and other changes have lowered our tax rate. The provision for income taxes in the third quarter of 2020 on a normalized basis was 20.4% before discrete items. Non-GAAP adjusted EBITDA was $101.8 million for the third quarter or 23.3% of net sales, up 300 basis points compared with last year.

Please turn to Slide 9 for a closer look at our balance sheet improvements, cash flow and liquidity. Free cash flow for the quarter was very strong at a record $81.1 million, which compares with $71.5 million a year ago. We have now generated $172 million in non-GAAP adjusted free cash flow year-to-date, which is a 20% increase compared with last year. This is a testament to our cash-generative business model, the financial strength of the new Altra and our team's ability to manage cash in what has been a challenging macroeconomic environment.

Capital expenditures during the quarter totaled $7 million, down about 45% from the prior year quarter. We plan to modestly increase our capital expenditure levels in the fourth quarter as we focus our investments on growth opportunities, including automation initiatives and technology enhancements.

We ended the quarter with $238.7 million in cash. Of this -- and this reflects a payment of $60 million on our term loan. This brings our total debt paydown year-to-date to $90 million, which is equivalent to last year, another testament to our ability to effectively manage the balance sheet even during the most difficult times. Since completing the A&S merger, we have paid down $240 million in term loan debt.

We decreased our net leverage to 3.5x, and we remain committed to deleveraging the balance sheet. We expect to be slightly below 3.5x at the end of 2020. And we remain very comfortable with the substantial room we have relative to compliance with financial maintenance governance under our credit facility. As a reminder, the terms of our net debt leverage covenant excludes the $400 million of senior unsecured notes, which have -- which we have outstanding and steps down to 4.75x at the end of 2020. And we have no short-term debt maturities as these are not due until October 2025 and October 2026.

In terms of use of cash, our top priority in the current environment continues to be to reduce our debt balance, manage leverage and preserve optionality for investing in future growth. As Carl mentioned, the Board voted to increase our quarterly dividend from $0.04 a share to $0.06 a share.

Please turn to Slide 10 for a review of our outlook for 2020. Today, we are increasing our guidance for the full year of 2020 to reflect our best estimates and practical assessment of potential impact of COVID-19 to our business at this time. We continue to closely monitor the situation and are prepared to implement further cost reduction measures should top line demand decelerate.

Our guidance assumes that we will experience a modest sequential revenue decline in the fourth quarter as we expect for strong sales we saw in China in the second and third quarter will moderate. The guidance also assumes that we will see SG&A expenses increase sequentially.

With that as a background, we are increasing our annual expectation to the range of $1.690 billion to $1.710 billion, and we are raising our EPS guidance on a GAAP and non-GAAP basis. As previously indicated, following the A&S acquisition, we began to exclude acquisition-related amortization net of tax from non-GAAP net income and non-GAAP EPS.

We now expect GAAP diluted EPS in the range of a loss of $0.55 to $0.46 and non-GAAP diluted EPS in the range of $2.70 to $2.82. We're also raising our non-GAAP adjusted EBITDA guidance to the range of $355 million to $370 million. We expect to continue to pay down debt in the fourth quarter.

We continue to expect depreciation and amortization in the range of $125 million to $128 million beginning in the fourth quarter, where we see a decline in acquisition-related step-up depreciation of approximately $8 million annually.

We are lowering our capital expenditure expectations to a range of $34 million to $40 million, and we expect our normalized tax rate for the full year to be in the range of 20% to 21%. We expect adjusted non-GAAP free cash flow in the range of $210 million to $225 million.

And with that, I would like to turn the call back to Carl.

Thank you, Christian. And please turn to Slide 11. As we close out 2020, we're not only extraordinarily proud of the entire Altra team, but we are increasingly confident about Altra's ability to thrive as a premier industrial company.

