Illinois Tool Works Inc. (ITW) Q4 2012 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I will turn over the meeting to Mr. John Brooklier, Vice President of Investor Relations. Sir, you may begin.

Thank you, Kelly. Good morning, everyone, and welcome to ITW's Fourth Quarter 2012 Conference Call. Joining me on today's call is our President and CEO, Scott Santi; and our CFO, Ron Kropp. Scott, Ron and I will discuss our Q4 financial results, our long-term strategic initiatives and our 2013 full year forecast. As always, we will take your questions. Now here's the agenda for today's call. Scott will make a few comments on our operating results, as well as discuss the enterprise strategy and long-term initiatives we talked about last month in New York City. Ron will cover our Q4 and full year financial results in more detail. I will then come back and talk about our geographic revenue performance and detail our segment results. Ron will then update you on our 2013 full year and Q1 forecast. And finally, we will open the call to your questions. [Operator Instructions] As always, we've scheduled 1 hour for today's call. Moving to the next slide. You can see the forward-looking statement. The presentation contains our financial forecast for full year 2013 and 2013 first quarter as well as other forward-looking statements identified on the slide. I'd ask you to read the rest of the slide, particularly as it relates to the appendix, where we have a whole host of non-GAAP and comparable GAAP measures. Couple of other housekeeping items. The telephone replay for the conference call is (888) 393-9645. No passcode is necessary to access the replay, and the playback will be available through midnight of February 12. Now let me introduce our CEO, Scott Santi. Scott?

Thanks, John. Good morning, everyone. I'd like to begin with a few comments on full year 2012. In a challenging global economic environment, we were able to deliver solid operating performance, while at the same time rolling out and mobilizing the company behind a number of key initiatives related to our 2012 to 2017 enterprise strategy. Our organic revenues grew 2% in 2012 due primarily to strong year-on-year growth from our auto OEM, welding and test and measurement segments. We also delivered 50 basis points of operating margin improvement, and we grew our adjusted earnings per share 10%. Last month at our investor meeting in New York City, we detailed the enterprise strategy that we are undertaking to position the company to deliver solid growth and even stronger margins and returns on capital in the context of an increasingly challenging global competitive environment. Through the execution of our enterprise strategy, we are narrowing our focus to areas of opportunity where we can fully leverage ITW's unique core capabilities. We have detailed execution plans in place for 2013 around 3 key initiatives associated with our enterprise strategy. Those are portfolio management, business structure simplification and strategic sourcing. We have covered these initiatives in detail in other forums, so won't be going them -- going into them in detail here. But I can assure you that the entire organization is aligned behind and focused on driving meaningful progress on all 3 in 2013. I do want to reiterate the performance goals that we are committed to achieving by 2017 through the execution of our enterprise strategy, and those are: organic growth at 200-plus basis points above global industrial production, operating margins of 20%-plus, returns on invested capital of 20%-plus and free cash flow conversion of at least 100% of net income. Simply put, we have 2 objectives for 2013: one is to run our businesses and execute at a high level in the context of the realities of the economic environment and two is to drive solid progress and momentum in the execution of our enterprise strategy across the company. We are confident that through our enterprise strategy, we are taking the steps necessary to position the company to generate maximum performance leverage and impact from a very unique and robust set of core capabilities, and that our strategy will result in highly differentiated operating performance in the years ahead. Now let me turn the call over to Ron.

