ITT Inc (ITT) 2016 Q3 法說會逐字稿

Welcome to ITT's third-quarter 2016 earnings conference call. Today is Friday, November 4, 2016, and starting the call from ITT today 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 EST today.

At this time, all participants have been placed in a listen-only mode, and the floor will be opened for your questions following the presentation.

(Operator Instructions)

It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Thank you, Maria.

I would like to highlight that this morning's presentation, press release, and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. Please note that our discussion this morning will primarily focus on non-GAAP measures.

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 the slide 3 where Denise will discuss our results.

Good morning everyone. Thank you for joining us to discuss our financial results and strategic progress for the third quarter of 2016.

In the third quarter, we focused on strategically managing through the difficult macro environment and the structural resets impacting our flow in-market, and we continued to deliver strong results in our transportation businesses. We also drove operational improvements to better serve our customers, and we expanded our growth opportunities in key markets while we effectively deployed capital and managed risks.

So let me provide some additional insights. Despite the anticipated project weakness in oil and gas and mining, and the negative impacts resulting from extended delays in maintenance spending, both of which significantly impact our industrial process segment, we reported a 3% decline in total revenue compared to the prior year. This reflected the significant organic share gains in our automotive break pad business and the benefits from our Wolverine acquisition.

In addition, we delivered adjusted EPS of $0.58 per share that was down only 2% compared to the prior year excluding the negative $0.04 impact from foreign exchange.

Our third-quarter results reflect lower volumes and project profitability pressures in our Industrial Process business. However, we collectively offset those pressures with stronger transportation results and corporate actions.

So let me put the third-quarter project dynamics at IP into perspective. At the same time that we have been executing our structural reset of IP, including reducing the headcount by close to 30% and transitioning activities in the global centers of excellence, we have also been winning some new, more complex top projects in a very difficult pricing environment.

The complexity of these projects, along with the impacts from our structural reset, contributed to a handful of complex projects generating lower than anticipated profitability, which negatively impacted our Q3 results by $5 million compared to the prior year. We have already strengthened our processes and procedures here, and we upgraded key talent to ensure that we managed this new tier of complexity and deliver these projects more efficiently and effectively going forward.

Next, I'd like to share some of the progress that we've made to strategically align our businesses with the market dynamics we are confronting. So let me highlight some of those strategic advances here on slide 3.

Motion Technologies continues to drive exceptional operational effectiveness that produced a 34% increase in adjusted operating income in the quarter. This growth is the result of the world-class manufacturing excellence program launch that Luca Savi and his Friction Automotive team embarked upon about 18 months ago to further improve their operations.

We think of this as the early next phase in their ongoing lean transformation. Their sustainable improvements are evident in operational areas such as safety, quality, equipment uptime, and materials flow. It is forward thinking like this, that distinguishes Motion Technologies among its transportation peers. At this point, we have only launched this program in our Barge facility, and we expect to roll it out to our other MT facilities in the future.

At ICS, we have been steadily improving our North American operations to support long-term strategic growth. In an effort to improve our delivery to our customers, we continue to make progress in eliminating the structural inefficiencies in our ICS operations. We have focused in areas such as machining capabilities and waste reduction.

We're starting to see the benefits coming through our results, as demonstrated by the 180 basis points of adjusted operating margin expansion in Q3 versus the prior year.

Our Control Technologies industrial business has been under growing its own internal transformation, taking a very holistic approach to value creation. As a result of their comprehensive realignment, including footprint actions, improved operational efficiencies, talent management, and front-end enhancement, the industrial business expanded its adjusted segment operating margin by 690 basis points in the quarter to low double-digit margins.

CT's achievements have been led by value center president Farrokh Batliwala, who we announced yesterday has also assumed additional responsibility for our interconnect solutions business. I am pleased to have Farrokh in this expanded role, as his continued strong leadership of CT, as well as his deep experience in improving operational processes, driving innovation, and building customer relationships, position him well to help both businesses continue to drive performance and growth.

Over the past few months, ICS has been steadily making progress in improving the business, and I am confident that Farrokh will work with the team to build on those efforts and advance both businesses even further.

Moving next to asbestos, we delivered yet another year of effective asbestos management as evidenced in the $82 million pre-tax reduction in our net liability following our annual remeasurement. In addition, our cash flow projections for the next five years remain stable, and over the following five years they actually improved versus prior forecast.

It is important to note that both of these improvements free up additional capacity that we can redeploy back into strategic long-term growth. This reduction in our liability is the cumulative effect of the comprehensive strategy that are cross-functional team of experts have put in place to reduce the volatility and uncertainty associated with both the assets and liabilities.

