Illinois Tool Works Inc. (ITW) Q3 2012 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to the ITW Third Quarter Earnings Release Teleconference. [Operator Instructions] Today's conference is being recorded. If there are any objections, please disconnect at this time. I'd now like to turn the meeting over to your host, John Brooklier.

Thank you, Dory. Good morning, everyone, and welcome to ITW's Third Quarter 2012 Conference Call. Joining me on today's call is our President and acting CEO, Scott Santi; and our CFO, Ron Kropp. Scott, Ron and I will discuss our strong Q3 financial results, our updated 2012 forecast, as well as our long-term strategic initiatives. And as always, we will take your questions. Before I review today's agenda, let me make a few comments about our succession planning announcement from last week. Our Board of Directors named Scott Santi to the role of President and Chief Operating Officer as part of our normal succession planning process. In addition, Scott was also appointed acting Chief Executive Officer following the decision by David Speer, Chairman and CEO, to take a leave of absence in order to fully focus on his health. On behalf of everyone at ITW, Scott, Ron and I send along our very best wishes to David. David, we're thinking of you and all your friends at ITW say get well. Now here's the agenda for today's call. Scott will highlight our Q3 financial results, as well as talk about our early [Audio Gap] stage progress we've made on our long-term initiatives that we publicly introduced earlier this year. Ron will then cover our Q3 financial results in more detail. I will then talk about our Q3 geographic performance in detail segment results. Finally, Ron will update you on our Q4 and full year forecast. Finally, we will open the call to your questions. [Operator Instructions] We have scheduled 1 hour for today's call. Moving to the next slides very quickly, [audio gap] the presentation contains our financial forecast for the 2012 fourth quarter and full year, as well as other forward-looking statements identified on this slide. We refer you to the company's 10-K for 2011 for more details about important risks that could cause actual results to differ materially from the company's expectations. Also, this presentation uses certain non-GAAP measures, and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the appendix of this presentation and also on our website at www.itw.com. Finally, the telephone replay for this conference call is (888) 566-0396. No passcode is necessary to access the replay, and the replay will be available through midnight, November 6, 2012. Now let me turn it over to Scott. Scott?

Thank you, John. Good morning, everyone. I also want to begin by sending along my personal best wishes to David Speer, who has been a leader, a mentor and a friend to me throughout much of my career at ITW. In the meantime, I want to assure everyone that it's business as usual here at the company. As noted in our announcement from last week, I've spent my entire 30-year career at ITW, and over the course of that time have had management experience and leadership responsibility in every one of our operating segments. We also have a very deep and talented management team who average more than 20 years of experience with the company, and I can assure you as, that as a management team, we remain focused on our 2 major objectives: Delivering solid earnings on a quarterly basis; and successfully implementing our enterprise initiatives to make ITW an even better company in the years ahead. As to our third quarter results, I was very pleased with our ability to enhance our profitability, [audio gap] even as we dealt with revenue headwinds in geographies such as [audio gap] in China. Our double-digit earnings per share growth and strong operating margin improvement in the third quarter clearly reflects our focus on our differentiated 80/20 operating model. I'll also note that we continue to return significant levels of cash to our shareholders. Through the third quarter, we have returned more than $1.9 billion of cash via dividends in our share repurchase program. Finally, some updates on our 3 enterprise initiatives: Business structure simplification; strategic sourcing; and portfolio management. We remain fully committed to these initiatives and implementation plans around each are well underway. Our divestiture activity thus far in 2012, including our Industrial Finishing group and pending Decorative Surfaces transactions, underscore our commitment to reposition our business portfolio to focus the company on our best long-term growth return and margin opportunities. We also continued to make solid real-time progress on our business structure simplification and strategic sourcing initiatives, and we look forward to sharing additional details and operating metrics around the enterprise performance benefits we expect to generate from all 3 of these initiatives at our December 14 investor meeting in New York. Now let me turn the call over to Ron.

