Illinois Tool Works Inc. (ITW) Q3 2011 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, please disconnect at this time. I'd now like to turn the call over to John Brooklier, Vice President of Investor Relations.

Thank you, Dory. Good morning, everyone, and welcome to all who've joined us for ITW's Third Quarter 2011 Conference Call. As usual, our CEO, David Speer; and our CFO, Ron Kropp have joined us to discuss our third quarter financial results. Here is the agenda for today's call. David will join us shortly to focus on many of our third quarter highlights. Ron will then take you through our Q3 financial results. I will then cover our third quarter operating highlights for our reporting segments, and Ron will then detail our 2011 fourth quarter and full year forecasts. Finally, we will open the call to your questions. And as always, we ask for your cooperation for our "one question, one follow-up question" policy. We are targeting a one-hour completion time for today's call. Please let me remind you that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding operating performance, revenue growth, diluted income per share from continuing ops, diluted net income per share, restructuring expenses, free operating cash flow, acquisition activity, tax rates, end market conditions and the company's related 2011 earnings forecast. Please refer to our 2010 Form 10-K for more details on our forward-looking statements. One other housekeeping item: The telephone replay for this conference call is (203) 369-0637. No passcode is necessary. And the replay is available through midnight of February -- I'm sorry, of November 8, 2011. Now here's David Speer to talk about our third quarter highlights. David?

Thank you, John. We are very pleased with our third quarter operating performance on a number of fronts. Both our total revenues and organic revenues were solid, coming in only modestly below our original expectations for the quarter. Total revenues grew 16.2% and organic revenues increased 6.2%. The vast majority of our diversified worldwide end markets were in reasonable shape. Ron will detail our full quarter 3 financial results in just a few moments, but it's noteworthy to highlight that our diluted EPS grew 25% in the quarter. We were especially happy to see the improvement in our free operating cash flow in the quarter. We generated more than $700 million of free operating cash in quarter 3. This represents a conversion ratio of 139% versus net income and gets us back on track to more traditional free cash flow generation metrics. In terms of how we utilize our free cash, we continue to implement a well balanced approach that target dividends, acquisitions and share buybacks. Here's what we accomplished in these targeted categories in the third quarter. First, we raised our annual dividend payout 6% in August 2011. We acquired annualized revenues of nearly $300 million during the quarter and year-to-date we've acquired annualized revenues of approximately $800 million. And we executed $400 million of share repurchases in quarter 3. And notably, year-to-date, we have now repurchased over 18 million shares for just under $1 billion. Finally, we took advantage of our strong financial profile and we issued $1 billion of long-term debt at very attractive rates. All in all, it was a very busy but a very productive quarter for ITW. Now let me turn the call over to Ron for the financial details.

