Good morning, and welcome to ITT Third Quarter 2013 Earnings Conference Call. Starting the call today from ITT is Melissa Trombetta, Director of Investor Relations. She is joined by Denise Ramos, Chief Executive Officer and President; and Tom Scalera, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 Eastern. [Operator Instructions] It is now my pleasure to turn the floor over to Melissa Trombetta. Please go ahead.

Thank you, Jennifer. Good morning, and welcome to ITT's third quarter 2013 investor review. I'd like to highlight that this morning's presentation, press release and reconciliations of GAAP and non-GAAP financial measures can be found on our website at itt.com/ir. 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 let's now turn to Slide #3, where Denise will discuss our results.

Good morning, everyone. Thank you for joining us, as we announce our financial results for the third quarter of 2013. Q3 was another strong quarter for ITT. Our financial performance reflects our ability to effectively manage our businesses in an unpredictable economic environment by truly leveraging our capabilities as a focused company that is aligned around key strategic end markets, geographies and customers. Our performance this quarter, and really for the last 2 years since spin, validates that we have made the right investments for this company to help strengthen our capabilities to withstand these uncertain conditions. We funded organic investments such as our Wuxi, China automotive expansion; our world-class Korean oil and gas facility with state-of-the-art testing capability; the expansion of our Industrial Process-engineered Center of Excellence in Seneca Falls, New York, as well as our aftermarket initiative, where we look to expand our profitable aftermarket reach and capabilities. The result of these investments, we have seen tremendous growth in these markets. Our automotive brake pad business in China is up over 50% this year. And our global oil and gas industrial pump business is up over 40% on a year-to-date basis. We've also made portfolio actions, starting with the acquisition of Blakers in 2011, an Australian distributor for the oil and gas and mining market. We then acquired Bornemann Pumps at the end of 2012. Bornemann holds a global leadership position in advanced oil and gas pumping technologies focused on unconventional processing. And finally, we divested a non-core product line in our Control Technologies business that served the general industrial market. We've also been proactively funding restructuring and operational turnaround efforts at Interconnect Solutions and at Motion Technologies shock absorbers business, KONI, which are targeted to reduce indirect costs and improve the operational performance for these businesses across…

Thanks, Denise. On Slide 5, we provide some of the details behind our third quarter results. Total revenue growth of 16% and organic revenue growth of 9% was powered by gains at each of our 4 segments. Motion Technologies delivered 12.5% organic revenue growth that reflected both global OEM strength and recent platform wins and a 19% increase in aftermarket sales. The aftermarket strength was partially driven by pent-up demand in Europe caused by the difficult economic conditions that delayed vehicle maintenance. Interconnect Solutions delivered exceptional organic growth at 15% in the quarter, reflecting strength across all strategic end markets. Organic revenue at Industrial Process accelerated 6% due to global oil and gas, which grew 50% in the quarter and is now up over 40% on a year-to-date basis. These strong results were diluted by continued sales weakness in mining and ongoing softness in our North American short-cycle base business. ITT's organic orders increased 10% in the quarter, and strong order intake at Bornemann drove total order growth to 23%. Motion Technologies was up 20% organically, driven by platform wins in Europe, China and North America. Orders at Interconnect Solutions were up 11% on key wins in aerospace, defense and medical that reflected some early benefits from our new strategic end market focus. Total Industrial Process orders increased 33% due to oil and gas strength at Bornemann Pumps that included a $28 million South American oil and gas order. Organically, Industrial Process orders grew 7%, driven by increased oil and gas projects. Similar to the revenue trends we have recently seen, we are experiencing weakness in our short-cycle North American base pump orders. Q3 adjusted segment operating income of $84 million increased 21%, primarily due to our net operating productivity, global supply chain efficiencies and proactive restructuring actions that, in…

[Operator Instructions] Our first question is from Matt Summerville with KeyBanc.

With respect to Motion Tech and the growth you're seeing there, 13%, I think, organic. If you were to separate that, how much would you say is share versus the base growth in global production versus the time you brought up inventory restocking? It sounded like in aftermarket. How would you bucket that?

