Melissa Trombetta - VP, IR Denise Ramos - CEO & President Tom Scalera - CFO.

Mike Halloran - Robert W. Baird Shannon O'Callaghan - UBS John Inch - Deutsche Bank Brian Konigsberg - Vertical Research Partners Matt Summerville - Alembic Global Advisors Joe Radigan - KeyBanc Capital Markets Joe Ritchie - Goldman Sachs Joe Giordano - Cowen and Company Nathan Jones - Stifel Nicolaus.

Welcome to ITT's 2015 Third Quarter Results Conference Call. Today is Friday, October 30, 2015. 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. [Operator Instructions].

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

Thank you, Crystal. 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 any remarks we make about future expectations, plans, prospects and other circumstances set out in our Safe Harbor Statement constitute forward-looking statements for purposes of 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 Form 10-K, as well as our other public SEC filings.

We undertake no obligation to publicly update any forward-looking statement 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.

Let's now turn to Slide number 3, where Denise will discuss our results..

Good morning, everyone. I appreciate you joining us as we announce our financial results for the third quarter of 2015. Q3 was yet another solid operational quarter for ITT, as we continue to execute against our long-term strategies and focus on what we can control.

In the quarter we extended our track record of investing in our future, while delivering strong operational results despite the persistent headwinds from the challenging macro environment.

Even with the volatile market conditions, we were able to maintain our strong execution and deliver solid margins of 15% and adjusted earnings per share of $0.63, both of which were nicely ahead of our expectations. Delivering on our commitment, even in the face of adversity, is what we do at ITT.

And I want to tell the Teams all across ITT how proud I am of the way that we collectively pulled together to overcome challenges and create value for our shareholders and customers. That is our culture and that is what we do. So now let me share some perspectives on the Q3 financial results. Organic revenue declined 2% this quarter.

Motion Technologies once again delivered solid top line, with 7% organic growth in automotive friction due to improved global production rates and OEM share gains in key geographies. This was coupled with increased independent aftermarket volumes due to solid execution and a shift in customer buying patterns versus the prior year.

This growth was more than offset by weak general industrial markets and a decline in upstream oil and gas activity due to lower capital spending.

Organic orders were down 9% on a sequential basis, mostly due to reduced capital spending in the oil and gas and mining markets which impacts our low margin projects, coupled with weaker short-cycle baseline pump activity due to global market uncertainty.

As I mentioned, from a margin perspective, we delivered strong adjusted segment operating margins of 15%. Our strong execution in addition to the benefits from proactive restructuring actions more than offset challenges at ICS and the negative impact from pricing headwinds.

Before I move on, let me provide an update on the ICS transformation this year. I'm pleased to report that we're making progress and we're tracking to our previous guidance. We're transitioning out of our facility in Santa Ana, California which we expect to vacate by early Q1 2016. Our new tech center in Irvine is up and running.

And our Nogales plant in Mexico is strengthening its foundation in terms of machining expertise and other production processes. And to support these actions, our internal team is working closely with external manufacturing experts who continue to address the root causes of our issues in an effort to move past these challenges as quickly as possible.

So in the quarter, we collectively delivered solid operating results that are reflected in our adjusted EPS of $0.63 per share which was up 8% versus last year, excluding $0.08 of negative impacts from foreign currency.

The growth also reflects lower corporate costs due to our intense focus on lowering structural costs through efficiency actions and lower environmental costs, as well as lower share count. Now, moving on to guidance. I'm pleased to announce that we're maintaining our total inorganic revenue and adjusted EPS guidance ranges for the full year 2015.

The guidance reflects the favorable operating results we delivered in Q3 and the minor positive impact of the Wolverine acquisition. These benefits are expected to be offset by the more challenging macro conditions we're currently facing, particularly in the aerospace aftermarket and general industrial markets.

In addition to our solid results in the quarter, we also achieved several other notable strategic milestones. We recently closed the acquisition of Wolverine Advanced Materials, a leading global developer and manufacturer of highly engineered specialty materials and components for the automotive and other harsh environment industries.

With the acquisition of Wolverine, we will be able to offer our strategic OEM, brake manufacturer and aftermarket customers an expanded portfolio of highly engineered automotive components, including key braking and sealing technologies.

With leading market positions and long-standing brands, ITT and Wolverine will both have new opportunities to strengthen our capabilities and create long-term value through an expanded presence in key geographies and end markets.

