Illinois Tool Works Inc (ITW) 2012 Q3 法說會逐字稿

Good day, everyone.

Welcome to the ITW third-quarter earnings release teleconference.

All participants will be in a listen-only mode until the question-and-answer session.

(Operator Instructions).

Today's conference is being recorded.

If there are any objections, please disconnect at this time.

I'd now like to turn the meeting over to your host, John Brooklier.

Thank you, Dory.

Good morning, everyone, and welcome to ITW's third-quarter 2012 conference call.

Joining me on today's call is our President and Acting CEO, Scott Santi; and our CFO, Ron Kropp.

Scott, Ron and I will discuss our strong Q3 financial results, our updated 2012 financial forecast, as well as our long-term strategic initiatives.

And as always, we will take your questions.

Before I review today's agenda, let me make a few comments about our succession planning announcement from last week.

Our Board of Directors named Scott Santi to the role of President and Chief Operating Officer as part of our normal succession planning process.

In addition, Scott was also appointed Acting Chief Executive Officer following the decision of by David Speer, Chairman and CEO, to take a leave of absence in order to fully focus on his health.

On behalf of everyone at ITW, Scott, Ron and I send along our very best wishes to David.

David, we're thinking of you, and all your friends at ITW say, get well.

Now here is the agenda for today's call.

Scott will highlight our Q3 financial results, as well as talk about our early-stage progress we have made on our long-term it initiatives that we publicly introduced earlier this year.

Ron will then cover our Q3 financial results in more detail.

I will then talk about our Q3 geographic performance and detail segment results.

Finally, Ron will update you on our Q4 and full-year forecast.

Finally, we will open the call to your questions.

And, as always, I ask that you cooperate with our one-question, one-follow-up-question policy.

We have scheduled one hour for today's call.

Moving to the next slides -- very quickly, the presentation contains our financial forecast for the 2012 fourth quarter and full year, as well as other forward-looking statements identified on this slide.

We refer you to the Company's 10-K for 2011 for more details about important risks that could cause actual results to differ materially from the Company's expectations.

Also, this presentation uses certain non-GAAP measures.

A reconciliation of the non-GAAP measures to the most comparable GAAP measures is contained in the appendix in this presentation, and also on our website at www.itw.com.

Finally, the telephone replay for this conference call is 888-566-0396.

No pass code is necessary to access the replay, and the replay will be available through midnight, November 6, 2012.

Now, let me turn it over to Scott.

Scott?

Thank you, John, and good morning, everyone.

I also want to begin by sending along my personal best wishes to David Speer, who has been a leader, a mentor, and a friend to me throughout much of my career at ITW.

In the meantime, I want to assure everyone that it's business as usual here at the Company.

As noted in our announcement from last week, I've spent my entire 30-year career at ITW.

And over the course of that time, have had management experience and leadership responsibility in every one of our operating segments.

We also have a very deep and talented management team who average more than 20 years of experience with the Company.

And I can assure you that, as a management team, we remain focused on two major objectives -- delivering solid earnings on a quarterly basis, and successfully implementing our enterprise initiatives to make ITW an even better company in the years ahead.

As to our third-quarter results, I was very pleased with our ability to enhance our profitability even as we dealt with revenue headwinds in geographies such as Europe and China.

Our double-digit earnings per share growth and strong operating margin improvement in the third quarter clearly reflects our focus on our differentiated 80/20 operating model.

I'll also note that we continue to return significant levels of cash to our shareholders.

Through the third quarter, we have returned more than $1.9 billion of cash via dividends in our share repurchase program.

Finally, some updates on our three enterprise initiatives -- business structure simplification, strategic sourcing, and portfolio management.

We remain fully committed to these initiatives, and implementation plans around each are well underway.

Our divestiture activities thus far in 2012, including our Industrial Finishing group and pending Decorative Surfaces transactions, underscore our commitment to reposition our business portfolio to focus the Company on our best long-term growth return and margin opportunities.

We also continue to make solid real-time progress on our business structure simplification and strategic sourcing initiatives.

And we look forward to sharing additional details and operating metrics around the enterprise performance benefits we expect to generate from all three of these initiatives at our December 14 investor meeting in New York.

Now, let me turn the call over to Ron.

Thank you, Scott, and good morning, everyone.

Here are the highlights for the third quarter.

Revenues decreased 1.7%, due to unfavorable impact from currency, partially offset by higher organic and acquisition revenues.

Operating income was $763 million, which was higher than last year by $49 million, representing income growth of 6.8%.

Operating margins of 16.9% were 130 basis points higher compared to last year.

Diluted income per share from continuing operations was $1.12, which included $0.03 of after-tax gains on divestitures.

Excluding these divestitures in after-tax gains, we finished at $1.09, which was at the upper end of our forecasted EPS range of $1.03 to $1.11.

While international demand continued to slow, we were pleased by the continued positive levels of North American demand.

Overall, we had a strong third-quarter earnings performance, reflecting our established 80/20 operating discipline and continued overhead management costs.

Now let's go to the components of our operating results.

Our 1.7% revenue decline was primarily due to the following factors -- base revenues were up 0.9%, with North American base revenues increasing 3.9%; and mixed international base revenues that, overall, were down nearly 3% year-over-year.

John will discuss the geographic mix in more detail later in the call.

Acquisitions, net of divestitures, added 1.4% to revenue growth.