Thank you, Scott, and good morning, everyone. Here are the highlights for the fourth quarter. Revenues decreased 2.3%, primarily due to the impact of divestitures, mainly Decorative Surfaces, which closed on October 31. Excluding the divestiture impact, revenue growth would have been 2.3%, largely driven by organic growth in North America and acquisitions. Operating income was $609 million, which was lower than last year by $38 million, representing a decline of 5.9%. Operating margins of 14.4% were 60 basis points lower compared to last year. Diluted income per share from continuing operations was $2.10, which included several discrete items, primarily a significant gain on the divestiture of Decorative Surfaces. Excluding the effect of these discrete items, we finished at $0.89 per share. Overall, both our Q4 top line performance and bottom line earnings were largely in line with our expectations, as growth in North America and Asia offset continued softness in Europe. As we discussed at the investor meeting in December, we had several significant discrete items this quarter. I want to take a minute to review our fourth quarter reported performance versus our operating performance from October. Our reported EPS on a GAAP basis was $2.10. During the fourth quarter, we recorded a gain of $1.37 on the sale of our former Decorative Surfaces segment. We also recorded the P&L impact of our ongoing 49% interest in the Wilsonart business of negative $0.04, which included activity from November and December, primarily related to transaction expenses and purchase accounting amortization. In addition, we had some discrete corporate items in the fourth quarter, which resulted in an expense of $0.04 per share. We also had several discrete tax items, which reduced earnings by $0.08 per share, mainly related to an IRS settlement we reached during the quarter. After excluding these items, our operating earnings for the fourth quarter were $0.89, which is well within the forecast range we discussed last month. Now let's go to the components of our operating results. Our 2.3% revenue decline in fourth quarter was primarily due to the following factors: Divestitures, primarily Decorative Surfaces, reduced revenues by 4.6%; base revenues were up 0.6%, with North American base revenues increasing 1.6%; and mixed international base revenues that overall were down 0.5% year-over-year. Our Asia businesses grew 3.7%, led by strong growth in India, as well as solid growth in China. We saw a 2.6% decline in Europe, with a decline in virtually all of our businesses. Acquisitions added 2.4% to revenue growth, while currency translation decreased revenues by 0.7%. Operating margins for the fourth quarter were 14.4% or 60 basis points lower than Q4 2011. Base business margins were down 40 basis points from last year. Higher sales volume contributed 20 basis points of operating leverage. On the non-volume side, price cost favorability improved margins by 50 basis points but was slightly lower than we were expecting. We also saw some negative impacts from higher pension and benefit cost, which decreased margin 70 basis points; and inventory revaluation from lower material cost, which reduced margins 30 basis points. In addition, total operating margins were lower by 30 basis points due to dilutive impact of acquisitions. The net operating margins from acquisitions, excluding amortization and other acquisition accounting items, were 12.2% for the quarter. Margins were also lower by 20 basis points due to higher restructuring. For the full year, revenues were up 0.8%. Excluding the impact of divestitures, revenues grew 2.2%. Operating margins were higher by 50 basis points. Excluding the discrete items that I discussed for the fourth quarter as well as the $0.33 favorable impact of the Australian tax case in 2011, full year EPS from continuing operations was $4.09 or 9.9% higher than 2011. Our total full year revenue increase is 0.8%, consisting of the following: Base revenue increased 1.7%. North America was strong for the year at a 4.3% growth rate. We had a mixed growth profile internationally that resulted in a 1% decline. John will discuss the full year geographic mix in more detail later in the call. Acquisitions added 3.1% to revenue growth, while divestitures, primarily Decorative Surfaces, drove a 1.4% reduction in revenue. Currency translation decreased revenues by 2.7%, mainly driven by a weaker euro. The higher full year base business margins of 110 basis points were partially offset by the dilutive impact of acquisitions of 40 basis points. Higher restructuring costs of 30 basis points also reduced margin, as we expect close to $100 million in restructuring activities this year, which was double compared to 2011. Overall, while international demand was sluggish for the year, our North American markets remained strong for most of the year. Despite our uneven top line growth profile, we saw a 50 basis point improvement in our operating margins as we maintained our 80/20 operating discipline and continued overhead cost management, while launching our rollout of our enterprise-wide strategy and initiatives. Looking at working capital and cash flow. Accounts receivable DSO at 58 days was consistent with last year, and inventory months on hand improved slightly to 1.7. ROIC for the year was 15.4%, consistent with 2011. Our ROIC continues to be well above our cost of capital and a key metric for us. As Scott mentioned, we expect the end result from our enterprise strategy will be an ROIC above 20% for 2017 and beyond. For the fourth quarter, net cash provided from operating activities was $605 million, with capital expenses of -- expenditures of $108 million, resulting in free operating cash flow of $497 million, which was 139% conversion of adjusted income from continuing operations. For the year, we generated nearly $1.7 billion of free operating cash flow, which was a 90% conversion of adjusted income from continuing operations. Excluding the increase in taxes paid due to divestitures, the cash flow conversion rate is north of 100%. Turning to our capital structure. Our capital allocation priorities continue to be as follows: Our first priority continues to be organic investments, especially focused on our key growth initiatives. Examples of our organic investments include R&D spending, 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 $350 million. This included the normal January dividend payment, which was accelerated into December to allow our shareholders to benefit from the 2012 dividend tax rate. Our current dividend yield continues to be about 2.5%. Any excess capital after organic investments and dividends is used for external investments, which are either share repurchases or acquisitions. We evaluate allocation between these investments based on the best risk-adjusted returns. During Q4, we purchased just over $600 million in shares, which brought us to $2 billion worth of share repurchases for the year. As we look to 2013, we expect that our normal share repurchases from free cash flow will be at least $500 million. In addition, we intend to use any U.S. after-tax divestiture proceeds for share repurchases as well. As of the end of the current year, we have approximately $1.9 billion of authorized repurchases remaining under our current buyback program. For 2012, we returned nearly $2.9 billion to our shareholders through share repurchases and dividends, which was 80% of our available capital. We also utilized $730 million for acquisitions for the year, nearly all of which continue to be focused on our growth platforms in emerging markets. As we think about 2013 and beyond in the context of portfolio management, 2 factors will be key to our acquisition strategy: a focus on our accelerated growth spaces and a strong differentiation potential. Lastly, our debt-to-capital ratio dropped to 32% and debt to EBITDA rose slightly to 1.5x during the quarter. Our cash balance overseas is nearly $2.8 billion, and we have plenty of debt capacity to make additional investments. I will now turn it back over to John, who'll provide more details on the operating results by geography and individual segments.