While this transaction will broaden ITT's offering to customers, it will also allow Wolverine to leverage ITT's world class manufacturing capabilities, operating systems and material science expertise to enhance the solutions and service it provides customers.

We have also continued to aggressively advance the Industrial Process optimization which is reflected in their 220-basis points of margin expansion this quarter despite a softening top line.

And we completed yet another year of effective asbestos management, as our annual asbestos remeasurement contributed to a 15% reduction in our net asbestos liability this year. So let's turn to Slide 4 for an update on our three strategic focus areas. Optimizing execution, market expansion and effective capital deployment.

Starting with optimizing execution, our focus on execution is what fueled our better-than-expected Q3 earnings. So let me provide a few examples that highlight some of our value-creating activities this quarter.

First, our Industrial Process business is continuing to generate solid benefits from the actions we're taking to reorganize the business to leverage previous investments while addressing the current realities of the global oil and gas market and slowing project activity.

While we continue to experience top line pressure in terms of project volume and pricing, we're benefiting from operational improvements, including productivity and incremental restructuring savings, as demonstrated by IP's 220 basis points of margin expansion this quarter.

As we move through the year and look ahead to 2016, we continue to evaluate and identify additional opportunities to improve IP's efficiency and reduce costs in areas ranging from facility optimization to a more effective supply chain.

Since we started the transformation of our Industrial Process business into three focused verticals in late 2014, we have announced actions that will reduce IP's head count by approximately 14%. In addition, we're exiting four global operating locations and consolidating into COEs and we have closed and consolidated 12 sales offices.

These activities were heavily focused on right-sizing our upstream facing businesses. In addition, we have exited certain non-core product lines. Not only are we reducing our overall cost structure across the businesses, but we're also leveraging prior investments and capability building, as well as driving efficiencies to reduce corporate costs.

In Q3, we once again drove lower-than-expected corporate costs due to prudent cost containment actions at the functional level. In addition, we incurred lower environmental costs due to more efficient project management and benefits from remediation strategies we implemented two to three years ago.

Finally, I would like to highlight the 15% reduction in our net asbestos liability this year. This significant decline is a cumulative effect of the aggressive strategy that our cross-functional team of experts has put in place to reduce the volatility and uncertainty associated with both the assets and liability.

In addition to the reduced net liability, this team was also able to reduce the expected net cash outflows which in turn frees up additional capacity that can be deployed back into the businesses for growth. Now, let's look at our market expansion activities.

During the quarter, Motion Technologies continued their track record of outpacing the global automotive friction market and we grew our friction OEM business 10%, excluding the impact of currency, bringing their year-to-date total to 13% over the prior year.

In addition, Motion Technologies also experienced strong automotive aftermarket expansion which grew 5%, mostly driven by a shift in a customers' buying patterns.

As a result of Motion Technologies' world class execution capabilities, our material science expertise and our ability to rapidly develop new technologies to meet our customers' evolving demands, our team continues to win strategic long-term platforms that will help fuel our future growth.

In Q3, we were able to secure seven new long-term platforms, four of which were replacement platforms and the remaining three platforms were new wins, specifically for the China market. We're tracking well with our market share gains plan in China, as we continue to win new platforms with western and local premium manufacturers.

Another example of market expansion is in our Control Technologies business, where we're pursuing three significant new long-term strategic aerospace opportunities in adjacent markets, including Rotorcraft and Environmental Control Systems.

In addition, as a result of the Hartzell acquisition, we're already pursuing synergy opportunities on aerospace platforms using ITT's reputation as a top tier supplier in Hartzell's environmental control systems portfolio.

These are the exact opportunities that were envisioned as part of the strategic process that led us to the acquisition of Hartzell. And now moving on to our last focus area, capital deployment. Shortly after the close of the second quarter, we announced the acquisition of Wolverine advanced materials.

I'm happy to report that we closed the acquisition in early October ahead of our initial expectations and the integration into our Motion Technologies business is nicely on track. The addition of Wolverine will give us nice EPS accretion in 2016.

During the quarter, we also continued our phased global investments to further expand our automotive friction capacity to meet our growing customer demands and to address new platform wins. As I look beyond 2015, what I am most pleased about is that we have already made the investments to build the foundation that we can leverage in 2016.