Let me start and just talk about Motion Tech in total and what's happening from a market share perspective. You can split it between Europe, which is our base and then North America and China. When we look at what's happening in Europe, what we're saying there and what we're seeing there is we are gaining market share in a market that is down. We're-- what we recorded in Q3 was 18% growth in our friction/brake pad business. We're also seeing not only good volume in the OE side of it, but also in the aftermarket, where the aftermarket grew about 28% in Europe for us. And that's because we believe there's been some pent-up demand, and we're seeing that maintenance has to be done on the vehicles in Europe right now. So Europe, that's what's happening. So we are significantly gaining some market share there. When you look at North America, we've just begun to penetrate that area. Ford is our #1 supplier -- -- our #1 customer in North America. And we grew our brake pad business there by 8%, off of a smaller base. But we're continuing to penetrate that market. And then when you look at China, which is where we made our Wuxi facility and that came online at the fourth quarter of last year, what we're seeing there is tremendous growth rates. And in Q3, we saw growth rate of a little over 30%. And we expect that to continue to perform in a very strong way. That market, actually, is growing at about 11%, so we're trending at about 4x the market in China. When you step back and you say why are we doing so well in these geographies and with this business. It's just because of the nature of this business and what's been built over the number of years in the past where we do great on innovation, we have great capabilities with material science, and we produce these brake pads in a very efficient way. So when you combine those things together, it is hard for others to penetrate that. And so we've been able to take this market share globally. Tom, anything you'd like to add?

Yes. I would say, Matt, that if we try to break down some of the strength that we're seeing into the 3 major buckets, certainly, share gains have contributed the most to the growth in 2013. So by my estimation, around 50% of the increased volume that we're generating this year is coming from share gains in one form or another. Probably 25% coming from an increase in production rates based on platforms that we're already a part of that continue to play through. And the remaining 25% upside probably is coming from an increase in demand coming out of Europe from pent-up vehicle maintenance activities. So that's how I would kind of project that. Certainly, the growth we're seeing this year in the aftermarket is a little unusual because, effectively, the growth we didn't see last year we're getting doubled up into this year. We think next year, that aftermarket demand resumes the normal kind of low-single digit type growth compared to what we're seeing this year.

And then just a follow-up on Industrial Process. You talked about -- a little bit about bookings. It sounded like you have a record backlog in that business, driven both by the core and Bornemann. How should we think about mix in the fourth quarter and into '14 based on what you have in backlog today? And then can you also discuss what sort of linearity or lack thereof you're seeing in that baseline business that you've referred to now as being soft for probably 6 months or so?

In terms of backlog, we are up at the end of Q3 with Bornemann, about 24% in the backlog versus year end last year, which we had Bornemann at the end of last year, some of their backlog. What we look trending forward towards year-end is that we expect that backlog to come down from where it is today, and the reason for that is because we're going to have some strong project shipments out of Bornemann. We're expecting that in the fourth quarter. We still expect to be up nicely. On a year-over-year basis, we expect to be up roughly about 10% in our backlog at that point. And as you know, a large portion of that backlog is project-related, because the projects take 12 -- 10 to 12 months lead time before you actually deliver on those projects. So good backlog, we're happy with it, and it's going to set us up nicely into next year. Now the important part hereto is the baseline business. And as we've indicated, that baseline business is soft for us right now. We're focused, a lot of that baseline business in North America, where we're just seeing just a general delay in that baseline business. So as we -- with our backlog, we're going to see that with a good portion weighted towards projects. And we'll just have to see what's going to happen with the backlog as we continue this year and into next year. And you're right, it's been soft for us. It's been soft for us in the back half of this year.

And I would say, Matt, as we kind of move into the first half of 2014, this baseline question is an important one from a margin perspective, because these baseline pumps tend to be higher margins than projects. In addition, the projects that we have been booking have been coming in at a lower price point. So we're going to see some of those margin headwinds in the first half of next year, as we kind of move through and wait to see some resumption of increasing activity in the base pump side of the equation.

Your next question is from Brian Konigsberg with Vertical Research.

Tom, just kind of touching on guidance. So just kind of the implied Q4 performance still kind of suggests a fairly low incremental or conversion rate on a year-over-year basis. I assume some of that is from mix from Bornemann, but also you are -- you should get pretty good top line leverage. I'm just kind of curious, are there other items in the mix in Q4 that are weighing done the conversion? Or is there a degree of conservatism there?

