Illinois Tool Works Inc. (ITW) Q4 2011 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is also being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to Mr. John Brooklier. Thank you. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to ITW's Fourth Quarter 2011 Conference Call. As is our normal practice, our CEO, David Speer; and our CFO, Ron Kropp, had joined me to discuss our solid fourth quarter financial results, as well as our 2012 earnings forecast. Here's the agenda for today's conference call. David will provide brief commentary on our fourth quarter highlights. Ron will then cover our Q4 financial results in more detail. I will then talk about our fourth quarter operating highlights based on our reporting segments, and then Ron will come back to talk about our full year '12 and Q1 forecast. Finally, we'll open the last 30, 40 minutes of the call to your questions. [Operator Instructions] A couple of housekeeping items. Please let me remind you that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding operating performance, revenue growth, diluted income per share from continuing ops, diluted net income per share, restructuring expenses, free operating cash flow, acquisition activity, tax rates, end market conditions and the company's related forecast. Please refer to our 2010 [ph] Form 10-K for more details on our forward-looking statement. One other note. The telephone replay for this conference call is (800) 704-0516. No passcode is necessarily. The playback number will be available until 12 midnight on February 14. Now let me introduce David Speer, who will highlight our Q4 accomplishments. David?

Thank you, John. We're pleased with both our fourth quarter and full year operating results. Beginning with the 2011 fourth quarter, we had a solid total revenue and organic growth of approximately 10% and 6%, respectively. Our North American and Chinese businesses led the way, with organic revenue growing approximately 9% and 10%, respectively. While European demand slowed, we still produced organic growth of nearly 3% in that geography. We delivered strong diluted EPS growth of 36%. We produced operating margins of 15%. That was substantially higher than the year-ago period. 7 of 8 reporting segments reported operating margin improvement in Q4. We generated robust, strong free operating cash flow of $617 million, representing a strong free cash to net income conversion rate of 140%. It also represented a second consecutive quarter where our free cash flow conversion was well over 100%. For the full year 2011, we delivered record revenues of $17.8 billion, with our organic revenues growing 7.5%. We generated $2 billion of income, which was a record from continuing operations. This represented a strong operating EPS growth of 41%. And we produced operating margins of 15.4%, which was 80 basis points higher than the full year 2010. All in all, it was a very strong fourth quarter and 2011 for ITW. These results placed us at a solid starting point for 2012. Now let me turn the call back to Ronald Kropp, who will give you a more detailed analysis of our Q4 operating performance.

Thanks, David. Good morning, everyone. Here are the highlights for the fourth quarter. Revenues increased 10% primarily due to higher base revenues and acquisitions. Operating income was $647 million, which was higher than last year by $165 million. Operating margins of 15% were higher by 270 basis points. Diluted income per share from continuing operations was $0.90, which was higher than last year by $0.24 and was in the middle of our forecast range of $0.86 to $0.94. Finally, free operating cash flow is very strong at $617 million or 140% of net income. Now let's go to the components of our operating results. Our 10.4% revenue increase was primarily due to the following factors: First, base revenues were up 5.9% with North American base revenues increasing 8.7% and international base revenues up 3.0%. Within international, Europe was up 2.6%, China was up 9.8% and Australia and New Zealand was down 2.1%. Next, acquisitions net of divestitures added 4.7% to revenue growth. Finally, currency translation decreased revenues by 0.4%. Operating margins for the fourth quarter of 15% were higher than last year by 270 basis points. The base business margins were higher by 330 basis points with the higher sales volume contributing 160 basis points, and the positive impact of non-volume items increasing base margins by 170 basis points. The increase in base margins from non-volume items was due to better variable margins, lower overhead costs and favorable corporate adjustments. Unlike the prior quarters of 2011, price cost had only a minimal margin effect of negative 10 basis points. In addition, the overall margins were lower by 30 basis points due to higher restructuring expenses, and the dilutive impact of acquisitions reduced margins by 20 basis points. The net margins from acquisitions, including amortization of intangibles from step ups, were 10%. Excluding amortization, acquisition margins were 21.2%. When I turn it back over to John, he'll provide more details on the operating results as he discusses the individual segments. In the non-operating area, interest expense was higher by $10 million primarily due to the new long-term debt issued in August, and other income and expense was favorable by $5 million. The fourth quarter effective tax rate of 27.2% was higher than last year's rate of 25.6%, but was lower than the forecasted rate of 29%, which added $0.02 per share to earnings. The full year 2011 tax rate was 22.2% or 28.6%, excluding the one-time benefit in the first quarter related to the Australian tax case. Our cash position decreased $141 million in the fourth quarter as our free operating cash flow of $617 million was utilized for acquisitions of $110 million, dividends of $174 million and debt repayments of $544 million. For the full year, revenues were up 15.4%, and margins were higher by 80 basis points. Excluding the $0.33 favorable impact of the Australian tax case, full year EPS from continuing operations was $3.75 or 30% higher than 2010. Our total revenue increase for the full year of 15.4% consisted of a base revenue increase of 7.5%, acquisition impact of 4.8% and favorable translation of 3.1%. The higher full year base business margins of 120 basis points were partially offset by the dilutive impact of acquisitions of 40 basis points. For the full year, we generated $1.6 billion of free operating cash flow, a $400 million increase from 2010. This free cash flow, plus debt increases of $1.1 billion, were utilized for dividends of $680 million, share repurchases of $950 million and acquisitions of $1.3 billion. For 2012, we expect to generate more than $2 billion of free operating cash flow. Approximately $700 million is expected to be used to pay dividends, with the remainder allocated to acquisitions and share repurchases as appropriate. Turning to the balance sheet. Total invested capital decreased $250 million from the third quarter, primarily due to lower working capital and currency translation. Accounts receivable DSO and inventory months on hand were the same as of third quarter levels at 58.7 days and 1.8 months, respectively. For the fourth quarter, capital expenditures were $94 million and depreciation was $83 million. ROIC for the fourth quarter was 14.5%, which was higher than Q4 last year by 120 basis points, primarily due to the stronger operating results. On the financing side, our debt level decreased $573 million from the third quarter due to lower Commercial paper borrowings and currency translation. Our debt-to-capital ratio decreased to 28% from 32% last quarter. We had cash on the balance sheet of $1.2 billion as of December 31, almost all of which is held overseas. During the fourth quarter, we acquired 7 companies, which have annual revenues of $86 million. As a result, for the full year 2011, we've acquired 28 company's representing annualized revenues of $867 million. 81% of our acquired revenues in 2011 were focused on our emerging market and platform growth initiatives. Although we paid a higher overall revenue multiple for the 2011 deals, we acquired higher growth, higher-margin businesses in 2011. Acquisition margins, excluding amortization, were 16.2% for full year 2011. In January 2012, we closed on the Brooks Instrument acquisition. Brooks has annual revenues of $210 million and will become part of our growing Test & Measurement platform. Serving end markets such as mobile computing, microelectronics, LED, energy and life sciences, Brooks manufactures devices that measure and control the flow of gases and fluids in applications where gas and fluid must be regulated with ultra-precision accuracy as part of the manufacturing process. I will now turn it back over to John who will provide more details on our fourth quarter operating results.