Thanks, Scott, and good morning, everyone. Here are the highlights for the third quarter. Revenues decreased 1.7% due to unfavorable impact from currency, partially offset by higher organic and acquisition revenues. Operating income was $763 million, which was higher than last year by $49 million, representing income growth of 6.8%. Operating margins of 16.9% were 130 basis points higher compared to last year. Diluted income per share from continuing operations was $1.12, which included $0.03 of after-tax gains on divestitures. Excluding the divestiture after-tax gains, we finished at $1.09, which was at the upper end of our forecasted EPS range of $1.03 to $1.11. While international demand continued to slow, we were pleased by the continued positive levels of North American demand. Overall, we had a strong third quarter earnings performance reflecting our established 80/20 operating discipline and continued overhead management cost. Now let's go to the components of our operating results. Our 1.7% revenue decline was primarily due to the following factors: Based revenues were up 0.9%, with North American-based revenues increasing 3.9% and mixed international-based revenues that overall, were down nearly 3% year-over-year. John will discuss the geographic mix in more detail later in the call. Acquisitions net of divestitures added 1.4% to revenue growth, and currency translation decreased revenues by 4.1% largely due to a weaker Euro. Operating margins for the third quarter of 16.9% were 130 basis points higher than Q3 2011. Based business margins increased 200 basis points, with higher sales volume contributing 20 basis points. The positive impact of non-volume items increased based margins by 180 basis points versus last year, primarily due to 80 basis points of price cost favorability, as well as strong management of overhead cost. In addition, total operating margins were lower by 30 basis points due to the dilutive impact of acquisitions. The net operating margins from acquisitions, excluding amortization and other acquisition accounting items, were 11.7%. Margins were also lower by 30 basis points due to higher restructuring expenses versus the comparable period last year. Looking at working capital and cash flow, accounts receivable DSO of 61 days was about 2 days higher than last year, mainly due to the impact of currency, and inventory months on hand remained consistent at 1.8 months. ROIC for the third quarter was 16.3%, which was 90 basis points higher than Q3 of last year. Our ROIC continues to run at our 15% to 17% target range as a -- and is significantly above our cost of capital. For the third quarter, net cash provided from operating activities was $635 million, with capital expenditures of $90 million resulting in free operating cash flow of $545 million, which was 104% conversion to net income. On a year-to-date basis, we have generated cash flow of nearly $1.2 billion, which was approximately $200 million better than the same year-to-date period last year. We expect to end the year with close to 100% conversion rate of cash flow to income from continuing operations. Turning to capital structure, our capital allocation priorities continued to be as follows: Our first priority continues to be organic investments, especially focused on our key growth platforms in emerging markets. Examples of organic investments include R&D spending for new product innovation, additional investments in manufacturing capacity and restructuring projects which have long-term margin benefits. Our next capital priority is dividends. During the quarter, we paid dividends of $169 [ph] million and our current dividend yield is about 2.5%. Any excess capital after organic investments and dividends are used for external investments, either share repurchases or acquisitions. We evaluate allocation between these investments based on the best risk-adjusted returns. During Q3, we continued to be active with our buyback program and repurchased $416 million of shares, which brings us to $1.4 billion in share repurchases through the third quarter of this year. As of the end of Q3, we have approximately $2.5 billion of authorized repurchases remaining under our buyback program. Through the third quarter of 2012, we have returned over $1.9 billion to our shareholders through share repurchases and dividends, which was 75% of our available capital. In addition, we utilized $62 million for acquisitions in Q3, the majority of which continue to be focused on our growth platforms in emerging markets. Also during the quarter, we took advantage of the fair book credit markets and issued $1.1 billion in 30-year bonds at an interest rate of 3.9%. Both our debt-to-capital ratio and debt-to-EBITDA remained consistent with last quarter at 33% and 1.4x, respectively. Our cash balance overseas is nearly $2.1 billion, and we have plenty of debt capacity to make additional [audio gap] investments. Now I want to spend a few minutes updating you on the status of the Decorative Surfaces transaction. In August, we announced that we entered into a definitive agreement to divest a 51% interest in our Decorative Surfaces segment to CD&R, a private equity firm. Between CD&R's equity investment and third-party financing by the new entity, we will receive approximately $1.05 billion at closing, which we expect to occur within the next few weeks. We will record a significant after-tax gain on the transaction upon closing. Going forward, we will deconsolidate this business from our operating results and record 49% of the ongoing net income of the entity. Due to the entity's interest and amortization expense, we expect our 49% share of these results to have a minimal ongoing P&L impact. Because we had retained a 49% interest, the gain on the transaction and ongoing equity income will be reported as current income from continuing operations, not discontinued operations, and prior-period results will not be restated. As Scott mentioned, this divestiture aligns with our portfolio management initiative, where we will continue to selectively divest businesses that no longer fit our core platforms or our long-term performance objectives. I will now turn it back over to John, who will provide more details on the operating results as he discusses the results by geography and individual segments.