Thanks, David. Good morning, everyone. Here are the highlights for the third quarter. Revenues increased 16% primarily due to higher base revenues, acquisition and translation. Operating income was $714 million, which was higher than last year by $95 million. Operating margins of 15.6% were lower by 10 basis points versus last year. Diluted income per share from continuing operations was $1, which was higher than last year by $0.20 and was on the higher end of our forecast range of $0.95 to $1.03. Finally, free operating cash flow is very strong at $704 million or 139% of net income. Now let's go to the components of our operating results. Our 16.2% revenue increase was primarily due to 3 factors. First, base revenues were up 6.2%, with North American base revenues increasing 7.8% and international base revenues up 4.2%. Next, currency translation increased revenues by 4.7%. Lastly, acquisitions net of divestitures added 5.3% to revenue growth. Operating margins for the third quarter of 15.6% were lower than last year by 10 basis points but higher than last quarter by 20 basis points. The base business margins were higher by 30 basis points versus last year, primarily due to the favorable impact of the higher sales volume, partially offset by the negative impact of non-volume items. Non-volume items reduced base margins by 120 basis points. Included in the non-volume impact for the third quarter was the unfavorable impact of price/cost, which reduced margins by 50 basis points. In addition, margins were lower by 20 basis points due to higher restructuring expenses and the dilutive impact of acquisitions reduced margins by 30 basis points. The net margins from acquisitions, including the amortization of intangibles and step-ups, were 9.1% for the quarter. Excluding this amortization, acquisition margins were 18.6%. When I turn it back over to John, he will provide more details on the operating results as he discusses the individual segments. In the non-operating area, interest expense was higher by $5 million primarily due to the new long-term debt issued in August. And other income expense was favorable by $24 million mainly due to higher interest income and translation gains this year versus losses last year. The third quarter effective tax rate of 29% was lower than last year's rate of 30.2%. Excluding the onetime benefit in the first quarter related to the Australian tax case, the forecasted tax rate for the fourth quarter and full year 2011 is between 28.5% and 29.5%. Turning to the balance sheet. Total invested capital decreased $169 million from the second quarter, primarily due to lower working capital and currency translation. Accounts receivable DSO was 58.7 days versus 61.4 at the end of the second quarter. Inventory months on hand of 1.8 was lower than the 1.9 last quarter. For the third quarter, capital expenditures were $83 million and depreciation was $86 million. ROIC for the third quarter was 15.4%, which was lower than last year by 70 basis points, primarily due to acquisitions. On the financing side, our debt level increased approximately $490 million from the second quarter, due to the new long-term bonds we issued in August, partially offset by lower commercial paper borrowings and currency translation. Our debt-to-capital ratio increased to 32% from 28% last quarter. We issued long-term debt in August to take advantage of historically low long-term rates. Of the $1 billion in bonds we issued, $650 million were 30 years at 4.875% and $350 million were 10 years at 3.375%. We had cash on the balance sheet of $1.3 billion as of September 30, almost all of which is held overseas. Our cash position increased $88 million in the third quarter as our free operating cash flow of $704 million and additional net borrowings of $578 million were utilized for share repurchases of $400 million, acquisitions of $451 million and dividends of $167 million. Year-to-date, we have returned almost $1.5 billion to shareholders via dividends and share repurchases, as well as investing $1.2 billion in acquisitions. During the third quarter, we acquired 8 companies which have annual revenues of $296 million. As a result, through 9 months of 2011, we have acquired 21 companies representing annualized revenues of $781 million. For the full year, we are forecasting acquired revenues between $800 million and $1 billion. I will now turn it back over to John, who will provide more details on our third quarter operating results.