Thanks, Ron. Let's begin with our Transportation segment, where Q4 '11 organic revenues grew 8.7% compared to the year-ago period. As usual, the segment's Q4 organic revenue growth was led by our auto OEM businesses. These units produced worldwide organic growth of nearly 8%, a notable achievement when you consider that worldwide auto builds only grew 1% in the quarter. It's clear that our product penetration, that's our ability to put additional value-adding products on car platforms, continues to be a real differentiator for the ITW auto businesses. Taking a closer look at our organic revenues, our Q4 North American and European base organic revenues increased 8% and 7.7%, respectively. Notably, our Asia-Pacific auto OEM businesses produced an organic revenue increase of more than 23% in the quarter with substantial growth coming from our Chinese auto businesses. In the other pieces that relate to this segment, our auto aftermarket businesses, Q4 organic revenues increased 5.6%, and growth emanated both from our transportation materials, as well as our consumer-based businesses. Finally, our truck remanufacturing and parts and service business grew organic revenues nearly 20%, largely due to continuing strength associated with Oil & Gas field exploration in the Western United States and Canada, a good strong performance from our overall Transportation segment. Moving to our Power Systems & Electronics segment. Once again, they produced double-digit organic growth in Q4 versus the year-ago period. Total segment organic revenues grew more than 10% in Q4 and once again, was led by our Welding businesses. Our worldwide Welding organic revenues increased nearly 23% in the quarter, with North America and international Welding revenues growing roughly 25% and 16%, respectively. These strong growth metrics worldwide were tied to high levels of project activities associated with Oil & Gas, heavy equipment and infrastructure. Please note that both our European and Chinese Welding businesses grew organic revenues substantially in the quarter. It was a different story in our electronics category where weakening end market and softer consumer demand resulted in less impressive results. Our total electronic businesses produced an organic revenue decline of 7.7% in the quarter and both our PC board fabrication and our other electronic businesses both generated negative organic growth in the quarter. Moving to industrial packaging. Q4 organic revenues grew roughly 4% versus the year-ago earlier period, and this was largely a tale of 2 geographies. In our total North American industrial packaging businesses, organic growth was 7.3% in the quarter, with our strapping and equipment units posting organic growth of nearly 11%. It was a different story internationally. Our total international industrial packaging units generated organic growth of only 1% in the quarter, with international strapping and equipment organic revenues growing about [ph] 1.5%. In addition, our worldwide protective packaging business grew organic revenues nearly 6%, while our worldwide stretch packaging units generated a revenue decline of approximately 3%. Moving to food equipment. Segment organic revenues grew 3.9% in the quarter versus the year-ago period, and that was directly related to better-than-expected equipment sales in North America and improving organic revenues for our worldwide service businesses. Remember, service represents roughly 1/3 of the overall segment activity. In North America, total food equipment organic revenues increased 6.1%, with equipment sales growing 7.5% and service sales growing 4.1%. North American equipment sales were boosted by an improving CapEx spend by customers in areas such as restaurants, supermarkets, as well as some colleges and universities. Internationally, equipment sales increased only about 0.5% as CapEx spending lagged in Europe. The better news was that our international organic revenues for our services businesses grew roughly 4.5% in the quarter. Let's move on to our construction product segment, where our organic revenues grew 2.6% in Q4 compared to the year-ago period. Probably not a big surprise that the biggest contributor to organic growth was due to better construction demand in North America, especially in the United States. In North America, organic revenues grew a surprisingly strong 9.1% as all construction categories produced increases in the quarter. Notably, in the residential businesses, organic revenues grew more than 12% as U.S. housing starts continue to show modest signs of improvement. And in our commercial construction and renovation categories, organic revenues increased 7.5% and 7.7%, respectively. Not surprisingly, the news was less favorable on the international side. Total international construction organic revenues were essentially flat in Q4 with Asia-Pacific declining more than 2%. That's largely because the Australian and New Zealand businesses were negatively impacted by disappointing housing starts in the quarter. The better news was that our European construction businesses produced organic growth of roughly 3% in the quarter. Thanks in large part to reasonable end-market demand in countries such as France, Germany and the U.K. In our Polymers & Fluids segment, organic revenues grew a little more than 3% in the quarter versus the year-ago period. Q4 organic revenues reflected some modest pullback in demand in a handful of the worldwide industrial base niche markets, particularly in Europe and parts of Asia. In Q4, worldwide polymer organic revenues grew 3.2% as top line contributions from our international and North American businesses were roughly equal. We did experience, however, a loss on an international polymers contract that accounted for the -- for most of the segment's year-over-year margin decline. The smaller worldwide fluids portion of the segment produced organic revenues of 3.2% with nearly all of this growth coming from international businesses and associated end markets. By specific geography, North American and Asia-Pacific led the total segment's organic revenue growth, increasing 6% and roughly 5%, respectively, in the quarter. And European organic revenues were essentially flat in Q4. Moving to our other construction-related segment, decorative surfaces. Organic revenues grew 3.5% in the quarter versus a year-ago period, and organic revenues were largely tied to contributions from the North American businesses, where organic revenues increased more than 5% in the quarter. North American organic revenues were driven by Wilsonart's premium product positioning in the high pressure laminate category, as well as increased demand from the office furniture category. The modest improvement in the major construction categories, especially Commercial sector, which is a big component of the segment, also contributed to organic growth. Internationally, organic revenues grew a little bit more than 1% as stronger growth in Asia was mitigated by slower growth in Europe, particularly in France and the U.K. And finally, on our All Other segment. Organic revenues grew 6.5% in the quarter versus a year-ago period, much like what we saw in earlier quarters. Revenue growth was largely driven by the Test & Measurement businesses, where organic revenues increased 15.6% in the quarter. That's largely due to increased CapEx spending across a broad set of end markets and geographies. Notably, Test & Measurements organic revenues grew 18% in North America and 13% in Europe in the quarter. In our other businesses, consumer packaging, we saw organic revenues increase roughly 4% as our beverage, packaging, foils and decorating businesses all contributed to organic growth. Finally, our industrial/appliance businesses produced an organic revenue decline of a little bit more than 2% in the quarter due to ongoing weakness in demand in the worldwide appliance sector. This concludes my segment remarks. I'll now turn the call back over to Ron, who will cover our 2012 forecast. Ron?