Not only the strategic actions that we have been taking over the last year, but the ones we took in Q3 and those that we will take in the near future, are preparing us for an ongoing challenging external environment next year. So let me give you some specific examples of actions we've already taken.

We realigned each business segment to intensify our collective focus on our end customers. We further optimized our footprint and permanently reduced our fixed cost structures at IP and ICS through Lean and proactive restructuring actions.

We're exiting and consolidating a combined total of 16 operating locations and sales office within Industrial Process. We reset our corporate cost base through efficiencies. We further evolved from a European centric automotive friction supplier to becoming a truly global partner with world class capabilities.

We expanded the depth and breadth of our customer offerings, while at the same time enhancing our long-term platform growth opportunities through the acquisitions of Wolverine and Hartzell. And we've lowered asbestos exposure in legacy liability risk.

All of these focused activities and investments will generate significant financial and customer-facing benefits as we head into 2016. But in addition, we also continued to believe that we have a differentiated opportunity set relative to peers to focus on new actions in 2016 that drive incremental productivity and growth.

So here are some of our value-creating areas of focus in 2016. We will enhance productivity by taking Lean to a higher level across the entire organization. We will significantly reduce the incremental impact resulting from the relocation of certain North American operations within ICS. We will drive global market share gains at Motion Technologies.

We will generate full-year accretion from Wolverine and Hartzell acquisitions. We will deliver an incremental $15 million to $20 million restructuring savings from 2015 actions.

And lastly, recognizing that the macro environment will continue to be challenging, especially for large projects, we're in the process of detailing out additional actions that we will execute in early 2016, with the goal of further generating incremental savings to help offset the expected environment headwinds.

So with that, I will turn it over to Tom to discuss our Q3 results and 2015 guidance in more detail..

Thanks, Denise. Now let's turn to Slide 5. In Q3 organic revenue declined 2% after adjusting for foreign exchange and the net impact of the Hartzell acquisition and a small Q2 industrial product line divestiture at Control Technologies.

The decline in revenue was primarily due to slowing global general industrial market conditions which negatively impacted Interconnect Solutions and Control Technologies.

These declines were coupled with the ongoing global weakness in the oil and gas markets due to lower capital spending levels and deferred maintenance activity that impacted Industrial Process and ICS. Industrial Process delivered mixed results this quarter, with an overall organic revenue decline of 1%.

The decline reflects soft global parts activity due to deferred customer maintenance that drove the aftermarket down 5%. This weakness was partially offset by a 2% increase in both projects and short cycle baseline pumps.

The increase in project activity was driven by strong North American pulp and paper shipments, partially offset by a mid single-digit decline in oil and gas.

While we experienced solid global growth in downstream oil and gas which was supported by strong backlog during the year, these results were more than offset by declines in upstream and midstream oil and gas activity. We also had weak project results in petrochemical and mining due to soft market conditions and difficult prior year comparisons.

Our diversified portfolio helped to partially offset these declines, as Motion Technologies once again delivered a strong automotive quarter. Global friction increased 7% organically, reflecting automotive market growth combined with our recent global OEM share gains.

In addition, the aftermarket grew 5% due to solid execution and a shift in our customers' buying patterns. Moving on to orders, on a sequential basis organic orders were down 9% versus Q2.

Compared to the prior year orders declined 17% due to a significant decline in large IP projects in upstream oil and gas, chemical and mining, combined with difficult comparisons to one of our highest ever order quarters in 2014.

Partially offsetting these declines were solid orders in our Motion Technologies automotive business which was up 5% on an organic basis, driven by an increase in global orders in automotive brake pads where we continued to outpace the market.

It is important to note that given the shift in the macroeconomic environment versus a year ago, we're focused on sequential orders at IP which were down 9% organically. The decline was primarily tied to oil and gas project delays, with approximately 25% of the projects in our pipeline being pushed out between three and nine months.

In addition, we experienced weak baseline pump demand related to deferred customer spending which is partially offset by increased aftermarket due to improved global service activity versus Q2. Third quarter adjusted segment operating income of $90 million increased 1% excluding the $10 million impact from foreign exchange.

This growth is due to strong net operating productivity from our ongoing Lean transformation and significant restructuring benefits from the actions taken at Industrial Process. These gains were partially offset by operational disruption costs at ICS and pricing headwinds in automotive and large projects.

