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Operator
Welcome and thank you for standing by.
At this time all participants are in a listen only mode.
(Operator Instructions) Today's conference is being recorded.
If you have any objections you may disconnect at this time.
I'll now turn the meeting over to Mr John Brooklier, VP of Investor Relations.
Sir, you may begin.
- VP IR
Thank you.
Good afternoon everyone and welcome to our first quarter 2010 conference call.
With me on today's call is CEO David Speer and our CFO, Ron Kropp.
Thanks for joining us.
I'll now turn call over to David who will make some brief remarks on our very strong first quarter operating performance and our updated 2010 guidance.
David?
- CEO
Thank you, John.
As noted, we posted very strong first quarter operating results in a number of key categories.
Our first quarter revenues increased 14.6% versus a year ago, with total base company revenues growing 7.5%.
Notably, we had nearly equal base revenue growth contributions from our North America and international businesses, with North American based revenues up 7.1% and international base revenues increasing 8% in the quarter.
A number of our segments produced solid based revenue gains in the quarter.
Our Transportation segment grew base revenues 32% thanks to the significant ramp up in the first quarter auto bills in both North America and in Europe.
Our Industrial Packaging segment and our Power Systems and Electronics segment both saw base revenue growth in the 11% range during the quarter, and our Polymers and Fluids segment produced revenue growth of 8% during the quarter.
We believe the stronger base revenue growth in these segments highlights an improvement in consume buying patterns, as well as a pick up in industrial production and underlying end market activity.
We posted very strong operating margins of 13.4% in the quarter.
This represented margin growth of 1,050 basis points versus our reported results from the year ago period.
When you exclude the impact of our 2009 first quarter impairment, our first quarter 2010 operating margins would have been 760 basis points higher than the first quarter of 2009.
It's important to note this dramatically higher margin growth was the result of our business units ability to achieve significant leverage on increased revenues, thanks to lower overhead manufacturing costs due to our restructuring programs.
Finally our 2010 second quarter and full year forecasts reflect a more bullish view of worldwide economic and end market growth for the remainder of the year.
While we have learned over the years that a forecast is still a forecast, we have a growing sense of optimism that the business environment will continue to improve as the year progresses.
Now back to John.
- VP IR
Thank you, David.
Here is the agenda for today's call.
Ron will join us shortly to talk about Q1 2010 financial highlights.
I will then cover Q1 operating highlights for our eight reporting segments.
Ron will then detail our Q2 and full year earnings forecast.
Finally we will take your questions.
As always, we ask for your cooperation for our one question, one follow-up question policy.
First, let's cover our mandatory housekeeping items.
Please note that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitations, statements regarding operating performance, revenue growth, diluted net income per share from continuing operations, restructuring expenses and related benefits, tax rates, end market conditions and the Company's related 2010 forecasts.
Finally, the telephone playback of this conference call is 203-369-3795 and no passcode is necessary.
The telephone replay is available through midnight of May 4, 2010 and one other reminder, our webcast PowerPoint presentation accompanying this call is available at our itw.com website.
Now here is Ron Kropp who will comment on our first quarter 2010 financial highlights.
- SVP, CFO
Thanks, John.
Good afternoon everyone.
Here are the key items for the first quarter.
Revenues increased 15% due to higher based revenues and currency translation and significantly improved from the fourth quarter revenue decline of 5%.
Operating income was $484 million, which was higher than last year by $393 million.
Margins of 13.4% were higher than last year by 10.5 percentage points.
Diluted income per share was $0.58, which was higher than last year $0.60 and above our most recent EPS guidance of $0.48 to $.56, primarily due to stronger base business results especially in March.
Also included in EPS for this year was the previously disclosed $0.04 per share tax charge related to the new healthcare bill.
Included in last years EPS was an impairment charge which reduced earnings by $0.17 and discrete tax adjustments which reduced earnings by $0.06.
Finally, free operating cash flow was $219 million.
Now let's go to the components of our operating results.
Our 14.6% revenue increase was primarily due to three factors.
First, base revenues were up 7.5%, which was favorable by 17.5 percentage points versus the fourth quarter base decline of 10%.
As David mentioned, we have seen solid revenue gains worldwide lead by the Transportation, Industrial Packaging, Power Systems, and Polymers and Fluids segments.
North American base revenues increased 7.1% and international base revenues increased 8% in the first quarter, which were significant improvements from the fourth quarter declines of 10.9% and 9.0% respectively.
Next, currency translation increased revenues by 5.4%, which was favorable by 210 basis points versus the fourth quarter currency benefit.
Lastly, acquisitions added 2% to revenue growth, which was 30 basis points higher than the fourth quarter acquisition impact.
Operating margins for the first quarter of 13.4% were higher than last year by 10.5 percentage points and higher than fourth quarter margins by 70 basis points.
The base business margins were higher by 810 basis points due to both the favorable impact of the higher sales volume and the positive impact of non-volume items.
Included in the non-volume items are the following items.
Lower cost as a result of restructuring programs plus 200 basis points, favorable price cost effect plus 70 basis points, inventory adjustments related to costing and obsolescence reserves plus 160 basis points.
In addition, margins were higher by 270 basis points due to last years impairment charge of $90 million.
Also acquisitions reduced margins by 20 basis points and translation diluted margins by 30 basis points.
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 increased by $13 million in the first quarter as the result of the bond issuance in late 2009 of March.
Other non-operating income and expense was favorable by $10 million, mainly due to higher income from investments.
The first quarter effective tax rate of 33.9% was higher as a result of the unfavorable discrete tax adjustment of $22 million related to the new healthcare bill.
Excluding this adjustment, the effective tax rate would have been 29%.