And currency translation decreased revenues by 4.1%, largely due to a weaker euro.

Operating margins for the third quarter of 16.9% were 130 basis points higher than Q3 2011.

Base business margins increased 200 basis points, with higher sales volume contributing 20 basis points.

The positive impact of non-volume items increased base margins by 180 basis points versus last year, primarily due to 80 basis points of price cost favorability as well as strong management of overhead costs.

In addition, total operating margins were lower by 30 basis points, due to the dilutive impact of acquisitions.

The net operating margins from acquisitions, excluding amortization and other acquisition accounting items, were 11.7%.

Margins were also lower by 30 basis points, due to higher restructuring expenses versus the comparable period last year.

Looking at working capital and cash flow, accounts receivable DSO of 61 days was about two days higher than last year, mainly due to the impact of currency.

And inventory months on hand remained consistent at 1.8 months.

ROIC for the third quarter was 16.3%, which was 90 basis points higher than Q3 of last year.

Our ROIC continues to run at our 15% to 17% target range, and is significantly above our cost of capital.

For the third quarter, net cash provided by from operating activities was $635 million, with capital expenditures of $90 million, resulting in free operating cash flow of $545 million, which was 104% conversion to net income.

On a year-to-date basis, we have generated cash flow of nearly $1.2 billion, which was approximately $200 million better than the same year-to-date period last year.

We expect to end the year with close to 100% conversion rate of cash flow to income from continuing operations.

Turning to capital structure, our capital allocation priorities continue to be as follows -- our first priority continues to be organic investments, especially focused on our key growth platforms in emerging markets.

Examples of organic investments include R&D spending for new product innovation; additional investments in manufacturing capacity; and restructuring projects, which have long-term margin benefits.

Our next capital priority is dividends.

During the quarter, we paid dividends of $169 million and our current dividend yield is about 2.5%.

Any excess capital after organic investments and dividends are used for external investments, either share repurchases or acquisitions.

We evaluate allocation between these investments based on the best risk-adjusted returns.

During Q3, we continue to be active with our buyback program and repurchased $416 million of shares, which brings us to $1.4 billion in share repurchases through the third quarter of this year.

As of the end of Q3, we have approximately $2.5 billion of authorized repurchases remaining under our buyback program.

Through the third quarter of 2012, we have returned over $1.9 billion to our shareholders through share repurchases and dividends, which was 75% of our available capital.

In addition, we utilized $62 million for acquisitions in Q3, the majority of which continue to be focused on our growth platforms in emerging markets.

Also during the quarter, we took advantage of the favorable credit markets, and issued $1.1 billion in 30-year bonds at an interest rate of 3.9%.

Both our debt to capital ratio and debt to EBITDA remain consistent with last quarter, at 33% and 1.4 times, respectively.

Our cash balance overseas is nearly $2.1 billion, and we have plenty of debt capacity to make additional investments.

Now I want to spend a few minutes updating you on the status of the Decorative Surfaces transaction.

In August, we announced that we entered into a definitive agreement to divest a 51% interest in our Decorative Surfaces segment to CD&R, a private equity firm.

Between CD&R's equity investment and third-party financing by the new entity, we will receive approximately $1.05 billion at closing, which we expect to occur within the next few weeks.

We will record a significant after-tax gain on the transaction upon closing.

Going forward, we will deconsolidate this business from our operating results and record 49% of the ongoing net income of the entity.

Due to the entity's interest and amortization expense, we expect our 49% share of these results to have a minimal ongoing P&L impact.

Because we have retained a 49% interest, the gain on the transaction and ongoing equity income will be reported as part of income from continuing operations, not discontinued operations, and prior-period results will not be restated.

As Scott mentioned, this divestiture aligns with our portfolio management initiative, where we will continue to selectively divest businesses that no longer fit our core platforms or our long-term performance objectives.

I will now turn it back over to John, who will provide more details on the operating results, as he discusses the results by geography and individual segments.

Thank you, Ron.

Let me take a few moments to review our Q3 geographic revenue trends, most of which will come as no surprise to any of you.

Excluding the impact of currency, our total revenue growth totaled roughly 2% in Q3, with organic revenues accounting for approximately 1% of that growth.

Similar to earlier quarters in 2012, our North American businesses delivered the strongest organic growth in Q3, with North American organic revenues increasing 4% in the recent quarter.

It's clear that North American end market demand, largely led by the US economy, remains in reasonably good shape.

Once again, total international organic revenues were weaker, declining a total of 3% in the quarter; and key geographic breakouts include European and Asian Pacific organic revenues decreasing 4% and 1%, respectively.

The only glimmer of better international revenue news came from South America, where our organic revenues increased 3% in the quarter.

Most notably, Brazil's organic revenues grew 2% in the third quarter.

Now moving to our Q3 segment table of results -- total Company organic revenues increased approximately 1%, with contributions led by our Power Systems & Electronics segment, which grew organic revenues 4.5%; and our All Other segment, which grew organic revenues a similar 4.5%.

Notably, all of our segments produced operating margin improvement in the quarter thanks to favorable price cost dynamics and the strength of our 80/20 business process focus.

We produced operating margin improvement of 260 basis points from both our Food Equipment and Industrial Packaging segments.

And, in addition, our operating margins for Power Systems & Electronics improved 220 basis points.