Now let's turn to market expansion. During the quarter, Motion Technologies continued their track record of outpacing the global automotive friction market and we grew our friction OEM business 19%, excluding currency, bringing the year-to-date total to 22% over the prior year. In addition, Motion Technologies delivered strong automotive aftermarket growth of 7% that was mostly driven by OEM platforms shifting to the dealer service cycle, as well as favorable independent aftermarket results.

During the quarter we also continued to expand our global automotive customer base, which demonstrates the significant long-term growth run rate for this uniquely positioned business. As a result of our competitive advantages from effective research and development, combined with operational excellence, we are pleased to announce that we were recently awarded GM's largest and copper-free platform for the North American market, and this award will be produced in our new facility in Mexico beginning in the fourth quarter of 2017.

And finally, we are pleased that two of MT's productive facilities were certified by a major Korean tier 1. These facilities are the first non-Korean break pad production sites to receive this qualification. While we do not expect a significant impact to our results in the near future, this is another key milestone in expanding our global customer base and reach, as it now allows us to bid on platforms for the Korean automotive market.

It is new platform wins and new market expansions like these, that will continue to drive the long-term growth trajectory of our Motion Technologies business well into the future. Lastly in terms of capital deployment, we executed the entire $50 million of share repurchases that we announced last quarter, bringing our total to $70 million for the full year.

Now, switching to guidance at a high level. Given the current volatile market dynamics, we are now anticipating lower short-cycle and project volumes and, to a lesser extent, lower project profitability at Industrial Process in the fourth quarter. As a result, we have reduced our previous total revenue expectations by one percentage point at the midpoint, and from an adjusted EPS perspective, our new guidance range is $2.20 to $2.30 per share.

Turning to slide four, we are excited to provide the details on our latest strategic acquisition, Axtone. Axtone is a leading manufacturer of highly-engineered and customized energy absorption solutions for railway and other harsh environment industrial markets. We believe their technologies are highly complementary to our legacy KONI brand, as they produce energy absorption solutions such as springs, buffers, and coupler components that are critical for railway freight and passenger safety and comfort.

When we consider inorganic investments, strategic fit, aftermarket content, and strong alignment with key financial criteria are critical. We believe Axtone nicely aligns with each of those core elements. They have leading positions and long-standing brands, high aftermarket content, and strong platform visibility.

We also appreciate their diversified revenue base across geographies and sectors within the rail industry. And from a valuation perspective, we have been cultivating this acquisition for many years, and we are pleased that we can utilize our foreign cash to acquire this strategic railway asset at an attractive multiple.

Turning to slide 5, comprehensively serving the transportation industry is a key element of ITT's long-term strategy, and the addition of Axtone will create a global leadership position in railway components. With the combination of KONI and Axtone, we will be better able to capitalize on the growing global demand for critical railway safety technology and expand our position in a profitable aftermarket.

We also believe that from an operational standpoint, we will be able to leverage the world-class management system that drove KONI to deliver 810 basis points of margin expansion over the last three years. These capabilities will be utilized to better serve Axtone customers, a key competitive advantage in the transportation industry.

For 2016 we are not including any impact from the acquisition in our guidance, as we believe it will close in early 2017, subject to customary closing conditions. We expect the acquisition to be accretive to adjusted EPS in 2017, but we're still detailing out the specifics. At this point, we're looking forward to bringing these two outstanding businesses together with a shared commitment to innovation, quality, and unrivaled performance.

So with that, I'll turn it over to Tom to discuss our results and guidance in more detail.

Thanks, Denise. Now let's turn to slide 6 for a detailed review of our third-quarter results

Total revenue was down 3%, while organic revenue declined 10% after adjusting for foreign exchange and the $40 million benefit from our Wolverine acquisition. In the quarter we continued our strong growth trajectory in the transportation end markets, which were up 21% in total and 6% on an organic basis. These gains were offset by a 40% organic decline in our global oil and gas and mining markets and softness in our short-cycle North American chemical and industrial pump markets.

Once again, Motion Technologies was the biggest contributor to our transportation strength, as global automotive friction increased 14% organically. This dramatic improvement was the result of high-teen OEM growth, mostly driven by China and Europe. Our European OEM business grew 10%, while growth accelerated in China to 69%. In addition, Motion Technologies grew a strong 7% in the aftermarket due to execution in both the dealer and independent aftermarket channels.

Moving on to oil and gas, which now represents approximately 11% of ITT's revenues. This market continues to be significantly impacted by lower capital spending levels and longer than anticipated deferrals of maintenance activity, which impacted both IP and ICS revenues. In addition, we experienced declines in mining across all major geographies due to weak market dynamics and difficult prior-year comparisons, mainly in Latin America.

