ITT Inc. (ITT) Q2 2012 Earnings Report, Transcript and Summary

Welcome to ITT's Second Quarter 2012 Earnings Conference Call. Starting the call today from ITT is Melissa Trombetta, Director of Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Standard Time. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. You may begin.

Thank you, Maria. Good morning, and welcome to ITT's second quarter 2012 investor review. Presenting this morning are ITT's Chief Executive Officer and President, Denise Ramos; and ITT's Chief Financial Officer, Tom Scalera. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures, as well as selected historical financial data can be found on our website at ITT.com/ir. Please note that any remarks we make about future expectations constitute forward-looking statements under the Safe Harbor provision. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in ITT's 10-K and other public SEC filings. So now let's turn to Slide #3 where Denise will discuss our results.

Good morning, everyone. I appreciate you joining us as we announce our financial results for the second quarter of 2012. I'd like to take this opportunity to share with you my perspective on our business performance. We continued our record of growth by delivering solid results at both the top line and EPS levels, even in an extremely unpredictable economic environment. Organic revenue was up 6% to $568 million. This strength reflected our growth and the attractive end markets where we are focused such as mining, automotive and chemical. The U.S. grew an impressive 18% in the quarter and as Motion Technologies continued its journey to expand outside Europe, they delivered growth of 36% in emerging markets. Industrial Process grew 16%, and with $233 million in shipments set a third consecutive record. This growth reflects strength in global mining, chemical and general industry pumps. We're also pleased to report an adjusted EPS of $0.50 per share, which reflects our strong top line performance, operational execution and cost action. We achieved this performance while absorbing incremental post-spin stand-alone costs, managing the impacts of FX and continuing to invest for the long term. In addition, we delivered 171% adjusted free cash flow conversion, which facilitates our ongoing investments for future growth. In the second quarter, we continued our track record of balanced and effective capital deployment, with $38 million in gross share repurchases and our quarterly dividend of $0.091 per share. Returning capital to shareholders has been our largest use of capital year-to-date as we recognize the need to balance our excess capital with our robust pipeline of organic and inorganic investments. These results demonstrate our ability to execute consistently on our growth strategies even in the midst of an uncertain global economic environment. Looking ahead, I remain confident in our second half, although we will remain vigilant and continue to closely monitor global economic conditions. We took several actions during the quarter to optimize our cost and organizational structure in our Interconnect Solutions and Control Technologies businesses. And we have additional actions identified should market conditions worsen significantly. So based on our year-to-date strength and the operational playbook we put in place, we are maintaining our adjusted EPS guidance range of $1.62 to $1.72 and our organic revenue guidance of 5% to 7%. During the second quarter, we made steady progress against our 6 profitable growth drivers. Today, given the environment that we're operating in, let me highlight our execution in 2 very specific areas, operational excellence and providing a premier customer experience. It's important to note that ITT is well positioned for optimizing our processes due to the approach that was taken to affect the spin quickly. We have aggressively identify the right actions to optimize our cost structure and processes. We're also planning additional leaning out of our operations. We are now able to move quickly to accelerate the implementation of those optimization and cost actions across all processes and all functions. We have also launched our plan around lean transformation across our facilities. We have invested in Korea and Wuxi, China and as these plants are built, we are implementing lean processes from the ground up to maximize capacity gain and add value for our customers. Because we are a more focused company, we can now drive lean processes further down into our organization to smaller facilities with $25 million to $75 million in revenue such as our Lancaster, Pennsylvania and Amory, Mississippi valves plants. This enables us to provide a premier customer experience by improving our total cycle time and productivity. As we accelerate our implementation of lean processes across 80% of our facilities over the next couple of years, we will be able to rebalance and optimize our cost structure, while improving the plant flow, increasing capacity and enhancing customer focus. Finally, to ensure the success of these lean strategies, we have hired a new operational excellence leader at Interconnect Solutions and several lean facilitators at Industrial Process. These individuals come to us with strong track records and very relevant experience, driving improved margins and optimization. Continuing to deploy resources in the right areas will help us address the significant growth at Industrial Process and optimize our capacity and help us improve profitability at Interconnect Solutions. Over the past 10 months, another area we have been driving hard in order to maximize long term shareholder value creation is the premier customer experience. As I meet with our customers around the globe, a theme I hear consistently is the importance of having leading cycle times and staying close to them to understand their businesses and create customized solutions for them. We're making good progress on both those fronts. We have organically developed and implemented finance configurator tools that shorten lead time and enable us to be responsive to customer needs and improve customer on-time delivery. The highly engineered nature of what we do allows us to leverage cross values in our teams to accelerate our progress here. By leveraging these teams via operational councils that have been implemented across ITT, we have been able to share this technology across 3 of our 4 businesses. In addition, at Control Technologies, we have implemented a system that maintains optimal inventory levels and brings improved visibility to all parties. This system provides 3 of our major aerospace customers improved on-time delivery and minimizes our working capital investment, so this is a win-win for IT and our customers. During the quarter, Interconnect Solutions won prestigious awards from several key customers, including Arrow Electronics, L-3 and Rockwell Collins, further proof that our focus on providing a premier customer experience is differentiating us from our competitors. So while these are just a few examples, they demonstrate the focus that we are bringing to enhancing our operations and customer relationships, as well as the progress we are making. Going forward, our solid track record and customer successes are a sturdy foundation and strategy for how we plan to continue to grow this company. We benefit from the stability we gain as a global industrial company, from a portfolio that is balanced and diversified across end markets, business cycles and geographies. When I look at the strength of our business model and our growth capabilities, we are well positioned to deliver on our commitment to 2012 and beyond, but we are mindful of, and we'll continue to monitor, the macro environment closely. The days ahead, we will continue to drive profitable growth and create value for shareowners, customers and employees. So thank you again for joining us today and now let me turn it over to Tom.