As Ron noted earlier, total Company operating margins hit 16.9% in Q3, 130 basis points better than we did a year ago.

Now let's take a closer look at our reporting segments, beginning with our Transportation segment.

Organic revenues grew 1.4% in Q3 versus the year-ago period.

And once again, our auto OEM business was a key contributor to organic growth, with worldwide organic revenues increasing a robust 9%.

Both our North American and international auto businesses produced organic growth of 9% in the quarter.

Notably, our European auto business produced organic growth of 4%, representing the third straight quarter where our strong European product penetration and positive customer mix more than offset a negative car build, which actually declined 6% in the quarter.

That's the continuation of great results from our Europe auto team, and congratulations to them.

One other note -- our European -- I should say our Asia Pacific auto OEM business, largely led by our China businesses, grew organic revenues more than 20% in Q3.

In our two other businesses in the segment, organic revenues for our auto aftermarket business declined 8% in the quarter, and that reflects weaker consumer demand in a variety of global end markets.

Our truck remanufacturing business produced organic revenue growth of 2%.

And that's based on ongoing demand for our specialty trucks and related service from customers in Canada and the western United States, and that's associated with energy development projects there.

In our Power Systems & Electronics segment, we benefited from strong demand from our electronics customers, and moderating but still positive North American welding trends.

Total segment organic revenues increased 4.5% in the quarter.

In electronics, our worldwide organic revenues grew a strong 11% in the quarter.

Our electronics assembly business increased organic revenues almost 30%, due to strong order rates from a key electronic customer with new product launches.

On the other side of the business, organic revenues for our component businesses were not nearly as good in the quarter.

Organic revenues declined 4%, as key customers were negatively impacted by weak consumer demand for more basic products such as cell phones and computers.

In our welding category, it was clearly a tale of two geographies in the quarter.

While our total organic revenues grew only 2%, our North American organic revenues grew at a more solid rate of 5%.

North American oil and gas, as well as heavy equipment OEM customers, continued to have reasonable demand for our welding equipment and specialty consumable products.

Led by weakness in China shipbuilding, our international organic revenues declined 6% in the quarter.

I might point out, however, that if you take a look at our welding business in Europe, we actually produced flat organic revenues in the quarter.

In our Industrial Packaging segment, our business has continued to generally reflect industrial production trends in the major geographies.

In aggregate, segment organic revenues grew very modestly in the quarter versus the year-ago period.

Our total North American Industrial Packaging organic revenues grew 2%, while our total international Industrial Packaging organic revenues declined 1%.

More specifically, in our Signode steel and plastic strap and equipment businesses that provide end-of-the-line packaging for finished goods across a very broad set of markets -- worldwide organic revenues declined 3%, with international and North American revenues organic revenues decreasing at similar rates.

The best news in the segment continued to be our stretch packaging business.

Worldwide organic revenues grew 10%; this time contributions coming from increases in North American film volume, and new business with customers in the beverage and food segments.

And similar to last quarter, silage and agricultural-related demand also drove organic growth in the quarter.

In our Food Equipment segment, North America continued to outperform the international side, and total segment organic revenues increased a very modest 30 basis points in Q3.

In North America, organic revenues grew 5%, with equipment sales increasing a very encouraging 6%.

The equipment category was led by sales gains from our baking, slicing, and cooking businesses.

Meanwhile, our North American service business increased organic revenues 2%.

Internationally, organic revenues fell 4%, as end-market weakness with institutional customers persisted in countries such as Italy and France for our Food Equipment products.

As a result, equipment sales declined a total of 8% in the quarter.

And the only bit of good international news was our service business, which grew organic revenues a very strong 6% in the quarter.

Moving to our Construction segment, ongoing weakness in Europe and Asia Pacific offset our positive performance in North America.

And as a result, segment organic revenues declined 2.8% in the quarter versus the year-ago period.

On the international side, organic revenues declined 6% as Europe and Asia Pacific revenues fell 8% and 3%, respectively.

In Europe, construction and markets continued to be hampered by both public and private spending, particularly in the commercial construction category.

The European retail segment also showed signs of further weakening in Q3.

In Asia Pacific, organic revenues declined, largely due to weak commercial tool sales in Australia and New Zealand.

Not surprisingly, it was a better story for us in North America.

Driven by improving residential fundamentals around housing starts, and new housing permits, our residential construction businesses grew organic revenue 7% in the quarter.

And while we haven't yet seen a major inflection point in the new housing market, we fundamentally believe much better days are ahead for our residential-related construction businesses.

Both our commercial and our renovation construction businesses produced organic growth rates of 1% in the quarter.

In our Polymers & Fluids segment, organic revenues were negatively impacted by weak European end-market conditions in the polymers and hygiene sector; as well as low-margin business we exited in the quarter.

Segment organic revenues declined 6.7% in Q3 versus the year-ago period.

In our worldwide polymers and hygiene category, organic revenues fell 9% as sales declined in Spain, England, France and Germany.

Our worldwide fluids organic revenues declined only 2%, as the MRO-oriented basis of this sector was more in line with industrial production trends in various worldwide geographies.

A couple of notes on our soon-to-be-divested Decorative Surfaces segment -- organic revenue has modestly declined in Q3 due to weakness in international end markets.

Accordingly, organic revenues decreased 1.7% in Q3.

In North America, organic revenues grew only 1% in the quarter, in part due to a decrease in product demand associated with lower inventory levels at some of the major big-box stores in the United States.