The tax rate is forecasted to be in the range of 28.75% to 29.25% for the second quarter and 29.75% to 30.25% for the full year.
Turning to the balance sheet, total invested capital decreased $171 million from the fourth quarter, primarily due to unfavorable currency translation partially offset by higher inventory levels.
Accounts receivable DSO was 61.2 days versus 59.7 at the end of the fourth quarter.
Inventory months on hand was 1.8 at the end of the quarter versus 1.9 at the end of last year.
For the first quarter, capital expenditures were $61 million and depreciation was $84 million.
ROIC for the first quarter, excluding the discrete tax adjustment, increased to 13% versus 5% last year excluding last years impairment and tax charges.
On the financing side, our debt level was essentially the same as the fourth quarter and debt-to-capital remained stable at 26%.
Cash on the balance sheet increased to $1.4 billion from $1.3 billion at the end of the fourth quarter.
Our cash position increased $99 million in the first quarter as our free operating cash flow of $219 million and short-term debt proceeds of $112 million were utilized for acquisitions of $28 million and dividends of $155 million.
Regarding acquisitions, we acquired four companies in the first quarter which have annual revenues of $26 million.
Our current forecast for full year 2010 is acquired revenues of $300 million to $500 million, which includes a $62 million auto after market business which closed in early April.
I'll now turn it back over to John who will provide more details on the first quarter operating results.
- VP IR
Thank you, Ron.
Now, let's review our first quarter segment highlights starting with Transportation, Q1 2010 total segment revenues increased 35.6% versus the year ago period.
Base revenues grew a very healthy 32% compared to the year earlier period, and notably Q1 operating margins of 13.7%, or 1810 basis points higher than the year earlier period, but 130 basis points lower than Q4 2009 operating margins.
The large Q1 increase in segment based revenue growth was due to continued high levels of auto builds in both North America in Europe.
In North America Q1 2010 auto builds of 2.9 million were substantially higher than the Q1 2009 builds of 1.7 million.
And Detroit three and new domestic OEMs both participated in these big year-over-year production increases.
European auto builds totaled 4.2 million in the first quarter of 2010 versus a build of 3 million units a year ago.
We continue to believe that auto builds will stay strong throughout the year and we are now forecasting full year 2010 auto builds of 11.2 million units for North American OEMs and 16.5 million units for Europe.
In our auto after market group, Q1 2010 base revenue grew a modest 0.6% on a year-over-year basis reflecting a slight uptick in miles driven and consumer spending in this category.
Moving to Industrial Packaging, total segment Q1 revenues grew 21% versus a year ago period.
Q1 base revenues totaled 10.9% growth compared to the year earlier period.
Q1 operating margins of 9.8% were 1,040 basis points higher than the year earlier period and 250 basis points higher than the Q4 2009 operating margins.
Industrial Packaging's base revenues continued to show improvement in the first quarter of 2010 with base revenue growth of 10.9% compared to the year earlier period.
Recent macro data including improving industrial production activity in the US, underpinned better financial results for a number of our North American Industrial Packaging business units.
Notably, our total North American Industrial Packaging base revenues increased 19.8% in Q1, with the signal strapping volume increases accounting for a significant majority of the growth.
Total international Industrial Packaging base revenues were up 2.5% in the quarter versus a year ago.
Moving to Food Equipment, total segment Q1 revenues were modestly negative on a year-over-year basis.
Q1 base revenues declined 5.2% due to an expected slow equipment sales.
Even with slightly negative revenues however, Q1 operating margins of 11.8% were 150 basis points higher than the year ago period, but 220 basis points lower than Q4 2009 operating margins.
The Food Equipment's Q1 base revenue declined to 5.2% was directly tied to slow equipment sales in the quarter.
As we said in Q4 2009, worldwide customers continued to delay equipment purchases and that has impacted both our North American and international businesses.
Total North American Food Equipment base revenues declined 2.7% in the quarter, with the new project side of the business accounting for most of that decline.
As you would expect, the replacement side of the business was stronger in the quarter.
Once again, the strongest performance in the segment was the North American service business, which produced Q1 base revenue growth of 1% versus a year ago period.
Total international Food Equipment base revenues decreased 7% in the quarter as both Europe and Asia saw pushback from institutional customers on equipment orders.
Moving to Power Systems and Electronics, the total segment Q1 revenues grew 13.7% versus a year ago period.
Base revenues totaled 10.7% growth in the quarter compared to the year earlier period.
The substantially stronger Q1 operating margins of 20.8% were 1,440 basis points higher than the year ago period and 620 basis points higher than Q4 2009 operating margins.
The segments Q1 base revenue growth of 10.7% was largely attributable to our PC board fabrication businesses.
These units, which provide solder and OEM and manufacturing equipment to worldwide consumer electronics customers, produced a Q1 base revenue increase of 89.4% versus the year ago period.
Clearly the surge in demand for variety in consumer electronic products including phone, portable computers and PDAs has spurred on business group growth.
In the welding related portion of the segment, Q1 worldwide welding base revenues declined 1.4% versus the year ago period, however that is substantially better performance in Q4 2009 when worldwide base revenues fell nearly 25% on a year-over-year basis.
The sequential improvement from Q4 2009 to Q1 2010 was lead by North American welding which produced Q1 base revenue growth of 1.7% versus the prior year period.
Internationally, Q1 base -- welding based revenues declined 8.4% compared to the year ago period.
The next segment, Construction Products, total segment Q1 revenues grew 14.2% versus the year ago period.
Base revenues however only increased 0.5% in the quarter compared to the year earlier period.
Even so, Q1 operating margins of 6.9% were 1,010 basis points higher than the year ago period, but 300 basis points lower than Q4 2009 operating margins.