Looking forward, our focus remains on advancing our strategic priorities to deliver sustainable value over the long term. These include leveraging our world-class business system to create sustainable competitive advantages, driving margin enhancement, delevering our balance sheet and positioning Altra to drive top line growth. On that note, we feel really good about the growth opportunities ahead of us and expect the vast majority of top line growth in the near to midterm will come from organic initiatives that are already underway.

As always, we're grateful for the ongoing support of our customers, partners and shareholders, and we look forward to keeping you updated on our progress.

With that, we will now open up the call for questions.

(Operator Instructions) Your first question comes from Bryan Blair with Oppenheimer.

Really solid quarter. I was hoping you could offer a little more color on distribution trends through Q3. I know July and August can be somewhat idiosyncratic. But how did September trend? And what are you seeing in the early part of Q4?

Yes. So it's encouraging. As you said, July and August with the vacations and other things going on, it's hard to tell. But things did improve modestly in September and have continued into October. So in that, if you look at the ISM numbers, it's -- now that's encouraging, too.

And our -- we believe that the industrial production numbers kind of trail the ISM by 6 to 9 months. So with the ISM numbers above 50 again, it's very encouraging that the distribution channel will start to pick up a little bit.

Okay. Very good. And EBITDA margins were again strong highlights in Q3. If we think back to your road map to 24% plus margin, is there anything other than volume that isn't tracking? And I guess, along the same lines, have you taken -- or are you taking now any structural cost actions that go beyond the initial A&S deal model?

Yes. So we're still -- if I look at the guidance, call it, $1.7 billion, that would sort of put us $130 million, $140 million below where we were in 2019. So there's a significant amount of volume that's still missing and needs to come back. And that will help us with very high variable contribution margins, particularly on the A&S side to continue to expand our margin profile.

As it relates to structural cost initiatives, we're doing what we said as part of the synergy piece. So we are in the middle of consolidating our 2 facilities. We're actually closing one small one. We are in the middle of consolidating one in the U.K. So that's on plan. But in addition to that, I think we have taken significant amount of cost -- permanent cost out of some of the business that serve, for instance, the oil and gas market, where we see a long road to recovery. And that permanent head count reduction that we have achieved so far is about $11 million on an annual basis, which is part of the $28 million that are quoted of permanent cost reductions.

Got it. Okay. And Carl, you've mentioned that the pipeline of cross-selling opportunities, that's doubled at this point. Is there any more detail you can offer on that front? And how we should think about the additive growth potential looking forward?

Yes. So those of you that are familiar with the business system, we've made it a policy deployment initiative and have assigned somebody probably 6 months ago, one of our high-level sales managers to manage that as a policy deployment initiative, and we've made some significant changes in the incentive compensation for cross-selling initiatives for the salespeople.

We're developing training materials, and we've got an app now where people, if they have an opportunity, they can go to the app and find out who is the right sales and engineering people to communicate with. So there's a lot of work being done in that area. And I think that's driving the increased funnel activity.

Excellent. And Christian, one last one, just kind of housekeeping. What's contemplated for working capital and your revised free cash guide?

Flat between year and year-end.

Your next question comes from Jeff Hammond with KeyBanc Capital Markets.

Just on the shift in the fourth quarter, I think you mentioned maybe wind would back off a little bit. But I'm just trying to get a better sense of sequential momentum. It seems like China truck is going to be strong. North America, Europe truck getting better, and it seems like you're kind of building momentum across a number of end markets. So just talk about kind of sequential cadence into 4Q on those lines.

Yes. Well, we think that the China truck market will remain strong in the fourth quarter. We think sequentially that market will be down. A lot of what we see in China is partially driven by what we call internally cash flow concuss program that will soon run out and so we think sequentially we'll see a decrease there.

We also think sequentially we're going to see a moderation in the China wind sales. At the same time, we think other pieces are coming back in a nice way, Turf and Garden, for instance, when we look at bookings in that area, they are very strong. So that's mainly driving a modest sequential decline in top line.

Yes. And Jeff, from a higher level, the way we do it is we roll up the business forecasts. And all the business forecasts have risks and opportunities. We discuss how likely are those risks and opportunities to materialize. And so then we get kind of a viewpoint of what the whole business looks like.