Yes, Brian, the issues that we're looking at for Q4, one's kind of a unique one, but it is a reflection of what we we've been talking about in the Motion Tech strength. We are going to try to close down and do some significant maintenance and facility work during December. So we're going to actually go off-line for some facilities in Q4, so we can get geared up for a really strong 2014. There will be costs associated with that maintenance activity -- with those activities, so those will be reflected in the Q4 margins at Motion Technologies. So that's just the cost of the type of growth that we've had year-to-date, and we really want to make sure we hit the ground running for 2014. So compared to Q3, you'll see the margins impacted for that issue at Motion Technologies, and we'll also see some of the aftermarket start to moderate in Q3 relative to Q4 at Motion Technologies. The other big driver at the segment level, I would say, is the Industrial Process mix. These baseline pumps, which tend to be higher margins, are expected to be soft again in Q4. So that will create some additional pressure even beyond what we saw in Q3. So those are 2 of the bigger operating items we're looking at as we exit Q3 into Q4. And then from a corporate segment and across a couple of the other businesses, we do have increased investments planned for Q4 that cause some additional dilution as we go into the end of the year here. Some of those factors at corporate include investments in the Lean transformation. We're continuing to build out our capabilities, our IT infrastructure and a lot of our internal effectiveness and internal capabilities around and to support the type of growth that we're generating today. So we're going to make some more investments in Q4 at corporate. And that's just one of the other factors you'll see going from Q3 to Q4.

Right. And just touch on Interconnect. Obviously, you guys had a fantastic quarter. You got the margins above, where you hit double digits. It sounds like a little bit earlier than you expected. You're doing some more restructuring. Just curious, maybe just a little taste of what there -- more is there to do? Is there some manufacturing footprint that you can consolidate? And really, what kind of, I guess, trajectory should we be thinking into '14? I know you don't want to give specific guidance, but just trying to get a sense of where that could go.

We are very happy with the margins that we recorded in Interconnect Solutions for Q3. Now hitting the double digit was sooner than what we had anticipated, and we're very happy with that. It's the result of a lot of good work that the team is doing there, where we are focusing in harsh environment connectors. We've brought in some new leaders, and we have refocused the business around 4 key end markets. So we've set up a GM structure in that business, where we've got someone leading oil and gas, someone leading medical, someone leading transportation and industrial and someone leading aerospace and defense. We think that focus is going to help us, as we go forward into the future. In terms of their cost structure, we've taken restructuring actions this year. We continue to take restructuring actions there. We're looking at those restructuring actions to be associated with overhead costs, a lot of indirect costs. And we are looking at the footprint and deciding what's going to make sense for us from a footprint perspective with -- as we progress down this Lean transformation, and as we progress with the organizational structure that we put in place there. So there is more to come there. We are nice -- again, we like the progression that we've had for this year. In fourth quarter, maybe moderated a little bit from Q3 depending on the mix in some of these investments that we're making. So we've got aerospace and defense. It was really, really strong for us in Q3. We don't expect defense to be that strong for us, as we go into Q4 for all the reasons that all of you might suspect. So we'll see some moderation, we expect to see some moderation with that. But we're continuing to focus on growing the top line and growing these margins. And I would expect, on a year-over-year basis, as we get into 2014, that we'll see continued improvement in both of those areas.

Your next question is from Jim Krapfel with Morningstar.

You've touched on some of the competitive advantages in your brake pads. Can you maybe elaborate on that on your structural advantages there in brake pads and how structural they are?

Yes. So I think, Brian -- Jim, the strength in our friction business is a combination of the material science with our manufacturing capabilities. So when you put those 2 strengths together, it allows us to do rapid prototyping through our very, I would say, world-class R&D function that can design a brake pad to the specifications that our customers are looking for. And we could turn those R&D ideas into good, reliable, repeatable manufacturing results, because we have a good integration of those 2 capabilities. So I think you really -- for us, putting those 2 together is what gives us a structural, very, very positive competitive advantage in how we approach the marketplace with a high quality brake pad that we can produce in a consistent, reliable way.

Okay. And then I think you mentioned a couple of quarters ago free cash flow conversion of 80% to 90%. Is that a target you still think you can achieve, given the 63% conversion year-to-date?

Yes, that's still the right target, Jim. One of the big levers is capital expenditures. We do have some additional investments as we've been talking about coming online in Q4. But our target still remains in that same mid-80% range conversion. And this year, the capital investments are going to be at a much higher rate than the typical run rate that we would expect as we move forward, but it is a reflection of the investments that we see that help support a lot of the initiatives and the strategic growth that we've been talking about in areas like the aftermarket capture, expanding our production capabilities and in Wuxi for automotive brake pads. So we have a number of other investments coming online this year, but our working capital remains very solid. We're targeting working capital as a percent of sales less than 20%, and that's what we're on track to deliver for the year. Certainly, Bornemann and some of the recent strength we've had put some pressure into the Q3 results. But we have a really good working capital momentum going here as far as management of that. So south of 20% is where we want to keep working capital, and we're still targeting that free cash flow in around the 85% range.