Thanks, John. For the first quarter of 2012, we are forecasting diluted income per share from continuing operations to be within a range of $0.89 to $0.97. The low end of this range assumes a 6% increase in total revenues versus 2011, and the high end of the range assumes a 9% increase. The midpoint of the diluted EPS range would be 6% higher than last year, excluding the first quarter 2011 impact of the Australian tax case. For the full year 2012, our forecasted EPS range for continuing operations is $4.02 to $4.26. This range assumes a total revenue increase of 5% to 8%. The EPS midpoint of $4.14 would be 10% higher than 2011, excluding the impact of the Australian tax case. Other assumptions included in this forecast are exchange rates holding at current levels, restructuring costs of $70 million to $80 million for the year and a tax rate range between 28.5% and 29.5% for the first quarter and full year. Note that beginning in 2012, we are discontinuing the monthly release of rolling 3 month revenue data. We believe that providing this data monthly has resulted in a disproportionate amount of focus on short-term revenue data versus long-term operating performance. We will continue to provide detailed revenue data each quarter by segment as part of our normal quarterly earnings release. I'll now turn it back over to John for the Q&A.

Thank you, Ron. We'll now open the call to your questions. [Operator Instructions] First question please.

Our first question comes from John Inch.

This seems to be going around this morning, this perspective that somehow, you've lowered your guidance. I don't see any sort of a tie into the 3% to 5% organic, but maybe you could just walk us through that. Is that true? Have you lowered your guidance in some manner versus the December analyst meeting?