Thank you, Ron. Let me take a few moments to review our Q3 geographic revenue trends, most of which will come as no surprise to any of you. Excluding the impact of currency, our total revenue growth totaled roughly 2% in Q3, with organic revenues accounting for approximately 1% of that growth. Similar to earlier quarters of 2012, our North American businesses delivered the strongest organic growth in Q3 with North American organic revenues increasing 4% in the recent quarter. It's clear that North American end market demand largely led by the U.S. economy, remains in reasonably good shape. Once again, total international organic revenues were weaker, declining a total of 3% in the quarter and key geographic breakouts include European and Asian Pacific organic revenues decreasing 4% and 1%, respectively. The only glimmer of better international revenue news came from South America, where our organic revenues increased 3% in the quarter. Most notably, Brazil's organic revenues grew 2% in the third quarter. Now moving to our Q3 segment table of results, total company organic revenues increased approximately 1%, with contributions led by our Power Systems and Electronics segment, which grew organic revenues 4.5% and our All Other segment, which grew organic revenues a similar 4.5%. Notably, all of our segments produced operating margin improvement in the quarter thanks to favorable price cost dynamics and the strength of our 80/20 business process focus. We produced operating margin improvement of 260 basis points from both our Food Equipment and Industrial Packaging segments. And in addition, our operating margins for Power Systems and Electronics improved 220 basis points. As Ron noted earlier, total company operating margins hit 16.9% in Q3, 130 basis points better than we did a year ago. Now let's take a closer look at our reporting segments, beginning with our Transportation segment. Organic revenues grew 1.4% in Q3 versus the year-ago period. Once again, our Auto OEM business was a key contributor to organic growth, with worldwide organic revenues increasing a robust 9%. Both our North American and International Auto businesses produced organic growth of 9% in the quarter. Notably, our European Auto business produced organic growth of 4%, representing the third straight quarter where our strong European product penetration and positive customer mix more than offset a negative car build, which actually declined 6% in the quarter. That's the continuation of great results from our Europe Auto team. Congratulations to them. One other note, our European -- I should say, our Asia Pacific Auto OEM business largely led by our China businesses grew organic revenues more than 20% in Q3. In our 2 other businesses in this segment, organic revenues for our Auto Aftermarket business declined 8% in the quarter, and that reflects weaker consumer demand in a variety of global end markets. Our Truck Remanufacturing business produced organic revenue growth of 2% and that's based on ongoing demand for our specialty trucks and related service from customers in Canada, Western United States and that's associated with energy development projects there. In our Power Systems and Electronic segment, we benefited from strong demand from our electronics customers and moderating but still positive North American welding trends. Total segment organic revenues increased 4.5% in the quarter. In Electronics, our worldwide organic revenues grew a strong 11% in the quarter. Our Electronics Assembly business increased organic revenues almost 30% due to strong order rates from a key electronic customer with new product launches. On the other side of the business, organic revenues for our Component businesses were not nearly as good in the quarter. Organic revenues declined 4% as key customers were negatively impacted by weak consumer demand for more basic products such as cell phones and computers. In our welding category, it was clearly a tale of 2 geographies in the quarter, while our total organic revenues grew only 2%, our North American organic revenues grew at a more solid rate of 5%. North America oil & gas, as well as heavy equipment OEM customers continued to have reasonable demand for our welding equipment and specialty consumable products. Led by weakness in China shipbuilding, our international organic revenues declined 6% in the quarter. I might point out, however, that if you take a look at our Welding business in Europe, we actually produced flat organic revenues in the quarter. In our industrial packaging segment, our business continue to generally reflect industrial production trends in the major geographies. In aggregate, segment organic revenues grew very modestly in the quarter versus the year-ago period. Our total North American Industrial Packaging organic revenues grew 2% while our total International Industrial Packaging organic revenues declined 1%. More specifically, in our Signode Steel and Plastic Strapping Equipment businesses that provide end of the line packaging of finished goods across a very broad set of markets, worldwide organic revenues declined 3%, with International North American organic revenues decreasing at similar rates. The best news in this segment continued to be our Stretch Packaging business. Worldwide organic revenues grew 10%, based on contributions coming from increases in North American film volume and new business with customers in the beverage and food segments. And similar to last quarter, silage and agricultural-related demand also drove organic growth in the quarter. In our Food Equipment segment, North America continued to outperform the international side. Our total segment organic revenues increased a very modest 30 basis points in Q3. In North America, organic revenues grew 5%, with equipment sales increasing a very encouraging 6%. The equipment category was led by sale gains from our baking, slicing and cooking businesses. Meanwhile, our North American service business has increased organic revenues 2%. Internationally, organic revenues fell 4% as end market weakness with institutional customers persisted in countries such as Italy and France for our Food Equipment products. As a result, equipment sales declined a total of 8% in the quarter. And the only bit of good international news was our Service business, which grew organic revenues a very strong 6% in the quarter. Moving to our construction segment, ongoing weakness in Europe and Asia Pacific offset our positive performance in North America. And as a result, segment organic revenues declined 2.8% in the quarter versus the year-ago period. On the international side, organic revenues declined 6% as Europe and Asia Pacific revenues fell 8% and 3%, respectively. In Europe, construction in markets continued to be hampered by both public and private spending, particularly in the commercial construction category. The European retail segment also showed signs of further weakening in Q3. In Asia Pacific, organic revenues declined largely due to weak commercial tool sales in Australia and New Zealand. Not surprisingly, it was a better story for us in North America, driven by improving residential fundamentals around housing starts and new housing permits, our Residential Construction businesses grew organic [audio gap] 7% in the quarter. And while we haven't yet seen a major inflection point in the new housing market, we fundamentally believe much better days are ahead for our Residential-related Construction businesses. Both our Commercial and our Renovation Construction businesses produced organic revenue -- organic growth rates I should say, of 1% in the quarter. In our Polymers and Fluids segment, organic revenues were negatively impacted by weak European end market conditions in the Polymers and Hygiene sector, as well as low-margin business we exited in the quarter. Segment organic revenues declined 6.7% in Q3 versus the year-ago period. In our worldwide Polymers and Hygiene category, organic revenues fell 9% as sales declined in Spain, England, France and Germany. Our worldwide Fluids organic revenues declined only 2% as the MRO-oriented basis of this sector was more in line with industrial production trends in various worldwide geographies. A couple of notes on our soon-to-be divested Decorative Surfaces segment, organic revenues modestly declined in Q3 due to weakness in international end markets. Accordingly, organic revenues decreased 1.7% in Q3. In North America, organic revenues grew only 1% in the quarter, in part due to a decrease in product demand associated with lower inventory levels in some of the major big-box stores in the United States. And internationally, organic revenues declined 6% due to slower end market demand in key geographies such as U.K., Germany and China. Finally, in our final segment, All Other. The key contributor to the segment was once again our Test and Measurement business. Organic revenues for this business grew 12% in Q3 based on ongoing CapEx spending for value-added structural testing equipment in North America, Europe and China. Tests and Measurement was also helped in the quarter by a onetime sale of equipment to a key consumer electronic customer. Our other major business in this segment, Consumer Packaging, produced flat organic revenues in Q3 as mid-single digit organic growth from our global Packaging Solutions businesses was offset by organic revenue declines in the worldwide Graphics and Decorating businesses. This concludes my remarks about the segments. And I'll turn the call over to Ron, who will cover our 2012 forecast. Ron?