Thanks, Ron. Let me take a few moments to review our full year 2012 geographic trends. Excluding the impact of currency, total company revenues grew 4% for the full year, and organic revenues accounted for roughly half of that growth. In 2012, our strongest organic growing geography was North America, as Ron mentioned earlier, which increased 4%. International organic revenues fell 1%, with European organic revenues declining 2%, roughly in line with our expectations as we came into the year. The better news was that Asia Pacific's organic revenues grew 1%, with India being the principal contributor to the region's growth. Although we started to see a bit of a pickup in China revenue growth in Q4, it probably had more to do with our auto OEM business and the high level of activity there. Organic growth in China for the full year was essentially flat. Now moving to our Q4 segment table of results. Total company organic revenues grew 60 basis points. And as mentioned earlier, this is led by our Transportation and all other segments that grew organic revenues; 4% and 3%, respectively. As to our operating margins, the majority of our segments produced margin declines in the quarter. As Ron mentioned earlier, higher pension and other benefit costs negatively impacted all segments. In addition, certain segments had unfavorable inventory revaluation adjustments, including Power Systems and Electronics, Construction and Transportation. The exceptions were our Industrial Packaging and Polymers and Fluids segments that produced operating margin improvements of 140 and 150 basis points, respectively, and this was in large part due to better variable margin performance on product mix and reduced overhead related to restructuring projects. Now moving to Slide 15. We'll take a closer look at our 7 reporting segments. Starting with our Transportation segment. Our worldwide auto OEM business was once again the key contributor to segment organic growth. Worldwide auto OEM organic revenues grew a very, very strong 11% in Q4, with North America organic revenues increasing 12% and international revenues growing 10%. It's important to note that our European auto business produced organic revenue growth of 2%, marking the fourth consecutive quarter where our strong product penetration and positive customer mix more than offset a decline in car build. We should note that auto Europe car builds fell 7% in Q4 versus the year-ago period. And one other strong trend to note: Our Asia Pacific auto business, led by our China auto OEM business, grew organic revenues 28% in the quarter. In summary, if you look on a worldwide basis, our auto businesses produced organic revenue growth that was 9 percentage points higher than the actual increase in worldwide auto production; a strong performance. In our 2 other businesses, organic revenues for auto aftermarket business declined 5% in Q4, largely due to a loss of a product line with a key customer. And our truck remanufacturing business, which continues to benefit from energy-related projects in Canada and Western United States, produced organic revenue growth of 3%. Moving to Power System and Electronics segment produced substandard organic revenue growth, as both the welding and electronics businesses battle slower end-market demand, particularly international. For our worldwide welding business, organic revenue declined 1% in Q4, largely due to a 12% decline from our international welding business. Notably, our China welding business, faced by slower end-market conditions in the fourth quarter, continued to transition the business away from the weak shipbuilding end market to focus more and more on oil and gas end markets. The better news was that our North American welding business produced organic revenue growth of 3% in Q4. Our North American oil and gas customer demand continued to be reasonably solid in the quarter. I will say customer demand from North American heavy equipment OEMs softened a bit in Q4. And in electronics, our worldwide organic revenues declined 1% in the quarter, and this was based on the fact that our electronics assembly business, which posted a nearly 30% organic growth rate in Q3 due to the new product launch with a key customer -- we saw that business normalized in Q4. As a result, electronics assembly organic revenues declined 1% in Q4 versus the year-ago period. In our Industrial Packaging segment, our worldwide business continues to essentially reflect industrial production trends in our major geographies. For example, our total North American Industrial Packaging organic revenues grew 1%, while our total international Industrial Packaging organic revenues declined 2% in the quarter. And while our worldwide strapping and equipment organic revenues declined 4% in the quarter, our protective packaging and stretch packaging organic revenues grew 4% and 2%, respectively, in Q4. I should note that our protective packaging business was aided by increased demand from agricultural perishable good customers in Q4. In the Food Equipment segment, a slowdown in equipment sales was evident in both North America and internationally in Q4. In North America, total Food Equipment organic revenues declined 2%. The equipment portion of this business, which comprises roughly 2/3 of the portfolio, generated an organic revenue decline of 5%, and this was mainly tied to slower demand for equipment from institutional customers and budget-constrained sectors, such as schools and hospitals. The North American service business generated organic revenue growth of 4% in Q4. Internationally, institutionally focused equipment sales declined 3%, but service-related organic revenues grew an impressive 8% in the quarter. Clearly, we're very happy with the performance of our service business in the Food Equipment segment. In our Construction segment, improving end-market demand across North America drove improved results in the quarter. Total North America Construction organic revenues grew 7% in Q4, with residential construction organic revenue growth of 11% leading the way. Driven by improving residential fundamentals around new housing starts and new housing permits, we continue to be optimistic about the longer-term prospects for growth. In the commercial construction, our renovation construction categories organic revenues grew 6% and 5%, respectively. And again, improving data fundamentals from both Dodge and ABI give us a higher degree of confidence that North American commercial construction should improve in 2013 and beyond. Internationally, our European construction business continued to face weak end-market demand, while our Australian construction business showed signs of life in Q4. In Europe, organic revenues declined 5% in Q4. But in Asia Pacific, organic revenues actually grew 2%, and this was the first time we produced positive organic growth in this geography in 2012. A few notes on our Polymers and Fluids segment. Organic revenues continue to be negatively impacted by both weak end-market conditions, as well as product line simplification efforts we continued to carry out throughout the year. Our worldwide polymers and hygiene business was the most impacted during the quarter, with organic revenues declining 9% in Q4. However, as noted earlier, we continued to exit low-margin products and associated customers, which in aggregate helped drive a 320 basis point increase in base margins. On the fluids side of the business, organic revenues declined 1%, as end-market demand was soft in both North America and the rest of the world. Finally, moving to our All Other segment. The segment was led by strong organic revenue contributions from our test and measurement, consumer packaging and appliance businesses. For test and measurement, organic revenues increased 3% in Q4, and this was mainly due to strong demand for our Instron structural testing equipment, particularly from customers in Germany, China and Japan. In consumer packaging, organic revenues grew 2%, due to the growing demand and higher installation of automated case picking solutions from our Vertique global packaging business. And in appliance, organic revenues grew a robust 11% as growth was driven by demand for enhanced screen and safety products in North America, as well as expansion in emerging markets. Now let me turn the call back over to Ron, who will cover our 2013 earnings forecast. Ron?