No, actually. So in the December analyst meeting, what we had talked about explicitly was only base. And we said base for the full year was 3% to 5%. We did talk about translation being negative, although we weren't specific around a number and certainly, that's moved down a bit since December. And then acquisitions, again, we weren't explicit. We have some long-range goals around that, but we weren't explicit around the 2012 guidance. So kind of the way it shakes out is base, 3% to 5%; acquisitions, 4% to 6%, probably in the lower end of that; and translation based on current rates, about a negative 2%, which gets you to the 6.5%.

Okay. So you are reiterating the 3% to 5% base, is that correct?

Yes, that's correct.

Absolutely, yes.

While we're on the subject of, maybe sort of -- just sort of dotting Is and crossing Ts, translation of down to -- what would that equate to in terms of EPS? I think there's a perspective that somehow translation is a massive headwind for you guys this year.

It's about $0.07 year-on-year.

Okay. And then just lastly, the Brooks deal, what kind of a multiple did you pay for it? And are there sort of other similar types of bolt-ons that you're going to build out as part of that? I think it was owned by Emerson before. Was it not?

Yes.

Some time ago, yes.

Yes, it was some time ago, yes.

The multiple we paid there, yes, we don't give specifically purchase price numbers. But it's in the normal range of what we paid historically between 7 and 8x.

EBITDA.

EBITDA.

7, 8x EBITDA. And that's a multiple of revenues, like 1 to 2?

Yes, it's probably closer to 2 than 1.

Next question from Jamie Cook. Jamie L. Cook - Crédit Suisse AG, Research Division: Two questions. Just one, what are your assumptions for a price cost in 2012? And then my other question is on the construction side of the business. It sounded like you guys were a little more up [ph] -- I mean, in your revenue numbers show that -- and a bunch of other companies have been a little bit more positive on U.S. construction, whether it's housing starting to improve or Commercial. So how you're sort of feeling about that business and has your assumptions on the -- I mean, do you think you're -- I think you guided 3% to 5% construction at the analyst day. I mean, is there any room for upside there, or just how you're feeling about that business in the U.S., specifically?

Okay, I'll ask Ron to talk about the price cost first, Jamie, and then I'll talk about construction.

So on the price cost, as you probably have seen, it's gotten better as we’ve moved through 2011. So the beginning of last year, I think it was negative 100 basis points, then it was 80, then what's it was 50. And this quarter, it was 10. What we've seen is, especially in the fourth quarter, plastic and steel really going down but have stabilized in the first quarter. So we'll have some carryover benefit from some of the price increases we've put in place, especially in the back half of the year. So overall, in the first quarter, we're looking at between 10 and 20 basis points favorable margin impact. And for the full year, something like 30 to 40. Jamie L. Cook - Crédit Suisse AG, Research Division: Positive.

Positive. Jamie L. Cook - Crédit Suisse AG, Research Division: Okay, great. And then, yes, David, just your thoughts on have we finally hit the inflection point?

Finally hit the inflection point. Well, let me put it this way, Jamie. We have changed our view since December on residential housing in the U.S. In December, we were less bullish. We were more looking at a housing start number for the year that was close to 600. And I think our view now based on some activity levels we've seen over the last several months, we feel more comfortable with the numbers likely to be more like 650 to 670 for 2012, which would be a nice improvement over where we started. So, yes, we do expect some upside. And while we've seen some early indications of that, as you know, this is early in the year and too hard to pencil that in as a straight line, but we do see signs that suggest that we should finally see some reasonable improvements in 2012 in the residential housing numbers here in the U.S. Jamie L. Cook - Crédit Suisse AG, Research Division: Okay. And what about your commercial construction, your thoughts?

Well, commercial construction is made up of so many different categories. We've got some categories that are moving up and some that are still moving down. So all in, I think it will be slightly positive year for commercial construction here. But I don't think it'll be a strong overall year. We still got some of those categories that are large, that are still on a square footage awarded basis comping negative numbers. But there are categories like healthcare and some education categories, where we're seeing stronger positive comps. So I think it's going to be a mixed bag depending on project type. But it would show us some signs that I think as the year progresses, we should see better numbers coming out of Commercial.

Next question from Andy Kaplowitz.

David, if we look at the global M&A markets, we had a strong maybe first 3 quarters for you guys last year, and then maybe slowed down a little bit and then you just did Brooks in January. And I think Ron had talked about 4% growth from acquisitions, which roughly equates to $700 million. But is there -- is that conservative? Is it possible that activity can pick up here? Are you seeing any signs of that?

It's certainly possible activity could pick up. I mean, as we went into last year, we talked about the acquisition of [indiscernible] a lot and it changed a lot during the year because of the market conditions. And so we've been really trying to focus on those handful of deals that we think makes sense, and that are robust enough to stay in the pipeline and actually offer opportunity. So I would say to the pipeline, opportunities are there. The question is to whether they'll actually end up in transaction. So we clearly, given the nature of the deals we did last year, we were able to close several larger deals, which was part of our focus in some platforms that we really think have good long-term growth. Test & Measurement being one of those and Brooks being a fit there. And certainly the automotive aftermarket being another one, and a large deal we did with SOPUS early in 2011 being another one there. So we continue to remain optimistic. But frankly, the M&A environment is still challenging in terms of finding the right kinds of opportunities and fits at reasonable valuations. But I expect that we'll continue to be successful in finding those types of deals as we're diligently looking for those fits.