The segments Q1 base revenue growth of less than 1% directly reflects sequentially better financial performance, but still relatively tepid end market demand in both North America and internationally.
In North America, total construction base revenues declined 2% in Q1 versus the year ago period.
Our North American residential businesses saw base revenues grow 7.6% in Q1, thanks to better housing start data.
In Q1, housing starts averaged 617,000 units versus housing starts that were largely in the 550,000 range for the second half of 2009.
However the renovation and commercial construction businesses both produced base revenue declines of 6% compared to the year ago period.
Internationally, Q1 base revenues increased 1.1% versus the year earlier period, with Asia Pacific base revenues growing 4.3%, and European base revenues declining 0.9%.
In the Polymers and Fluids segment, total revenues grew 18.3% versus the year ago period.
Base revenues increased 7.6% on a year-over-year basis as the Fluid side of the business showed substantial improvement.
Notably, Q1 operating margins of 12.5% were dramatically higher than Q1 2009, but 110 basis points lower than Q4 2009 operating margins.
The segments Q1 base revenue growth of 7.6% was largely driven by our worldwide Fluids businesses.
Base revenues for the worldwide Fluids businesses grew 13.9% in Q1, with international businesses increasing 15.1% and North American base revenues growing 11.5%.
Growth in the Fluids category was mainly due to increased worldwide demand for both MRO, aerosol products as well as personal hygiene products.
The worldwide Polymers business has also shown improvement in Q1 with base revenues growing 4.7%.
International Polymers based revenues increased 6.1%, while North American based revenues were essentially flat year-over-year.
Decorative Surfaces total segment Q1 revenues grew 1.5% versus the year ago period.
Base revenues in Q1 declined 2.6% of segments.
As the segments North America commercial construction revenue concentration continue to impact results.
As a result, Q1 operating margins of 9.5%, or 260 basis points lower than the year ago period but 10 basis points higher than Q4 2009 operating margins.
While the Decorative Surfaces base revenues sequentially improved from a decline of 10.3% in Q4 2009 to a base revenue decrease of 2.6% in Q1 2010, the overall segment continues to be constrained by North American commercial construction mix.
Commercial construction activity indices all show on going weakness in US based commercial construction products.
Base revenues for the North American Wilsonart Laminate business declined 2.6% in Q4, I should say Q1, versus the year ago period.
On the international side, base revenues fell 2.5% in the quarter compared to the year earlier period.
Finally, in our All Other segment, Q1 revenues grew 11.4% versus a year ago.
Base revenues in Q1 increased 2.6% with short cycle consumer related businesses leading the way.
Very strong Q1 operating margins of 16.8% were 560 basis points higher than the year ago period and 190 basis points higher than Q4 2009 operating margins.
The segments year-over-year base revenue increase of 2.6% was due to the improved performance of our consumer related businesses.
Most notably, our industrial appliance base revenues grew 12.9% in Q1 versus the year ago with most of that growth emanating from energy efficiency initiatives in the appliance sector.
Consumer packaging base revenues grew 4.2% in Q1.
While our more CapEx related businesses showed sequential improvement Q4 2009 to Q1, they were still faced with weaker demand for equipment sales.
Most notably our worldwide test and measurements based revenues declined 7.5% in Q1 versus the year ago period.
Now, let me turn it back over to Ron who will cover our 2010 second quarter and full year forecast.
- SVP, CFO
For the second quarter of 2010, we are forecasting diluted income per share from continuing operations to be within a range of $0.74 to $0.86.
The low end of this range assumes a 15% increase in total revenues versus 2009 and the high end of the range assumes a 19% increase.
The bid point of this EPS range of $0.80 would be 122% higher in Q2 2009.
For the full year, our forecasted EPS range is now $2.72 to $3.08, based on higher total revenues of 10% to 14%.
The mid point of the EPS range of $2.90 would be 50% higher than 2009.
This new EPS forecast is a significant increase from the forecast range we provided in January of $2.43 to $2.93, and reflects our more optimistic view of the business environment and our ability to continue to generate solid operating margins.
Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues between $300 million and $500 million, restructuring costs of $50 million to $80 million for the year, and as I mentioned earlier, a tax rate range between 28.75 and 29.25 for the second quarter, and 29.75 and 30.25 for the full year.
I'll now turn it back over to John for the Q&A.
- VP IR
Thank you, Ron.
This concludes our formal part of our presentation.
We'll now open the call to your questions.
Please, as a reminder, one question and one follow-up, so everybody has a chance to ask questions.
Operator
(Operator Instructions) Our first question comes from John Inch, your line is open.
- Analyst
Thank you, good afternoon everyone.
- VP IR
Hi, John.
- Analyst
Hi.
Could we talk a little bit about M&A?
I see you didn't raise the expected contribution target this year.
If you look at sort of industry bid ask spreads, things have narrowed considerably, you are obviously very strong acquirers.
What do you see in terms of your current pipeline?
I think you have this secondary pipeline.
Maybe where could there be upside based on your activity levels and what areas are you looking?
- CEO
Yes, John, first of all as you know we don't adjust the pipeline until we've actually closed deals.
So if you follow what we said about Q1 and Ron noted in his comment we closed a deal early in April, of about 60 some million.
So year-to-date we're about $90 million in revenues closed, so at this stage, we wouldn't obviously raise the range, but obviously as our experience base on deals going forward would rise, we would look at that range.
I can tell you that the pipeline has strengthened since the end of the year.
The pipeline today is about $600 million in size, so it's up some $200 million since the end of the year.
I would expect that what we have in the pipeline that is scheduled to close over the next 45 days or so that we would likely be in a position before the end of the second quarter to make some upward revision in the range for acquisitions.