Internationally, organic revenues declined 6% due to slower end-market demand in key geographies such as the UK, Germany and China.

Finally, in our final segment, All Other, the key contributor to the segment was once again our test and measurement business.

Organic revenues for this business grew 12% in Q3, based on ongoing CapEx spending for value-added structural testing equipment in North America, Europe and China.

Test and measurement was also helped in the quarter by a one-time sale of equipment to a key consumer electronic customer.

Our other major business in the segment, consumer packaging, produced flat organic revenues in Q3, as mid-single-digit organic growth from our global packaging solutions businesses was offset by organic revenue declines in the worldwide graphics and decorating businesses.

So this concludes my remarks about the segments, and I'll turn the call over to Ron, who will cover our 2012 forecast.

Ron?

Thanks, John.

Before I provide the details of our forecast, note that both our fourth-quarter and full-year 2012 forecast now exclude operating results from Decorative Surfaces after the expected closing date; as well as the expected after-tax gain on the Decorative Surfaces transaction, and any related transaction expenses.

The forecast also excludes any ongoing P&L impact from our 49% equity interest in the new entity.

Before our year-end earnings release, we will provide you an updated forecast that incorporates all these impacts from the Decorative Surfaces transaction.

For the fourth quarter of 2012, we are forecasting diluted income per share from continuing operations to be within a range of $0.86 to $0.94, which assumes a total revenue decline of 1% to 4%.

This forecast includes only one month of Decorative Surfaces results in the fourth quarter, which reduced our fourth-quarter revenue growth by nearly 4% and our fourth-quarter EPS range by $0.03.

This forecast also assumes continued softness in end markets, particularly internationally.

The midpoint of the Q4 diluted EPS range of $0.90 would be flat versus the prior year.

For the full year 2012, our forecast to total revenue growth is now between 0% and plus 1%, versus our prior revenue range of plus 1% to plus 3%.

Our forecasted EPS range for continuing operations is now $4.06 to $4.14.

The new EPS midpoint of $4.10 is $0.01 lower than our forecast from July, and is driven by a $0.03 reduction from having only one month of Decorative Surfaces in the fourth quarter; and a $0.05 reduction from base businesses and acquisitions.

This is partially offset by a $0.03 increase from the Q3 divestiture gains that we previously discussed; a $0.03 improvement due to stronger currency rates versus July; and a $0.01 benefit from higher share repurchases.

The EPS midpoint of $4.10 would be 9% higher than 2011, excluding the Q1 2011 tax benefit related to the Australian tax matter.

I will now turn it back over to John for the Q&A.

Thank you, Ron.

We will now open the call to your questions.

And, as always, please honor our one-question, one-follow-up question request.

(Operator Instructions).

Ann Duignan, JP Morgan.

Can you give us a little bit more color on your Industrial Packaging business?

What you saw going on throughout the quarter, as we progressed into the quarter, both in North America and internationally -- it being so coincident with economic activity?

Yes, Ann, this is Scott.

I would say that the results were fairly steady throughout the quarter in North America, running flat to down a couple of hundred basis points throughout the quarter; and in Europe, down 3% to 4%.

But no big trends one way or the other, as we move through the quarter.

Yes, we had a nice quarter from stretch packaging in that segment.

Overall.

they were up 10%.

And some of that was related to film volume in North America, related to food and beverage.

And, as you said, silage.

I didn't realize you were exposed to silage, so that's good news.

It something that I said this year.

And my follow-up question is just a little bit more color on the restructuring efforts and the spend in the quarter; how things are progressing.

Just a little bit more deep dive on all of the transformation programs, please.

So, as we disclosed our forecast, our overall restructuring spend for the year is expected to be between $100 million and $110 million, which is about $30 million to $40 million higher than a normal run rate that we would have.

Year to date, we've spent $76 million, so we're looking at about a $30 million spend in the fourth quarter, which is similar to what it was in the third quarter.

And a lot of that incremental spend in both Q3 and Q4 is related to us working through our business simplification initiative and starting to take some actions around the management organization, as we move to put the appropriate leaders in place at deep divisions and starting to make some changes there.

Certainly more to come, as we move through that initiative in 2013.

But we're starting to see -- we're starting to take action here, starting to see some of the cost related to that.

And our best wishes to David, obviously.

That goes without saying.

I'll get back in line.

Thank you.

Rob Wertheimer, Vertical Research.

Hi, good morning.

I wonder if you could give any detail around the price cost benefit that you saw?

I don't know whether that is nat gas and resins or whether it's more broad-based than that.

I'll start there, thanks.

We continue to see significant price cost benefit in the third quarter.

We also had a pickup in the fourth.

Overall, it was 80 basis points across the Company.

But we really saw it in every segment, so it's pretty broad-based.

We did see a pickup in resin towards the end of the quarter, but we think that's going to stabilize and perhaps go down in the fourth quarter.

The biggest segments where we had impacts, Polymers & Fluids, was positive 130 basis points in price cost.

Industrial Packaging, 100 basis points; Power Systems & Electronics, 100 basis points.

Okay, and then just generally speaking, the margins in food were really quite good, obviously, on -- not so much on revenue.

Was that anything in particular in restructuring?

Is that your competitive environment?

Are you getting better?

Maybe if you could comment on the trend line there.

Sure.