Thank you, Ron. Starting with our Transportation segment. Our Q3 organic revenues grew 9.5% compared to the prior-year quarter. As usual, the segment's Q3 organic revenue growth was led by our auto OEM and tier businesses. Our auto businesses produced worldwide organic revenues of 9.2% versus a worldwide car build increase of 5%. That represents more than 4 points of penetration directly tied to new product innovation. Put another way, that's more ITW products on a growing number of auto platforms. In North America, our organic revenues totaled 6.9% as the new domestic producers, including Japanese OEMs such as Toyota, Honda and Nissan, produced approximately 150,000 more automobiles in Q3 versus Q2. Clearly, the Japan crisis of Q2 saw a favorable recovery in Q3. Internationally, our automatic -- automotive organic revenues increased 11.3% as Europe produced nearly 200,000 more cars in Q3 compared to Q2. Notably, our organic revenues in Asia grew nearly 27% in Q3. Both China and India helped drive top line growth in the quarter. For full year 2011, we are expecting auto builds in North America and Europe to be modestly lower than what we saw coming into the third quarter, but still at very healthy levels. In our auto aftermarket business, Q3 organic revenues grew 5.4%. The majority of growth came from the North American side of the business, and 2 developments helped our North American auto aftermarket business in the quarter. We saw a notable increase in the collision repair business and lower gas prices translated into more discretionary income to buy our maintenance and appearance products, so good news on that front. Finally, our truck remanufacturing business grew organic revenues 17.7% in the third quarter due to strong customer activity associated with oil and gas field exploration in the Western United States as well as Canada. Moving to Industrial Packaging. Segment's Q3 organic revenue grew 6.3% versus the year-ago period, reflecting stable industrial production fundamentals around the world. However, it's clear that the North American end markets were in fundamentally better shape than Europe. To illustrate the point, total North American Industrial Packaging grew organic revenues 8.1% while total international Industrial Packaging increased revenues a more modest 4.2%. In the strapping and equipment category, our North American Signode businesses grew organic revenues 12% while International organic revenues increased 3.7%. And similar to last quarter, the equipment portion of the business was growing at a faster rate than the consumable portion. On a worldwide basis, our stretch packaging equipment and consumables businesses grew organic revenues 10.3% while our protective packaging units increased organic revenues 4.7%. Moving to Power Systems and Electronics. Similar to what we saw in Q1 and Q2, this segment produced very strong organic growth in Q3 versus the year-ago period. Segment organic revenues grew 11.7% in the quarter, led once again by our welding business. Our worldwide welding organic revenues grew 20.2% in Q3, with North American welding organic revenues increasing a very robust 26.1%. The strong growth in North America was largely driven by high levels of activity associated with the oil and gas as well as heavy equipment end markets. On the international side, organic revenues grew 6.3% in the quarter, with China producing nearly 20% growth. Moving to the electronics side of the segment. This category grew a modest 1.7% in the quarter, but it was really a tale of 2 different parts of the business. Our PC board business grew organic revenues 9.1% as consumer demand for electronic products remained relatively strong. And please remember that the PC board organic growth was accomplished even with very difficult comparisons from Q3 '10. The other portion of our electronics business experienced more difficult conditions and produced an organic revenue decline of 2.6% in the quarter. In the Food Equipment segment, organic revenues declined 0.5% in the quarter versus the year-ago period as weak demand for institutional equipment was evident in both North America and internationally. In North America, overall organic revenues fell 0.8% in the quarter as equipment organic revenues declined 3.2%. Institutional demand for products has been muted by tighter CapEx spending for the private sector and tighter budgets for government entities. The good news was that the performance of the North American service business -- it produced organic revenue growth of 3.3% in the quarter. And this story of slower equipment purchasing was also evident internationally, with equipment organic revenues declining 1.9% due to tightening related to institutional spending. Like North America, we were pleased with our international service organic growth of 4% in the quarter. In Construction Products, segment organic revenues increased a modest 2.9% versus Q3 '10 due to positive growth contributions from North America and Europe. In North America, organic revenues grew a surprisingly strong 7.4% as all sectors of the businesses demonstrated product penetration gains and fundamentally trough end markets. In the residential business, organic revenues grew 6.8% even as housing starts averaged modestly above 600,000 units in Q3. In our commercial construction and renovation construction categories, organic revenues increased 5% and 9.5%, respectively. Internationally, European Construction organic revenues grew 3.3%, in part due to the ratcheting down of government spending. And in Asia Pacific, Construction produced an Q3 organic revenue decline of 1.7% due in part to housing softness in Australia and New Zealand. In the Polymers and Fluids segment, organic revenues showed improvement from earlier 2011 quarters as organic revenues totaled 8.2% in Q3 versus the year-ago period. Growth was driven from both the larger polymers sets of businesses and the smaller fluid portion of the segment. Worldwide polymer organic revenues grew 9% due to reasonable worldwide industrial production metrics and further penetration to the various niche markets we serve. International polymers grew organic revenues 10.2%, while North American polymers grew organic revenues 6.2%. In the fluids businesses, total organic revenues grew 5.7%, with both North America and the rest of the world contributing to growth. In the Decorative Surfaces segment, organic revenues delivered another quarter of better-than-expected organic revenue growth, with segment organic revenues increasing a healthy 8.7% versus the year-ago period. Growth was led by contributions from both our North American and international business units. In North America, organic revenues increased 7%, thanks to the consistent launch of premium laminate products especially those in the high definition category. These products have a similar look to natural stone but are at lower price points. The North American high-pressure laminate business also benefited from growth in the office furniture category, which is largely being driven by commercial construction renovation activities. Internationally, organic revenues grew 10.5% due to strong performance from a number of European and Asian businesses, including those in the U.K., China and Thailand. And finally in our last segment, of the All Other, segment organic revenues grew 3.1% in the quarter versus the year-ago period. Organic revenue growth was directly the result of our Test and Measurement business. For this business, organic revenues increased a strong 11.2% as capital spending in their end markets helped drive equipment orders to healthy levels in a variety of geography. Notably, organic revenues in China grew 22% in the quarter and Test and Measurements' organic revenues totaled 6.2% in Europe. The story, unfortunately, was not as favorable for our consumer packaging and industrial/appliance businesses. In Q3, consumer packaging's organic revenues were flat as strength in the decorating business was offset by slowdown in demand for beverage packaging products. And not surprisingly, our industrial/appliance businesses saw organic revenues decline 4.9% in Q3. And this concludes my segment remarks. I'll now turn the call over to Ron, who will cover our 2011 forecast. Ron?