We are beginning to see some change obviously in the bid and ask if you will, the spread, but I can also tell you that there are a number of factors that are occurring from a private equity perspective that have also driven valuations up relatively quickly.
So there's a number of things going on, but I would say we certainly see an improving environment and I would expect that as the year progresses the pipeline will continue to strengthen.
- Analyst
David, if you look to the mid 2000s you completed $1 billion to $2 billion of revenue from deals.
Could you maybe just contrast today's environment with that period and are we -- do you foresee a scenario where we build back to those types of levels and if not why, or perhaps maybe we exceed them?
Just a little bit more color in terms of where you think we are relative to the future runway and it's less to do with this quarter next quarter, it's more just where are we heading with all of this as you sort of take a look at the landscape?
- CEO
I think we're clearly headed back to that same kind of trajectory that you referenced that we had from 2006 to 2008.
I think we're coming off of a very significant trough that occurred actually beginning in the latter part of 2008 into 2009 as business conditions weakened and as it became less and less a very conducive environment for acquisitions.
But I certainly see that the trends are upward, certainly the capabilities from our balance sheet standpoint and certainly our interests are there.
So I certainly see us returning to that kind of activity level again, where I would expect that we would be routinely looking at acquisitions that are in that 7% to 8% of our annualized revenues which is would put you in the billion dollar plus range on a normalized basis.
So I think we're at the beginning of what I would expect to be an up surge in the cycle as it impacts our acquisition activity.
- Analyst
Right.
Thanks very much.
- CEO
Yes.
You're welcome.
Operator
The next question comes from Jamie Cook.
Your line is open.
- Analyst
Hi.
Good afternoon.
Two questions.
One, just trying to get a feel for you talked about I think material costs, price you had a benefit of 70 bips in the quarter.
How do you see that playing out for the full year and whether or not we've gone out with more aggressive price increases in the back half and just the competitive response to that?
And I guess just a follow-up question to that is should we view -- how do you think about margins I guess in the remaining nine months of the year, should we continue to see sort of modest sequential improvement or whether there's anything in terms of seasonality or material cost price risk that I should be thinking about?
- CEO
Well, it's a couple things, Jamie.
First of all on the price cost side, yes, you accurately noted we had a 70 basis point favorable impact.
By our projections going forward that's over.
We've clearly seen raw material price increases, some of which we will offset with already initiated price increases as well, but I would expect that as we move forward it's going to be sort of the more traditional range where we have some cost increases that we don't recoup necessarily in line with the price, if you will, or price increases that don't necessarily recoup in line with all of the cost increases.
I would expect for the balance of the year we're probably going to bounce around between maybe minus 50 to minus 100 basis points per quarter, but pretty normal level of activity and that's really what we've built into our future look forward.
The price increases that we've seen, or cost increases we've seen, have largely come from the steel and plastic categories and they have moved up clearly at the end of the quarter and into what we're seeing in the early for the second quarter.
So I expect it will be in that kind of sort of market for the next several quarters anyway.
On the margin side, I would just remind everyone that our strongest quarter is in fact the second quarter.
So the margins that we are projecting for the second quarter are sequentially better that what we'd expect in the second half of the year on a percentage basis.
The change in margin profile, I think solidified significantly in the first quarter as we saw with the strong incrementals and I would expect that if you look at our mid point numbers for Q2 and extend those through to the implied ranges for the balance of the year, we would expect our margins for the year to end up in the 14% to 15% range.
So obviously trending up from the 13.4% in Q1.
- Analyst
Okay, and then the competitors response to price increases, are people being rational or are they being aggressive, just what you're seeing in general?
- CEO
I don't know that we have a lot to talk definitively about competitive response, but I know that our early moves on price have not met with anything other than the normal kind of resistance.
So I don't think there's any notable data on competitors that would suggest that people aren't expecting to recoup price based on cost increases.
- Analyst
Thanks very much.
I'll get back in queue.
Operator
Our next question comes from Terry Darling.
Your line is open.
- Analyst
Thanks.
Wonder if we can talk a little bit about the drivers of the sequential revenue improvement that's implied by the second quarter guidance, which segments is that coming from and if you think about the high and low end of the range on guidance kind of where the big swing factors could be again from a segment perspective?
- CEO
Well I think we expect, obviously as John and Ron pointed out in their comments, we've raised our guidance in the Transportation segment significantly based on what we see as a significantly better auto build.
The number now for us is 11.2 million for the year, that's up from 10.5 million, which was revised up from 10 million.
And the same on the international side in Europe, the auto build now is projected in the 16.9 million range up from just over 16 million.
So that's probably individually the strongest driver.
Continued strengthening in the Industrial Packaging area, certainly you saw the numbers that John spoke about particularly obviously on the consumable side, we haven't seen any significant rebound in equipment yet, but strong demand in consumables, almost a 20% increase here in North America in Q1.
So those are two of the more significant I would say drivers on the upside.
If you look at our revised guidance, however for the year you'll note that while we improved our earnings guidance we did not change the revenue range.
So our expectation is still that we're going to see base revenue for the year in the 8% range and that the real driver here in earnings improvement is going to be the incremental performance and stronger performance as the result of cost controls that we've had put in place.
So I think the offset to the stronger guidance on Transportation and Industrial Packaging is still a lag in what we see happening at some of the equipment businesses.
So I think all in, we're talking about a stronger margin profile based on what we see as better incrementals through the cost controls we've had in place, but not a significant change in our revenue outlook for the year.
- Analyst
And David, I guess two points of clarification on that.