Thanks, John. Before I provide the details of our 2013 forecast, I'd like to walk you through some changes in our segment reporting, which will be effective for 2013. As we discussed at last month's Analyst Day, we're aligning our reporting segments to better match our portfolio segmentation strategy. So looking at the new 2013 segment reporting structure, I'll start with our former Transportation segment. We'll be transitioning that to a pure automotive OEM segment, with the automotive aftermarket business moving into our Polymers and Fluids segment, as well as the truck remanufacturing and service business moving to our Specialty Products segment. Given its continued growth, we have pulled test and measurement out of the All Other segment and combined it with the electronics business. This segment represents a core part of our overall growth profile within the company going forward. The welding business, which was formerly combined with our electronics business, will now be a stand-alone reportable segment. And our former All Other segment has a new name, Specialty Products, which primarily includes our consumer packaging businesses, as well as our appliance businesses and our truck remanufacturing service business. Lastly, we've eliminated the Decorative Surfaces segment, given the divestiture. In the appendix of our slide presentation, you'll find some detail showing the 2012 revenues for the new segments. And the appendix of last month's Analyst Day presentation includes more detail on our 2013 segments, which is also available on our website. Prior to our April earnings release, we'll provide you a set of restated historical financials for the new segments. As I mentioned previously, because we retained a 49% interest in the Wilsonart business, the gain on divestiture and ongoing equity income will be reported as income from continuing operations, not discontinued operations, and prior period results will not be restated. To allow for like-to-like comparisons to 2013, we'll be presenting our 2012 results on a pro forma basis, which exclude the impacts of the Decorative Surfaces business from our 2012 results. In the first 10 months of 2012 when we owned the business, the Decorative Surfaces business generated $921 million in revenue and $143 million in operating income, which resulted in the $0.21 per share impact. The net gain on the sale of the business and the impact of our ongoing equity interest in the business resulted in $1.30 per share in 2012. Excluding these items from our 2012 actual results, our pro forma 2012 full year revenue is just over $17 billion. Our 2012 pro forma EPS is $3.76, which represents a growth of 6.8% over a similar pro forma 2011 EPS. The $3.76 will be the 2012 baseline EPS we'll use as a comparison point to our 2013 forecast. Going forward, we will record 49% of the ongoing net income of the Wilsonart business. Due to the entity's interest expense and amortization expense, we expect our share of the results will have a minimal ongoing P&L impact. So turning to the forecast. For the full year 2013, our forecasted EPS range for continuing operations is $4.13 to $4.37. This range assumes a total revenue increase of 3% to 5% versus pro forma 2012. The EPS midpoint of $4.25 would be 13% higher than the 2012 pro forma EPS of $3.76 that I just discussed. Also, as we mentioned in New York last month, we expect increased operating margins next year in the range of 16.5% to 16.9% versus 2012 margins of 15.9%. The key drivers of our 13% EPS growth for 2013 include the following: $0.41 from the base business, driven from organic growth as well as the net benefits from our initiatives, primarily related to business structure simplification, with some sourcing benefits later in the year; a minimal impact from acquisitions and a $0.02 decline from divestitures, which relate to the smaller divestitures completed in 2012, not the impact of Decorative Surfaces. We expect to spend between $120 million and $140 million in restructuring, which will be 20% to 40% higher than 2012, resulting in a $0.05 EPS decline. Our nonoperating costs increased, largely due to higher interest expense from the long-term balance we issued last August. We expect currency to have a minimal impact year-over-year as we have assumed exchange rates will hold at current levels. There's an $0.08 benefit due to the 2013 tax rate forecast of 28.5% to 29.5% versus the actual 30.4% pro forma tax rate in 2012. And we expect to see a $0.12 benefit from the shares we bought back in 2012, as well as what we forecast to buy back in 2013, which we expect to be a minimum of $500 million from our normal free cash flow. For the first quarter of 2013, we are forecasting diluted income per share from continuing operations to be within a range of $0.91 to $0.99, which assumes a total revenue growth of negative 2% to flat. The midpoint of the Q1 EPS range of $0.95 would be a 4.4% growth versus the 2012 pro forma EPS of $0.91. There's 1 less shipping day in the first quarter of 2013 versus 2012, which had a negative impact of 1.5% on revenues and $0.04 per share on EPS. Based on equal days, revenue would be flat year-over-year, with EPS up 9%. I will now turn it back over to John for the Q&A.