For the fourth quarter of 2011, we are forecasting diluted income per share from continuing operations to be within a range of $0.86 to $0.94. The low end of this range assumes a 9.5% increase in total revenues versus 2010 and the high end of the range assumes a 12.5% increase. The midpoint of the EPS range would be 36% higher than last year. For the full year 2011, we have moved our forecasted EPS range for continuing operations to $4.04 to $4.12. This new range essentially encompasses the low end of our previous range. This range assumes a total revenue increase of 15.1% to 15.9%. The new midpoint of $4.08 would be 42% higher than 2010 and is $0.05 lower than our previous midpoint of $4.13. This $0.05 decrease in the midpoint is comprised of a positive Q3 of $0.01, offset by fourth quarter decreases of $0.03 related to currency translation, $0.02 related to lower revenues and $0.01 due to higher restructuring costs. Other assumptions included in this forecast are: exchange rates holding at current levels; acquired revenues between $800 million and $1 billion; restructuring costs of $50 million to $60 million for the year, which is $10 million higher than the previous assumption; and a tax rate range between 28.5% and 29.5% for the fourth quarter and full year, excluding the impact of the first quarter favorable Australian tax case. I will now turn it back over to John for the Q&A.

Thank you, Ron. We'll now open the call to your questions. As I said earlier, we ask that you honor our "one question, one follow-up question." We'll start with the questions now.

[Operator Instructions] Our first question comes from Amy -- excuse me, Ann Duignan with JPMC. Ingrid Aja - JP Morgan Chase & Co, Research Division: It's Ingrid Aja standing for Ann. Can you talk a little bit more about what you're seeing in Europe? Is it across all businesses, or is it more concentrated in certain segments?

What we've seen in Europe? Well, in Q3, the overall European numbers came in, in the 3.8% range in terms of total organic growth, so a reasonably good quarter. We saw -- I wouldn't say we've seen any disparity in any particular segments there. I mean, the appliance segment is probably the only segment of great note this week, but the auto segment's been good, the Construction segment's been reasonable there. Our Test and Measurement businesses have done well there. So I'd say it's pretty evenly spread in terms of what we saw in performance during the quarter. Ingrid Aja - JP Morgan Chase & Co, Research Division: But looking forward to your Q4, you had noted that softer trends in Europe. So I was just wondering which segments specifically?

Well, I think, as you've looked at the -- some of the industrial production numbers have softened a bit there. And I think, going forward, we'd expect to see -- some of these trends, we've seen come down from Q2 to Q3. We came down in growth rates in Europe and we're expecting that we'll see some modest slowing in Q4 in our numbers as well. So I wouldn't call it anything dramatic or any particular single market that we're looking at. Ingrid Aja - JP Morgan Chase & Co, Research Division: Okay, that's helpful. And then, you noted $300 million in acquired revenues in the quarter. I was just wondering if, given the macro economic environment and the dislocation we've seen in the market, has there been any change in the acquisition environment? Any change in multiples? Are targets more anxious to sell?

I would say that there's not been a lot of change since last quarter. It still remains a market that, I think, there are opportunities out there, but valuations still, from historical standards, remain relatively high. And so we've kept our discipline in our pricing on acquisitions. But I think the pipeline at the moment is reasonable. But it's the -- we're heading towards the end of the year so it's always variable as to what we think we have in the pipeline that might actually close. But I would characterize the environment as largely similar, some uncertainty in the acquisition environment related to economic trends. It always cast a bit of a pall over it. But on the other hand, plenty of liquidity, which is keeping valuations in many segments at pretty high historic levels.

Our next question comes from Andy Kaplowitz with Barclays Capital.

So you saw a large reversal in your construction base revenue between 2Q and 3Q. What do you think it says about the overall markets? I know you talked about penetration. But also, your dec surfaces business has been doing well too, regarding commercial Construction. So how do we characterize commercial and even residential, which showed some growth?