[Operator Instructions] Your next question is from John Inch with Deutsche Bank.

So cash in the quarter looks like it was dragged from receivables and the payable line. And I guess my question is, is that -- Tom and Denise, is that a function of expanding energy orders with perhaps, say, some of these big energy companies that just take longer to pay? Is this the derivative of supporting growth? And if so, do you expect that to reverse in the fourth quarter? Or how should we think about it?

Yes, it's -- that's exactly what it is, John. It's really the 2 factors, oil and gas and the nature of our larger projects that we're involved in today. So the bigger the project, the longer the payment cycle, typically, because of the technical complexities. And, quite frankly, the customers that we're dealing with, we do see the receivable investment increasing based on the nature of those platforms getting larger, including oil and gas, in particular, in this quarter. The other factor is just the strength that we've had in the automotive business. They tend to pay on a longer cycle. So when we're growing our automotive business, primarily, in Europe, we do see some additional pressure on receivables. They're typically in the 90-day kind of range in many cases. So those are 2 factors we see playing through receivables on a year-to-date basis.

Okay. So that makes sense. You'd called out just the increase in maintenance that was sort of an upside surprise for you guys in terms of the brake business in Europe. If you look at the data in terms of how weak the car builds have been for so long, it would almost suggest there could be a period of extended maintenance that should invariably benefit you guys because of your very strong positions on brake pads in Europe. Is that how you see this playing out? Like in other words, why would that benefit -- I realized you want to be conservative, but why would that benefit be restricted to a singular quarter? Shouldn't that, considering the auto build has been so weak for so long, that should not, itself, play out over a period of time?

Yes, John, we were happy with the results in Q3. We could see that continue as we go out into the future. Will it be as strong as it was in Q3? It's hard to predict at this point. But could we see that trend extrapolating out into the future? You could, to some degree.

That seems reasonable. Can I ask you also about just your acquisition strategy as we sort of tee up for the playbook into '14 and '15? I mean, you guys had originally targeted, I think, smaller transactions. What are your thoughts toward perhaps looking at some larger acquisitions, not big ones but larger acquisitions, and maybe even at some point down the road, using your balance sheet to perhaps raise some debt or some other manner?

That's a good question, John. When we think about acquisitions, while we've targeted the $15 million to $50 million, that's just an average. We look at things that are smaller than that, and we look at things that are larger than that. So would we look at larger acquisitions? Look at what we did with Bornemann. When we bought Bornemann, we paid about $200 million for that acquisition, because we saw the synergies that would create, and it was a perfect fit into IP business. So we -- when we look at the playbook and when we look at the pipeline that we have there, we've got both large-, medium- and small-sized acquisitions on the radar screen. We've been building that pipeline, and we've been cultivating various targets that are out there. We still like looking at the pump business, oil and gas. We like the valve business. We like thinking about aerospace, because we have such a strong position in aerospace. Our Industrial business in Control Technologies is an interesting business for us also when we think about expanding because focused on energy absorption markets. And we think that we can have some nice benefit there. And as we rightsize ICS and get that business working right, there could be some interesting opportunities associated with that also. So robust pipeline that we're looking at. And we're looking at all different sizes of acquisitions.

And just to comment on the balance sheet, John. So the focus remains our investment grade rating, and that kind of governs the amount of leverage we would have available for a good, solid acquisition. But our goal is to continue to expand the capacity available within that rating. We think the asbestos remeasurement today was another -- a stable result for a third year in a row. That's a positive indicator, stabilizing, I think, the balance sheet and increasing our capacity with investment grade, in combination with the solid results that we've had on a year-to-date basis.

Right. In other words, asbestos not going up. As you grow -- as the company grows, it gives you future flexibility to raise debt, I'm presuming, to do deals. You haven't really done anything since Bornemann, so given the progress that you've made, right, in terms of restructuring the platforms, I guess, I'm just -- was trying to understand, Denise, has your appetite for, perhaps, doing a slightly larger deal increased? And should we may be thinking about executing on more activity in 2014 and again preliminarily? I realized you can't time the stuff, but [indiscernible].