Thanks, Ron. We'll now open the call to your questions. [Operator Instructions]

[Operator Instructions] The first question is from Jamie Cook of Credit Suisse. Jamie L. Cook - Crédit Suisse AG, Research Division: Just a couple of questions. One, on your 2013 guidance, you talked about the $0.41 help from just your base -- your revenue growth, as well as strategic initiatives, and you sort of mentioned sourcing benefits you'd get in the back half of the year. If you could just give us any color on what's really top line versus what's sourcing or any operational improvements? And then my second question just on the restructuring, you mentioned 20% to 40% higher versus last year. I think at the Analyst Day, you hinted more towards flat to 2012. So what's changed and which segments are they directed towards?

Okay. So I'll start with the EPS for 2013. As we've laid out in the slide, there's a $0.41 increase related to the base business, which is where the benefits from the sourcing and business structure simplification initiatives are. That -- so that's based on the 2% base growth as the midpoint of our range. And about half of that benefit, including the negative $0.05 in restructuring, relates to the initiatives. The other half relates to growth and getting operating leverage from that growth. Jamie L. Cook - Crédit Suisse AG, Research Division: And then just on the restructuring question?

On the restructuring side, when we had talked in New York, we had thought it'd be flat year-over-year, which was still a significant increase over 2011. As we finalized our 2013 plans and look specifically at our 2013 initiatives around business structure simplification, we got some more specificity around exactly what we need to do during 2013, so we increased the $30 million. It's all related to business structure simplification.

Next question is from Andy Kaplowitz of Barclays.

Can we talk about welding in particular? When do you think we'll hit bottom in that China shipbuilding business for your business? And then if you look at the overall business, I think your initial forecast from December was 4% to 6% growth for 2013, organic. You were at negative 1% for 4Q. I know the compares are going to get easier in the international business. So how do you assess that initial '13 forecast and what you saw on 4Q?

Well, I don't think -- we've changed our organic assumption around welding. Again 4% to 6%, could it be at the lower end? Possibly. I think that as it relates to China, clearly, we're going through a transition. We've been going through a transition on the shipbuilding side. It will -- I think it will continue to be -- it will continue to impact some of our results, but we should probably by the end of the year, second quarter, things should start to get better for us in China.

And I will point out overall in welding, we had a very strong first quarter last year, almost 20% year-on-year growth, so we have a tough comp in the first quarter, but it gets a little bit easier as we move through the year.

And John, you mentioned that the OEMs softened a bit in welding in North America but still relatively good growth. I mean, do we still look for sort of relatively good growth? I understand the tough comps in 1Q, but generally oil and gas can hold you up in North America. Is that fair?

Yes. I think that's a fair assumption. I mean, if you saw our performance in Q4, up 3%, 4%, largely driven by oil and gas. You saw the report coming out of CAT. So I don't think this is any big news to anybody that their order rates have slowed somewhat. And they're being impacted by some of the global environment, too. So I would expect oil and gas to be a clear contributor to welding in 2013.

So maybe if I can ask just a follow-up on the overall segment, Power Systems and Electronics. Can you tell us how much was the inventory reval in that business versus maybe incremental weakness in the business, in that 300 basis points decline?

So in the Power Systems segment, the inventory reval was negative 70 basis points on margin. So the other pieces [ph] of the margin, certainly as we talked about, there's the pension and benefit costs that we record here at corporate that got spread to all the segments; that had an impact of about 100 basis points. On the plus side, price cost was favorable, 80 to 90, and overhead was up a little bit.

Next question is from Robert Wertheimer from Vertical Research.

I wanted to ask one business question. Obviously, the automotive sector is doing great. And I wondered if you could give us any indication of how long that outgrowth versus the market might continue. In other words, it seems as though you've won a lot of content on vehicles, and maybe as the newer vehicles mix in and the older mix out, that continues to be a driver for you for a multiyear period, or maybe it's over. I'm just curious.

No, I think it's a multiyear story.

Yes, this is a business where we obviously have sort of forward visibility. One of the few where we have some pretty significant forward visibility because we are engineering and specifying in new content on models that are 2 or 3 years away from production. So I think this is a pretty solid story for us for a while to come.

So you expect that content win growth above the market to continue for years to come, let's say?

For at least the next 2 or 3 that we can see.

Yes. But I would caution, Rob, as we look at this longer term, I think we -- if you're looking at sort of average penetration numbers, in aggregate, I think we're probably looking at outperformance on a global base, probably 4% to 5%. Now you're going to see some numbers on a quarterly basis that are probably above that. But long term, it's probably more like in the 4% to 5% range.

Great. And then if I can ask just a couple of cleanup questions. There was $0.04 -- you mentioned this in the Investor Day, about $0.04 of corporate nonoperating in the quarter. I'm not sure what that was. And then just the -- in your earnings walk, Slide 19, you have $0.09 of drag from nonoperating. I'm not sure what that is. And then just one last cleanup, in the $3.76 that you're using for a base for next year, what's the 4Q number embedded in that?

Okay. So the $0.09 nonop in 2013 versus '12, most of that relates to higher interest expense. We issued some long-term bonds in August of 2012 that will have a full year impact in 2013. What was your first question, sorry?

The $0.04 corporate discrete, yes.

Yes. We -- it's mostly pension- and benefit-related cost. The biggest piece of that is additional costs related to the passing of our CEO, David Speer, during the quarter, where we had some acceleration of pension and equity costs related to that.