Well, I -- one month isn't a trend in residential. I mean we've seen some nice turnaround in some numbers here recently, but we're still at historically low levels. So while we're happy with the performance, given the trough scenario that John described earlier, I would hardly say that we're seeing a -- the end of the tunnel here yet. But clearly, we're pleased with what we saw during the quarter. I think the way that I would describe it is, residential has been bouncing along at this bottom between 500,000 and 600,000 housing starts on an annualized basis, changing monthly over the last almost 1.5 years now. So it's clear that, I think, a bottom has formed at that level, but how we're going to accelerate from that bottom is going to depend, I think, largely on what happens on a number of fronts. Certainly, the mortgage market, some of this refinancing that's being talked about. But people aren't going to be building new homes in significantly higher volumes until we start to see the housing market begin to function again, which means some stabilization in housing prices and working out some of the mortgage issues that still remain: foreclosures, mortgage rates, et cetera. So while we've been able to take advantage of some of this short-term, in terms of penetration gains, I think we're still fundamentally at almost a record-low level here, in terms of housing activity here. The Decorative Surfaces market, our end markets, that business is a business that is about 2/3 commercial now in North America, so it relies more on commercial. And a lot of the commercial markets, they rely on our renovation-related -- retail outlets, as an example, office refurbishments, things like that, that have in fact improved somewhat over the course of the year. So we're happy to see those improvements as well. On a square footage basis, the Dodge Construction data in August showed that the year-over-year comparisons are down now only 6% compared to last year. So we're probably seeing the bottom in the equivalent of construction start activities on the commercial side, with even some categories having actually shown some positive comps year-over-year during the quarter, like commercial construction showing 4%, improvement warehouses are up 15%. And still, some negative numbers in there as well: Education and healthcare are the ones that are the biggest negatives at the moment. So I think we're seeing a similar floor sort of form in commercial in terms of start activity but, again, at some pretty low levels historically.

That's helpful. The other big topic, I think, that people ask about is China. You showed good organic growth in the quarter but a lot of moving pieces. It seemed like a lot of the commentary was actual improvement in China. So maybe you could just comment on, overall, what you're seeing and what businesses maybe are strong and maybe some that are not as strong?

Well, I think John highlighted some of those in his comments. I'll try to recap a few of them. I mean, the auto business has been quite strong for us in China, as John highlighted in his comments earlier. The segment revenue data in China was up -- or I should say, between China and India, it was up in the mid-20s for the quarter. Our Test and Measurement business has done well in China, mid-teen growth rates there, in those businesses. So I think it's spread across a number of different end markets. And I think our China business, overall, with the exception of those that are concentrated on the consumer electronics categories where we've seen more weakness lately, I think most of the China businesses have been performing in modestly double digits, up to the mid-20 kind of double-digit organic growth rates. So we're not seeing any significant change other than electronics.

Okay, so it's fair to say you're not seeing significant slowing in the business, it's still performing pretty well overall?

Yes.

Our next question comes from Jamie Cook with Crédit Suisse. Peter Chang - Crédit Suisse AG, Research Division: It's actually Peter Chang for Jamie. So the price/cost relationship, as you guys alluded to during the last call, was negative for the third quarter. How should we be thinking about that, going into Q4? I know you guys had talked about your price increases would start impacting that. And then I wanted to kind of dovetail that into -- your incremental margins are going to be pretty strong in Q4 albeit against an easy comp. Where should we be thinking about those in 2012 in sort of a slow-growth environment? I mean, are we talking mid-teens here or sort of in the low 20% range?

So on price/cost, as we've talked about all year, we've been battling cost increases all year. The costs have stabilized in the third quarter, in some cases have gone down in certain categories. So our price/cost overall for the quarter, for the total company, is negative 50 basis points. We expect that to be flat year-on-year in the fourth quarter but an improvement sequentially from the third quarter of this year to the fourth quarter of about 20 basis points. So we have been putting a lot of price increases in place throughout the year. Costs have stabilized, so that'll be less of an issue as we move forward here. Regarding margins, we do expect margins to be significantly higher than last year. Last year, we had relatively low margins in the fourth quarter, in the 12.5% range. We had a very tough December internationally due to weather and some other issues, so we do have an easy comparable. We expect margins to be in the 14.5% to 15.5% range in the fourth quarter. We won't -- we can't really comment on margins for the full year at this point. We typically don't look forward to 2012 at this point in the year. Peter Chang - Crédit Suisse AG, Research Division: That's fair, I thought I'd give it a shot. One more, if I may. The $1.3 billion in cash, most of it's held overseas. Do you guys have a breakdown of that geographically?

I don't have it off-hand. But generally, there's a fair amount in Europe, there's a fair amount in Asia and Australia. So typical, where we earn the revenues, that's where the cash is. And we hold that overseas and try to reinvest it in the business as well as make overseas acquisitions. Certainly, there's a tax cost of bringing it back to the U.S. and that's why we haven't brought it back.

Our next question comes from John Inch with Bank of America.

Did you see any weather-related benefits to your Construction businesses in North America? 3M called out a strong roofing granule business because of the hurricane. I'm just wondering if you had any associated benefit that you could perhaps tell?