Thanks, John. Before I provide the details of our forecast, note that both our fourth quarter and full year 2012 forecast now exclude operating results from Decorative Surfaces after the expected closing date, as well as the expected after-tax gain on the Decorative Surfaces transaction and any related transaction expenses. The forecast also excludes any ongoing P&L impact from our 49% equity interest in the new entity. Before our year-end earnings release, we will provide you an updated forecast that incorporates all of these impacts from the Decorative Surfaces transaction. For the fourth quarter of 2012, we are forecasting diluted income per share from continuing operations to be within a range of $0.86 to $0.94, which assumes a total revenue decline of 1% to 4%. This forecast includes only one month of Decorative Surfaces results in the fourth quarter, which reduced our fourth quarter revenue growth by nearly 4% and our fourth quarter EPS range by $0.03. This forecast also assumes continued softness in end markets, particularly internationally. The midpoint of the Q4 diluted EPS range of $0.90 would be flat versus the prior year. For the full year 2012, our forecasted total revenue growth is now between 0% and plus 1%, versus our prior revenue range of plus 1% to plus 3%. Our forecasted EPS range for continuing operations is now $4.06 to $4.14. The new EPS midpoint of $4.10 is $0.01 lower than our forecast from July, and is driven by a $0.03 reduction from having only one month of Decorative Surfaces in the fourth quarter and a $0.05 reduction from base businesses and acquisitions. This is partially offset by a $0.03 increase from the Q3 divestiture gains that we've previously discussed. A $0.03 improvement due to stronger currency rates versus July and a $0.01 benefit from higher share repurchases. The EPS midpoint of $4.10 would be 9% higher than 2011, excluding the Q1 2011 tax benefit related to the Australian tax matter. I will now turn it back over to John for the Q&A. John?

Thank you, Ron. We will now open the call to your questions [Operator Instructions]

[Operator Instructions] Our first question comes from Ann Duignan with JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Can you give us a little bit more color on your Industrial Packaging business, what you saw going on throughout the quarter as we progressed into the quarter, both in North America and internationally, it being so coincident with economic activity?

Yes, Ann, this is Scott. I would say that the results were fairly steady throughout the quarter. In North America, running flat to down a couple of hundred basis points throughout the quarter and in Europe, down 3 to 4. But no big trends one way or the other as we move through the quarter.

Yes, we had a nice quarter from stretch packaging in that segment. Overall, they were up 10% and some of that was related to film volume in North America related to food and beverage. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And as you said, silage, I didn't realize you were exposed to silage, so that's the good news, something that I've heard this year.

Yes. Ann P. Duignan - JP Morgan Chase & Co, Research Division: And my follow-up question is just a little bit more color on the restructuring efforts and the spend in the quarter, how things are progressing. Just a little bit more deep dive on all of the transformation programs, please.

Well, so as we disclosed in our forecast, our overall restructuring spend for the year is expected to be between $100 million and $110 million, which is about $30 million to $40 million higher than kind of a normal run rate that we would have. Year-to-date, we've spent $76 million, so we're looking at about $30 million spend in the fourth quarter which is similar to what it was in the third quarter, and a lot of that incremental spend at both Q3 and Q4 is related to us working through our business simplification initiative and starting to take some actions around the management organization as we move to put the appropriate leaders in place at the divisions and starting to make some changes there. Certainly, more to come as we move through that initiative in 2013, but we're starting to see -- we're starting to take action here, starting to see some of the cost related to that.

Our next question comes from Rob Wertheimer with Vertical Research.

I wonder if you could give any detail around the price cost benefit that you saw. I don't know whether that's [indiscernible] Resins or whether it's more broad-based than that, start there.

We continue to see a significant price cost benefit in the third quarter. We also had a pickup in the fourth. Overall, it was 80 basis points across the company, but we really saw it in every segment. So it's pretty broad-based. We did see a pickup in Resin towards the end of the quarter, but we think that's going to stabilize and perhaps go down in the fourth quarter. The biggest segments where we had impacts, Polymers and Fluids was positive 130 basis points in price cost; Industrial Packaging, 100; Power Systems, Electronics, 100.

Okay. And then just generally speaking, the margins in food were really quite good, obviously on -- not so much on revenue. So was that anything in particular in restructuring? Is that your competitive environment getting better? Maybe if you could just sort of comment on the trend line there.

Sure. The primary drivers are really a focus that we've had in that business for the last 18 months, so really around reapplying 80/20 in a fairly aggressive and focused way, and we're starting to see the benefits of that come through. Certainly, some help on the price cost side, but largely looking at the fundamental operating structure and taking some nice actions around 80/20 and as Ron alluded to before on our business structure, simplification initiative as well.

Our next question comes from Andy Kaplowitz with Barclays.