First, you did talk about being more optimistic about the economic environment and so perhaps you're really suggesting maybe there is more upside here to the full year guidance to the extent that you do get a little bit more volume.
And secondly in terms of the better margins than driving the full year guidance move, doesn't sound like it's price cost.
Is it you're finding greater benefits from the restructuring you did last year, or maybe you can just clarify where within kind of the margin levers you're feeling better there?
- CEO
I think largely the margin levers is we're getting more benefit in the restructuring that we did last year than what we had projected.
That's probably 80% of it.
I would say that price cost, I would describe the price cost environment that we outlook now for the balance of the year as being sort of a normalized environment where there's some negative sort of headwind but it's relatively narrow.
We certainly will not see the benefits that we saw for the last three quarters in the price cost equation, but I think it's largely the incrementals are being driven by better benefits, or higher benefits if you will, than what we had anticipated in our restructuring activities last year.
Relative to the optimism, I would suggest the optimism we had built optimism into our original guidance in terms of what we saw happening with revenues.
I think we can confirm after the first quarter we came in slightly above our mid point on base revenue growth in Q1 and I think our base revenue growth, if you run the numbers for the balance of the year, would suggest that we're up in low double digits in Q2 and in the 6.5% to 7% range for the second half of the year.
So if we get revenue strength beyond that we'll certainly have much improved results from our guidance, but I think the note is we're really projecting similar revenues to our original guidance but stronger incrementals which leads to higher margins.
- Analyst
Helpful and then just lastly if I can sneak one more in, the geographic profile, David of your $600 million M&A pipeline, can you give us a feel for that?
- CEO
Oh, I don't have the exact makeup, but it would be probably slightly tilted towards international revenues at the moment.
- Analyst
Thanks very much.
Operator
Next question comes from Henry Kirn.
Your line is open.
- Analyst
Hi.
- CEO
Hi.
- Analyst
Wondering if you could chat a little bit about what you saw from the demand in March versus the rest of the quarter.
- CEO
Well obviously, the March numbers were quite strong.
In fact if you look at the differences between the numbers that we had put out in our mid March release covering the first two months versus what happened in March, it was a significant change upward, base business up more than 12% in March, which is obviously a strong indication of the improvement that we saw in that month.
We saw some of that building obviously heading into March, but obviously clarified across a pretty broad range of business, as John and Ron noted in their comments, but yes, March was a strong month.
- Analyst
And I guess could you talk a little bit about how we should think about working capital as we go through the rest of the year?
- CEO
Yes, well the big swing in cash flow, if you will, compared to Q1 of last year was really the build in receivables which you'd expect to come as a result of increased revenues.
There was not much change in inventory in terms of the overall inventory dollars, but certainly as the year progresses and we look at rates in the second quarter of base business growth in the 10 plus percent range we'll start to see inventory build as well.
So I would expect to see some modest gains in both inventory and then certainly as you look at receivables, the sales volumes for the coming quarters are higher than they were for Q1.
So you'll see some rise in obviously working capital as we look at the balance of the year.
- SVP, CFO
I think what you should expect to see is going back to more historical levels of DSO and month on hand, so typically, months on hand is 1.9 to 2 and DSO is between 60 and 61, 62.
- Analyst
Okay, thanks a lot.
Good quarter.
- CEO
Thank you.
Operator
Our next question comes from Eli Lustgarten.
Your line is open.
- Analyst
Good afternoon, brilliant quarter.
- CEO
Thank you, Eli.
- Analyst
A couple of questions.
One by the way, I hope you can post the presentation on the website.
At least I can't find it -- [Inaudible]
- VP IR
It's there.
- Analyst
Some place, we can't find it though.
Power Systems and Electronics had a phenomenal margin with the big part welding business sort of fell flat on its back.
Can you give us an idea of [Inaudible] was great, sustainability, both volume and margins, particularly the margin side of this business is expecting welding, have some guidance listed on the welding business in the next couple quarters and will consumables hold margins or are you familiar with what's going on there?
- CEO
Well obviously as you pointed out, Eli, the margins were impressive.
I'd say the biggest single lever in the quarter was the significant improvement in the PC board businesses because they had been a huge drag on margins.
Certainly the margins in welding are impressive and they have remained high.
The consumable margins are strong in that business.
The mix is still tilted towards largely equipment in our welding businesses, it still represents about 70% of the welding group if you will.
So the real -- I think the real swing in Q1 in terms of margin improvement would be really related to what changed in terms of the electronics subsegment there, and the strong improvement in the order volumes, both on the consumable side as well as the equipment side.
And the equipment side continues to build -- the backlog there continues to build, as John pointed out in his comments, the strong response or rebound in consumer electronics has been one of the stronger drivers there and some of that product also ends up in the automotive segment and that's also had a contributing factor as well.
- Analyst
So you're expecting these margins to be sustainable for most of the year at this point?
- CEO
Yes.
If you look at the growth rates we're looking at across this segment for the balance of the year the answer is yes.
- SVP, CFO
Eli, if you look at the prior year margins of 6.4%, that includes an impairment charge that had an impact of 5.7%.
So that's also driving part of this.
Historically, this segments margins are in the 20% range.
- Analyst
Without welding, it would be quite impressive at this point, and second question, are you seeing what's known as a [bolbus] effect?
Can you talk about what's going on in inventories in the chain and is there any chance -- any worries that a lot of this is just restocking and rebuilding the pipeline from the big defamation last year in the first half?
- CEO
Yes, there's no question that I think certainly in March, I would expect at least some of this had something to do with restocking in some segments.
It's hard to get an exact handle on that, but I would think that it would have had some impact.
Some of the segments that have begun to rebound the inventory levels were very low, so any kind of increased activity level is going to require at least some rebuilding of inventory to a reasonable level.