Shifting to orders, we were pleased that total orders increased 8%, and organic orders, for the first time this, year grew 1%. Organic orders at Motion Technologies were up 10%, including a 12% increase in global automotive brake pads due to new platform awards that are now entering production.

IP orders declined 4% organically versus the prior year. However, they were sequentially flat compared to Q2. This sequential stability reflected a 23% increase in Q3 chemical pump orders due to solid petrochemical product activity in North America and the Middle East, and that Control Technologies, solid rotorcraft and commercial aerospace and defense platform wins drove a strong 8% order increase compared to the prior year.

These positive order trends were more than offset by a 20% decline in general industrial pumps, driven by weak North American market conditions, together with a 10% decline in oil and gas activity at IP. These oil and gas declines reflect the ongoing market conditions, largely in the upstream, resulting from capital project uncertainty, extended deferrals in the aftermarket, and difficult prior-year comparison.

Q3 adjusted segment operating income of $73 million declined 19% or 13% excluding $5 million of unfavorable foreign exchange. Our results reflect several items stemming mostly from IP, including lower volumes across key end markets, negative foreign exchange transaction impacts, pricing headwinds, and lower project profitability. These items were partially offset by solid adjusted operating income results reflected in the 34% improvement at Motion Technologies, the 26% improvement at ICS, and strong growth at Control Technologies industrial business.

Our results also reflect the significant restructuring benefits generated from the aggressive actions taken at IP and ICS, as well as solid contributions from our Wolverine acquisition.

Third-quarter adjusted EPS of $0.58 per share was 8% below the prior-year or 2% excluding the $0.04 impact from foreign exchange. The EPS performance reflected lower volumes and project profitability at IP along with a higher effective tax rate. However, those items were offset by the strong operational execution at MT and lower corporate costs.

The corporate result reflected lower incentive compensation costs, favorable insurance recoveries, and improved functional efficiency, and it is important to note that we also funded $0.02 of incremental long-term strategic investments compared to the prior-year.

Turning now to slide 7, here you can see that we delivered segment operating margins of 12.5%, or 13.9% operationally excluding foreign-exchange, acquisitions, and strategic investments. The strategic growth investments primarily include startup cost for our new North American brake pad facility.

Our focused operational execution delivered a combined 510 basis point margin improvement in the quarter, that included $35 million in gross productivity savings driven by benefits from lean efforts, as demonstrated by the examples Denise discussed earlier at ICS and CT.

In addition, we continue to benefit from our world-class manufacturing program at MT and expanded global strategic sourcing, along with $13 million of restructuring benefits, largely at IP and ICS. However, the benefits from these actions were more than offset by the headwinds at IP and price pressures at both MT and IP.

Next, let's turn to slide 8. As a result of our annual assessor's measurement we recorded an $82 million pre-tax benefit in the third quarter. This reduction was partially driven by various recent favorable trends, primarily related to improved acceptance rates and lower average settlement values. The net liability reduction was also the result of benefits generated from the defense strategy that we put into place last year that drove significant reductions in outstanding claims and at lower defense costs.

When we take a step back and evaluate the strategies that we have put in place to help mitigate our asbestos risk exposure, we are extremely pleased with the progress that we have made. We have certainly proven our ability to effectively manage this asbestos liability. Over the last five years since then, we have dramatically reduced our ten-year gross liability by 43%, or $760 million, in addition to significantly reducing our outstanding claim count by 72%.

We have also worked diligently on the asset side, where our coverage under insurance settlement agreement, which provides more certainty around the timing and value of our insurance receivables, now represents approximately 45% of the assets. Combining the impact of our liability and asset strategies, we have been able to reduce our net liability by over 20% post-spend. And from a cash flow perspective, while we are continuing to forecast the same annual average after-tax cash outflows for the next five years, we are now able to reduce our expectations by $5 million per year for years six through 10.

And finally, in keeping with our ongoing efforts to de-risk our pension plans, we are executing a voluntary pension settlement program. This program offers certain former US employees with a vested pension benefit, an option to take a one-time lump sum distribution rather than future monthly pension payments. All payments will be made from existing retirement plan assets during the fourth quarter of 2016.

Based on the estimated number of participants, we expect to recognize a pre-tax pension settlement charge of approximately $18 million to $20 million in the fourth quarter. Please note that this settlement will be treated as a special item and is excluded from our full-year adjusted EPS guidance.

Let's now turn to slide 9 for our 2016 guidance update. As Denise discussed earlier, we are lowering our total and organic revenue guidance ranges for the full year, with total revenue down 5% to down 6% and organic revenue in the range of down 9% to down 10% versus the prior year.