Can you guys talk about your ability to continue to outperform in that European transportation market? I mean, it has been pretty impressive over the last few quarters. Maybe talk about the mix in the business and the ability to continue to penetrate and outperform as you have.

Andy, I think it's a function of we always talk about product capability, having the right set of products, new introductions, so on and so forth. But I think more specific to Europe is this whole issue of mix and where we really have strong mix is on the German OEM side, which -- clearly, the best performing part of the European autobuild story. So I'd say we have the right set of customers at this point in time. And I think we're going to continue to -- I think Germany will continue to outperform the rest of Europe as it relates to autobuilds. Having said that, I would expect continued outperformance, but we certainly can't give you the guarantees we've seen over the last 3 quarters. But I think directionally, Europe's on the right path, both from a product development standpoint and from a mix standpoint.

And I would add to that, I think from the standpoint of -- pipeline of new penetration gains, both in Europe and, really around the world in our Auto OEM business, I think we've probably got as good a pipeline going forward there, as we've had in a long time.

Okay, great, that's helpful guys. If I focus back on North America, the sustainability of the U.S. growth going forward, I mean it's been obviously quite good versus the rest of your business, but it's been concentrated in Power Systems and Electronics. I mean, I know it's also in Test and Measurement, and if you look at it, Welding has been strong, but some of your OEMs have started to sort of change their production. So -- and I know you've talked about limited visibility in that business, so I'm just trying to figure out, sort of how you guys look at it going forward from here in North America?

Well, I think it's obviously an environment that's pretty dynamic at the moment. I think one of the things that's been interesting for us throughout the year is the fact that sort of the stronger ends of our -- the stronger components of our overall portfolio from a growth standpoint have been the more capital goods-intense events, which is, again in this environment, probably a little bit counterintuitive, but what it says is that, customer base, the customer base that we have is certainly willing to spend money, invest in new equipment that helps improve their productivity or their performance. So if you look at the Welding business, Test and Measurement, the stronger ends of our sort of overall organic growth from the standpoint of the North American market have really been in these CapEx categories. We certainly can't sit here and -- with any great assurance say that, that will continue, but I think it is indicative of the fact that our customer base are still looking to make investment in new products and new capabilities that help drive better productivity, better performance for them.

And Scott, you haven't seen any change in behavior though to date, from those customers.

Not anything meaningful, no.

Our next question comes from Jamie Cook with Crédit Suisse.

This is actually Andrew Buscaglia on behalf of Jamie Cook. Yes, so actually I have a quick question on, sorry, just on your orders going through, if you could -- if you guys could track them or just tell us how they've been tracking on a monthly basis, specifically into the month of October.

Well, we don't -- as you know, we don't give out monthly data anymore. I think what we can tell you, though, is that if you look at the sort of activity levels through the months in the quarter, the third quarter, I don't think on an adjusted basis, there was any real big difference between July, August and September. So once again, we're not seeing any kind of outperformance early and things softening. I think it's more or less a story of the geographies we've talked about. Europe and Asia Pacific continue to be a little weaker, and they have been persistently weaker. North America, U.S.-led, continues to be a number that's reliably in sort of a 3% to 4% growth rate. So I don't think we've seen anything on a month-to-month basis that point to anything changing in any material way.

Okay. And then sort of along those lines, can you comment on what your visibility is like right now into Q4, and then potentially, maybe into '13?

Well, I think Q4 visibility is what we've baked into the forecast. So we're expecting that overall base revenue growth to be in the plus 0.5% to 0.7% range. North America continued to be solid, maybe a tad weaker in the 3% or 4% range. International, still negative, but a little bit less negative than we've been.

And we generally, what I would add is, and we've said this before, but we generally don't fill big backlogs in terms of the way we execute on our customers' demand. We're typically shipping today what our customers ordered yesterday. So from a standpoint of overall revenue rates, we're seeing, on the ground today, essentially, a very similar flavor to what we saw in the third quarter.

Andrew, one other thing, as it relates to 2013, in New York in December, as we typically do, we'll give you a look at what we think third -- full year '13 will look like from an organic revenue standpoint. But that won't be until the middle of December.

Our next question comes from Stephen Volkmann with Jefferies. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: I guess I'm wondering, sort of a big picture question, granted we're all waiting for December for the details, but I'm wondering as we get past your sort of new plans and consolidation and so forth, is there any reason to think that your priorities for use of cash would change as we move forward?

Well, I think, certainly, we've always been in this position where we have a lot of free cash flow to generate from operations to deploy. On top of that, as we do more divestitures, we'll have some additional cash to utilize. And what we've said on the divestiture cash is, to the extent we have after-tax cash in the U.S., we would use that for share repurchases, to offset earnings dilution and so we've been doing that. We closed on a Finishing Systems deal earlier in the year. We're about to close on this Decorative Surfaces deal. So one of the reasons, if you look at our share repurchases for the year, and our allocation to that, that's higher than it would normally be, because of these noted divestitures. I think going forward, historically, we've returned about 60% of capital to shareholders via dividends or share repurchases. Given that we're bit more focused around strategic acquisitions, we might allocate a bit more to return to shareholders versus acquisitions, say 1/3 to acquisitions and 2/3 to shareholders after considering divestitures. Stephen E. Volkmann - Jefferies & Company, Inc., Research Division: Great, that's very helpful. And then what's the ultimate resolution for the Decorative Surfaces business? I mean, I'm sure you don't want to sort of keep it this way for too long, or maybe you do, what are your comments there?