Thanks, Denise. Now let's turn to Slide 5 for a review of the second quarter financial results in greater detail. In the second quarter, we delivered strong organic revenue growth of 6% that was driven by global demand for our pumps in mining, chemical and general industry. The Industrial Process segment grew 15% organically and delivered a third consecutive quarter of record shipments. The Industrial Process segment revenue strength also included 34% growth in the United States and a 19% increase in aftermarket revenue that reflected growth in our global oil and gas and chemical installed base. The strong second quarter top line growth also reflected continued market share gains in the global automotive and rail markets. Our Motion Technologies segment organic revenue improved 5% in Q2, as growth in China and North America more than offset 3% decline in European automotive. This result compared favorably to the market due to our recent share gains in Europe. Partially offsetting these areas of strength were the continuing weakness in global connector markets and 2 large prior year emerging market projects totaling $27 million. Adjusting for these projects, our base business would have actually grown 10% organically in the quarter. However, our global engineered business will continue to provide large-scale unique project solutions like these that will periodically generate unfavorable comparisons. In the quarter, organic orders were flat. However, organic orders at Motion Technologies grew 4% due to a 7% increase in automotive that reflects recent global share gains. Orders at Industrial Process declined 2% organically as continued demand strength for chemical pumps was offset by timing of project orders. However, the Industrial Process segment year-to-date organic orders were up 3%, quote activity remains at high levels and backlog continues to exceed beginning 2012 levels at nearly $500 million. In Q2, Interconnect Solutions saw some early signs of stabilization in the connectors markets as it posted its second consecutive quarter with a book-to-bill ratio greater than 1. In addition, Interconnect also produced sequential improvements in many end markets, including oil and gas and general industrial. Q2 adjusted segment operating income of $70 million, improved 7% sequentially, but declined 15% versus the prior year due to incremental post-spin dis-synergy costs, a prior year gain on a sale of a product line, reduced connector volumes and a negative mix at Industrial Process. These declines were somewhat offset by strong operating productivity across all 4 business segments, which added over $25 million in gross cost reductions, further demonstrating our operational execution. For the quarter, our adjusted EPS of $0.50 nicely exceeded our previous expectations and was 8% stronger than the prior year adjusted pro forma EPS. Our improvement reflected strong corporate cost actions and lower interest and taxes. Overall, the quarter exceeded our expectations on both the top line, as well as EPS. With the year-to-date delivery of over half of our 2012 EPS guidance midpoint, we are well positioned to achieve our full year 2012 commitments. Next, let's turn to Slide 6. Here, we see our revenue results by major geographies, excluding the impact of foreign exchange. In the United States, we delivered another exceptional quarter of growth. In Q2, the U.S. grew 18% due to solid pump and valve demand at our Industrial Process segment, where each of our 4 major end markets served grew 17% or more. We also saw the continued benefit from Motion Technologies penetration of the U.S. automotive market through continued share gains at Ford. Our strategy to diversify outside of Europe has paid significant dividends, with a 45% second quarter increase in the U.S. We also benefited from a 7% increase in commercial aerospace components at our Control Technologies segment. Revenue in Western Europe declined 4% due to weak connector and automotive market conditions. Our automotive business represents nearly 70% of our Western European content and the majority of that is in Northern Europe, which benefits from 30% of its production being exported outside of Europe. Western European revenue was also impacted by shifts in automotive production to Eastern Europe by some of our largest European manufacturers. However, our continued automotive share gains helped to mitigate these impacts. Emerging markets improved 1% in the quarter, despite 2 large prior year projects