I think that's clearly the case in parts of our Industrial Packaging businesses.
We have not seen it to any significant extent in any of our equipment businesses yet, but the Transportation segment I would not say there was much of an inventory build there.
Most of that occurred in the latter half of last year.
The volumes from Q4 to Q1 change in the auto build was not significant and in fact it went down in Europe.
It was up modestly here.
So I think the restocking, if you will, is probably begun to occur at least in some segments but it's hard to get a handle on it.
Certainly not as significant as what we saw in the destocking.
- Analyst
Okay, thank you very much.
- CEO
You're welcome.
- VP IR
Point of clarification, the PowerPoint presentation was not posted.
Eli, you were correct, so our apologies.
Everybody on the call the PowerPoint presentation should be posted within the next five minutes.
- Analyst
Thank you.
Operator
Our next question comes from Mark Koznarek.
Your line is open.
- Analyst
Hi, thanks.
A question about the Transportation margin performance in the quarter, because if you look at revenues, comparing it versus fourth quarter.
So just sequentially revenues were about flat but margin down 130 basis points or so, was there something unusual going on here in the first quarter?
- CEO
Well I think the change in margins in Q1 in Transportation, remember this is a segment that's got automotive after market in it as well as a truck business, a truck related after market business, and so the margins certainly in the truck related business were down, that would have had somewhat of a negative impact, and we had probably the strongest incrementals in the automotive OEM business in Q4.
So I think you probably got a combination of several things.
- SVP, CFO
Also in the non-volume area we had some pick ups in inventory things like LIFO in the fourth quarter in this segment.
- Analyst
So then given that we're at a sort of a run rate for North American manufacturing anyway, these margins would be pretty much good for the remainder of the year.
Do you expect anything different as we get to the full year annual?
- CEO
Are you talking about the Transportation segment or automotive?
- Analyst
Transportation segment.
- CEO
Yes, the transportation segment I would expect these margins to actually improve through the year.
- Analyst
Okay, and then a question about the earlier comment about price versus cost.
It seems like you're pretty direct saying you think that's going to be a negative headwind 50 to 100 basis points and yet it seems like across a lot of the manufacturing economy, there's a lot of price increases being put in place right now to the final customers, and lead times are beginning to stretch out in several categories and it seems like buyers are, on the margin, becoming less price sensitive and more focused on availability.
And I'm wondering why ITW isn't adopting a more aggressive posture with regard to price improvement in the latter half of the year.
- CEO
Well I wouldn't describe our posture as passive.
I think what I'm describing it as we've had price increases, we'll continue to have price increases.
The delta is largely related to timing.
You never get price increases perfectly in line with cost increases from a timing standpoint.
So it's really the lag effect of how long it takes to get a price increase actually through the system while you have already incurred cost increases.
So I would describe this as a very normal sort of an environment, and if in fact costs, or price increases, if we figure that we can go higher on some of these than we can, we certainly will.
We certainly look at the market, we look at the cost profile and what we think is reasonable, but I wouldn't read anything negative into my comment.
That's sort of a typical price cost environment and it's really based more on a lag than anything else.
And remember, we're coming off of three extremely strong quarters of a big delta between price and cost.
So we've recognized a lot of this improvement already in our current margin profile.
- SVP, CFO
And part of the reason for the such a strong performance there over the last three quarters is as costs have come down, our prices have not come down as much, so we've been able to hold price over the last year.
- Analyst
Okay, and then just a final little detail here, Ron.
The outlook for tax for the full year, [the 50%], that would include this Medicare charge in there?
- SVP, CFO
That's correct.
That includes the 33.9% rate in the first quarter.
- CEO
And that's really the reason the rate for the year has changed is related to that.
- Analyst
Great.
Thank you.
Operator
Our next question is from Ann Duignan.
Your line is open.
- Analyst
Hi, good afternoon.
- CEO
Hi.
- Analyst
Can you talk a little bit about your commercial construction businesses and they seem to be holding up better than the market itself.
Can you just talk about what's going on in those specific businesses and is there worse to come or is it that those segments that are kind of holding you to be more conservative on your revenue outlook?
If you could just give us some color on those that would be great.
- CEO
Well obviously the commercial segment, Ann, as you know from the Dodge data on contracts awarded, continue to be significantly negative, it was negative all of last year, negative into the mid 40s last year for the year on start related data on a square footage basis, it's still year-to-date commercial square footage down nearly a third.
So we haven't seen any significant improvement in the market levels.
Obviously, what we built into our original guidance was not for a rebound in commercial construction.
I think we are performing somewhat better in the market.
I think some of it has to do with our short supply lines.
Some of it also has to do that in some of our commercial construction businesses we do have a component of some MRO activity that helps, but overall, while it's down 6% versus some significant declines in start activity, obviously we're pleased with the performance in that kind of a market environment.
But I wouldn't read anything too significant into it.
- Analyst
And on the Food Service side, would you expect to see further declines just given that your Food Service business is highly kind of institutional and maybe tied more to a state and local budgets?
What are you seeing there or do you think you're at the bottom in that business?
- CEO
I think we're probably near the bottom, but I wouldn't call it a bottom yet until we actually see some inflection point.
I think it's, as John pointed out in his earlier comments, the main downfall or the main shortfall in North America as an example was the project related activity.
That's almost exclusively new construction, so the replacement activity I think has flattened out.
We'll see over the next quarter what happens.
So if we're not at the bottom I would expect we're reasonably close.
The bid activity, the quote activity is reasonable, which is obviously precursor to any significant improvement in ordering activity.
So too early to say it's at the bottom, but probably based on where we are not far away.