Well, yes, this transaction, it may seem a little bit complicated. I mean, it'll certainly, in the P&L, have some puts and takes as we continue to own a share of this. But it's a good transaction for us. It allows us to get $1 billion out of the business right now, which we can redeploy. So what will happen is, it's part of this joint venture, and the joint venture will manage it. And ultimately, to the extent the joint venture ends up selling the business on to somebody else, we will participate in that. So the way I would think about it from an ongoing impact on us, we'll have some amount of P&L, our 49% interest, but that will be pretty minimal. The joint venture will have a lot of additional cost beyond operating income related to interest expense, amortization expense, et cetera. So we'll probably have very little in the way of P&L pickup for our 49%. But ultimately, when this business gets sold on, we will get 49% of the proceeds and 49% of the gain at that point.

Our next question comes from Eli Lustgarten with Longbow Research.

One just, qualification, the $0.03 gain from the sale in the quarter, is it reported in other income? That's it.

Yes, it is. It's in other non-operating income.

Yes, I just wanted to make sure of that. Can you talk about seasonality in the fourth quarter? I mean, your comps are a little surprising, because we've had lots of companies report that September's gotten a lot of weaker, so it's good to hear that somebody's, who's -- somebody's getting the business but is there anything seasonally in the fourth quarter that's -- in the operating divisions that's weaker than what we -- than normal on a seasonal basis? Is there anything that's showing any softness and the same thing when we talk about profitability as we go into the fourth quarter, the ability to sustain the third quarter profitability, adjusted, probably to some volume differences?

So overall, from a total company perspective, our fourth quarter tends to be our weakest quarter, from a revenue and margin perspective. Yes, part of that is, the month of December, especially now that we've moved off to one-month lag for international, December also falls in the fourth quarter. So it tends to be our weakest revenue quarter, our weakest margin quarter. Most of our businesses aren't overly seasonal beyond the impact of the holidays. Maybe a couple of exceptions, the Construction business is a little bit seasonal, as well as some of our Consumer Packaging businesses that serve the beverage markets. But generally, from a seasonality perspective, we don't have a ton of seasonality beyond the holiday impact.

I guess my question is, is there anything that appears to be any weaker than we would normally expect because of -- adjusted for this?

No, no.

Everything else is good. And a follow-up question, can we talk a bit about acquisitions? I guess you only made $52 million, I think is what you said in the quarter. Where is that year-to-date, because you didn't have a chart in here? And where were you hoping to be this year? I mean, how full is the acquisition pipeline at this point? Restructuring permits.

So during the quarter, we acquired 5 companies and paid about $69 million for the year. We have 19 acquisitions for about $400 million, paid about $659 million. And so generally, we're seeing a reasonable level of acquisition activity. We're certainly focused on growth platforms in emerging markets, when we look at acquisitions. So we're doing fewer deals, but the average size is bigger. So we feel reasonably good about the acquisition pipeline. It's not great, but it hasn't dried up either, and we're looking at a fair number of deals.

Yes, but you talked something about this year in the 500 to 750 kind of range, so expected something like that.

Well, yes, we're already at 400, so certainly, a bit more than that in the fourth quarter, although fourth quarter is always a little bit iffy, and things that are expected to close at the end of the year sometimes fall into the next year.

Our next question comes from David Raso with ISI Group.

On the fourth quarter, I apologize if I missed it, what is the base revenue growth assumption?

Base is plus 0.5 to plus 0.7.

Okay. So to my question, in the fourth quarter, the implied operating margins are essentially flattish year-over-year, so you have base business up, you have 2 of your higher margin businesses' core growth driving the growth, right, Power and All Other. Price cost, I would think would still be positive. So I'm trying to understand why the margins would be roughly flattish, and it would be helping me out would be if you have a share count assumption for the fourth quarter? But if you can square up why the margins wouldn't be improving? I mean, they just went up 140 basis points this quarter, and your base growth assumption for fourth quarter is similar to the third quarter.

Yes. So overall, we're looking at margins to be up a tad, 10 to 20 basis points, and the base part of that is about 30 to 40. So that does include continued favorably priced cost of 60 to 80 basis points, so not quite as strong as third quarter, but still pretty favorable. We do have some headwinds on the corporate side, so we had some corporate gains last year, for reserves and cash for undervalue life insurance and those kinds of things. So that's going to be a drag of about 40 basis points. The other thing that's up year-on-year, and I talked about it earlier, is restructuring, so that will cost us 40 basis points or so as well.

Okay. So it basically comes down to leverage, say the price cost is negated roughly, slightly more than negated by corporate expense and restructuring. It basically comes down to operating leverage on that core business growth.

Yes, yes.

Okay, all right. I have one quick one, sorry. 2013 for dec surfaces, for trying to model it. You're saying the net P&L impact for your 49% stake is neutral, but just for pure modeling, I mean, you're going to show other income showing the JV, some 49%, but then there's cost above the EBIT line? I get -- I'm just trying to see how to model it.