that included an oil and gas shipment to Brazil and a unique China rail program. Excluding these 2 projects, emerging market revenue would have actually grown 21% due to significant gains in Latin American mining, China automotive and Middle Eastern oil and gas connectors. Year-to-date emerging markets in total have grown 9%. So now let's turn to the revenue by end market on Slide 7. The energy and mining and Industrial Processing end markets were both up 18% in the quarter. The growth in energy and mining was primarily delivered by global strength from our Industrial Process mining business and this result was augmented by a 40% increase in our Interconnect Solutions oil and gas connectors. Within the Industrial Processing end market, chemical grew 22% due to increased investments in U.S. processing equipment that has been fueled by lower natural feed -- gas feedstock prices. For us, most of the chemical growth was driven by projects that further add to our substantial and growing installed base. In the general industrial markets, we delivered a healthy 5% increase that was primarily driven by North American sales at Interconnect Solutions and Control Technologies. Results in the defense and aerospace market were relatively flat in the quarter, as general defense weakness offset Control Technologies' aerospace strength. And lastly, transportation markets were up 1%, as global automotive and rail gains were offset by weakness in truck and bus. Next, let's turn to Slide #8. Operating -- segment operating margins declined 260 basis points compared to the prior year. However, second quarter margins were 100 basis points better than the first quarter and they nicely exceeded our internal expectations due to stronger net productivity benefits from Value Based Lean Six Sigma and global sourcing actions. Compared to the prior year, the 190 basis point improvement in net productivity was more than offset by unfavorable mix of projects at Industrial Process, lower volumes at Interconnect Solutions and a prior year gain on a sale of a product line. Q2 margins were also negatively impacted by incremental costs in 2012, driven by post-spin to synergies and increased growth investments to expand our thriving automotive business in Wuxi, China and to further increase our efficiency in our target end markets of oil and gas, mining and chemical. In the second half of 2012, we are expecting incremental margin improvements compared to the first half due to the favorable margin mix in backlog at Industrial Process and continued operational improvements at Motion Technologies. In addition, we expect to generate some incremental second half benefits from restructuring actions we announced in Q2 and additional actions that we will be implementing in early Q3. We are taking these actions proactively in 3 of our 4 segments to mitigate economic impacts, while optimizing our operational efficiency and post-spin cost structures. Finally, turning to Slide 9 for a wrap up. We are very pleased with our strong first half results and the quality of our second half indicators even in these uncertain economic conditions. So as a result, for the full year, we are maintaining our organic revenue growth of 5% to 7% and our 2012 adjusted EPS guidance range of $1.62 to $1.72 per share. The significant portion of our confidence comes from a combination of the $50 million in year-to-date productivity improvements and the corporate cost control actions we've already executed across ITT. And we expect to generate further benefits from targeted restructuring actions, accelerated lean transformation activities and an ongoing post-spin optimization effort. These improved efficiencies will continue to fund our long term R&D and strategic investments that will provide the foundations for our continued future growth. Our visibility into the second half builds on our first half results that include solid Industrial Process backlog of $500 million, encouraging sequential improvements at Interconnect Solutions and a strong 7% organic order growth in the first half at Motion Technologies. We clearly recognize that there are headwinds in the macro environment, primarily from Europe, and at ITT, we are known for proactively addressing these headwinds, while maintaining an intense focus on generating long term growth. That playbook has already been written and we will continue to execute against it for the remainder of 2012. So now, let me turn it back to Maria to begin the Q&A session.