Understood. And then the 4Q, the embedded 4Q in the $3.76, if that's possible. It just seemed like there was a lower number than the $0.89 embedded.

$0.76 is the embedded 4Q number.

The next question is from Deane Dray of Citi.

Just to follow up on that automotive question. The numbers in China were particularly impressive at 28% on base. Maybe frame for us what the builds were within those platforms, and where you stand in terms of your penetration to date in terms of the OEs in China and outlook for the balance of the year?

Yes. I mean, we have -- we've had dramatic overperformance in China. If you look in the last quarter, we were up, as you said, 28% organically, and builds were only up 7% or 8%. So I think it's really fundamentally focusing on those key OEMs, Chery, Brilliance and the like. That's the future of China, and their build continues to be -- while that continues to be strong, our overall performance continues to be very much targeted around our ability to serve those local OEMs that are going to contribute to growth longer-term.

Who are now building cars that are at a much higher level of technical sophistication than they were even 2 or 3 years ago, which certainly helps us in terms of being able to deliver solutions to them that they now need.

Great. And then a follow-up question for Scott. Lots and lots of questions about -- and expectations about a resurging U.S. residential cycle. And maybe just give us a sense -- ITW touches so many of those, the products and services within that cycle, and sometimes it's just proportionately attributed to what your overall revenues are. But you still has some really good insight of -- and hopefully you can share for us what you're seeing today for the signs of a recovery and how might this cycle play out differently versus previous cycles.

Well, I think what we are seeing for the first time in this sort of extended recovery, if you want to call it that, is we're starting to see, I think, some real consistent alignment in terms of the overall market metrics that we're looking at across a number of different sources. So I think we are in a stage now where we're starting to build some momentum, and I think the -- in terms of how all this plays out, my view is it's still going to be spiky. It's still going to be -- it's still a high level of foreclosure activity. There are still some, what would you call it, some of the excesses of the prior market issues there are -- that still have to be dealt with as we go through this. But in general, I think we're at a point now, where we're going to start to see some solid year-on-year improvement, and that's going to play out for, as it gets going, for a number of years.

And just to clarify, is there the same market exposure, the same distribution channels, the big-box versus a really diverse set of building yards that don't necessarily show up in -- that you would get from big-box indicators? But how is that mix today versus the last cycle for ITW?

Yes. It's a good question. I don't -- I think from an overall channel standpoint, I think the market structure has remained largely intact. I think one of the interesting things that's starting to crop up that certainly is going to have an effect is the issue of shortage of skilled trade labor. We're starting to see now some shortages in terms of various construction trades because a lot of people that used to do that for a living has now -- have now gone out and found other things to do, as this market has been in such a declined state for a while, and so I think we'll see how that ultimately -- it's probably the biggest concern on our radar in terms of macro fundamentals here.

Next question is from Ann Duignan of JPMC. Ann P. Duignan - JP Morgan Chase & Co, Research Division: This is Ann from JPMorgan. I haven't changed, again.

We assumed it was JPMorgan. Ann P. Duignan - JP Morgan Chase & Co, Research Division: I just wanted to take a circle back on the Industrial Packaging business. We always think that, that business as being the most coincident with economic activity. And maybe you could give us some color in terms of what you're seeing now as we go into the new year, post any uncertainty that popped up in the fourth quarter?

Again, I go back to my comment around that I think it -- largely reflecting industrial production metrics, either in North America or in Europe. So the European business is slower, the North American business is a little bit better. Now, we do have disparate pieces of that business around strapping, around protective packaging and around stretch that all have sort of different growth metrics right now. And quarter-to-quarter, those can change based on sort of discrete demand from specific end markets or customers. But I would say in aggregate, what we're seeing there is not dissimilar than what we're seeing from a sort of a total industrial production demand level.

No big changes in Europe over the last 2 quarters. Right.

More of the same on the North American side too, Ann. Ann P. Duignan - JP Morgan Chase & Co, Research Division: So the process is the same, but the --

And we were down in more than industrial production in the fourth quarter, but a lot of that was due to some comps and hedge buys in the prior year. So if you can strip that out, we're really close to flat in the fourth quarter, and that's what we're seeing going forward here. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Okay. That's good color. And then on Food Equipment, schools and hospitals, no surprise there that the spending might be curtailed a little bit. Do you think that, that was just kind of lack of budgets in 2012 and we might see some pent-up demand in '13? Or are those sectors likely to remain under pressure as we go forward? Just some color on what you're seeing out there in the Food Equipment side.

Yes. I think the budget issues continue going into '13 for those sectors, and that's sort of one of our -- one of the realities of our position, as we've got some real strength in the institutional space, that both in Europe and in North America are obviously dealing with some fiscal pressures and other things. We have been very focused on growing earnings through margin improvement in that business and also focusing on the service part of the business, as I think John talked about earlier, had some nice growth there. So I think that story remains intact for us in 2013. Ann P. Duignan - JP Morgan Chase & Co, Research Division: Is that one of the sectors that you might look to build from -- through acquisition?