Okay. Ron, if I could ask you, maybe I'm confused, but if I look at the 1Q guidance, I see relatively decent revenue and maybe slightly lower than I expected incremental margins. And you just told us the price cost will be positive in 1Q. So if I look in maybe the restructuring you're doing for the year, is it more front-end loaded or is this something else going on in 1Q or am I just confused?

It is more front-end loaded. Our overall estimate for the year is $70 million to $80 million. $25 million to $30 million of that we've got in the forecast for the first quarter. So that's having about a 50 basis point negative impact year-on-year in first quarter margins.

Okay. And so that's the big difference in the thinking?

Yes. Also, acquisitions are having a greater impact in the first quarter than they had in the fourth quarter. Partly due to some of the stronger margin acquisitions like SOPUS, falling off and some of the other carryover acquisitions having lower margins.

Got you. But no change in other things, no change in the core business, correct, Ron?

No, no.

No. But it should be noted that the restructuring expenses, as we see them for 2012 will be much more directed towards international and, in particular, Europe as we get our businesses right sized from what we expect will be a very slow growth economic environment in Europe.

We also had a very strong first quarter last year, so the comp is a bit difficult as well.

Next question from Ann Duignan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Can you guys talk a little bit just following on what you said about expectations for Europe, can you talk a little bit about how the quarter progressed? And we always use your industrial packaging business as kind of the leading indicator. Maybe you could tell us what you're seeing by country and by end market in the region?

Well, Europe, as you saw from the fourth quarter numbers that I think John talked to, industrial packaging, the numbers there are relatively weak. And that's the second quarter in the row we've seen that. So we are seeing a pretty broad weakness across Europe. I mean, the stronger numbers are coming out of Germany but even the strength in Germany is lower than it was 2 quarters ago. So we're clearly seeing slowing across the European industrial markets in what we're seeing and which is reflective in our 2012 forecast. And overall, we see Europe as a flat market by and large for us for 2012. There will be some pockets where we'll see stronger growth. But industrial packaging, we expect will be one of those markets that we'll be seeing growth that will be in the low-single digits. Ann P. Duignan - JP Morgan Chase & Co, Research Division: But flat overall isn't -- that's not that bad.

No.

No.

Remember that when we talked -- when we're in New York, we were talking about our expectations for Europe for the year. And our expectations were basically sort of flattish, with more -- be more problematic in the first part of the year. And things getting a little bit better as the years progress. I don't think there's anything we've seen in our numbers that are -- that have been terribly surprising in any of our segments as it specifically relates to Europe. And as I said in my comments earlier, we've had some better than we expected in Welding, even parts of food equipment on the service side were a little better than we expected. But if you look at, to David's point, if you look at industrial packaging, which is the reasonable barometer, some of the industrial production activity there right now is reflective of sort of flat demand.

But even with that, know that we said that in Q4, we had some reasonable increase in equipment sales in Europe in the industrial packaging area. So there are clearly signs that things are moving, but I'd say at a cautious and somewhat slow pace. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. That's exactly what I was looking for was just some color around how the quarter ended or progressed versus what you told us in December. Maybe you could tell -- speak a little bit to the same around the food service sales in North America. They were -- the equipment sales were much stronger. Do think that, that might have been driven somewhat by pull forward for 100% depreciation?

Well, there's always -- in food equipment, North America, there's always some pull forward in the dealer network as they look at stocking incentives and things like that, that drive their behaviors. And that's a year-end phenomenon that we typically see. So clearly, some of that, but also, clearly, some pickup in demand in some categories where orders had been out there, if you will, and finally placed for deliveries. So I think we can see it’s some of both. Some of it's the normal year-end phenomenon of stocking the shelf heading into a new year and picking up on rebates and some of it’s actual project activity that's been released. But I think as we've highlighted for 2012, we don't expect the equipment side to be a huge step up in terms of increased activity. It's going to be largely dependent on CapEx and some new store formats, but we do expect to see continued improvement in the service business, which was up nicely on the quarter.

And then, I think the fourth quarter typical pickup had very little to do with the tax incentives. It's really tied more to rebates and annual rebates.

Our next question is from Deane Dray.

First question is a bit controversial, but we need to get it aired out. And maybe you can share for us about this activist involvement and specifically, does it change any of the scope and time frame that you all talked about, your own internal simplification initiative?

You're referring to the relational?

That would be the one.