[Operator Instructions] Our first question comes from the line of Mike Halloran of Robert W. Baird. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: So first, on the Motion side, nice positive organic orders for a couple of quarters in a row here. Could you talk about how you feel that's going to trend towards the back half of the year here? In other words, how do those orders start? I know it's a shorter lead time typically, but how do those orders start trending through the back half of the year? What kind of momentum are you seeing in that business? And can that positive order turn keep up even with the European pressures there?

Sure. We're really happy with our automotive business in Motion Technologies. They've proven over the past number of years the capabilities that, that organization has and how they're able to gain market share even during difficult times. So the team has done a really nice job there at positioning themselves and being able to gain these global wins that they've been having. It was primarily a European business, and we started focusing more in North America and then in China. And the recognition of that is the growth that we've seen in this second quarter for those 2 areas, which gives us a really nice balance in that automotive business because of some of the challenges that we're seeing in Western Europe. So just to set it up a little bit, within Western Europe, while that has been our primary focus, you do have to think about the business between Northern Europe and Southern Europe, where about 70%, 75% of their business resides more with Northern European customers as opposed to the South, which -- the South has been seeing most of the challenges. So it's a little bit of a nice offset there because we've got some really strong automotive companies in Northern Europe that we're benefiting from, that we've been selling brake pads to for a long time, BMW, Daimler, companies such as that, and they're doing well. So we have some diversification that's been happening in that portfolio, which makes us less susceptible to what's happening, very specifically in Southern Europe right now. So with that as a backdrop, we did see nice growth in Motion Technologies in the second quarter. As we sequence into the back half of the year, we will see some normal seasonality that takes place in that business and that's because of the European shutdown that typically occurs around the August time frame. Now, the way that business sequence is, it tends to have its highest growth rate in the -- the highest revenue in the first quarter of the year and then you see the lowest in the third quarter. So for seasonality purposes, we do expect to see that coming down in the back half of the year. We will continue to see some challenges from Southern Europe, but we have some mitigating factors with Northern Europe and what's happening there. And then we do continue to see very good revenues coming from China and North America. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: And then on the mix side in your IP areas, obviously, the original equipment was supposed to compress the margin a little bit in the front part of the year, but you saw really good aftermarket growth in the quarter. Maybe you could talk a little bit about how that mix starts turning for you, maybe a little more positive as you work through the back half of the year and how that mix of aftermarket and original equipment orders starts trending going forward.

Let me just start out and lay a landscape for you and then I'm going to turn it over to Tom. But in terms of the IP business, you're exactly right. We've been seeding that project business as we've been getting more and more into these high growth markets of oil and gas and mining and chemical globally. And so we have seen a preponderance of these projects coming into play, which, as we all know, are lower margin than the aftermarket. But as we get those projects in place, we then start getting the installed base and then we start getting the aftermarket. So Tom, why don't you respond to how you see that sequencing for the back half?

Yes, sure. So I think what we're seeing, Mike, is an increase in Q2 as a relative percent of total in the aftermarket, a couple point improvement in the aftermarket content in Q2, but I wouldn't say there's been a significant shift in the mix, this is kind of the build for the ongoing aftermarket activities. We're certainly encouraged by the percent growth that we showed, I think it's a reflection of the business model that we're operating and the fact that these aftermarket gains will continue to accumulate. But I think one of the key drivers of second half profitability, which I think is one of the underlying questions is really around the mix of the projects that we do see in our backlog. So for the second half of 2012, we have good, obviously, visibility into what we plan to ship in the second half. And the mix of profitability within those, call them midsized projects, is giving us some additional margin lift relative to what we've seen in the first half of the year. So it's really the combination of a gradual improvement in the aftermarket content weighting. I wouldn't say there's a dramatic shift, but it's a gradual movement, coupled with good visibility to kind of medium-sized project profitability that will be playing out in the second half and that profitability will reflect the improved efficiencies we are building on each quarter as we move forward.

Now the other thing within the IP business, they've done a lot of work around improving their cycle time and really working the front end of the process, and getting these orders through in a more efficient and effective way. So they've done a really nice job and are doing better with on-time delivery than what was expected and customer satisfaction targets that they have out there. And that's also going to help them as they get into the back half of the year. Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division: And then some guidance on the corporate expense and tax run rates from here?