For the quarter, our adjusted EPS of $0.63 per share exceeded our expectations and was 8% higher than the prior year, excluding the negative impact of foreign exchange. This growth reflects solid segment operational performance, effective corporate cost management and a lower share count.

The decline in corporate costs is due to our intense focus on lowering our structural costs through efficiency actions, as well as lower environmental costs. Turning to Slide 6, here you can see that we delivered solid segment operating margins of 15%.

Excluding the impact from the Hartzell acquisition and foreign exchange, margins expanded 30 basis points to 15.4%. As we've highlighted, this expansion was largely the result of strong operational execution that generated over $36 million in gross productivity savings.

These savings were driven by benefits from our Lean transformation, expanded global sourcing and restructuring actions. The productivity gains more than offset the disruption impacts from our ICS business.

Included in our third quarter adjusted segment margins was another quarter of significant expansion in our Industrial Process business which grew 220 basis points to 13.3%.

This expansion reflects the benefits from the actions we have taken to reorganize the business into three focused verticals which allows us to optimize execution while lowering our structural cost base. This realignment will also make us an even more stronger competitor as we navigate through this difficult macroeconomic environment.

And once again, the productivity gains across ITT self-funded 40 basis points of organic investments and helped to absorb the negative mix impact from lower aerospace aftermarket volumes. The investments included development costs for new long-term aerospace platform wins at Control Technologies and ERP system advancements at Interconnect Solutions.

Next, let's turn to Slide 7. As a result of our annual asbestos remeasurement, we recorded a $45 million pretax benefit in the third quarter. This benefit was based on various recent favorable trends and experiences primarily related to lower acceptance rates and lower average settlement values.

This adjustment, coupled with the $124 million pretax benefit recorded in Q2 resulting from our new single-firm fixed fee defense strategy, were the primary drivers of the $174 million reduction in our gross liability in 2015.

Moving on to the asset side, our coverage under insurance settlement agreements which provides more certainty around the timing and value of our insurance receivables, currently represents 53% of the asset. Combining the impact of our liability and asset strategies, we have been able to reduce our net liability by 15% this year.

And finally, from a cash flow perspective, we're continuing to forecast the same annual average after-tax cash outflows for the next five years between $15 million and $25 million.

And for the subsequent five years, we're now able to reduce our expectations by $5 million per year, bringing the new range down to $35 million to $45 million due to the net liability reduction discussed above.

The $174 million reduction in the gross liability, the high percentage of our receivables under coverage-in-place agreements, our 10-year fixed defense cost strategy and the resulting reduction in our future cash flow projections are clear indications that we're effectively managing this declining net asset liability - net asbestos liability.

Finally, let's now turn to slide 8 for a 2015 guidance update. As Denise discussed earlier, we're maintaining are total inorganic revenue guidance ranges for the full year with total revenue down 9% to down 7% and organic revenue in the range of down 3% to down 1% versus the prior year.

While the ranges did not change, we have changed some of the drivers of the full-year performance.

Compared to our full-year expectations given on the Q2 earnings call, we now expect further improvement in project execution in our Industrial Process business which will help to offset the continued softness we're experiencing in the aerospace aftermarket and general industrial markets.

The total revenue guidance also reflects the impact of the Wolverine advanced materials acquisition from October 5 through the end of the year. So let me provide some additional insights into our organic revenue expectations by end market for the full year.

For oil and gas, we now expect to be down in the high single-digit range on a year-over-year basis. The improved outlook is due to the strengthening of our project execution capabilities.

In the industrial markets, we still expect the full year to be down mid-single digits versus the prior year, primarily reflecting weakness in our general industrial markets due to lower-than-anticipated levels of economic activity.

And finally, in the transportation market, we now project low single-digit growth for the full year, slightly lower than our prior forecast, reflecting weaker aerospace aftermarket conditions. Moving on to adjusted EPS, as we mentioned earlier, we're maintaining our adjusted EPS guidance range of $2.45 to $2.55 per share with the midpoint of $2.50.

So despite the challenging macroeconomic environment, we continue to expect to grow our adjusted EPS 11% at the midpoint, excluding the $0.24 negative impact from foreign exchange. The guidance range reflects lower corporate and environmental costs and a minor benefit from the Wolverine acquisition.