So as I said earlier, it will be -- continue to be included in continuing operations, because we retain a 49% interest. So what we will show, going forward is first of all, we will have a gain in the fourth quarter that will be considered non-operating. And on an ongoing basis, we will have 49% of the income, but as I said, the income should be fairly minimal. So using a flat expectation over the long-term is probably appropriate. There may be some one-time amortization charges in the fourth quarter that could make that negative, but over time, it should be basically flat. That will also be reported outside of operating income. But it's still included in continuing apps.

So the cost related to it, plus the income related to it will all be below the…

It'll be netted into one line, so we will not show revenues, operating income margins, et cetera, and it will no longer be a separate segment.

Our next question comes from Henry Kirn with UBS.

Could you walk through some of the key factors that would take you to the high end versus the low end of the sales forecast for the fourth quarter?

Well, certainly, if the economic environment gets better, that will help our base earnings, and we'll get a lot of leverage from that. Yes, we don't think that's -- this could get substantially better, but there could be a lot of upticks, potentially in Asia Pacific and China. Right now, we have that continuing to be negative, but that can move fairly quickly quarter-to-quarter. On the cost side, certainly we could do better on the margin. We may be able to get better price cost in the higher end of that range. We're continuing to see overhead benefits, and we've got a lot of that built in, but sometimes, we can outperform that. From a business perspective, we've seen strong performance in certain segments, and we're modeling some of that to come down, but that could continue to be favorable on the upside, in things like Welding and on Automotive.

But, Henry, if you think of our forecast, I think if you look at the last couple of quarters, I think our forecast really underlies the notion it's more of the same. You have North America, a little bit better; Europe, Asia Pacific, a little negative. So I -- we're not seeing anything right now that gives us a high degree of confidence that those trends are going to change per those geographies.

In either direction.

In either direction, right.

That's helpful. And I guess as a follow-up, could you talk about, with all the headlines on the elections and the fiscal cliff, are any of your North American customers playing wait-and-see until they get behind us, before coming back and ordering again?

I don't -- I mean, I don't think so. I mean, Scott, your observation?

I would say the same. We're not seeing any evidence of that.

I think to Scott's earlier point, Henry, think about the amount of activity around our CapEx-related businesses. Again, seems counterintuitive, it seems like something that wouldn't happen if people were worried about these type of issues, and we're not seeing that. I think businesses really do what's in their best interest over a shorter period of time and they tend to get less worried about policy.

Our next question comes from Deane Dray with Citi.

On the Test and Measurement side, that was a standout performer in the quarter. If I got it correctly, 12% organic, but you also called out there was an impact from 1 particular customer, big shipment. So was that in the number? And can you size us -- that for us please?

I think the big shipment was related to the Electronics sector, not Test and Measurement.

So that was a pure 12% core?

Yes, I think it was really more representative of what we saw in the various geographies. Although we did pick up some business from -- a little bit of business from a key customer in Test and Measurement, but to Scott's point, it had -- there was a bigger variation or a bigger contributor coming on the Electronic side from us from a key customer.

And then, just within the business mix within Test and Measurement, obviously, this is more on the industrial side, it's CapEx sensitive, but if you just gave us a quick 80/20 of what are the key drivers there in terms of the products, is it all Instron? And are there any particular end markets that are seeing that type of growth?

Well, I think Instron continues to be the flagship business of Test and Measurement. I think the drivers of growth, again are related to sort of to your point, on CapEx needs, and I think that the global trend, if you asked our Test and Measurement people, the thing they point to all the time is sort of standardization around the globe, and whether it's in China, whether it's U.S., whether it's Europe, people are looking at standardization, and it requires our form of technology, as it relates to our Test and Measurement equipment, both equipment and the software that goes with it. So we like this whole notion of standardization, globalization. We think it'll be the long-term good trend for the Test and Measurement category.

How meaningful might Test and Measurement be in your potential acquisition candidates?

Well, very meaningful. I mean, over the last 5 or 6 years, we really started this segment from scratch with the acquisition of Instron in 2005, and that continues to be a key focus of our acquisition targeting.

Our next question comes from Ajay Kejriwal with FBR Capital Markets. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Scott, I know you said you're going to provide more details on the long-term initiatives, December 14, but maybe a clarification on the slide deck here, where you're saying you have the strategic leaders on place for the GM roles. So do you have all the GMs identified? Are they -- do they have their teams in place? Any color there would be helpful.

Well, I think largely we have the leaders in place. What we're really talking about is building bigger scale into our divisional structure, so the sort of before-and-after on that is moving from roughly 600-plus operating divisions down to a number around 150 to 175 or so when we're done. The planning around that is -- has been done, it's been ongoing throughout this year. I'd say we're largely through the -- sort of define the game plan, we're in the sort of early stages of the execution around that, starting with the leadership questions related to those 150-plus divisions and I would [indiscernible], I can't tell you that 100% of those are done, but I -- the number's probably well north of 90%. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it, that's helpful. And then on the EPS walk, Slide 13, 2 items on -- dec surfaces, that $0.03, is that inclusive of the offset from share buyback that you've been doing? And then on acquisitions, the $0.02, is that just from acquisitions that you've done last quarter? Is that all one time? Does it go away?