And then in the fourth quarter, it's always highly variable depending on what our customers and distributors do with inventories and order patterns at the end of the year. So we try to balance all those things to come up with the -- what do we think is the best take on the fourth quarter. We've also learned that the penalty for overachieving is significantly less than for underachieving.

Okay. And then yes, just on the year-end buys and kind of restocking. Is your guidance that people don't restock because they don't have -- they're not going to hit their rebates anyways? Or so if we get any kind of restock, that would be upside?

Yes. I think if we get restocked, that would be an upside. We haven't really seen any restocking at this point. At least the anecdotal data we have doesn't indicate an -- we do get some real data. It doesn't indicate any restocking. So if that did happen, that would be upside.

Okay. I understand in the short term, you're still kind of working down the leverage and internally focused. But if we look out to 2021 and you start getting closer to the 3x or below, and then just looking at 2 years past since the A&S deal. Just how do you think -- how are you thinking about the portfolio? How are you thinking about potential divestitures? How are you thinking about kind of rebuilding the pipeline? And where do you see yourself doing deals?

Yes. So I think we said it before that the size of the company now, we can do, I think, a better job of portfolio management. And so we will, I think when the environment gets better, look at, are there some businesses that are lower margin, lower growth and just don't fit the portfolio anymore. I think we've said before, it's -- it might be product lines and in combination, maybe $50 million to $100 million.

So you won't see us sell a whole business right away, but try to trim some things that may not fit the portfolio long term. But I think the environment does have to improve. It does feel like it is starting to, that the M&A world is getting a little bit more active. So -- and then on the other side, we want to pay down the debt as quick as we can. So we're in a position that if the right thing does come along that we could take advantage of it and participate. And then just the EBITDA comes up too, and that helps the leverage ratio.

And then just last one. As you look into 2021, and it seems like, again, things are getting better, and you've got a couple of years of easy comps. How -- and just with the structural and the temporary costs kind of coming back. Like, how should we think about incrementals for each of the segments versus, say, normal?

Do you want to take that?

So I think with some of these cost reductions, think of travel, think of medical expenses, which are lower than a year ago, they're going to come back. If I weigh all these moving pieces, I think you should look at incremental margins just in line with historical incremental margins. While some of these costs are coming back, we achieved permanent cost reductions that are almost equal to those that are going to come back, and you get the volume increase.

So as of now, I would look at this as your normal incremental margin profile. So we had another $100 million in revenues that would probably create somewhere in the range of $35 million to $40 million of incremental operating income.

Your next question comes from Mike Halloran with Baird.

So maybe sticking on the '21 question a little bit, but flipping over to the demand side of the equation. When you think about the run rate in the fourth quarter slightly lower sequentially doesn't seem all that different from what normal seasonality might look like, how are you thinking about the underlying set up in the next year in terms of end markets, puts and takes? Anything that you think is unsustainable from what we're seeing here? Any markets that you think have real inflection potential to get into next year?

Yes. I think there's 2 key markets that we're looking at. One is the Class 8 trucks in China and that cash for clunkers program and when does it end and how big an impact is that? Now that's going to be offset by improving demand here in North America and in Europe. So that's 1 market we're doing a lot of work on trying to figure out what that will look like.

I think the other one is the medical market where we -- it took us a while to ramp up. So the second quarter, we didn't get the benefit of the COVID equipment, the ventilators and respirators, but we did in the third quarter as we ramped that up. And now I think the strategic supplies of ventilators and respirators are in good shape.

So we'll see a drop-off on that COVID-related equipment unless there's another big surge, and you have a really terrible winter, which some people are predicting. So those are 2 markets that we're looking at from the potential downside.

Now on the upside, there are some other things that are going quite well. So Turf and Garden, that's going better in the second half of the year. I think there was some concern from our customers about their inventory levels at the beginning and with the stay-at-home activity and people buying in the housing market has been really, really solid. So that market is expected to do better than what we had predicted probably 6 months ago, 3 to 6 months ago.