These tail winds will be offset by the impact of lower volumes in our high margin aerospace aftermarket and lower general industrial expectations, in addition to unfavorable foreign exchange and a higher effective tax rate due to an unfavorable jurisdictional mix.

From a segment margin perspective, we do expect a sequential step down from Q3, mainly due to the seasonal impacts of a lower aftermarket mix and the dilutive impact from the Wolverine acquisition at Motion Technologies.

In addition, we also expect a decline in our control technologies business due to weakness in the aerospace aftermarket and higher compensation costs. It is also important to note that Q2 is typically a low margin quarter for ITT.

And finally, looking at the Q4 corporate costs, we do expect an increase in corporate costs compared to Q3, due to typical functional seasonality and higher environmental costs.

Looking at the full year, due to the year-to-date favorability, we now expect approximately $45 million of corporate costs and, in addition, we expect our share count to generally remain consistent with our year-to-date results.

So in conclusion, based on our strong year-to-date execution and our effective capital deployment, we're well-positioned to maintain our previous revenue and adjusted EPS guidance, despite the macroeconomic challenges that we continue to face. So with that, let me turn it back over to Crystal to begin the Q&A session..

[Operator Instructions]. Your question comes from the line of Mike Halloran with Robert W. Baird..

Could we talk a little bit about how you're looking at your trajectory from here within your Industrial Process business? Obviously, the orders have been much worse, given the environment, than the actual conversion's been on the revenue line which has really held in there.

Maybe you could give some thoughts on what that trajectory looks like as we exit the third quarter? And then, more specifically, what that impact looks like as you get towards next year when you think about your end markets..

Sure. With IP, when you look at it sequentially, the orders were down 9%. You look at it on a year-to-date basis, they were down 18%. In the quarter, it was down 30%, but last year was one of our highest quarters that we had for them.

So, we're looking at some of these challenges that we've got from a project perspective within IP, largely associated with oil and gas here. The weakness that we have here, we do expect that we're going to - that will impact us as we get into 2016.

But what we've been focused on is looking at reducing the impact of those declines through the restructuring benefits that we've had, aggressively going after productivity efforts and improved execution. We've talked about how we've already made a 14% headcount reduction. We've been consolidating facilities. We've rationalized product lines.

And all of that is going to give us some incremental savings as we get into 2016. Also, while we see that there's been declines in these large projects, we're hopeful that, on small and medium-sized projects, we're going to see some of that coming back next year.

And then, we believe we're going to be well positioned if there is any modest recovery in the short-cycle markets or any resumption of this deferred maintenance activity that we're seeing in key markets..

Your next question comes from the line of Shannon O'Callaghan with UBS..

This one's a little technical, but I guess I'll use my question for it just because it's moving around a lot.

In terms of this corporate line, how do we think about this going forward? Can you split the corporate - the $45 million of this year, can you split that between sort of base corporate and environmental and give us a sense of where those should move, going forward?.

Sure. Shannon, environmental is obviously very specific to site management and developments that are very hard to predict as we manage through the sites in our portfolio.

Generally speaking, our range has been anywhere from about $2 million to $10 million per year and it really is hard for us to anticipate how that's going to play out through the year. But that's the range that we've experienced. We usually start the year assuming it will be towards the higher end, around the 10%.

And then we actively try to manage that down as best we can through proactive site activities, if you will.

So the balance then is the functional cost piece for the most part which has been ranging also between $40 million and $50 million from a planning perspective based on functional execution and the actions we've taken to build a foundation for the corporate team going forward.

One of the other big swing factors - so we think about the three, we've got the functional corporate, we've got the environmental and then we have some investments that are also running through the below the line.

And, based on the market returns for those assets or other benefits that had come out of those assets, that shouldn't - generally has been a little bit of a positive offset for us in the last two years on a below-the-line basis..

Your next question comes from the line of John Inch with Deutsche Bank..

I was just wondering, with my one question here, could we talk to the oil and gas results and orders maybe parsed along the upstream, midstream and downstream framework, maybe perhaps dovetailing back to, I think it was last year you guys did a really good job of trying to drill into the IP business and what you thought was going to be the impact.

So, more what you're seeing now with the orders, how that plays out along those lines and if there's any comment you would make as it pertains to what you thought would be an outlook and, obviously, here we're today. That would be really helpful. Thank you..