Yes, it's always nice to have the good operational performance that we've had. And obviously, that does improve the capacity that we can have from a capital perspective for us. And so it does. You can look at larger opportunities that you've done in the past. So we just -- we feel very comfortable with the position that we're in right now, and we'll just continue to look at all different types of acquisitions that are out there. We'll look at larger and smaller and medium-sized ones.

And your final question will come from Matt Summerville with KeyBanc.

Just a couple of follow-ups. Tom, you mentioned you're taking what sounds like a pretty substantial maintenance outage in your Motion business. So were you producing them in the third quarter to sort of account for that? And I guess how much expense should we be building into the P&L? And is there anything being added to Wuxi in terms of productive capacity as part of this outage?

Matt, we did build some inventory moving -- leading into the plant shutdown, and it's not uncommon in the automotive space, as you know. We saw some of these shutdowns from our customers last year, to have these kind of shutdowns. I think for us, we typically might do a week's shutdown at the end of the year. We're extending that this year based on the level of -- quite frankly, of activity we've had inside the factory. So the goal is kind of as you're articulating, to have the additional global flexibility to start moving more volumes back and forth to Wuxi and to have a more balanced global platform. We'll be in a better position at the end of next year to do that as we bring the additional equipment online in Wuxi that will allow us to kind of, I think, toggle back and forth more effectively. Our facility in the Czech Republic is -- will continue to be running through this period. And that's where we do a lot of our aftermarket activities, getting ready, quite frankly, for 2014 from a production perspective. So there will be incremental expense, Matt. We haven't given an exact number there. But the way to kind of think about this, the margin profile for kind of Q4 of this year is going to look similar to last year despite higher volumes. So we're going to have to reinvest some of the additional drop from the volumes that we're seeing in Q4 into this year's results, and it gets us back to a margin that's more in line with where we were last year.

Got you. That's helpful. And then with respect to Interconnect, Denise, can you talk about the volume you're starting to see -- you're actually starting to see volume growth in there of -- that's meaningful for the first time in, I'd have to look, but 8 quarters, something like that, a long time. So you're seeing volume. How sustainable -- I'm not saying 15% is sustainable, but what's sort of a sustainable growth rate in volume we should be anticipating? And how much is still left to go in terms of restructuring and repositioning? Because it sounds like you haven't even started the repositioning yet?

There is quite a bit of restructuring that still needs to take place in that business, and we have been executing and really focusing on that. In terms of the volume, the message I want to leave with everyone on ICS is we've got great results in Q3, but this is a journey that we're on. And so we'll have some positive, some negative, but it's going to be a slow, upward trajectory, as we go through time. So we're very happy with the results. We've seen an improvement on a year-over-year basis. We hope to continue to see those improvements as we get -- as we go into 2014. The changes that we have in there right now are very structural in nature. So we are improving the basic structure of how ICS operates, how they go to market, the back end. A lot of change taking place to make it run more efficiently and more effectively. So again, the message is, everybody view this as the journey that we're on. It won't necessarily be a straight upward trajectory, but what you'll see is that over time, we're going to continue to march down an improvement in their financial results for ICS.

In using the same similar analogy, is the end destination then, for operating margin's still 15%? Or are you finding that it can go beyond that?

Well, Matt, I think, given the industries that we're focusing on, the 4 segments in particular, the harsh environment, all of these structural improvements are to angle our business to it's, really, core strength, which is around these more, highly engineered specialized connectors. We think those provide us an opportunity to create more value for our customers and generate a stronger margin profile. We do a lot of benchmarking in those particular sectors. We do think the margins typically are above 15%. So I think our ability to build a platform, to really reconnect with some key customers in these key end markets and reset our footprint and our operating foundation, we should be over time, as Denise articulated, thinking about this business in line with the peers that have produced those kind of results. It's our entitlement, I think, to target that level of performance.

And look back in 2012, the margin that we had for the full year 2012 in ICS was only 4%. This, in third quarter, we're up at 10.9%. We've been building throughout the year. 15% was -- is a good goal -- is a good target for you to think about, but we're not going to stop there. We're going to look to continue to improve this business and continue to get the entitlement that we deserve in this business when we focus in the harsh environment space.

I will now turn the conference back over to Denise Ramos for closing remarks.

Well, let me just thank everyone for joining us on the call today. As you've heard this morning, we're very pleased with our Q3 performance and how we've been able to, once again, deliver on our commitments and move our strategy forward. This is the result of focus and strong execution, and it will continue to create ongoing, long-term value for all the stakeholders. And I look forward to updating you on our progress next quarter. Until then, thank you very much.

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