Yes, Mike, we had some favorability in the second quarter from a corporate perspective. It was really good cost containment actions, coupled with some favorable run rate experiences that gave us a nice positive outcome in Q2. But we've really been very focused as an organization in driving leverage and reducing our overall cost structure coming out of the spin. So what we really modeled for the back half of the year is a corporate run rate that looks a little bit more like Q1 than Q2. We're going to continue to maintain our full year budget rates in some of these areas where we have generated some strength in the first half. But we're going to be mindful of how these run rates could develop in some areas around medical and other insurance programs where we're establishing our own experience history for the new ITT. So what we're seeing up to this point has been positive in some of these areas. But we are assuming that, that positive flow-through may not be there at the same levels in the back half of the year. So I think corporate looks a little bit more like Q1 than what we're seeing in Q2. From a tax perspective, our year-to-date effective rate is around 29.5%, so we have seen favorability relative to our guidance, which I think was around 30% to 32% and that's reflective of the mix of our income by jurisdiction, and that has played out favorably for us over the course of the year, but we think 29.5% is the rate that we see going forward from this point. And again, that would logically normalize for some special items that we have listed, including a deferred tax asset valuation allowance, which was similar to what we had in Q1 that will play through in Q2 and into the future. But that's a special item. We think when we generate some U.S. taxable income in a go-forward basis, you'll actually see that from a GAAP perspective flip the other way. But in either event, we think our kind of long term and 2012 tax rate is in and around this 30% level.

Our next question comes from the line of Matt Summerville of KeyBanc.

A couple of questions. You mentioned in your prepared remarks that IP orders were down 2%, some of that being timing related. Was that timing related in that they got pulled into Q1 or pushed out into the second half of the year? Can you help us with that?

Yes. It's a little bit more of a push out from Q2, Matt. But I'd also say, as we continue to build momentum with this franchise, we are being more selective in which orders we think we want to pursue. Denise mentioned our advanced order configurators, the improvements we're making within our facilities and factories are giving us some better visibility to project profitability. And given the strength of our backlog, we have been more selective in the second quarter and that caused some orders to push out even beyond Q3 and we're happy with that outcome in some respects. But other orders have shifted slightly, I would say, to Q3 but we haven't seen a major shift in order patterns at this point.

That being the longer cycle business, it's really hard to look at these orders on a quarterly basis. We tend to look at it more on -- we look at the backlog, we look at how it's been building year-to-date and that gives us a better perspective as to how we think about the back half of the year. And so we were really pleased with the fact that IP ended up with $500 million backlog because that is really nice support for the back half of the year for them. And that was high and in fact, that backlog is higher than it was at the end of last year. Their quote activity has been very strong and so they are seeing good activity associated with that. Of course, we know that needs to translate into orders, but we've been seeing the strength that they've got, particularly in North America and some of these other locations. So we're feeling good about IP and the projections that we have for them for the rest of the year.

With regards to Interconnect, you saw a pretty decent sequential pickup in revenue and operating income. Does this business take another step back in the back half before it continues to improve? How should we think about sequencing this business? And when does that positive book-to-bill start to generate organic growth?

That business started -- being an early cycle business, it started in the third quarter of last year seeing declines. And so we were happy to see the sequential improvement from Q1 into Q2. We are expecting, as we get into the back half of the year, that we're going to have higher volumes coming out of ICS, which is going to allow us to have better absorption. We do think we're going to have a better mix. We've been -- we're going to see better improvement around the medical side, in the oil and gas side. And also, it's important to note that we've been unlocking the opportunity for some key initiatives and focus in this business than what's been done in the past, and we're committed to making these improvements. So we're improving factory efficiency. We're improving many of our marketing strategies. We started a standard products campaign that we're beginning to see new traction under. We've had -- we've brought in many new leaders that's going to help drive this business. We've been making investments from a front-end perspective. So we think and we believe that, that is also going to help us in the back half of the year, as well as some of the restructuring actions that we took in Q2. So we do expect that, that's going to have some improvement in the back half, that's also supported by what we're seeing externally and what we're seeing from the Bishop report that's out there, too, about how trends are expected to go in the second half. So there's a lot of positive fact into the second half versus what we've seen in the first half.

Yes, and the way I would kind of characterize it too, Matt, is we've probably seen the floor established on the connectors business. And that's been an important data point for us. So 2 quarters of sequential improvement gives us some good comfort that we have a foundation to work on and drive some of these improvements in the back half of the year.