The decline in our revenue guidance was primarily driven by the incremental pressures impacting Industrial Process across all key end markets in both the short-cycle and project categories. As a result, we are expecting our IP volumes to be down mid to high single-digits on a sequential basis compared to our Q3 performance.

Moving on to EPS, in Q3, compared to our expectations, we were able to fully offset the negative impacts at IP and the unfavorable tax rate and foreign-exchange with stronger automotive execution and lower corporate costs. However in Q4, the negative mix effects from lower short-cycle volumes and, to a lesser extent, lower project profitability and negative foreign exchange impacts at IP along with the impacts from a higher effective tax rate and continued market uncertainty, have caused us to lower our adjusted EPS guidance range to $2.20 to $2.30 per share with the midpoint of $2.25 per share.

From a segment margin perspective, we do protect a sequential step down from Q3, due to the seasonal impacts of lower volume and a lower aftermarket mix, coupled with normal maintenance activities that occurred during the fourth quarter at Motion Technologies. However, we do expect sequential improvement across the other three segments due to higher net productivity at CT and ICS and incremental restructuring savings and reduced project profitability impacts at IP.

And finally, looking at the Q4 corporate costs, we do expect an increase in corporate costs compared to Q3, as Q3 included favorable cost items that we do not expect to repeat in Q4. In addition, in Q4 we expect a typical functional increase due to seasonality, as well as higher environmental costs. And finally, we expect our Q4 share count to decline modestly as a result of the share repurchases we executed during the year.

So with that, let me now turn it back to Maria to begin the Q&A session.

Thank you.

(Operator Instructions)

Mike Halloran, RW Baird.

So let's start in the IP margins. I understand the puts and takes in the quarter here, but it seems like there's going to be some moving pieces going forward, as well. So maybe talk a little bit about a little more specificity on how you expect these project margins to play out as you get into Q4 and next year.

Maybe add some specificity around what kind of restructuring benefits you expect to see going forward in 4Q and as you go into next year, and just what that trajectory of margin then can look like as we move forward from this year and as we start pacing into next year.

Okay. Hello, Mike. Let me just start by saying that the margin that you're seeing for IP in the third quarter was impacted by really two main events. It was foreign-exchange impact that we had and then the $5 million project profitability impact that we had.

There was also, when you look at it Q3 versus Q2, we had lower short-cycle activity and sales in Q3 than we had expected -- than we saw in Q2. So that was really what happened for the margin in Q3.

You know from a project perspective, what basically happened there, to give a debrief on that, is in the third quarter, we had an issue with one of our higher-complex projects that we noticed that we saw some incremental costs associated with it. So what we did is we put a team of people together to aggressively look at it and go after it and identify what other types of potential problems we could have with our project business.

It's important to note that we focused on these highly complex projects even though we looked across the whole realm of our project business. So we looked at these specific projects, and we identified really two to three projects that we needed to make some cost adjustments associated with it. And that's really the impact that you're seeing in Q3 associated with those -- that review that we did.

So as we go forward, we don't expect to have that type of an impact in Q4 or beyond that. We saw that as a discrete event that happened in Q3 that is not expected to repeat as we get into Q4. So with that, Tom, let me turn it over to you and you can give more specifics as we think about margins going forward.

Yes absolutely. Mike, you know on a year-over-year basis, based on the restructuring that we've done up to this point, we would expect $19 million of incremental savings rolling over into 2017. As you know, we've been aggressive in reducing the headcount. We've increased that number up to 30% now from prior levels which were at 25% headcount reductions. So that's going to help us certainly moving into next year.

We're going to have a little bit of a sequential impact from Q3 to Q4 from restructuring activities, but certainly the bigger story is the rollover benefits that we will be playing into next year.

You know, and as Denise mentioned, for Q4 the additional project issue is only a couple million impact versus our prior expectations. And that's not unusual given the nature of the project type activity that we were involved in. The story for us in Q3 is really about the short cycle and our belief that there's going to be a reduced level of activity in the much more highly profitable short cycle business.

And as it plays through into 2017, that's a key variable as it relates to our long-term margin projections, but we will certainly have the project profitability issue better under control going forward. We'll have incremental benefits from restructuring, and we hope that the mix on the aftermarket moderates to add additional stability as we going into 2017 from margin perspective.

Thanks for that. And then on the IP orders in the quarter, focusing on the two more positive areas -- the chemical side a couple quarters in a row now of very healthy wins there. Maybe a little thought on what's going on from an underlying perspective there.

Then also on the oil and gas downstream wins, are those more insular in nature? ITT differentiated wins -- it doesn't seem like that market is really turning, so a few thoughts there, too.