The primary drivers are really a focus that we've had in that business for the last 18 months; really, around the reapplying 80/20 in a fairly aggressive and focused way.

And we're starting to see the benefits of that come through.

Certainly, some help on the price cost side, but largely looking at the fundamental operating structure, and taking some nice actions around 80/20.

And, as Ron alluded to before, our business structure simplification initiative as well.

Okay, thank you.

Andy Kaplowitz, Barclays.

Good morning, guys.

Nice quarter.

Can you guys talk about your ability to continue to outperform in that European transportation market?

It has been pretty impressive over the last few quarters.

Maybe talk about the mix in the business and the ability to continue to penetrate and outperform as you have.

Well, Andy, I think it's a function of -- we always talk about product capability; having the right state of products, new introductions, so on and so forth.

But, I think more specific to Europe is this whole issue of mix.

And where we really have strong mix is on the German OEM side, which, clearly, the best performing part of the European auto build story.

So, I'd say we have the right set of customers at this point in time.

And I think we're going to continue to -- I think Germany will continue to outperform the rest of Europe, as it relates to auto builds.

Having said that, I would expect continued outperformance, but we certainly can't give you the kind of guarantees we've seen over the last three quarters.

But I think directionally, Europe is on the right path, both from a product development standpoint and from a mix standpoint.

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

Okay, great.

That's helpful, guys.

If I focus back on North America, the sustainability of the US growth going forward -- it's been obviously quite good versus the rest of your business, but it's been concentrated in Power Systems & Electronics.

I know it's often test and measurement.

And if you look at it, welding has been strong, but some of your OEMs have started to change their production.

And I know you've talked about limited visibility in that business.

So I'm just trying to figure out how you guys look at it, going forward from here in North America.

Well, I think it's obviously an environment that's pretty dynamic at the moment.

I think one of the things that's been interesting for us throughout the year is the fact that the stronger ends of our -- the stronger components of our overall portfolio, from a growth standpoint, have been the more capital goods-intensive ends; which is, again, in this environment, probably a little bit counterintuitive.

But what it says is that customer base -- the customer base that we have is certainly willing to spend money, invest in new equipment that helps improve their productivity or their performance.

So if you look at the welding business, test and measurement, the stronger ends of our overall organic growth, from the standpoint of the North American market, have really been in these CapEx categories.

Certainly can't sit here and, with any great assurance, say that that will continue; but I think it is indicative of the fact that our customer base are still looking to make investments in new products and new capabilities that help drive better productivity, better performance for them.

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

Not anything meaningful, no.

Okay, thank you.

Jamie Cook, Credit Suisse.

Hi, this is actually Andrew Buscaglia on behalf of Jamie Cook.

Jamie, you sound different.

Yes.

So, actually I have a quick question on your orders going through.

If you guys could track them, or just tell us how they have been tracking on a monthly basis, specifically into the month of October.

Well, as you know, we don't give out monthly data anymore.

I think what we can tell you, though, is that if you look at the activity levels through the months in the quarter, the third quarter, I don't think on an adjusted basis there was any real big difference between July, August and September.

So, once again, we're not seeing any kind of outperformance early and things softening.

I think it's more or less a story of the geographies we've talked about -- Europe and Asia Pacific continue to be a little weaker, and they've been persistently weaker.

North America, US-led, continues to be a number that's reliably in sort of the 3% to 4% growth rate.

So I don't think we've seen anything on a month-to-month basis that points to anything changing in any material way.

Okay.

And then, sort of along those lines, can you comment on what your visibility is like right now into Q4, and then potentially maybe into 2013?

Well, I think -- Q4, the visibility, is what we have baked into the forecast.

So we're expecting that overall base revenue growth to be in the plus 0.5% to 0.7% range.

North America continue to be solid, maybe a tad weaker, in the 3% to 4% range.

International, still negative, but a little bit less negative than we've been.

And we generally -- what I would add is, and we've said this before -- but we generally don't build big backlogs in terms of the way we execute on our customers' demand.

We're typically shipping today what our customers ordered yesterday.

So from the standpoint of overall revenue rates, we're seeing on the ground today, essentially, a very similar flavor to what we saw in the third quarter.

And, Andrew, one other thing as it relates to 2013, in New York in December, as we typically do, we'll give you a look at what we think the full year of 2013 will look like from an organic revenue standpoint.

But that won't be until the middle of December.

All right.

Thanks, guys.

Stephen Volkmann, Jefferies.

Hi, good morning, guys.

I guess I'm wondering, sort of a big picture question -- granted we're all waiting for December for the details -- but I'm wondering, as we get past your new plans and consolidation and so forth, is there any reason to think that your priorities for use of cash would change as we move forward?

Well, I think, certainly, we've always been in this position where we have a lot of free cash flow to -- generated from operations to deploy.

On top of that, as we do more divestitures, we'll have some additional cash to utilize.

And what we've said on the divestiture of cash is, to the extent we have after-tax cash in the US, we would use that for share repurchases to offset earnings dilution.

And so we've been doing that.

We closed on a finishing systems deal earlier in the year.

We're about to close on this Decorative Surfaces deal.

So one of the reasons -- if you look at our share repurchases for the year and our allocation to that, that's higher than it would normally be, because of these divestitures.

I think, going forward, historically we've returned about 60% of capital to shareholders via dividends or share repurchases.