Yes, I think it's one that we certainly need to up our penetration in more of the fast-food, fast-casual arena than -- where we said we have a nice position there, but certainly not one that is reflective of, on a relative basis, the overall potential. So whether it's organic or acquisition or some combination thereof, I think we have some -- assume some -- it's been part of our strategy for the last 18 months or so to really position ourselves to have a bigger piece of that part of the market.

Next question is from John Inch of Deutsche Bank.

So the elevated restructuring in '13 versus '12, I apologize if you said this, but again, where are you taking these actions? Do you expect the costs to kind of be relatively linearly spent? And is this a new run rate given sort of simplification? Or -- we do expect, from what we know, '14 to kind of revert back to the $100 million.

So the $130 million is really being driven by business structure simplification initiative. As we talked about in New York, 2012, 2013 are going to be strong years for restructuring around business structure simplification, and we'd expect that to moderate a bit in 2014, probably not back to normal levels, which are $60 million, $70 million until 2015. But I would say 2013, we'd expect to be a peak. And it's really spread out throughout the year and throughout the company as the business structure simplification is really an initiative company-wide.

So -- I'm sorry. So okay, it sounds like $100 million for '14 is a reasonable midpoint between what you just said for '15 and what you're spending in '13. Where are you -- where have you sort of opportunistically, if you want to think about in that context or whatever, found incremental restructuring opportunities? Is it -- are you just sort of accelerating your process? Or as you're arrived at the new [ph] process and you're saying, "Oh, we can be doing more of this or that"? Or -- a little more color would be great.

Yes. John, it basically is coming from the fact that as this BSS, business structure simplification, initiative continues to get sort of developed and executed around the company, our plans for '13 have become much more crisp and clear around what we need to do there. And so essentially, it's about this initiative really accelerating from an execution standpoint for '13.

Okay. And I'm just trying to understand, though, it's the context that, "Oh, we really have to," I guess, "spend more money, because we didn't appreciate how," let's say, "difficult the problems were"? Or that you're getting progress and you're accelerating kind of the plan?

We can get more done in 2013.

Okay. That makes sense. And then just lastly, Scott, it's going to be your first year as CEO. I mean, obviously, simplification is going to be a big part of what, I'm assuming, you're going to be focusing on. What are you going to be -- how are you going to be allocating your time? Is there any way to sort of segment this as you're sort of thinking about your year ahead and what you're hoping to accomplish this year?

Well, I talked about -- as part of my opening comments, the real priorities from my standpoint are pretty simple, which is, we have to execute with excellence in terms of how we run our businesses every day in the context of whatever the realities of the economic environment are. And we are in the process of sort of executing enterprise strategy that we've spent 2 years developing here. So from the standpoint of my time and the management's team and our -- management team's time and our priorities, that's where it resides. So we are in execution mode in a big way in 2013 on our enterprise strategy.

I'm assuming a disproportionate amount of this is going to be focused on Europe, just based on continued market malaise, your big company in Europe. I mean, I'm just -- I'm assuming that you're going to be spending more time physically in Europe with your European managers figuring out how to drive incremental productivity and so forth.

Yes, I think those plans are pretty far advanced in terms of all the planning around business structure simplification and -- in Europe. I think the -- I wouldn't characterize the benefits to the company as disproportionate to Europe. I think Europe is a big part of it. But ultimately, from the standpoint of -- you know, this is not necessarily economic in its -- sort of motivation. This is about structuring the company in a way where we can leverage scale and yet maintain our decentralized operating model. So this is a global initiative. We're applying this in both North America and in Europe. And certainly, the economic environment in Europe has an added element to it. But by and large, the processes are very similar in North America and Europe. The execution is a little more challenging in Europe, as I'm sure you well know, given just some of the realities there but doesn't in any way take away from the potential benefits for the company in the end.

I guess I was also thinking from the potential of the profit improvement. I'm assuming that you would probably have more European margin improvement opportunity than you would in other parts of the company. Maybe that's not a fair statement.

Yes, I wouldn't necessarily -- I would say there are equal benefits in both.

The next question is from Andy Casey of Wells Fargo Securities.

The -- a question going back to the Power Systems and Electronics, the 300 basis point segment margin decrease. If I take out the inventory revaluation and the pension hit you described earlier, everything else appeared to drive around the 90 basis point decrease in margins, if I'm doing the math right. That's still a relatively high decremental. Was that -- aside from the price cost stuff you already described, was that primarily driven by the mix shift related to the various OEM actions? And how far are your customers saying those are going to last into 2013?

Well, I think the biggest piece of that remaining amount that I didn't talk about earlier is, there's a 50 basis point hit related to restructuring in that segment, which is really more focused on the electronics business versus welding. So we don't see any significant difference in margins between -- in the product mix area coming through this quarter.

Okay, okay. So that, okay, should reverse through the year. On -- then on this automotive aftermarket product line loss, a few cleanup questions, I guess. Is that related -- is that contained within the acquired revenues from SOPUS? What drove the customer decision? Was it price or something else? And then does that have a material impact on the '13 revenue outlook?

It is related to SOPUS. It was related to -- how do I want to describe it? I think, ultimately, a pricing situation that we weren't comfortable pursuing from a profitability standpoint. And from an overall 2013 impact, it certainly had some impact from a revenue standpoint. But from a -- we've got -- have had some strong margin improvement momentum within the -- what's now our aftermarket platform, and we expect that to continue in '13, with or without the revenue that we just talked about.