You know for what we saw in Q3 with orders in the downstream side, it was really international orders that we received on the downstream side. And then on the chemical side, petrochemical orders that we received, it was in North America and the Middle East. And so there were significant projects that we received, but we see that those two areas are going to be areas where we should see some momentum as we go into the future.

So we felt good about it. We felt good about the orders that we received, and we do think that those will be markets that will continue to grow into the future.

Yes. Mike, just to add to that, we did see a little mining sequential improvement in orders, as well. So I think your point broadly is an important one.

For us, the key is to win projects where we have the opportunity to go out and capture some opportunities. They are not broad market calls, but our ability to execute our reset effectively and efficiently through this overall industry reset that's going on -- if we can get through the reset effectively and target opportunities where we have a chance to win, that's going to drive some nice incremental growth rates for us. But it's going to be hit or miss based on what opportunities present over the next couple of months and quarters.

And it is important to note that these two areas are areas that have historically been our sweet spots. So we've done well in these areas, and I think that's playing through as we have the opportunity to get these orders.

I appreciate the time. Thank you.

Matt Summerville, Alembic Global Advisors.

With respect to the short-cycle business, I guess, what led you to conclude previously a bit more of an aggressive assumption than what you're concluding today kind of driving the guidance down? I guess, what changed and when in that business?

Yes. It's the question that we've been asking ourselves on a daily basis, Matt. I mean, the October order inflow from a short-cycle perspective was lower than our expectations. Entering Q4, we're clearly mindful at this point that oil is down below $45 a barrel again. Things are moving very dramatically in the oil and gas markets, and it's our belief that the short-cycle pressures are going to increase as we get into the latter half of the quarter.

So we are taking that kind of positioning. We don't expect that distributors and key customers in key markets are going to kind of operate and behave in the normal Q4 patterns, where we might typically see some increased activity at year-end. We are not banking on that in this environment. There's just too much uncertainty.

So a lot of what we're seeing is very situational because obviously our short-cycle visibility is maybe a month out at best. So we're taking the view that with lower oil prices and all the other risk factors, that we're not going to see a typical Q4 on the MRO side or on the baseline pump side. And we'll do our best to manage through that, but we thought that was the appropriate way to view Q4.

And then just with respect to ICS, if you say, I guess, that the current revenue run rate in that business, which is about $80 million, and based on the restructuring that you've done, the repositioning that's been accomplished, where can margins get to in that business without help from organic revenue growth?

So you're seeing that we're improving the margins as we go forward, and the reason that we've been able to do that is largely because we've been getting much better from an operating perspective in our Novalis facility. And after the transaction we made from Santa Ana down to Novalis, we will continue to have those improvements as we go forward. We're not finished with those yet. We have a ways to go at that.

So we will see continued margin improvement because of these productivity improvements and enhancements that we've gotten some restructuring that is falling into the margin into the margin line.

With the ICS business, a big impact for them had been a decline in the oil and gas business. So that has significantly impacted their margins. That was the highest margin product line that they've had. And we would like to see some of those volumes coming back to get some of those margins back into that business again.

But we'll continue to drive the improvement that we've seen. We've got a runway ahead of us to be able to do that. And we'll see when volumes begin to come back, but we're not going to be -- we're not going to base our margin improvement on volumes. We're going to be able to achieve margin improvement just because of the efficiencies that we're going to be driving from a productivity perspective.

Thank you.

John Inch, Deutsche Bank.

Denise, did the three projects in question -- were they all US, or was there anything tied to kind of your -- I mean, I guess the Korea facility expansion? How is that going by the way?

They're not US. What we've done, John, as part of the structural reset is we've created centers of excellence in the IP business. What that means is we're concentrating our manufacturing production in certain locations for, let's say, complex pumps that we have. And we are putting those primarily into Korea.

Now in other locations, we're creating centers of excellence for design capabilities, packaging and testing capabilities, and some service capabilities. So that's part of the whole footprint optimization that we've been going through in that process.

So what happened with these complex projects is many of them began to be produced in Korea, and as a result of that, you're going to have some challenges because you have some new processes, new procedures, new people in place, and you need to make sure, especially with those projects, that you have all the appropriate hand-offs and everybody working closely together.

That's where a disconnect came into play. And so we have put in new processes, we've put in new procedures, we've put in some new people, which is going to correct that going forward. But that's what really caused the problem here, and also because some of these complex projects are relatively new projects for us also. So that was a part of it.

And John, you know the Korean operation has been fully up and running for the last two years with a full range of capabilities. They are very -- they're not vertically integrated. They do a lot of engineering assembly light manufacturing and machining, if you will, so it is the right place for us to continue to move manufacturing in this environment over time. They have a full range of capabilities there.