And then we're starting to see some activity in vertical lifting machinery. So that hoists and cranes and some of those things as activity and logistics are moving again. So that's doing quite well. We hope that the other side of the medical, the surgical medical equipment and that elective surgeries start coming back again, and we can see that part of the market improve.

Farm and ag is kind of a question mark that we're trying to watch carefully. And then the 2 that seem to have been also very solid that we hope will stay solid are defense and then specialty machinery and automation. Some segments of the automation business have been really good. So hopefully, as we -- people try to deal with the post-COVID world, we see that automation investments take off.

So if I net that all together, it sounds like a little concern on the comps for medical, obviously, the China piece on the Class 8 truck. But beyond that, it seems like it's stable at a minimum with a bias for momentum upwards for most of the pieces.

Yes, I think that's fair. Oil and gas and commercial aerospace are probably the 2 exceptions to any bias towards momentum upwards.

Yes. No, that's definitely fair. And then how to think about pricing from here? Obviously, price cost positive in the quarter. It still seems like you're in a good position from a pricing perspective. Maybe some thoughts on kind of twofold. One, how you guys are going about and thinking about the pricing side of things across the pieces, what varies there? And two, how you guys -- what are your views on conduciveness of the market to accept pricing, if we see commodities continue to move higher, if we have other inflationary pressures?

So historically, we averaged somewhere around 75 to 90 basis points of incremental price, 100 basis points this quarter was very strong. Last quarter was strong. So it shows that we have pricing power even in times of economic difficulties.

I think looking at next year, you probably should use that historical average. We have the benefit that within distribution, price increases happen every year. That's a big part of our business. That helps on the OEM side. It's certainly challenging to get price increases, but we try to do that through upsells through model changes. So I think that's a fair assumption at this point.

Your next question comes from Scott Graham with Rosenblatt Securities.

Outstanding quarter, guys. I had some questions around the costs. So Christian, you were kind enough to share your annualized $60 million of cost out. Can you parse that out maybe a little bit further, maybe kind of like by segment? I know, additionally, for example, you were shooting for in the $10 million facility for synergies from A&S. Kind of where do you stand on that? And just much more interested in just kind of how the cost reductions are falling by segment.

I would say, by segment, it's about 60% on the A&S side, 40% on the PTT side.

Got it. And so you are expecting that difference, though, the $60 million versus the $28 million to come back? Or is there something more to the math?

So out of the $60 million, which is an annualized rate, out of the $60 million, we think we realized this year about $55 million. Out of the $60 million, we think $28 million are permanent, will not come back next year. That means about $32 million on an annualized basis will come back next year.

What will come back? Some travel we assume will return. Medical expenses will start to normalize. The furloughs that we introduced will not reoccur. Some of the short work weeks that we introduced will not reoccur. Those would be some examples of the costs that will come back on the permanent side. I mentioned permanent head count reductions of about $11 million, that won't come back.

Procurement savings that won't -- that will be permanent. Facility cost savings that will -- some of those will be permanent, some of those will come back next year. We have made progress in reducing our cost for outside services and professional services. Some of that is permanent, some of that will come back. And if we have this all up, it's this $32 million, $28 million. That will...

Got it. Understood. Last question. You were kind enough, Carl, to talk about sort of the cadence of distribution coming out of the quarter. I was hoping you could also do that for a couple of your other markets, namely metals, mining and the factory automation piece?

Yes. So metals, we saw a little bit of an improvement. And it feels like that the utilization of some of the mills is coming back up a little bit. But it's slow and some of the activity, like pipe for the oil and gas business just seems that that's going to come back for a while. But we did see some increased activity in metals.

And then we've seen some nice projects in some of the mines around the world, but mostly replacement parts and some projects, but not wholesale, let's go invest in somewhere. So -- and what was the other one? The automation space? So semicon was particularly strong in the quarter and that was -- it was just very, very strong.