We have, John, we have a modest presence in the residential roofing market, but I wouldn't have any data that would, at the moment, suggest that we saw any improvement there. And we do also have a modest amount of revenue in the commercial roofing segment. And I know, from having visited a couple of our businesses in that segment during the quarter, that they've in fact saw some improvement in their demand based on some retrofitting and reroofing jobs that were weather-related. But none of those would be significant enough to have provided any commentary in our call today.

Yes, I know. And even I wasn't just thinking roofing but just, in general, because of weather. I don't know, I was just speculating.

We did pick up a little bit of incremental growth in the welding area, around the power systems, associated with the hurricane. So typically, what happened: power goes out, we and other companies ship in generators, things of that sort. So, it helped a little bit in the Q3 for our welding business, in North America in particular.

Okay, well, that makes sense. I want to square up your commentary around consumer electronics demand being relatively solid. I mean, 3M missed numbers on the back of consumer electronics weakness and, whether it be Philips or other companies and just some of the macro data, suggesting that there's a material softening underway. Why is your business different? Is it -- do you think it's a mix issue, a channel, the way you kind of go to market issue? Maybe just help us on that, kind of square those 2 dynamics.

Well, first of all, I don't think we said our consumer electronics business was strong. If we did, I think -- I don't think that statement was what we intended to say, if it came out that way. I think what we said was the demand for some of our consumer electronic products remained strong mainly in the smartphone market, not -- and somewhat reasonable still, in some of the computer-related markets, but we're not really into electronics on a broad-category basis in terms of display systems and things like that, if that's what you're referencing. So I would say, what we've seen on the demand side has been more related to some of the smartphone markets and some of the higher-end chip markets where we have reasonable penetration. But in terms of actual consumer end products, beyond those, our products end up in a lot of different industrial electronic applications as well.

Yes, I know. The scripts says, "our PC board business" as it pertains to "consumer demand for electronic products remained relatively strong." So is that mix tied to what you just described, David, smartphones and tablets...

Yes, it does, John. I apologize. Yes, that's exactly what it's tied to.

Okay, okay. So overall, how would you just characterize kind of your consumer electronics exposure and the position? Do you expect it to kind of hold? Or I mean, obviously, you can see the data points like everyone else. Do you expect it to sort of hold or soften a little bit, or what?

I would expect, based on the trajectories we've seen in those segments, that we would expect some softening in Q4. And we've built that into our guidance already, yes. Remember also, John, that our PC board business is about 70% equipment, 30% consumable. So we still see the front end of the equipment, particularly as they launch some of these newer products, the equipment sales are still relatively strong because many of these newer products that are being launched require new equipment configurations.

No, that's helpful. Just lastly, would you be considering any kind of cash repatriation, given that -- your commentary that the bulk of your cash is resident overseas? But clearly, you still want to do deals in North America.

Certainly, it's something we look at all the time. There is a tax cost to bring it back. And the economics around it is, what's the tax burn versus the investment, et cetera? We've been lucky to have enough capital and enough debt capacity in the U.S. to fund all our U.S. investments. And we are making a lot of investments overseas, both from a merging market perspective as well as acquisitions. So we do look at it on a continuous basis to the extent that, if there was any kind of tax law change with the repatriation holiday, we would certainly take advantage of that.

Our next question comes from Deane Dray with Citigroup.

For the fourth quarter guidance, I know you gave the total revenues within the range. Do you bracket what the base revenue assumption is for the fourth quarter?

The base is in the 5.5% to 6.5% range.

Okay, great. And then a question on restructuring. And this is a question that would suggest going beyond just the incremental restructuring that you're looking to do in the fourth quarter and is already in your guidance. But it sounds like ITW is in the preliminary stages of what could be a significant portfolio restructuring or simplification. So I recognize that this is real early and you're probably going to want to talk more about this in December, but perhaps you could just frame for us today what that scope might be, potential timing and, just to clarify, what you're thinking about along those lines?