Let me start with that, John. From an upstream perspective, when we started out the year, we thought that we would be down around 20% to 25% with the upstream. And then, as we progressed through that - at least this is from a sales perspective, we can talk about orders in a minute.

But we've been able to really get - have good project execution in the IP business. And so we've been able to mitigate the impact of that sales decline us on, on the upstream, as we went through the year and we had really good project execution associated with that. From a midstream perspective, we don't play much in the midstream.

We have a small business in there, but we don't play in that very much. And then, in the downstream, we do have a reasonable position in the downstream. And what we've seen from a downstream perspective, on a year-to-date basis, is that it's been down for us..

And just keeping in mind, the biggest challenge is, certainly in the upstream, the project rollover that we had in the beginning of the year. I would say that our order flow in the beginning of the year was stronger, particularly in the upstream markets and probably stronger than some of our peers. I think our Q3 number.

As we all cycle through this oil and gas environment, projects are going to roll on and off based on where the spending is shifting to. So, there has been more activity in the midstream as of late. That is not one of our core areas of strength. We have been strong in the first half in upstream.

The pronounced declines that we're seeing now, not unexpectedly, are in the upstream and that will continue into the back - into Q4 for sure. And then, downstream has been a little bit erratic. We're still trying to get a good read on where the downstream market is progressing. But when we put it all together, on a year-to-date basis, we're down 18%.

I think it kind of cuts through all the markets and all the quarterly dynamics. These are big, lumpy projects. Last year, for example, we had a $25 million upstream oil and gas project that we're lapping this year. So that creates a lot of additional headwinds in the numbers.

If you take that out of last year, our orders were down 22% in the quarter at Industrial Process. The point being, we're looking across all these kind of factors and one data point is not necessarily indicative of where we're in the cycle, but what we're doing from a planning perspective, as Denise articulated.

The weighting of our internal activities, up to this point, have been in our upstream business. We've been the most aggressive in cost take-outs, repositioning and footprint within the upstream because we clearly can see the signs of where that market is progressing for the short, medium and longer terms..

Your next question comes from the line of Brian Konigsberg with Vertical Research Partners..

I just wanted to ask if maybe if you'd give us a little bit of a taste of what the order profile has been, quarter to date? And, with that in mind and how the trajectory going to the 2016, you kind of talked about before being able to still keep margins relatively flat with the top-line pressure setting in with just some price, but offsetting with restructuring.

Do you think you could still maintain the margin profile going into next year? Any detail would be great. Thanks..

Sure. Brian, I'm assuming your conversation is relative to IP. And from an IP perspective, while we recognize we're going to have challenges from a top-line perspective, because of the project business that we're not seeing come through this year, what we're planning on doing is increasing our margins in IP next year.

And that is because of all the actions that we've been taking that - with the headcount reductions, the consolidating facilities, consolidating sales offices and then just continuing to drive LEAN and productivity through that business.

So, with a 10% or so decline on the top line or whatever it is that it turns out to be - it could be more or less than that - our goal is to increase our margins to help compensate for some of that decline on the top line..

And as you guys are aware, obviously, the project business - at the high end of the project business where we're seeing the biggest year-over-year challenges, those are the lowest margin activities we have in our entire ITT portfolio.

So the impact of a decline in project revenue for us is a significantly lower impact from a decremental margin perspective than we would see elsewhere in the portfolio - especially when you consider, as many of you know, we have pass-throughs. A large chunk of that revenue is purchased components that we then do some assembly and pass through.

So, the net effect on our operating income from a decline in projects is much less impactful than other parts of the portfolio. Just wanted to reemphasize that..

Your next question comes from the line of Matt Summerville with Alembic Global Advisors..

I wanted to spend a minute on ICS. It looks like your disruption costs, if you will, were $5 million Q1; $6 million Q2; and, based on the math in your slides, $7 million Q3. So, they optically look like they are getting a little worse before they get better.

What's the full-year expectation and how much of that can you gain back, if you will, in 2016, just in terms of the disruption costs? And then also, how much of the $15 million to $20 million of restructuring flows into ICS next year as well? Thank you..

Okay. Let me start with that. In terms of ICS, as we said on the last call that we had, we expected to see the same amount or close to the same amount - of disruption in the second half of the year as we did in the first half of the year. And we're tracking pretty close to that. We're making progress with the work that's being done there.