Given that we are a bit more focused around strategic acquisitions, we might allocate a bit more to return to shareholders, versus acquisitions; say, one-third to acquisitions, and two-thirds to shareholders, after considering divestitures.

Great.

That's very helpful.

And then, what's the ultimate resolution for the Decorative Surfaces businesses?

I'm sure you don't want to keep it this way for too long -- or maybe you do.

What are your comments there?

Well, yes, and this transaction, it may seem a little bit complicated; and it will certainly, in the P&L, have some puts and takes as we continue to own a share of this.

But it's a good transaction for us.

It allowed us to get $1 billion out of the business right now, which we can redeploy.

So what will happen is, it's part of this joint venture, and the joint venture will manage it; and, ultimately, to the extent the joint venture ends up selling the business onto somebody else, we will participate in that.

The way I would think about it, from an ongoing impact on us -- we'll have some amount of P&L, our 49% interest, but that will be pretty minimal.

The joint venture will have a lot of additional costs beyond operating income, related to interest expense, amortization expense, et cetera.

So we'll probably have very little in the way of P&L pickup for our 49%.

But, ultimately, when this business gets sold on, and we will get 49% of the proceeds and 49% of the gain at that point.

Great.

Thanks very much.

Eli Lustgarten, Longbow Research.

Good morning, everyone.

And tell David our prayers are with him, please.

One qualification, the recent gain from the sale in the quarter, is it reported in other income?

Yes, it is.

It's in other nonoperating income.

Okay, I just wanted to make sure of that.

Can you talk about seasonality in the fourth quarter?

Your comments are a little surprising, because we've had lots of companies report that September has gotten a lot weaker.

So it's good to hear that somebody is getting the business.

But is there anything, seasonally, in the fourth quarter that -- in the operating divisions, that's weaker than when we -- than normal, on a seasonal basis, or anything that's showing any softness?

And the same thing, when we talk about profitability as we go into the fourth quarter, the ability to sustain the third-quarter profitability, adjusted probably for some volume differences.

Overall, from a total Company perspective, our fourth quarter tends to be our weakest quarter, from a revenue and margin perspective.

Part of that is the month of December, especially now that we've moved off the one-month leg for international.

International December also falls in the fourth quarter.

It tends to be our weakest revenue quarter, our weakest margin quarter.

Most of our businesses aren't overly seasonal, beyond the impact of the holidays.

Maybe a couple exceptions -- the Construction business is a little bit seasonal; as well as some of our consumer packaging businesses that serve the beverage markets.

But, generally, from a seasonality perspective, we don't have a ton of seasonality beyond the holiday impact.

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

No.

Everything else is good.

And the follow-up question, can we talk a little bit about acquisitions?

I guess you only made $52 million, I think, is what you said in the quarter; whereas, year to date -- because he didn't have a chart in here -- and where would you hope to be this year?

How full is acquisition pipeline at this point?

(Multiple speakers) The restructuring [unit].

During the quarter, we acquired five companies and paid about $69 million.

For the year, we have 19 acquisitions for about $400 million; paid about $659 million.

So, generally, we're seeing a reasonable level of acquisition activity.

We're certainly focused on growth platforms in emerging markets when we look at acquisitions.

So we're doing fewer deals but the average size is bigger.

So we feel reasonably good about the acquisition pipeline.

It's not great, but it hasn't dried up either, and we're looking at a fair number of deals.

But you're talking about, this year, in the $500 million to $750 million kind of range, something like that?

Well, yes, we're already at $400 million; so, certainly, a bit more than that in the fourth quarter.

Although the fourth quarter is always a bit iffy on -- things that are expected to close at the end of the year sometimes fall into the next year.

Thank you.

David Raso, ISI Group.

Hi, good morning.

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

Base is plus 0.5% to plus 0.7%.

Okay.

So, to my question on the fourth quarter -- the implied operating margins are essentially flattish year-over-year.

But you have base business up; you have two of your higher-margin businesses [pour] growth driving the growth, right -- Power and All Other.

The price cost, I would think would still be positive, so I'm trying to understand why the margins would be roughly flattish.

And maybe helping me out would be if you have a share count assumption for the fourth quarter.

But if you can square up why the margin wouldn't be improving -- they just went up 140 basis points this quarter, and your base growth assumption for fourth quarter is similar to the third quarter.

Yes.

So, overall, we're looking at margins to be up a tad, 10 to 20 basis points.

The base part of that is about 30 to 40, so that does include continued favorably priced cost of 60 to 80 basis points; so not quite as strong as third quarter, but still pretty favorable.

We do have some headwinds on the corporate side.

So we had some corporate gains last year for reserves, and cash render value life insurance and those kinds of things.

So that's going to be a drag of about 40 basis points.

The other thing that's up year-on-year, and I talked about earlier, is restructuring.

That will cost us 40 basis points or so, as well.

Okay, so it basically comes down to leverage.

Say the price cost is negated at roughly -- slightly more than negated by corporate expense and restructuring.

It basically comes down to operating leverage on that core business growth.

Yes, yes.

Okay, all right.

Thank you.

Oh, I have one quick one, sorry.

2013, for Decorative Surfaces for trying to model it -- you are saying the net P&L impact for your 49% stake is neutral.

But just for pure modeling, are you going to show other income, showing the JV?

(Multiple speakers) And the 49%, but then there is cost above the EBIT line that get in -- I'm just trying to see how to model it.