- Analyst
Okay, and then just a quick follow-up on the margin outlook.
I think you said by year-end you'd expect to be at 14% to 15% margins.
- CEO
Yes, I think if you look at the implied guidance for the second half of the year along with the Q2 guidance at the mid point it comes out between 14% and 15% margins.
- Analyst
And then assuming when you give us that guidance you're baking in roughly $400 million of acquisitions at lower margins?
- CEO
Yes.
Correct.
- Analyst
Okay.
- CEO
$400 million of acquisitions with almost no significant margin impact.
- Analyst
Okay, perfect.
Thank you.
Operator
The next question comes from Robert Wertheimer, your line is open.
- Analyst
Hi, good afternoon everyone.
- CEO
Hi, Rob.
- Analyst
I had, I guess a couple questions.
First is on financial distress in the supply chain.
I'm wondering if you're seeing share gains, I know it's tough to measure from competitors who are struggling to get financing in the growing up cycle, and maybe if that's tough to answer, if you're seeing more situations of distress in the potential acquisition pipeline?
- CEO
I would say on the supply chain side, we probably in some markets have seen some modest benefit as a result of some supply chain disruption.
There's no question that some players in the supply chains in some markets cut back to the point where they have not been able to respond to any significant up swings.
I think in other cases our businesses are positioned with much shorter lead time profiles and that's a lot more comfortable for people to deal with in what is still somewhat of an uncertain environment in terms of the demand profile over the next several quarters.
So I think we clearly have benefited from that.
We know we have in construction, we know we have in auto, we know we have in Industrial Packaging.
So I don't think there's any question that we've been the benefactor of that at least at some level.
I think as it relates to the M&A environment, I don't know that I could say anything definitively there other than the fact that some of the deals that have started to emerge of size have emerged with multiples that remind me more of 2007 than 2008, which would indicate that there's a shift, in thinking at least, from how some people are looking at valuing some of these larger size deals both public and private.
So it's hard to get a read on that environment.
Has not had much impact on our pipeline or the pricing but I tell you, there's a few deals we've looked at that did not get into our price line because the pricing was clearly outside of anything we felt was comfortable.
- Analyst
Okay, and if I can ask a follow-up, I know you've asked and answered this, David, but I was surprised not so see the revenue outlook go up given how bullish you sound.
I don't know if it's a fair question or not, but are you more comfortable with the revenue outlook now than last time you spoke to us?
- CEO
Maybe I sounded too much like a bear before, but I would say what I'm reflecting -- what we're reflecting our change in guidance is based largely on the strength of what we saw incrementals, much better performance in incrementals largely as the result of more benefits coming out of the restructuring that we did.
When you do the restructuring you try to peg the benefits as closely as you can, but you really don't get a full view until things really begin to take off and you see the incremental impact and obviously it's stronger than what we had projected.
In terms of the market, the market is playing out at this stage about what we expected.
Some markets performing better, like Transportation and Industrial Packaging and some somewhat slower like test and measurement and the Industrial Packaging equipment business.
So I don't think there's any dramatic change in what our expectations are.
The second half of the year, remember we're going against obviously stronger comps for the second half of 2009, so no real change in the demand profile.
I think perhaps the more optimism is based on we have a pretty strong sense now of where our cost profile stands and what we think we can generate with what now we think looks to be a reasonably good look at revenue forecasts for the year.
- Analyst
Thanks.
Operator
Our next question is from Robert McCarthy.
Your line is open.
- Analyst
Good afternoon.
- CEO
Hi, Rob.
- Analyst
What specifically is included in your second quarter revenue forecast in terms of base business growth?
The low double digit?
- CEO
Yes, it's about 11% at the mid point.
For the second quarter base business.
- Analyst
Sure, and in a world where nothing ever exactly meets forecast, you've identified some businesses that were stronger in the first quarter.
Nothing that is running a bit behind earlier expectations?
- CEO
Yes, I would say the equipment businesses that our test and measurement group, which is in the All Other category, along with even some of our welding equipment and some of our Industrial Packaging equipment.
So what we've seen with the businesses that are more CapEx related that there really has not been a significant rebound in order profiles there.
Replacement volumes are starting to build but new equipment orders are not and capital budgets appear to be increased, but they aren't being spent yet.
So those would be the ones that I would highlight as sort of a category businesses that are probably somewhat weaker than what we would have expected, which means I think in some of those equipment businesses, we now don't expect any real improvement in the demand profile until probably the second half of the year.
- Analyst
Okay, that's very helpful, David and then related to that, focusing in a little more closely on Industrial Packaging, you made the comment that you really didn't see any improvement in the equipment side of the business in the quarter, but my memory is there had been some improvement in February maybe that didn't follow through in March, and I would think that what you're really looking for there is a of course up in general industrial to tell you that something is fundamentally changed in the economy and I wonder how far away from that we are?
- CEO
Well, Rob what I would say is we had a very strong March in Industrial Packaging lead by the consumable volume, which as you know, is the first pre-cursor to any improvement in the marketplace and certainly would be a precursor to any improvement in equipment activity.
So it's a strong reflection that in fact capacity utilization across these customers is going up.
They are utilizing the capacity at a rate that drove demand up.
Some of that was probably a modest level of restocking, but a 20% increase in consumable volume here at North America, that's a pretty good indication that we have finally seen, I would think, a significant inflection point upward on the demand side there.
I would expect that that would mean that over the next quarter or so, we'll start to see an improvement in the equipment profile.
The quote activity has improved, but it hasn't resulted in orders and shipments that would allow me to say that that part of the business is sort of back on track.
- Analyst
That's very helpful, David.
Thank you very much.