The Santa Ana facility that we've got is planned for closure early in 2016. In our Nogales facility, we've been focused on really strengthening that foundation, focusing on machining and other production processes that's going to improve efficiency with that.

So, the goal has been to get this facility up and running and really being the facility that we want it to be as we go forward, recognizing that this is going to be a strong facility for us, a center of excellence for us with the Interconnect business there. So, we're progressing according to what we said.

We should expect to see margins begin to improve as we go throughout 2016 and we think that we're going to be able to see the benefits of that flowing through in 2016 for us..

For sure, Matt. This is a nice opportunity for us in 2016 to progress the margins in the ICS business. We're currently getting hit with duplicative costs, because we're maintaining a footprint that's larger than we will be maintaining next year. There's some one-time activities.

We have a big surge of critical defense contracts that we're working on right now. So, we're progressing through the back half of this year.

But I think fundamentally, as Denise articulated, this is a nice source of opportunity for us to offset some of the headwinds we're seeing elsewhere in the portfolio and to drive some strength in margins and strength in execution across ICS..

Your next question comes from the line of Joe Radigan with KeyBanc..

In Motion Tech, excluding the FX headwind, operating margin was almost 23% and that's with price pressure and negative mix. So, obviously, execution there continues to be very good.

Can you help me understand the FX impact on the bottom line? Because in Q1, you had, I think, a 15% top-line headwind and it was actually favorable for margin; in Q3, a 13% top-line headwind and then 350 bps negative for margin.

And then, obviously, there's seasonality in Q4, but given the change in the aftermarket cadence there and Wolverine - how should we be thinking about revenue and margin in that segment on a year-over-year basis in Q4?.

Joe, as you look into Q4, I would expect to see pretty similar FX impacts as we flow in, maybe a slight touch-up. And that's the mix of the impact, obviously, from the revenue and from the OI perspective. So, what we saw in Q3 probably is consistent with what we're going to see going into Q4, with maybe a slight 10, 20 bps tick up from there.

It's a global business, we're now, obviously, growing in China and in North America. So it's really the reflection of this evolving portfolio, Motion Technologies, where we didn't have as large of a global presence as we have today. So we're seeing a lot of the cross-currency events.

Having said all that, the currency is kind of moving a little bit more these days below the 112 range that we forecast it at. So there could be more pluses and minuses as we go through Q4. And then lastly, I think one of the areas that's really hard for us to project around foreign exchange is transaction.

That's kind of a reflection of just the flow of activity during the period. And that's a little bit more inconsistent from a forecasting perspective. But if you put all that together, Joe, I would say a little bit of an uptick in the foreign exchange pressure on margin in Q4 relative to Q3..

Your next question comes from the line of Joe Ritchie with Goldman Sachs..

Two questions really, just follow-ups. One, on your orders in IP this quarter, what impact, if any, did DXP and the termination of that contract have to your order rate? And the second follow-up I had was on ICS. Denise, you talked about some margin improvement next year. Clearly margins have been down significantly this year.

Is it your expectation that margins will at least get to double digits in ICS in 2016?.

I'll start with the DXP question. Yes, I would say no discernible impacts to the orders in the quarter. We've been aware of this transition with DXP for a long time. We've been managing through it. Clearly, the North American markets that we're serving are facing the end-market headwinds, so I would say the bigger factor in the quarter is the market.

As we look forward through the re-establishment of our distribution capabilities in North America, we're very excited about the strategic opportunities we have to reenergize our distribution capabilities in North America.

It's going to give us an opportunity to go into some new markets, new geographies and have a much more direct presence with some of our key customers and contacts there. So, not really something that's meaningful to us in the short term, but as we progress into next year, for sure, we like the strategic opportunities that this reset will give us..

And then, Joe, from an ICS perspective, when we think about margins and the trajectory of margins as we get into next year, there will be a slow ramp-up as we go throughout the year. And our expectation is that we will get to low-double digit in 2016..

Your next question comes from the line of Joe Giordano with Cowen..

I'm going to cheat here and try to ask a couple of questions on one topic and see if that's okay..

We've never had such a clean slate here of one question per analyst. But, do what you got to do--.

I want to talk about MT. I just was curious if you could parse out your growth in U.S., Europe and China.

And I was curious about your exposure to Volkswagen and what that might mean on - if you see a customer shift? Is it just a movement from one customer of yours to another? Or is it worse if it potentially goes to Japan where you may not have as much exposure? How do you look at that?.