So, as I said earlier, it will continue to be included in continuing operations, because we retain the 49% interest.

What we will show, going forward, is -- first of all, we will have a gain in the fourth quarter that will be considered nonoperating.

And, on an ongoing basis, we will have 49% of the income.

But, as I said, the income should be fairly minimal.

So using a flat expectation over the long-term is probably appropriate.

There may be some one-time amortization charges in the fourth quarter that could make that negative.

But over time, it should be basically flat.

That will also be reported outside of operating income (multiple speakers) but still included in continuing ops.

So the cost related to it, plus the income related to it, will all be below the EBIT line?

It will be netted into one line.

So we will not show revenues, operating income, margins, et cetera.

And it will no longer be a separate segment.

All right, I appreciate it.

Thank you.

Henry Kirn, UBS.

Good morning, guys.

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

Well, certainly if the economic environment gets better, that will help our base earnings, and we'll get a lot of leverage from that.

We don't think that -- it could get substantially better, but there could be a lot of upticks, potentially in Asia Pacific and China.

Right now we have that continuing to be negative.

But that can't move fairly quickly, quarter to quarter.

On the cost side, certainly we could do better on the margin.

We may be able to get a better price cost on the higher end of that range.

We're continuing to see overhead benefits, that we've got a lot of that built-in; but sometimes we can outperform that.

From a business perspective, we've seen strong performance in certain segments.

And we're modeling some of that to come down.

But that could continue to be favorable on the upside, in things like welding and in automotive.

But, Henry, if you think of our forecast, I think if you look at the last couple of quarters, I think our forecast really underlies the notion it's more of the same.

So, North America a little bit better; Europe, Asia Pacific, a little negative.

So we're not seeing anything right now that gives us a high degree of confidence that those trends are going to change, per those geographies.

In either direction.

In either direction, right.

That's helpful.

As a follow-up, could you talk about -- with all the headlines on the elections and the fiscal cliff, are any of your North American customers playing wait-and-see until they get behind this before coming back and ordering again?

I don't think so.

Scott, your observation?

I would say the same.

We're not seeing any evidence of that.

I think to Scott's earlier point, Henry, think about the amount of activity around our CapEx-related businesses.

Again, it seems counterintuitive, and it seems like something that wouldn't happen if people were worried about these type of issues, and we're not seeing it.

I think businesses really do what's in their best interest over a shorter period of time, and they tend to get less worried about policy.

That's helpful.

Thanks a lot.

Deane Dray, Citi.

Thank you.

Good morning, everyone.

On the test and measurement side, that was a standout performer in the quarter.

And if I got it correctly, 12% organic.

But you also called out, there was an impact from one particular customer, a big shipment.

So was that in the number, and can you size that for us, please?

I think the big shipment was related to the electronics sector, not test and measurement.

So that was a pure 12% core --?

I think it was really more representative of what we saw in the various geographies.

Although we did pick up some business from -- a little bit of business from a key customer in test and measurement.

But to Scott's point, there was a bigger variation, or a bigger contributor coming on the electronic side from us from a key customer.

And then just within the business mix within test and measurement, obviously this is more on the industrial side; it's CapEx-sensitive.

But if you just gave us a quick 80/20 of what are the key drivers there in terms of the products.

Is it all Instron?

And are there any particular end markets that are seeing that type of growth?

Well, I think Instron continues to be the flagship business of test and measurement.

I think the drivers of growth, again, are related to -- to your point, on CapEx needs.

I think the global trend -- if you asked our test and measurement people, the thing they point to all the time is standardization around the globe.

Whether it's China; whether it's US; whether it's Europe; people are looking at standardization, and it requires our form of technology as it relates to our test and measurement equipment -- both equipment and the software that goes with it.

So we like this whole notion of standardization, globalization.

We think it will be a long-term good trend for the test and measurement category.

How meaningful might test and measurement be in your potential acquisition candidates?

Well, very meaningful.

Over the last five or six years, we've really started this segment from scratch with the acquisition of Instron in 2005.

And that continues to be a key focus of our acquisition targeting.

Great, thank you.

Ajay Kejriwal, FBR Capital Markets.

Thank you.

Good morning, gentlemen.

Scott, I know you said you're going to provide more details on the long-term initiatives December 14; but maybe a clarification on the slide deck here, where you are saying you have the strategic leaders in place for the GM role.

Do you have all the GMs identified?

Do they have their teams in place?

Any color there would be helpful.

Well, I think largely we have the leaders in place.

What we're really talking about is building bigger scale into our divisional structure.

So the before-and-after on that is moving from roughly 600-plus operating divisions down to a number around 150 to 175 or so when we're done.

The planning around that has been done.

It's been ongoing throughout this year.

I'd say we're largely through the -- define the game plan; we're in the early stages of the execution around that, starting with the leadership questions related to those 150-plus divisions.

I would say -- I can't tell you that 100% of those are done, but the number is probably well north of 90%.

Got it.

That's helpful.

And then on the EPS walk, slide 13 -- two items on -- Dec Surfaces, the $0.03, is that inclusive of the offset from the share buyback that you've been doing?

And then on acquisitions, the $0.02, is that just from acquisitions that you've done last quarter?

Is that a one-time?

Does it go away?

So the $0.03 for Dec Surfaces is simply the operating results related to Dec Surfaces.