So the $0.03 for dec surfaces is simply the operating results related to dec surfaces. We've also included a $0.01 benefit from higher share repurchases. That's really related to the use of proceeds from the dec surfaces transaction. So from a net perspective, that's about -- that's a $0.02 decline if you netted the shares in there. The acquisition number, is really 2 components of that. One, that's a function of the cash distribution from the acquisitions we've already completed. In the early part of the year, we had a couple of larger ones that, as things have weakened, especially internationally, the results have come down a little bit. Secondly, we had included some amount of acquisitions in the forecast, that we expected to complete and some of that's gotten pushed off. So we've taken the number down a little bit there as well.

Our next question comes from John Inch with Deutsche Bank.

I want to ask about restructuring. Now some other companies, given the environment, have sort of taken the opportunity to up their restructuring spend. You guys have outperformed in terms of your results versus them. But I'm just curious, is there a reason why, perhaps you didn't opportunistically try to dial in a little bit more restructuring just as a hedge, given the macro and could you just as a follow-up to that, could you just talk about the mix in your restructuring spend that maybe is focused on Europe, and then focused on some of the simplification initiatives?

So as I talked about earlier, our restructuring spend for the year is already above what we would normally spend. So certainly part of that is, what I talked about earlier, business simplification. And part of that is Europe and other places where things are weak, and really as we work through this business simplification exercise, it's all related. As we look at simplifying the European business, we're also factoring in what we think the results are. So it's hard to split up exactly what would be business simplification versus economic related, but we certainly have increased the overall spend accordingly, and really set it at the beginning of the year.

And all I would add to that is the business simplification initiatives, certainly they're the kind of head-start we've had, given that initiative and its sort of central point in the company's operating approach over last year's is, in a lot of ways, sort of prepared us for this environment, and so it's really about implementing that plan and executing to that plan. Not a lot of deltas around -- we knew going into this year it was not going to be a great environment, economically anyway, so from a standpoint of incremental and restructuring, we just don't see the need at this point, but there's plenty of that activity going on, and has been, throughout the year.

That was [indiscernible] to my question. The question was why didn't you, was there some obvious reasons why you didn't take -- I realize the simplification in the added year-over-year. I'm talking about sort of what you saw in the third quarter. Your plans are in line, I'm just saying other companies are taking up their restructuring. You were just saying that you had set it at an appropriate level, but…

And ours was pretty higher.

Yes, John, remember, we increased our restructuring spend last quarter by $15 million to $20 million. So I think there, that -- I think that was a realization, that there was more to come as the year progressed.

The other thing I'd point out, and as I said earlier, as we continue to work through business simplification, we'll have a higher spend than normal next year as well, and certainly, some of that will be related to places where the top line's challenged.

You mean higher versus trajectory? You don't mean higher versus this year, right?

Well, I'm not going to quantify exactly, but certainly higher than our normal level of spend.

Yes, that's fine, so it's probably close to this year. What kind of a payback do you guys expect on this restructuring? At least help, some sort of cushioning tailwinds into next year.

I mean typically, overall, across the company, we get about a one-to-one payback in North America. It's lower than that and in places like Europe, it's higher. Because it's higher, more expensive, but overall, on average, it's about one-to-one.

Can I just ask as a final point here? The process of simplification, you guys, I realize, have been collecting an awful lot of data that will go into the framework. Where are you in that process? Meaning, are you still waiting for, say, a bunch of little projects to be completed to give you information that's coming through in November or something to then in turn provide the output framework for how you're thinking about future cost savings? Or is a lot of that kind of -- is a lot of that sort of in place and really then you're just sort of dotting Is and crossing Ts in terms of, sort of how this is actually going to progress in the time frame? And maybe just, so I'm not asking for the numbers, I'm asking more for just the process and kind of your confidence as you've sort of gone through this process.

Yes. What I would say is, we are well through the planning process and are in the active execution mode.

And you're feeling good?

Yes.

Don't we sound like we feel good? All right, we have time for one more question.

Our final question comes from Andy Casey with Wells Fargo Securities.

I guess a few questions to wrap it up. First, if you can give any quantification on the estimated tax impact for the $1.05 billion divestiture cash proceeds.

I can't give that at this point. You can assume our typical effective tax rate on that, maybe a little bit higher, because it's more North American-based, so say between 30% and 35% from an effective tax rate perspective.

Okay, thanks. And then on the business trends that you're seeing, particularly Signode North America, I think it grew year-over-year in the first half and then in this quarter, if I heard right, you called out a decline year-over-year. First, is that right? And then second, if it is, can you please remind me when that business last flipped to a decline from growth?

It was -- North America, if you're talking about Signode specifically, the number was minus 2 to minus 3 in the quarter, and this would have been the first quarter where we saw negative activity.

We're also down 1 shipping day in the quarter.

And right, we all -- we did lose a shipping day in the quarter. So I'd say on a real-time basis, the business has probably slowed a little bit, but probably not as much as that number.

Okay, thanks. And then lastly, across your businesses, are you seeing any evidence of inventory destocking? And if so, could you point out where?

I would say not. I think generally, customers have been pretty tight in that regard all year, in terms of overall cautious posture, but I don't think we're seeing anything significant in terms of change around that of late.

Thank you, everybody. We appreciate you joining us today on our conference call, and we look forward to talking to you again. Have a good day.

Thank you for joining today's conference. That does conclude the call at this time. All participants may disconnect.