Yes. Well, obviously, relational, like many of our stockholders have perspectives on our business, and we're pleased to engage them in understanding what their views are, which is what we did during the year. As it turns out, in our discussions with them over several different time periods, much of what relational was highlighting is things that we were already focused on. Some we had been more public in discussing and some we had not been. So clearly, there is -- there are some ideas they have that are much aligned with what we were already working on. So I think there's been a very productive dialogue and discussion with them. As it relates to some of the initiatives that we've been working on, as you know, we've been talking for a while about driving more simplification. In our business, we've talked in the past about some of the things that we do on a centralized basis to do that. It's clear that as we look across our portfolio of businesses today, and particularly in the last 3 or 4 years where we've acquired hundreds of businesses and several billion dollars of additional revenue, it is time for us to go back and take a look further at those strategic sourcing opportunities for sure and also some of those structural opportunities that exist inside the business segments as we're grown in these segments now in some new areas that offer the opportunity for probably some more thoughtful level of consolidation and increased focus. All things we can do without destroying the decentralized approach to end customer access, end customer intimacy. So, yes, I think to say that the production or the dialogue has been productive, I would say yes. It's largely been in line with things that we were already focused on and it will clearly, I think that those dialogues will clearly help, I think, accelerate our progress in those areas as we move forward, because we are committed and we remain focused on long-term shareholder value creation. And there's no question that hitting some of these complexities and simplicities will drive better returns in the long run, but without taking apart the successful model that the company has been built on and it is our 100th year anniversary.

Is there anything in your guidance this year that's baking in either some special restructuring charges or actions on this simplification initiative? And how might we see this manifest during the course of 2012?

There are no specifics built in around that, because we are still developing the parameters for what our expectations are. But it's clear that as we formulate specific plans, that as they become apparent and as we've begin to implement that those metrics will become clear and I expect will have some impact in 2012. But I would expect the larger impacts to come in 2013 and ahead as these plans, you might imagine, would take somewhat longer time to put in place and realize the significant benefits that could be available.

And just last one for me related to this. Any update on the sale of the finishing business? And if you -- if this ends up being blocked, if that comes back into operating results, isn't that an accretive event?

Let me answer about the process. I'll ask Ron to answer about the last part of the question. As you know, in April, we entered into a purchase agreement with Graco to sell the operations of our finishing business for $650 million in cash. Our goal all along has been to work with Graco and the FTC to get that completed. The FTC has raised a number of objections, which Graco is now in the process of addressing. And our hope is that in the coming weeks, that Graco will be able to get the FTC's clearance to move forward with the transaction, in which case, we hope to be able to close that transaction in the coming months. But obviously, FTC approval is paramount to making that happen or a consent order with some remedies that the FTC will find acceptable to make that happen. So that has not yet happened. And there's no clear timeline for that happening, although our lawyers tell us they would suspect that the FTC would reach some kind of a decision over the next 2 to 3 months. So that's where the process stands. I'll let Ron answer the second half of your question.

So, Deane, if for some reason as we work through this process it ends up being blocked, certainly, we would want to explore other alternatives for this business, including do we want to have a broader sale process? So I wouldn't assume that it would necessarily come back into continuing operations immediately. But certainly, if it did, it would have some accretive impact. But I would not assume that.

Our next question comes from Eli Lustgarten.

Let's just follow-up one final point. Is there a reasonable expectation that we can see an accelerated divestiture program from ITW? I mean, that's the part that keeps coming up when I talk to clients all the time as part of this agreement with the activists. So is that a reasonable expectation that maybe we'll see some more puts and takes? The acquisition program is well-developed but the divestiture is sort of been viewed as few and far between.

Let me say this, Eli, we have ramped up our divestiture activities over the last 3 years. And certainly, we continue to look at the portfolio in that regard and certainly, the finishing business sale is a clear example of that. So, yes, we're spending more time on that. And we have, in fact, more businesses right now in the queue for divesture, potential divestures than we have in, certainly in my tenure at the company. So over the last, I think, 10 years, we've divested nearly 100 businesses. So while most of them have been smaller, there have been some that have been larger. So, yes, I would say that divestiture is something that clearly part of our ongoing look at our portfolio of businesses. And based on our current strategies and trajectory, I would expect that we would see more divestitures going forward.

And, Eli, we can't really comment publicly around any specifics, around potential changes in the portfolio in advance of any [indiscernible].

Yes, just following on that. You indicated 81% of your acquisitions were in emerging markets this year, which is probably a very strong statement for the company. But in the last 6 to 12 months, we're looking at emerging markets that are quite muted as far as growth rates and likely to stay that way at least with the first part of 2012. Is there -- have you -- can you talk about the impact of the weaker emerging market economies on these acquisitions as they come into ITW? Is this causing a little more dilution than you expected? Are you handling this? Are you not seeing this weakness that we're hearing across the board and from a lot of countries? Can you give us some color on what's going on as we went through these 81% acquisitions?

So first of all, Eli, the 81% of the acquired revenues relates to both emerging market, growth initiatives, as well as new platform opportunities. So that's not all emerging markets. Certainly, we did a number of deals in emerging markets, those tend to be the smaller bolt-on deals. I think we did 9 emerging market deals in 2011. And as we model out these acquisitions, especially given the high growth rates we've seen historically, we do build in some mitigation of that going forward. Obviously, places like China can't grow at 15% to 20% forever. So while certainly it will have impact on our results, it won’t have an overall impact on our investment returns or anything like that. And while emerging markets are muted, they're muted from high double-digit increases. So even next year, we're looking at high-single digits to low double-digit increases for Asia Pacific, for instance.

Next question from Andy Casey.