So kind of to Denise's point, this is not an issue with the capabilities from a manufacturing perspective or an assembly perspective in Korea. It is about making sure that we have the right order coming from our front-end teams and having that kind of aligned with the manufacturing locations. So Korea is a very strong facility for us, has been, and will continue to be once we clear through these projects.

So just so I'm clear, is the issue that there was an experience curve in Korea, or is it specifically these projects specifically were just -- they just -- the terms of the projects were the challenge, and therefore you field a ring fence because you just don't have any more of them? Is that kind of the way to think about it?

It's a combination, John, of factors. Part of it was some, I'll call it execution challenges. Part of it had to be with scoping of the project. Part of it had to do with sourcing and certain restrictions we had on sourcing. So it was a variety of different factors. There was an element that had to do with just the capabilities of people having the appropriate hand-offs from one another, but there were the other issues associated with it also.

Can I shift gears just to mining? You talked about a little bit of sequential improvement, I think, Tom, you mentioned. And a couple of other companies have also sort of signal that they feel that their mining business trajectory is kind of at a bottom, maybe looking a little bit better. Can you remind us sort of how you serve the mining market and kind of what your own thought process is toward that vertical -- like how big is it again, and what are your thoughts on that vertical heading into 2017?

Yes. Mining for us, John, is about a 10% of the IP business, specifically. So it's part of that segment, and it has historically been very project-specific. So we've had a good legacy in categories like potash where we see some activity pick up here and there.

I think for us in these kind of pockets, one or two projects, one or two orders coming in can really give us a nice growth trajectory, but it's less about a call on the overall market. But we did see a little bit of a pickup, as I mentioned, sequentially and on a year-over-year basis.

So it does feel like any incremental activity off of this lower base in mining is going to, I think, periodically drive some nice results in the quarter. And in this case, for us in Q3, we did have some nice mining parts that went into the certain mines that we have in Africa.

And how much, Tom, is mining down pro forma? So 10% of IP today from where it peaked -- how much is that business actually down? Just to get a sense of the rebound opportunity that eventually happens?

It's probably down, John -- and we will confirm this -- I would say 5 to 7 points. We were probably as high as 15%. But at the same time mining was up, oil and gas was strong, too. So I'll check that, but I don't believe we've ever had mining over 15%. But IP's mix, as we see, is changing fairly dramatically in this marketplace.

Got it. Great. Thank you.

Nathan Jones, Stifel.

If we could just talk a little bit about the asbestos liability here, this is the second time that you've been able to reduce that, I think both of them this year. Are there more things in the pipeline that could potentially see that reduced further, or do you think you're about done with that for the time being?

I'll say we always look for ways to reduce it, and we've had a really nice track record to be able to do that. So yes, we have a list of other opportunities that we're looking at to reduce that, and it could be on the liability side. We're also looking at strategies that could be on the asset side here.

So the combination of both of those things allows us to reduce the net liability over time, and we're overly happy with the work that's been done to date. But the work is going to continue.

And you've had this cash flow kind of guidance of the 15 to 25 and 35 for 45 for one to five years and six to 10 years. For two or three years now, the lower number seems to continue to stretch out to the right. Is that correct, and how come that lower cash outflow keeps extending out to the right?

Yes. And thanks for noticing that, Nathan. That is really at the end of the day what we really are driving towards when we manage this net liability.

So we have effectively maintained for about five years the same level cash flow projections. So our strategies of extending our strengths in this area are having an impact and keeping these cash flows in line with our prior expectations. And that is a real positive.

And yes, I think it's a reflection of all these strategies, particularly the defense cost strategy that we've put in place. That changed our cash flow profile because we have more certainty around our defense fees because we locked that in.

We have more certainty around our receivable inflows because of the agreements that we've negotiated. So we have been able through the effective management to provide more certainty around key elements of the cash outflows, more certainty around the inflows, and that has had the effect of stabilizing these forecasts for an extended period of time, which I think is a very strong indication of how these things are all coming together for us.

Okay. And then just one on the baseline pump business. Clearly the industry is seeing continued weakness and probably the market getting even worse out there. Have you see any increase in pricing pressure from customers, and are you booking lower margins in that business now than you would've anticipated?

No. You know, the pricing impact that we've seen has really been on the project side of the business. Our baseline in our aftermarket has been relatively consistent over this year, so we haven't really seen anything material.

What do you think the risk of that is going forward that you could see pricing step down in that business?