We've also included a $0.01 benefit from higher share repurchases.

That's really related to the use of proceeds from the Dec Surfaces transaction.

So, from a net perspective, that is a $0.02 decline, if you netted the shares in there.

The acquisition number -- there's really two components of that.

One, that's a function of the contribution from the acquisitions we've already completed.

In the early part of the year, we had a couple of larger ones that, as things have weakened, especially internationally, the results have come down a little bit.

Secondly, we had included some amount of acquisitions in the forecast that we expected to complete.

And some of that has gotten pushed off, so we've taken the number down a little bit there as well.

Very helpful, thank you.

John Inch, Deutsche Bank.

Thank you.

Good morning, everyone.

I want to ask about restructuring.

Now, some other companies, given the environment, have taken the opportunity to up their restructuring spend.

You guys have outperformed in terms of your results, versus them.

But I'm just curious, is there a reason why perhaps you didn't opportunistically try to dial in a little bit more restructuring, just as a hedge, given the macro?

And could you -- just as a follow-up to that -- could you talk about the mix in your restructuring spend that maybe is focused on Europe, and then focused on some of the simplification initiatives?

So, as I talked about earlier, our restructuring spend for the year is already above what we would normally spend.

So, certainly, part of that is what I talked about earlier -- business simplification.

And part of that is Europe and other places where things are weak.

And, really, as we work through this business simplification exercise, it's all related.

As we look at simplifying the European business, we're also factoring in we think the results are.

So it's hard to split up exactly what would be business simplification versus economic-related.

But we certainly have increased the overall spend accordingly, and really set it at the beginning of the year.

And all I would add to that is -- the business simplification initiatives, certainly the kind of head start we've had -- given that initiative and its central point in the Company's operating approach over the last years is, in a lot of ways, prepared us for this environment.

And so it's really about implementing that plan and executing to that plan.

Not a lot of deltas around -- we knew, going into this year, it was not going to be a great environment economically, anyway.

So, from the standpoint of incremental and restructuring, we just don't see the need at this point.

But there is plenty of that activity going on, and has been throughout the year.

(Multiple speakers).

That was more to my question.

The question was, why didn't you -- was there some obvious reason why you didn't take -- I realize the simplification and the added year-over-year.

I'm talking about what you saw in the third quarter.

Your plans are in line.

I'm just saying, other companies are taking up the restructuring.

You would just saying that you had set it at an appropriate level that -- (multiple speakers).

Yes, John, remember we increased our restructuring spend last quarter by $15 million to $20 million.

So I think that was the realization, that there was more to come as the year progressed.

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

You mean higher versus trajectory.

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

Well, I'm not going to quantify exactly.

But yes, certainly higher than our normal level of spend.

Yes, that's fine.

So it's probably close to this year.

What kind of a payback do you guys expect on this restructuring?

At least help some sort of cushioning tailwinds into next year.

Typically, overall, across the Company, we get about a 1-to-1 payback.

In North America, it's lower than that.

And in places like Europe, it's higher because it's more expensive.

But, overall, an average is about 1-to-1.

Can I just ask, as a final point here, the process of simplification -- you guys, I realize, have been collecting an awful lot of data that will go into the framework.

Where are you in that process?

Meaning, are you still waiting for, say, a bunch of little projects to be completed to give you information that's coming through in November or something, to then in turn provide the output framework for how you are thinking about future cost savings?

Or is a lot of that in place, and really then you are just dotting i's and crossing t's, in terms of how this is actually to progress in the timeframe?

So I'm not asking for the numbers.

I'm asking more for the process, and your confidence as you've gone through this process.

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

And you are feeling good?

Yes.

Don't we sound like we feel good?

Yes, I'd like to hear it.

Thank you.

All right.

We have time from one more question.

Andy Casey, Wells Fargo Securities.

Good morning, everybody.

Best to David, and his family as well.

A few questions to wrap it up.

First, if you can give any quantification on the estimated tax impact for the $1.05 billion divestiture cash proceeds.

I can't give that, at this point.

You could assume our typical effective tax rate on that; maybe a little bit higher, because it's more North American-based.

So, say, between 30% and 35% from an effective tax rate perspective.

Okay, thanks.

And then on the business trends that you're seeing, particularly Signode North America; I think it grew year-over-year in the first half.

And then in this quarter, if I heard right, you called out a decline, year-over-year.

First, is that right?

And then, second, if it is, can you please remind me when that business last flipped to a decline from growth?

If you are talking about Signode specifically, the number was minus 2% to minus 3% in the quarter.

And this would have been the first quarter where we saw negative activity.

But also, down one shipping day in the quarter.

Yes.

Right, we did lose a shipping day in the quarter.

Okay.

So I would say on a real-time basis, the business was probably slowed a little bit, but probably not as much as that number.

Okay, thanks.

And then, lastly, across your businesses, are you seeing any evidence of inventory de-stocking; and, if so, could you point out where?

I would say not.

I think, generally, customers have been pretty tight in that regard all year, in terms of an overall cautious posture.

But I don't think we're seeing anything significant in terms of change around that, of late.

Okay.

Thanks, and belated congrats to you on your promotion, Scott.

Thank you, Andy.

Thank you, everybody.

We appreciate you joining us today on our conference call, and we look forward to talking to you again.

Have a good day.

Thank you for joining today's conference.

That does conclude the call at this time.

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