And then some of the other specialty machinery in automation and some of the specialty machinery was also strong. That's good food processing automation projects. We did some in medical. There was a cryogenic medical transportation project that we worked on. There was some defense radar systems that were automated, that some automation equipment on them. Ship loaders, as I mentioned earlier. So anyway, there was a whole lot of really good project work.

I guess what I was wondering about that was on factory automation, in particular, was kind of how you're feeling over the last sort of 30 days, even taking the last couple of weeks of September, the first couple here in October, just to understand that market because I do think that there is some good news that's been trickling out of that market, and I wanted to see if you were seeing the same thing.

Yes. No, it's been good. It was good through the whole quarter, and we do expect it to improve. We haven't seen any big wholesale, "Oh, gee, we've got to automate our whole factory because of COVID, and we want to really significantly reduce the number of people." I think that will come eventually. But we have seen some very good project work in the automation space right through the quarter.

Scott, let me correct. I looked at the breakdown again of the $60 million between A&S and PTT. It's 10% of the $60 million is at the corporate level, 45% at the PTT and 45% on the A&S side.

Your next question comes from Joel Tiss with BMO.

So one practical question and then one little more maybe dreamer question. Are the temporary cost reductions, are those all pretty much reversed? Are you back to normal? Or are you keeping it flexible because who knows what's going to happen?

So we're going to keep that flexible to the extent we can. And they're not going to all snap back in 1 quarter. It's going to be a gradual comeback. A good example of that is medical. In the third quarter -- in the second quarter, our medical expenses were about $3 million less than in the prior year. When we looked at the third quarter, they were about $1.5 million less than in the prior year.

Travel. We're still on travel restrictions.

Travel. We still have close to 0 travel expenses. Those will come back gradually over time.

Probably done with furloughs.

We're done unless we...

Something happens.

Something happens. We're done with furloughs, corporate wide. We still have some places where we have salary reductions in place depending on the local situation. Those will eventually come back. So it's a gradual return.

Okay. And then I just wonder like whenever any company goes through kind of like a big kind of a shocking scenario. What do you -- have you guys really learned about the long-term margin potential? Do you think that this company 10 years from now could be a 20% to 25% operating margin business? Or do you think that you'll get whatever you can get out of these businesses, and you're going to still continue on your track of acquisitions to try to get the whole company up, say, into the 20s over time?

So I think our margin goal is at least for now, and that's the goal that we set out when we announced the merger 2 years ago, that we have operating income margins in the low 20s.

And so do you see -- you see the potential maybe for 30s then? I'm just trying to get a sense of like what you guys have learned through this process. Maybe there's a little more cost to come out or more pricing or new products or it's too disruptive of an environment to get that kind of conclusion?

I don't think that 30s with the current portfolio is in the cards. But low 20s is very well in the cards.

Yes, we set the goal to improve the market by 400 basis points. And I think if we get there, we'll be really happy, and then we'll set the goal -- the next goal, maybe as we approach that 400, we'll set the next goal. And I think you're right, Joel, that it has to come from portfolio improvement in higher-margin businesses that we would acquire to really take it up another step function.

(Operator Instructions) Our next question comes from John Franzreb with Sidoti & Company.

Most of my questions have been addressed, but I do have a question about the truck market. Do you guys participate at all in the Class 5 to 7 truck market? And if not, is that an opportunity for you?

It's a very little bit of the market. So we don't really see it as pickup.

A lot of background noise.

That could be me. Okay. That's all the -- my follow-up I actually had. I was just curious about the rebound in that market and its impact, yes.

All right. Thank you.

There are no further questions at this time. I will now turn the call back over to CEO, Carl Christenson, for closing remarks.

Okay. And thank you, everyone, for joining us today. And we will once again be on the virtual road this quarter, including attending Baird's Global Industrials Conference on November 12. We look forward to engaging with many of you in the months ahead, and thank you again for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.