Just a lot of questions have been answered, but a question on the quarter. Can you give a little more detail on the food equipment operating margin, specifically the non-volume and overhead piece? Those kind have been bouncing around year-over-year each quarter this year and yet a pretty big improvement, 480 basis points in Q4. Can you give us a little more color behind that?

Yes, sure. So price costs was basically flat in that segment year-on-year. We had overall lower overhead cost that contributed about 110 basis points. We had some inventory-related adjustments, pickups in inventory reserves, change in inventory standard cost. This segment is also on LIFO, and there's some positive LIFO adjustments that had an impact. And then we had some overall improvements in variable margin rate that added 120 basis points. For a variety of reasons, mix is one. We also had some unfavorable issues in our service business last year in the fourth quarter. So all that together added up to positive 480 basis points.

Okay. And then, Ron, on the price cost, should that improve as we go through 2012?

Well, definitely, I think the second quarter will be the strongest. And then if you remember, we started getting more and more price increases put in place in the back half of the year. So the impact of those will mitigate. So 10 basis point, 10 to 20 basis points in the first quarter; second quarter, stronger than that. Overall, for the year, 30 to 40 positive.

And at the moment, we're seeing fairly stable prices for most of the major commodities. So lacking any further upward movement, I think Ron's point of view is that the trajectory should be reasonable going forward. But we have to wait and see. Steel and plastics have certainly leveled off at the moment, but they were fairly volatile mid-last year.

And then one last one, just kind of a clarification, I think, of an answer that you gave to Eli's question about the divestitures and you answered, I believe, something to the effect of it's one of largest chunks of revenue that's been up for divestiture. Are you including the finishing business in that comment?

Well, the finishing business is obviously up for divestiture, it's in discontinued operations at the moment and we're readily trying to sell it. So, yes, I would be including finishing in that comment.

Next question from Stephen Volkmann. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Wondering if you can just help me think about the incremental margin for 2012. It looks like, if I'm calculating it right, it's kind of low 20s is the way you've given your guidance at the midpoint. I guess, I felt like price cost probably is a slight positive for you in 2012. And obviously, you had some restructuring. I think we talked briefly about it in the analyst day, which should have some benefit as well and then I think you had a couple of fairly high margin acquisitions last year. So the step up accounting, the short-term step up on that was probably a little higher than usual. So I felt like there were a few tailwinds going into 2012 and so, I guess, I was a little surprised that the incremental wouldn't be a little higher. So I guess, what am I missing with the offset, or are we just being a little conservative?

So what you're looking at is the total company incremental, which includes restructuring and acquisitions. The base is substantially higher than that, more typical in our 35% to 40% range for the year. So certainly, restructuring, higher restructurings, mitigating the overall company incrementals as well as acquisitions. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Okay. I guess, that does it. And then just a quick one. Ron, I think you mentioned that you'd have a fair amount of cash left over for purchases and repurchases of stock. It looks like you have enough to do both your acquisitions and some repurchases. But then you said most of your cash is in Europe. Does that have any implication vis-à-vis repurchasing?

Well, certainly, to the extent we have cash overseas, that's not just in Europe, but overseas generally, that makes it more difficult to use that for U.S. investments of which share repurchases is one. What we do is we tend to keep our cash overseas for overseas investments. So to the extent we're buying companies overseas, we use that cash. We also are using our overseas cash for emerging market investments, Greenfield investments, putting up plants in China, for instance. We could bring it back. There would be a tax cost to that and if we ever needed the cash, we would do that. But we're perfectly happy leaving it there for our overseas investment opportunities.

And easier on a short term. Credit facilities is necessary, yes, sure.

Yes. We have plenty of credit facility available and plenty of free operating cash flow in the U.S. in '11 and '12 to use for share repurchases or U.S. acquisitions. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Excellent. And, I guess, I would assume on the divestiture commentary that, that might be a little more skewed toward North America?

Not necessarily.

I think the current pipeline with finishing in it, would describe it as such, but I wouldn't put that down as a thesis, no.

The next question from Henry Kirn.

The Welding business was really strong. Was there stronger-than-normal year end activity or any changes to competitive dynamics from the recent sale of one of the key competitors?

I think the Welding business is just clearly continue to power along on a strength of a couple of really hot end markets. Oil & Gas and heavy equipment have been very, very strong and the demand and needs for equipment and consume [ph] is in those categories continue to strengthen. So those are the primary drivers in our view as to what's really driving that organization at the moment.

Yes. I would echo David's comments. If you look at it and you talk about it by geography, I mean, North America, very strong. But even the international side, diluted to some of the growth coming out of Europe and China, I mean, double-digit growth in both cases. Significant growth coming out of Europe, surprisingly strong growth. So I think it's a function of -- in a reasonable -- very, very strong demand, good positioning in terms of our products, good technology. This is a very, very strong business for us, and we remain optimistic about its prospects for 2012.

Okay. And on the decision to stop providing the monthly revenue updates, could you talk a little bit more about what went behind that and do you intend to update guidance less frequently as well?