And then if I can just ask one more, Denise, I think it was in your remarks, you talked about deploying lean in 80% of your facilities to rebalance and optimize. Over what timeframe are you looking to kind of be fully implemented in that regard? And what sort of savings do you see associated with that? I understand this is longer term, but if you can frame that, that will be helpful.

Sure. We're looking at this taking anywhere -- 3 to 5 years. Some of the easier facilities will take shorter than that. In fact, what's interesting is I went down to one of our small facilities in Amory, Mississippi and the reason that I did that was because, first off, I wanted to talk to the team and to indicate that these are important, that we are now focusing at a much lower level in terms of these lean initiatives than we've done in the past. Now lean transformation there will take a shorter amount of time than when you get to more complex facility such as our Seneca Falls facility in our IP business. That's going to take little bit longer because of the -- just the nature of what they do. So it's a high focus area for this company. It's one of our key initiatives. And we expect that over the course of the next 5 years, we're going to be generating growth productivity anywhere from $250 million to $300 million over that period of time. So we expect to see some nice benefits from that. And the nice thing is even in Q2, we saw some very nice productivity coming out of these businesses. So there is already a heightened focus on looking at these facilities and leaning them out and making sure that we're now taking the opportunities that we really believe are there.

Our next question comes from the line of Michael Wherley of Janney Capital Market.

I just wanted to ask about the buyback, and if there is plans to continue that, or how you're thinking about that into the back half of the year.

Sure. Yes, so Mike, we've been active in both the first and second quarter on our share repurchase programs. Year-to-date, we've repurchased $77 million worth of our stock. So we've had a really good return of capital to shareholders during the course of the year. We're on track for about a 70% payout ratio, so we've been very active. And obviously, what we're doing as we come out of the spin is really building our M&A pipeline and that activity is ongoing. And we didn't see opportunities materialize in the first half of the year. And that was part of the reason why we were returning cash to shareholders more actively in the first half of the year. Our focus as we go forward will continue to be on building that M&A pipeline and watching the opportunities as they develop, recognizing that we have a pretty good return payout at this point so far.

Okay. And then just moving on to the Interconnect Solutions. You said that you had a lot of strength in oil and gas. Did I hear it right that the oil and gas part of that was up 40%?

That's correct.

And was that mostly in the Middle East? Or was that seen in other parts of the world as well?

It was a combination of North America and the Middle East, Mike. And what's interesting about the Middle East growth, and this is kind of a tale of a new ITT. So we have always had a strong North American connectors business that played well in the oil and gas market, one of the leading players in North America. Part of the new ITT, we have been able to leverage some of our global relationships with companies like Saudi Aramco and others outside of North America and those relationships are giving us opportunities to take a very strong North American oil and gas connectors business to be a much bigger player on a global scale. And we did see some of those benefits in Q2.

Great. I haven't heard you guys talk about medical there much, and I was just wondering what specifically you're doing there in medical.

Mike, that's an area that we've got some business with. It's, frankly, an area that we would like to grow over time. So we're looking at utilizing -- we've used our Universal Contact on the medical side. That's been the primary product that goes into -- on the medical side. But that's an area that we're looking hard at, and we think that there's going to be a lot of future opportunities for us. And it's one of the key things that we've been focusing on in our strategies for ICS. So more to come on that in the future.

Okay, great. And then just to quantify, you mentioned that U.S. and China were up in the auto piece and I was just wondering how much China was up? And if that slowed from the first quarter or where you see that going in the second half?

We had really strong growth in China and North America that they were both in excess of 20% or more. We're still building on a strong foundation in both North America and China. So I don't think we'd see -- we'll have a little bit of moderation relative to those growth rates in the first half in China, but we're continuing to bring our Wuxi facility online. And I think as we've established a really strong beachhead in the region, we are seeing more opportunities to really add to our share gains. So I think we've made good progress in the first half of the year. We would see some moderation given the fact that we have a good growing installed base in both North America and China. We're not going to stay at those levels of growth in perpetuity, but we do continue to have a very strong view of our long term growth in both markets.