I would say, Nathan, there's definitely some risk. It's a tough environment. It's an extensive, long-term market dynamic that we're playing through. I would say there's been a little bit of an upward pressure on pricing as the year has progressed. It hasn't manifested itself in a material or significant way, but I would say we feel it kind of building based on the way the markets are performing. And I would say that if we continue to see the types of conditions that we're seeing now, I would expect pricing to probably increase in those categories in 2017.

Okay, that's helpful. Thank you.

Shannon O'Callaghan, UBS.

On some of the deferrals that you are continuing to see in the aftermarket, what do you think is driving that at this point? I mean, is there excess inventory of product out there that's still being used for replacements to things? I mean, we've seen this across a lot of companies, and just trying to figure out how long you think -- or what's currently driving it at this point, and how long do you think that deferral process can actually continue from here?

You know, I think it's a combination of a lot of things, Shannon. I think it's excess inventory. I think it's just general uncertainty in the marketplace that people are holding back on spending OpEx dollars. And so I think it's just that general uncertainty and lack of knowing where things are going that is causing people to hold back in the aftermarket.

You know we've said for a while that at some point we believe it's got to come back, and we believe that. It's just a matter of when that's going to happen. We don't expect it in the fourth quarter. We'll see what happens as we get into 2017.

Okay. Thanks. And then just a couple of the outside the business questions. One just on corporate, Tom, can you help us with some of the benefits there in the quarter, and what should we think of as kind of the new normal corporate expense number?

And then just one follow-up on the asbestos. Why is the benefit -- the cash flow benefit in years six to 10 versus years one to five, if you could just help with that. Thanks.

Yes. Absolutely. So on the corporate side relative to where we were in Q2, the biggest mover we had was related to incentive compensation costs that we trued up based on our current projections. We do have an EPS metric that's 30% of all of our bonuses and some pooled features for our bonus plan, so the adjustments impacted quite a bit in Q3 relative to Q2.

The next item -- so that was about $3 million of incentive comp compared to Q2. We mentioned insurance recoveries. Compared to Q2, that was about $2 million of insurance costs that we recovered from a settlement, and that settlement relates to all legal costs that we incurred -- not all, but a portion of legal costs that we incurred in 2016 that we did include in our continuing results. So that was just an offset to higher expenses we had on a certain matter that we recognized on a year-to-date basis about $3 million, and we recovered about $2 million of that in Q3.

And then lastly, relative to again Q2, we had about $2 million more corporate efficiency, which some of that we're going to continue to maintain as we going to Q4. But as we mentioned, some functional costs do tick up in Q4 versus Q3 just on when activities are done in the normal course of business.

So those items added together were about $7 million to $8 million of variation compared to Q2. As you heard, the incentive comp, the insurance, those are not going to repeat into Q4. Our typical run rate at corporate has been in the $8 million to $10 million range when you factor in environmental. And I think that's typically the way we start every quarter, and that's how I would expect Q4 to play out.

We're always working to drive more efficiencies. We're always looking for ways to offset costs. We did have a couple of those play through in Q3, but I would not expect the one timers back in Q4. So I would look more at the Q2 and Q1 as a better indication of the trajectory of corporate going into Q4.

And then lastly, your question on asbestos, Shannon. Going into years six through 10, I think there's a natural evolution on the actuarial curves that there is a downward slope in the further out we go. And some of that is reflected in the fact that projections in years six through 10 go in that direction in the out years.

That's why we're seeing a little bit of the revised improved forecast. We've taken the defense benefits, the insurance benefits, and then we have a little bit of the actuarial mortality benefits, if you will, in years six through 10. That's why we're showing the reduction.

But compared to years one through five, the reason why the annual average after-tax outflows go up in years six through 10 is because we do have less insurance for certain category of claims in those out years compared to the next five years.

Okay great. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

So just on the IP margins, can you explain -- it looks like FX on a revenue basis was a $5 million hit and then on the bottom line $5 million. Just what's going on there that you're having such a big profit impact?

Yes. Jeff, one of the primary drivers is our dynamic in Korea. Our Korean operations typically invoice in petro dollars, so they have US dollar denominated revenues, receivables, and cash on their books even though their local functional currency and all of their costs are generally in Korean Won.

So we have seen the impact of those coming through on the transaction line. That's probably accounting for about half of what we're seeing in Q3 relative to last year.

The other half is hits and misses in different currencies, whether it be in Mexico or the UK or elsewhere. But what we've been seeing kind of hit us is this issue with Korea in Q3. And we did guide a little bit more of FX global pressures into Q4, but that's kind of what caused the year-over-year change in Q3.

Okay. And then shifting gears to motion, one, can you just kind of speak to how you think about the trajectory into Q4, given pretty tough comp?