The next question is from Eli Lustgarten of Longbow.

Just got one cleanup question. The tax rate is going down in '13 to a new midpoint of 29%. Is that mostly the R&D tax credit? Or is that the level we should look out for 2014, whether or not they have an R&D tax credit or not?

No, and I think we've got the R&D tax credit baked in at both years. I think the -- our normal run rate for our tax rate has been 29%. It ticked up a little bit in the fourth quarter, which got us the 30.4% for the year, but we'd expect our normal run rate, similar to what it was in the earlier quarters of 2012, to be 29%. So no significant change in our tax profile.

So '14, it would be -- you should assume the same as '13?

Yes. We're not going to predict '14 tax rate at this point, but that's certainly a reasonable assumption.

Or 2015, Eli.

Yes, I was just -- just wanted to make sure whether this is a permanent change or not.

Not today.

In the 0.5 point to almost 1 point improvement in operating margins, could you give us some idea as you look at the new segments that, will most of that come in a couple of segments? Or is it pretty well spread? And could you give us some idea of the operating margin improvement expected for 2013?

It's really across most segments. And as we said, these enterprise initiatives are touching all the segments, and that's certainly been a large part of the margin improvement.

So there's no 1 or 2 segments that's going to have above average -- or, what was it? Above average? Would it be average? Or, I mean, is there any guidance...

Not anything of significance.

So it's pretty well distributed. And just a cleanup, do you have an auto forecast in North America, Europe and China and a housing forecast?

Yes. Eli, I'll go offline with you, and give you all of those numbers.

Next question is from Ajay of FBR. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So maybe just on that inventory reval, and I know you do this on a periodic basis, but sounds like it came a little bit heavier this quarter. So is it possible to kind of just provide general color in what that was? Is it more related to raw material pricing? Or is it more accounting on work in process or finished goods? Just general color would be helpful.

So what it is, is certainly, we do look at our inventory costing as we move through the year on a quarterly basis. But generally as we move into -- through the end of the year, there's a normal process of looking at our standard cost based on current cost, as well as going forward. And if you look at where the impact of that standard to standard, it's really in the businesses that use steel as a primary raw material input. So it's automotive. It's Power Systems. It's Construction. So as you know, steel has been going down all year, so it's really -- you really had to catch up in some of the adds that we recorded in the fourth quarter. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Got it. But if we can maybe look at 2013, so your organic revenue guide -- and I know you provided color at the analyst meeting by segment. But just any updated thoughts on the new segments. What are your expectations that you're baking in to that full year guide? Which segments coming in better than average, which kind of flagging?

Well, if you remember, when we presented this in New York, we did present it in the context of the new segments. So the segments that have higher-than-average growth in that were automotive OEM, which we've talked about, and welding. Those are the 2 bigger segments that are driving the higher growth. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Good. And not to violate your 2-question policy, but -- so I'm looking at this $0.09 hit nonoperating, and you mentioned interest expense in the bonds. But then you also have this nearly $3 billion in cash overseas, which I'm presuming is not yielding much return. So what's the game plan? I mean, is it just you wait for a tax policy change? You have this big cash sitting outside; what do you do with that?

That's a good question, and it's something that we certainly are focused on. The way the tax policy works now, it would be significantly expensive to bring that back to the U.S. But certainly, we could do that, if we needed to do that. Right now, what we've been doing is using that cash for overseas investment. So we've had a lot of growth in Asia and China, for instance, through greenfield builds; in Brazil, through acquisitions. So that's certainly where we're using that overseas cash. But where we're at now and especially given all the discussions around U.S. tax policy, right now, there's no plans to bring any of that back until all that gets sorted out. And certainly, we'll evaluate that as the tax policy gets finalized.

The next question is from Joel Tiss of BMO.

So here's my list of 11 questions. So just 2 quick ones on acquisitions. You didn't really give us any kind of a target level, and I know it's being deemphasized. But can you just give us a sort of a ballpark of where things look like that might be shaking out?

I think what I would say is, from my standpoint, Joel, for 2013 -- not a big focus for us. We've got a lot of things to get implemented and executed. We will certainly take a look at good opportunities as they come to us. And so we're certainly not ruling acquisitions out. But from an overall priority and focus standpoint for 2013, probably not high up on the priority list. That being said, we had about $500 million of acquired revenues in '12, maybe something close to that, maybe something less.

Okay. And then the growth of 200 basis points organic growth, 200 basis points better than industrial production. Is that going to start later after the businesses get realigned? Or is that something that's going to start right away?

Well, part of it relates to the portfolio mix, so we are -- we have businesses inside the company today, a number of them, significant ones that are -- have historically performed over the last 5 years at that level or above. We have some others that have, given the sort of characteristics of their markets, been working the other way. So some of the sort of aggregate performance of the enterprise is a function of how we're going to shape the portfolio over the next couple of years. And I think as a result of that, a higher growth portfolio is going to yield us the overall metric that we're talking about. So yes...

Probably more '14 and beyond?

'14, '15 and beyond; heading up to that, yes.

Thanks, everybody, for joining us on today's call. I know it's a busy day for everyone. I look forward -- we look forward to hearing from you again, and I'll be talking to a number of you later in the day. Have a good day.

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