Well, Dean, I think what I would say is that the restructuring that we've indicated in the Q4 numbers are obviously a result of 2 things. One is, we do see some slowing in some end markets that would require some level of restructuring already, which we're focused on, and the increased activity level in acquisitions over the 1.5 years, which also feeds restructuring projects. Those are probably the 2 primary reasons for the higher fourth quarter level. In terms of what we would expect to see, in terms of restructuring in 2012 and ahead. Obviously, we haven't cast any of those numbers yet, but as we look at what we would expect to see from an economic standpoint next year, it may well lead to us looking at further restructuring to size our businesses according to what we might see the economic activity levels to look like. But it'd be premature to talk about that at this stage since we haven't really gone through all of that analyses yet. But in terms of our continuing business simplification efforts, those remain underway and have always been integrated in our restructuring plans and programs along the way. So there's nothing at the moment that we would highlight as it relates to 2012 or any of that activity. But certainly, as our plans for 2012 begin to firm up and as we begin to look ahead to what the economic scenarios look like, we'll certainly share more of that at our Investor Day in December. But we really don't have anything that, at the moment, I would flag.

Okay. And then, last one for me. On Automotive Aftermarket, just if you could update for us the expectations for that business in terms of where you grow from here. It looks like there's further investments to be made. And just remind us, it doesn't look like there's much in the way of synergies with your OEM side, and perhaps that's the attraction.

There is not any significant synergy between the Automotive Aftermarket business and our OEM business. The OEM business is selling really product into the OEMs as vehicle parts and components. The aftermarket business is really broken into several categories: maintenance products, repair products and then the appearance product categories. So those are all unique products that don't cross over at all with our OEM business. The Automotive Aftermarket has obviously some different growth trends: Miles driven are an important factor, and age of vehicles. It's a particularly attractive market overseas in the maintenance and repair categories. And here -- in the repair category and the appearance categories are probably of higher growth and higher interest. So they operate differently globally, the end markets in Automotive Aftermarket. But it's an that we've been flagging for the last 3 or 4 years as we have acquired several businesses in that space. And we like the underlying dynamics of the space. We think it's got a nice growth characteristic and we like the margin profile of the businesses that we've been able to put together in our portfolio in the Automotive Aftermarket category. And you may recall, we highlighted that as one of our future growth platforms last year. And I think we will continue to focus on that as we see the opportunities.

Our next question comes from Mark Koznarek with Cleveland Research.

The non-volume hit your margins of 120 basis points. You called out 50 impact from price/cost. What is the other?

The biggest piece of the other relates to a variety of corporate adjustments, the biggest being a mark-to-market on our value of our life insurance policies, which cost us about 50 basis points.

Okay. I'll ask you about that one offline, that's a new one on me. Okay. Then, given -- there's -- you've talked about kind of slowing activity in a variety of areas and a little more cautious here in the fourth quarter. But you just, in your answer to a previous question, pointed out that the 4Q base is looking like 6% at the midpoint, which is on top of the 3Q level. I know that we're talking about an easier comparison, but that doesn't look like a particularly dramatic slowdown. Can you kind of square up the caution with the actual numerical guidance that's still pretty reasonable?

We had built in 7% in organic growth when we did our forecast last quarter.

Yes, our original forecast, so it's modestly down from what our forecast had been originally for Q4. But as you point out, very much in line with what we actually saw in Q3. So I think what we've seen is at least some moderation and slowdown. You may recall that our original forecast for Q3 was also closer to 7% and we came in at 6.2%, so we've seen some modest level of slowing. I think that's what we would anticipate as we look ahead to Q4, a similar range but not anything dramatic.

Okay. Final clarification on your acquired revenue outlook. We're almost at the lower end of your range and you've been clicking off 200-plus per quarter. Is it -- are you signaling that, suddenly, there's been a pretty big gap that's emerged between the buyers and the sellers attitude towards valuations? Or are you just being cautious?

Well, there's a lot of variables that go into citing that number. Obviously, it's based on what we see in the pipeline at the moment and what transactions we think could likely close during the quarter, and I think it's based on that. I think I commented earlier about the environment. I think the environment, from a valuation standpoint, still remains, in my view, challenging. There's still a lot of expectations of higher valuations that we're not comfortable with. That has some impact on how we would look at the success rate, if you will, on closing some of the things that are in the pipeline. So I think it's probably a twofold question. One is, we're close to the end of the year and there's always things that move around in the pipeline and so, trying to predict accurately what the exact number will be for Q4, and therefore, for the year, is a little more challenging. And secondly, the things in the pipeline that the valuations could change in the last 30 days, and we may elect not to be in. So it is a more volatile environment in that regard. So it -- a little more caution in our look at the pipeline as we provide these sort of updates on what we see happening is probably reasonable, given the environment.

And Mark, also, the fourth quarter tends to be a slower quarter for acquisition activity generally, anyway, because of the holidays. So if you don't have the deal all ready to go before the Christmas season, it tends to fall into the next year.