And then just on this Axtone, was this privately negotiated or an auction? Denise, you talked about significant margin improvement in KONI. Just maybe talk about synergies in the margin improvement opportunity at Axtone. Thanks.

Sure. In terms of Axtone, let me deal with that first, it was a preemptive process that we were involved in. We've been going after this company for a couple of years now or in discussions with them. But this was privately negotiated. And so we're happy that we were able to achieve this acquisition. We think it's a good fit with our KONI business.

Where we see the synergy opportunity that we have put into our acquisition models is largely on the cost side of things. And what the MT operating system has been able to accomplish with KONI, we see that they're going to be able to take that same operating system and be able to take the margins that we have in Axtone and be able to significantly improve it from where they are today. So that's a large part of the synergies. Might be something on the revenue side, but we're not banking on that. We're banking on it from an operational perspective.

And then with MT, as Tom indicated in his remarks, in terms of the fourth quarter, that is the lowest volume level and margin level for MT. It's very typical. It's seasonality. It has to do with the aftermarket business. So you will see that when you look at the Q3 margins into the Q4 margins.

And then as we go into 2015, they continue to work on their world-class manufacturing and continuing to drive productivity in that business.

Okay thanks.

Brett Linzey, Vertical Research Partners.

Just wanted to come back to motion tech. The wins there continue to build on the friction side. You've got a couple more here in the quarter in both North America and China. Are you at a point where you can roughly size the revenue or earnings contribution for contracts in hand as you look out over the next couple of years here?

It's a great question, Brett. I think it's something that, as we get ready for guidance for 2017, and thinking about our investor kind of dialogue into next year, we'll probably try to put more of that information together so that it's easier to see the type of visibility that we've been building through these platform wins over time.

So that is something that we are working through. You have to work with customers and make sure that you have approval to put all of these pieces together, but I do think it would be helpful to show the visibility that we have, how the platform wins start to ramp up for us.

This Motion Technologies business is unique in two respects. One is they've been winning at a rate significantly higher than the markets that they serve. And two is those wins do give us significant long-term visibility. And I think those are important storylines for us to continue to provide more insights to, so I would expect to see more of that in 2017.

Okay and just as a follow-up there, I understand there's a modular approach in terms of capacity installments in friction, but as you look at the aggregate contracts in hand, you extrapolate those out, do you think you have adequate capacity to serve those future projects, or do you think there's investments required to sort of ramp up in line with some of the contracts you have?

We do it in a very modular way, and we look at when these contracts from the start of production will be with these contracts. Specific to the facility in Mexico, many of the wins that we're having today will have started production either the end of 2017 or as we get into 2018, so we're seeing those platforms ramp up at that point in time. And then in China, as we've been winning platforms, we continue to invest and ramp up where we've got the platform wins.

It's important to note that when we put a new facility in place like the one that we're doing in Mexico -- because you're building a new building, you'll have more capital required initially to build out the building. And then as you go forward, when you win these platforms, you will just sequentially put in the equipment that's needed and the capability that's needed in that existing facility, so the capital expenditures will be less at that point in time than you will find at the beginning when you're putting in place the whole building.

Okay great. Thanks.

Joe Giordano, Cowen.

This is Tristan for Joe today. I was wondering about your -- how the current results at Wolverine compare to your expectation when you first acquired the business?

Yes, absolutely. Tristan thanks for the question on Wolverine. It is a business that is performing in line with our expectations. We have been aggressively resetting our -- the manufacturing capabilities at Wolverine. It takes a little bit of time in automotive and aerospace acquisitions, as well. We're seeing that in the hard sales side of Control Technologies.

It takes time to get approval and alignment with our customers to make the types of improvements that are required to drive the performance that we have. So the expectations for those synergies ramp up a little bit slowly in the early years because of that process, and then they build in years two and three and four.

So we like the trajectory that Wolverine is on. We're very focused on customer delivery, customer performance, and we are in the process of driving a lot of initiatives to reduce scrap, rework, and to improve the level of automation within Wolverine. So far, so good. And I think as we go into the next year or two, you'll start to see more of the synergies and benefits start to pick up.

Great. Thanks. And then could you please talk about the strength of your aerospace business as well?

Sure. The acquisition or just aerospace in general?

No. Just in general, I think, because some of your -- some of the names in the industry have said that they see some strength this earnings season, and I was wondering if you see the same.

We've seen some nice wins in aerospace and in defense for us. And our aftermarket has held up relatively well in aerospace and defense. So I'd say we're at least tracking with the market. In some specific areas we're actually doing better and winning on some new platforms and new areas that are benefiting us, so we're happy with our aerospace business, and its performing as we had expected.

Thank you, guys.

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