Yes, we do expect in the back half that we're going to stay at the sort of the levels we've seen in Q2 for both of that, which is good. We're not going to see the seasonality there that we're going to see on the European side. We're building that. What's so exciting in China is we were drawn into China by our customers even before we thought about putting a facility in there. What we're seeing now is the fact that we're building this facility in Wuxi along with an R&D center. We're seeing that the customers are even coming to us more and more because they see the commitment that we're making to serve them in China. So we're very excited about that, and the momentum just keeps building as we build out that facility and then look at bringing it online, probably towards the first quarter of next year. And in North America, we've been working on penetrating and working with Ford for a long time. And we've seen some really nice gains with Ford and we're hoping to leverage that and leverage some of our European relationships to get into looking at the GMs and Chryslers. So it's a good growth story for Motion Technologies.

And Mike, let me just follow-up with a couple of numbers. So sequentially, both North American and China automotive are going to be moderately improving from the level that we've established. But on a year-over-year basis, we would continue to expect 40-plus percent growth in China compared to the second half of 2011. And high single digit second half growth relative to the prior year in North America.

You say high single digits?

Yes.

[Operator Instructions] Our next question comes from the line of Ajay Kejriwal of FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So on your EPS guidance, if I could drill on that little bit. So that $1.62 to $1.72, Tom, I thought I heard you say more than half done in the first half, so what are you assuming for 2Q in that guidance range?

The Q2 adjusted EPS was $0.50. That's what we put out in our press release. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So you are making [ph] then $0.50 for 2Q in that guidance range?

Right. And that was -- so Q1 was $0.39 on an adjusted basis. Q2 was $0.50. We add those 2 together, we get a 53% of our guidance midpoint. So we're pleased with the progress we're seeing in the first half of the year. When we entered the year, we did expect to see a little bit more of a back-end improvement relative to the first half. We've been very successful in managing a lot of our cost and really driving the optimization activities that we've been talking about in the post-spin environment. We've accelerated those and have been able to bring those many forward into the first half of the year, which I think has been a real positive development for us. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Okay. So given all the adjustments below the line, is it possible to back your EPS guidance into a segment operating number comparable to what you did last year? I mean, we get -- when we do the math, it's a $270 million number for segment operating income, is that about right?

Well, we haven't provided that level of detail. It's certainly something that -- as you work through the models, there's a range of operating income. We have a number of below the line items that we have to manage in the second half of the year, and really establish our corporate run rate. So we have not given that level of visibility, Ajay. But I would say, what we're seeing drive through the back half of the year, that really informs what we see in the second half operating income from a segment perspective is the Industrial Process visibility into their mix is very important indicator of where we see the second half going. So the Industrial Process visibility gives us some nice margin lift in the second half relative to the first half of the year. And the real question for us is just connectors, right? Connectors, first half, has been lower than we initially expected from a margin perspective into the second half of the year. We're establishing a new floor from a top line perspective with some good sequential growth there. So that gives us some comfort as to the levels we're currently at. But one of the areas that we're managing is really where does the connectors volume play through in the back of the year and what additional impacts, if any, could FX have on us as we progress through the second half of the year. So we take all those factors into consideration and we are driving our entire cost structure. So because we've come out of this spin as a new organization, we're driving operational efficiencies at the factories, but we're driving them across all of headquarter and corporate locations as well. And I think that is unique to us given the spin happened not that long ago. And as Denise mentioned in her comments, we have a lot of opportunities now to really optimize on that cost structure. So we do look at it more comprehensively at this point. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Okay. The reason I was asking is first half segment income is tracking 15% below last year first half. But if I just back that EPS guidance to a segment number, it appears to be that you're expecting full year to be flattish versus last year. So just trying to connect the dots as to what changes in the second half this year versus last.

Yes. It's a little bit of a comparative challenge given our cost structure last year did not reflect the synergies that we have as a standalone entity in 2012. So we mentioned that we had about $20 million of incremental costs running for the full year that were driven by dis-synergies that we have in 2012 that were not fully reflected in our 2011 baseline. So this story for 2012 ITT is not really about the comparisons to 2011 because of this unique recalibration to where we are. Our guidance does have, on the face, a 4% increase versus the $1.60 that we generated last year. But when you adjust for that $20 million of dis-synergy costs, it's actually closer to a 13% EPS increase. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: But I was also using $0.50 in the second quarter. Okay, so one more on the cash balance. I see that FX was about a $30 million sequential hit to the cash balance. Given what the dollar has done since the end of the quarter, is it possible to mark-to-market what the cash balance is or talk directionally?