Okay. And Ron, what was the pipeline? I think I missed that earlier.

The range is $800 million to $1 billion.

No, the size of the pipeline at present?

I don't think we disclosed that.

The pending deal portfolio, the pipeline that you guys often mention?

Mark, we don't have that number with us here but we'll see if we can find that. But it's probably somewhere in the $500 million to $700 million range.

Our next question comes from Eddie Szeto with Goldman Sachs.

So just looking at your capital allocation policy. It looks like you guys just did $400 million of buyback this quarter -- $400 million this quarter, $550 million last quarter. Any change in kind of the buyback attitude or preferences for free cash?

No real change. We've always wanted to have a balanced capital allocation, and certainly, depending on the environment, the mix of the different components changes. We -- as we talked about, year-to-date, we've returned to shareholders almost $1.5 billion in dividends and share repurchases and we've spent $1.2 billion on acquisitions. So we've been able to remain relatively balanced. We are slightly above the high end of our target debt-to-cap range of 20% to 30%, but we've always said that's a guideline and we're willing to go above that for the right kind of investments.

Got it. And then just on the repurchase for 3Q, could you give us some sense of the balance of that over the 3 months? Was it more September-weighted? Or anything, that would be helpful.

Yes, we don't typically disclose that.

We were active throughout the quarter, let's just put it that way.

Fair enough. And then do you guys have any updates on the finishing business, the divestiture there? That would be helpful.

We continue to work with Graco and the FTC to gain the FTC approval. I think, as was noted in our last call, there was a second request made by the FTC for additional information, which we and Graco have provided. And we're working through the remaining questions the FTC has with the hopes of getting their approval and clearance sometime in the next 60 days or so.

Okay. And just last question for me. It looks like you guys have a $24 million, $25 million other income item this quarter. Just anything there would be helpful.

The biggest component in there, we had translation gains that were favorable versus last year by about $10 million. These are assets and liabilities denominated in a foreign currency. In this case, U.S. dollars, held by international operations. And as you know, the dollar strengthened significantly, especially in the month of September. Next question?

[Operator Instructions] Our next question comes from Ajay Kejriwal. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: So just first on Industrial Packaging, and I apologize if you already answered this question. I jumped on late. Looks like North America base revenues came in very nice, 8.1%. Maybe any color by what you saw sequentially? And then, any early read into October?

Well, I don't have the sequential data for the quarter, if that's what you mean. But I think what I would say is that we have seen, as I think John pointed out in his earlier commentary, the equipment businesses have remained stronger than the consumable businesses, equipment businesses still in -- modestly in the double digits and the consumable businesses in the lower-single digits. So we're seeing they're pretty much in line with the activity levels that we would've expected at this stage in those businesses. I don't really give you a read on Q4 that's much different than what we saw in Q3. The early look at our Q4 numbers would suggest, sort of in line with what we saw, overall growth to be, on a comparable basis, probably up in the mid-single digits for the category as we head into Q4. But not a lot more flavor than that at this stage, Ajay. Ajay Kejriwal - FBR Capital Markets & Co., Research Division: Okay. And then a follow-up on that pricing discussion. It sounds like you expect pricing materials to be a positive in the fourth quarter. Any early thoughts into expectations for next year, assuming materials remain where they are? Would you expect to keep pricing? Or could you give back some pricing as materials ease?

Ajay, so first of all, to clarify, the price/cost fourth quarter '11, expected versus fourth quarter '10, we expect to be flat year-on-year -- Ajay Kejriwal - FBR Capital Markets & Co., Research Division: But I thought you said sequentially that's a positive?

Sequentially, it's positive because what we do -- yes, as we put price increases in place, we expect to hold those even as costs moderate a bit. So that's what we would expect going forward here. Assuming that raw material costs stay where they're at, that should be some benefit into '12.

So on a relatively stable environment, Ajay, what we would normally see is that the prices will generally hold. In some cases, we have to provide some price relief if the commodity costs go down, but we generally are able to protect margins better in a declining commodity environment than obviously we are in a rising one. Our view at the moment for 2012 on most of these commodities is we'd expect to see a relatively stable environment entering the year, which means that, when we do develop our final numbers for 2012, we'd expect to probably see some positive price comp -- price/cost comps for the year.

At this time, we have no additional question.

Okay. Thanks, everybody. We appreciate you participating in the call, and we'll be talking to many of you later. Thank you very much. Have a good day.