Let me answer the Volkswagen question. So, in terms of Volkswagen, our main exposure to Volkswagen is largely in Europe. We have strong market share in Europe. We're on numerous platforms. So, if there is some impact of VW in Europe, we expect that, that volume would go to other car manufacturers and we're probably on those platforms.

So we see very minimal or no impact to us in Europe. And, again, the Volkswagen volumes that we've got, about 85% are centered in Europe. So we don't expect any big impact on that in the volumes in Motion Tech..

Just to give a geographic perspective on what we're seeing in the quarter from a sales perspective, the U.S. was up for us in the mid-teens and this is on automotive friction. Europe has continued to be a good story for us, up high-single digits in the quarter.

In China, for us, was - our volumes were up, but there's flattish revenue because of some of the pricing in the marketplace. That situation in China, we expect to resume growth in Q4. Certainly there's some recalibration in the market.

But we have programs and platform startups in Q4 and our indications are that China will get back to growth in Q4 and give us, for the full year, a solid mid-teens-level growth in China. And that will continue into 2016 as we continue to start new wins that we have in China.

So we'll have new volumes for us driving through China and we'll all be watching how the government incentive programs play through the Chinese market. But, for us, it's a lot about share gains and new platforms in China..

Our next question comes from the line of Nathan Jones with Stifel..

I'm going to cheat as well and ask for a clarification before my question. Denise, you said a slow ramp-up in ICS and get to low-double digit.

Is that exiting the year at low-double digit or low-double digit for the full year?.

It could be for the full year. We've got to see how we end up in Q1 here for next year. It's a very complex move that we've made here. The goal is that it would be low-double digit in 2016. And we'll just monitor and track it up to that point. We'll give you better clarity in February when we talk about our 2016 numbers. But that would be our goal..

Obviously, the IP backlog has helped to prop up revenues in that business this year. You came in with a very healthy backlog. Looks like you started to really start to chew through that in the last couple of quarters.

Can you talk about maybe where the backlog is now relative to where it was when you came into 2014, what the difference in pricing is, what the difference in mix is and how that all plays together looking out to next year?.

Sure, Nathan. Part of the reason the backlog is coming down at the rate it is, is we have really amped up our execution capabilities in the engineered-systems business. As you know, we entered this space about seven years ago and we're continuing to improve our operational capabilities there.

So, the objective going into the year was to improve on our delivery and I think, as we progress through the year, we've actually seen nice progress there. And that has helped us drive shipments out the door that we've been working on. Some of these are 9- to 12-month lead-time-type projects. We have seen those go out.

But I would say that was how we expected the year to play out and, quite honestly, we're executing and performing at a slightly higher level as we go through the cycle. As a result of all of that, the project backlog certainly has come down from where we began the year.

Total backlog relative to the end of last year is down about 17% organically and the weighting of that is certainly on the project side. I think our baseline and aftermarket businesses, in totality, has been relatively flattish. So there's been some ups and downs as we progress through the year.

But I would say the story for sure in our backlog is getting these projects out the door as efficiently as we can. And, obviously, the replenishment rate. As we indicated, those new projects are getting delayed three to nine months, so we're not seeing the backfill in the projects.

But, we're building a much more capable Industrial Process segment to be able to go out and win new projects when they are available and demonstrating our execution this year is a part of that strategy as well..

And pricing and mix in the backlog?.

I think pricing in backlog, we don't - there's no repricing of backlog. Obviously, it was set in last year's conditions. The mix is, I would say, towards kind of the higher end. There's been a weighting of unconventional upstream in our backlog, but the mix is decidedly towards projects, as is often the case.

Pricing is continuing to stay difficult, certainly on new activities that are coming through. We're seeing up to 15% pricing headwinds. We're doing better than that, on average, but we're seeing projects facing those kind of headwinds. Not seeing that kind of pricing challenge in the aftermarket or baseline business.

But, as expected, the project pricing has been difficult. And we're staying disciplined through the cycle.

So the projects that we're bringing in right now, I would say the team is being very disciplined in making sure that we're filling the backlog up next year with projects where we can improve our margin profile because we know what it's been like over the last couple of years with project margin, how thin it can be.

And I think we're maturing into the space to realize that we can be more selective in the projects that we're going to go after..

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