- CEO
You're welcome.
Operator
(Operator Instructions) Our next question comes from John Inch, your line is open.
- Analyst
Thanks.
Just as a follow-up, currency was a little bit more of a contributor to the top line than we would of thought this quarter.
Given the dollar, what are you baking in for translation headwinds over the course of the rest of the year?
- SVP, CFO
Well, if you remember, the currency changed quite a bit last year so we're comparing to the prior year.
- Analyst
Right.
- SVP, CFO
It will have less of a contribution in the second quarter in the 3% to 4% range, about flat in the third quarter and down negative two to negative three in the forth based on current exchange rates.
- CEO
Remember current exchange rates for us, John are the end of February.
- Analyst
Right, okay, so end of February and I'm assuming if you want to drive the EPS you just simply multiply it by the corporate average margin, is that fair how you do it?
- SVP, CFO
Yes, I think that works.
- Analyst
That's reasonable?
- SVP, CFO
Yes.
- Analyst
Okay, so then I just want to -- can you remind me why are your Asia Pacific construction businesses still really sluggish?
I know you've got exposure to Australia, but aren't those economies doing much better and maybe you could comment broadly in what you saw in China in the quarter and maybe any business activity specifically like welding or something like that?
- CEO
Yes, well certainly as it relates to construction you're right.
We have a reasonably strong presence in Australia and New Zealand and our construction businesses and the first quarter is traditionally a relatively weak quarter.
Remember it's not December and January, which is the big vacation month certainly down under.
So that's not expected to be very strong.
I don't have the exact granular numbers for China in construction, but I suspect they would have been modestly in the double digits.
- Analyst
What about China overall, David?
Do you have any color in terms of your businesses overall?
- CEO
Certainly see a solid rebound in China.
For the quarter revenues up in the 37% range, but I think what I would suggest that we have seen a couple of businesses with strong improvement, those are the ones beaten way down in the first part of last year.
First quarter of last year you may recall we had a big decline in several of our businesses related to the electronics segments, both in the Power Electronics segment and then some in our Polymers and Fluid segment where we have other businesses concentrated there.
That's probably the biggest single element in terms of rebound.
Some modest pick up in overall export activity, but the most notable one would be the Electronics segment.
- Analyst
I'm sorry you said revenues were up 37% in China in the first quarter?
- CEO
Correct.
- Analyst
And then what did your welding business do in China and maybe talk a little bit about that and the outlook.
- CEO
I don't know that I have specific data on welding down double digits, modest double digits welding in China, primarily on the basis of major decline in shipbuilding.
The energy infrastructure business still held up well, but the shipbuilding business which was still good through the first quarter of last year obviously has declined and that's been the big headwind in welding in China.
- Analyst
Yes.
Thanks very much.
- CEO
Yes.
Operator
Our next question comes from Joel Tiss.
Your line is open.
- Analyst
I didn't think I was going to make it.
I just have a I quick one.
I'll make it fast for you.
The second quarter margins, are they based on your guidance, are they going to be the high spot for the year or do you think that you can continue to make progress as we move through the year?
- SVP, CFO
Well, consistent with where we normally run, the second quarter is our strongest quarter and so we expect the margins to be the highest in the second quarter in the 15% to 16% range.
- Analyst
Okay.
- CEO
Remember the third quarter has got significant vacation period in there for Europe and obviously the fourth quarter is a lower quarter of activity level.
[Inaudible] international.
- Analyst
Okay.
And is there a chance for some more pricing as we move through the year or that remains to be seen?
- CEO
I think it remains to be seen.
Obviously as I described earlier, we're in a price cost environment that I would call relatively normal, if there's an opportunity to recoup price more quickly that may have some impact, but it will probably take at least a quarter for us to sort of understand.
First of all, understand how significant these cost increases are and how long they are going to stick if you will and certainly how quickly we're able to respond from a price standpoint, but I wouldn't place a lot of credence on any significant change in prices going forward, not that we're going to get any significant gains.
- Analyst
Okay, thank you very much.
- VP IR
We'll take one more question.
Operator
Our last question comes from Andy Casey.
Your line is open.
- Analyst
Good afternoon, everybody.
Thanks.
- CEO
Hi, Andy.
- Analyst
A couple follow-ups.
One is to an earlier question on international.
You gave China revenue increase.
Could you give the same for Europe?
- SVP, CFO
It's around 3% for the quarter.
- Analyst
Okay, thanks.
And then on the PC board fabrication business, the positive 89.4 that you saw in the quarter, clearly that is not a sustainable number.
What do you think is that more first half loaded, that type of comp and then it flattens out in the second half or just more kind of moderate revenue growth as we go forward?
- CEO
Well certainly we don't expect 89% going forward, that's for sure.
Remember that was the worst quarter of the year last year, so things did begin to improve by Q3 and Q4 in those businesses.
So I certainly wouldn't expect that.
I think the kind of demand profile we would expect, probably overall in that related business, is somewhere in the 20% to 25% range for the year.
Clearly, it's impacted by both equipment volume and consumables .
The equipment component is about 70% of that volume.
So a lot of that is going to have to do with change in technology, some of the newer devices that are being sold today require newer equipment.
In addition to that, obviously higher volumes require more consumables.
So I would expect the demand profile for the year is probably in the 20% to 25%
- SVP, CFO
And Andy if you look at the comps that segment was down more than 50% in the both the first and second quarter and it got better in the third last year and was only down 14% in the forth.
- Analyst
Okay, thank you very much.
- VP IR
Okay, thanks, everybody for joining us on the call and we look forward to talking to everybody again.
Have a good day.
Operator
Thank you.
This concludes today's conference.
You may disconnect at this time.