Well, I think to Ron's point, when he at least introduced the subject that we were going to eliminate it is that our belief is that over the last number of years, it's caused people to take a very, very short-term focus around not only revenues but organic revenues. And while we certainly note that organic revenues are important, we'll continue to report those out on the quarter. We'll give you all the components of organic revenue as we've always done. So I think our view is that on a quarterly basis, you're going to get more -- you'll get more trend data from us as it relates to all the different metrics. And so we don't think it's a big take away and it allows us to really focus on all the metrics that are important to ITW, not only revenues, but margins, Return on Invested Capital, things that are very, very important to the ITW story. So we think it's a more balanced approach on a go-forward basis.

Much more reflective of the way we report our results internally and manage the business.

Yes. I would say -- around the topic of forecasting, updating around forecasting, we clearly have the ability to -- in public forums, as we're attending different conferences. We have the ability to give people trend data during the quarter. So our plan is to try to keep people abreast of the recent developments in the quarter and I think directionally, you'll be able to get a sense from us as what we're seeing in the quarters.

Next question from Rob Wertheimer.

I just had one sort of bigger-picture question. Out of curiosity, it seemed as though at the investor day, you've talked and you've been talking today about some simplifications, some consolidation within units and maybe some 80-20 of the acquisition process itself resulting in higher quality or higher growth deals, maybe fewer of them. How has that impacted your business unit managers? The idea that you can sort of come and grow and add businesses below you and grow your way up the chain. Is that a cultural and philosophical shift? And are you doing anything proactively to do deal with it or is it maybe not that big a deal? I'm just curious what's bubbling up from the ranks.

No, it is the shift, for sure. But we've been building momentum on that now for several years, talking about scale does matter on these acquisitions even at those levels. But first of all, strategy managers. So strategy is about how do these acquisitions fit with the long-term strategy and growth prospects of that segment? And so I think the process over the last several years has been moving the focus on acquisitions to really strong strategic fit with the segment that we're trying to grow and looking more at our business as a series of platforms. And where does that potential acquisition fit within that platform structure? How will it accelerate our growth in attractive markets? What kind of technology is it going to bring us? And how will that leverage longer-term profitable growth that we would find attractive as opposed to it's a deal in an adjacent space that we might be able to do something more with. So much more strategic and I think a much more thought through in terms of long-term impact, which means that it can still be a bolt-on acquisition, but the fit has got to be a lot stronger and a lot better vetted with, I think, more people than perhaps in the past.

That’s helpful, David. And just one quick follow-up. Have you had any increased turnover at the business unit manager level? Are you able to retain the top-quality managers you've got in the same way?

No, not to my knowledge, we haven't had any significant turnover. I haven't looked specifically at numbers at that level. But, no, we have not had any significant turnover as a result of what I just described. It clearly is a shift in terms of the way we ask them to think and operate but it's also still utilizing their skills of understanding their local markets and the opportunities and how to better leverage those against a larger platform view of how we strengthen our market positions on a global basis, which is what our customers in our markets expect today. Not just being strong in one geographic market in one country. Our major customers want us to be able to offer those opportunities on a global basis. And it's hard to do that if you're just looking at a one-off opportunity.

Our last question comes from Ajay Kejriwal. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Just one clarification, if I could, on the divestiture comment, Dave. I thought I heard you say you have more in the pipeline compared to what you've done in the last 10 years. And you've done about 100 divestitures. So was your comment more in terms of numbers are just the quantum?

Just the quantum. I mean, it was really about -- I didn't mean to suggest we have more 100 in the pipeline. What I meant is that any moment in time, we would typically have 4 or 5 in the pipeline. And now we have somewhat more than that. And the process is more active as a result of our strategic planning process. We've done a portfolio review of our businesses within each platform and have identified those that could be likely divestiture candidates. So we have a much more robust process for dealing with that, which, I think, will lead to a more reasoned approach to how we manage the actual divestiture of businesses going forward. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Good clarification. And then on Brooks, looks like a nice add to the T&M platform. Maybe if you can talk about the opportunity to build that platform out further? And then just on Brooks, any color on margins and the synergy opportunities?

Well, Brooks is as was pointed out, is a solid Test & Measurement business that comes with high margins and great growth prospects, well-positioned in some nice end markets that we think will bring some good long-term growth opportunities. A number of Brooks’ customers are also customers of others in our Test & Measurement group. As you can see from the slide that we presented, in the package today, well-spread revenues with about half the revenues coming from Asia, Europe and the Middle East and about half coming from North America, very much precision equipment that measures and controls the flow of gasses and fluids through electronic interfaces. So very precise use in the production of high-quality products, mobile computing, microchips, microelectronics, LED, life sciences. So some very interesting high-growth markets that we think will be good solid markets for us to continue to grow in. And you might notice some of these end markets are markets we've talked about in some of the other Test & Measurement acquisitions that we've done are also important like some of the acquisitions in the Instron area and with the Speedline electronics and others. So we think a very solid piece in a number of high-growing market spaces globally. And this is a market-leading position with good margins. So we think this is definitely something we can leverage into an even bigger business globally.

Thanks to all who have joined us on the call today. We will talk to you later, and have a good day. Thank you.

Thank you. And this does conclude the conference. You may disconnect at this time.