Well, we certainly are pleased with the level of our cash balance that we continue to retain and make the investments in return to shareholders that we have on a year-to-date basis. So we're pleased to see our net cash balance around $700 million. Certainly, we saw some FX headwinds in the quarter, but we have, during the course of the quarter, reduced our euro-denominated holdings in Europe to about 50% of the target that we would like to reach by the end of the year. So while we're not providing any specific guidance on those impacts, we are making good progress and we've been active in denominating our holdings into U.S. dollars in this environment.

Our next question comes from the line of Jim Krapfel of Morningstar.

How much did the currency affect the second quarter EPS? And how much effect will it have for your full year guidance relative to when you gave guidance last -- in the end of first quarter?

Sure, Jim. So we had about a $0.03 and $0.02 hit versus the prior budget expectations that we had in the second quarter. We had some negative translation impacts that were offset by favorable transaction FX. So while the euro is certainly causing the bulk of our translation impact, we did have some favorable developments from a transaction perspective and there are a number of other currencies that we participate in. So in the quarter relative to our budget, we saw about a $0.01 hit compared to the prior year. We did see about a $0.03 negative impact from EPS that's played through in the first half of the year in total. And in the Q2 versus the prior year, it was also about a $0.01 hit. As we play through for the second half of the year relative to our expectations, we're expecting at these levels to see about a $0.04 incremental FX impact compared to what we expected coming into the year. And on a full year basis relative to the prior year, it's about a $0.09 FX headwind, and on a full year basis relative to budget, we're looking at something closer to $0.06 or $0.07.

Okay. And you mentioned restructuring second quarter and third quarter. How much will you be spending at this point? And what kind of cost savings are you expecting?

Yes. We're looking at actions that would range up into about the $5 million level from an expense perspective. We think that would give us second half 2012 benefits around $2 million to $3 million and on a full year run-rate basis for 2013, it would give us around $6 million to $7 million of incremental favorability.

Okay. And then the -- can you speak a little bit more about maybe your market share gains in auto? Obviously, Ford is a big factor. Maybe you can explain where you're seeing gains with Ford and then maybe your potential with other manufacturers.

Sure. Well, Ford is really on global platform with them. So what's nice about some of the positions that we're getting in North America and some of these other manufacturers is that not only do we participate in growth in North America, but we participate in other areas which is growing too, which is the nice linkage that we've seen into our China facility. So we continue to take market share across the globe. In Europe, that's why we don't have as much of a decline as we will see the market in general, because we're winning market share in all throughout Europe, along with as we go into China and to North America. So that market share gain is pretty broad based. Remember, our customers are very global customers also. So that's also what cements these nice relationships and gives us a capability to go around the globe with them.

Okay. And then your primarily seeing the market share gains with Ford right now, that's right -- not the other auto manufacturers at this point?

No, we're seeing it with all of them too. It's going across the board. We're just saying, in North America, like with GM and Chrysler, we haven't had much business with them. So that's a relationship that we're building here in the U.S. But when we look at our -- the customers that we've had, the Daimler, the BMWs, the Audis, those companies, we've been continuing to gain market share.

Yes. And I think, Jim, that even extends to some customers that are currently facing some larger headwinds. So we are taking share even with some of our European, Southern European customers. And I think it's a reflection of our competitive strengths we have that are allowing us really comprehensively to target and win some very significant platforms. We mentioned in our slides that there are 4 platforms coming online from a production perspective that cover Volkswagen, Toyota, BMW and Ford. And there's a good mix of European, North American, emerging market and global platforms on that page. It's really a good demonstration of how we're winning.

At this time, there are no further questions. I would 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 can tell, we're very excited about this company and the prospects that we have. In the Q2 results, you see the strength that we have because of the diversified portfolio. You see the attractive end markets that we participate in. And then you also see the strong execution that this whole team is driving in all of our activities and in all of our facilities and taking as much optimization as we can in our structure to eliminate costs and lean out our facilities. So we're laser focused on that. We are mindful of the global economic uncertainty, and we will continue to be mindful of that, watch it, monitor it, and we will take the appropriate actions. So we look forward to talking with you again in a quarter from now. So thank you again.

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