Illinois Tool Works Inc. Q3 2008 Earnings Conference Call Transcript

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 |  About: Illinois Tool Works Inc. (ITW)
by: SA Transcripts

Operator

Welcome to the ITW Third Quarter 2008 Earnings Conference Call. 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. Now I'll turn the meeting over to Mr. John Brooklier, Vice President of Investor Relations. Thank you sir, you may begin.

John L. Brooklier - Vice President, Investor Relations

Thank you, Candy. Good afternoon everybody and welcome to ITW's third quarter 2008 conference call. I'm John Brooklier, ITW's Investor Relations Officer and with me today is David Speer, our CEO and Ron Kropp, our CFO. Thanks for joining us.

At this point, David will make some brief comments about the recently concluded quarter.

David B. Speer - Chairman and Chief Executive Officer

Thank you, John. The third quarter turned out to be a mixed bag of results for us.

First, let me start with the good news. We grew total company revenue during the quarter 11%, which was within our original forecasted range. Revenues were clearly helped by our strong acquisition program. We acquired 14 companies during the quarter, representing $847 million of annualized revenues. Through the end of September, we've acquired a total of 40 companies now, representing $1.4 billion of annualized revenues. We're estimating that we will finish the full year with an additional $1 million to $200 million worth of acquisitions.

All in all, it's been a very good acquisition year, especially when you consider that we continue to pay an average price of approximately one-time revenues for the acquisitions completed to date.

Our strong free cash... free operating cash flow of $599 million in the third quarter was a conversion rate of 132% and our $1.4 billion year-to-date total has also permitted us to remain aggressive with our share buyback program. In the third quarter, we spent $406 million to repurchase approximately 8.5 million shares and year-to-date, we've paid approximately $1 billion to repurchase 20 million shares.

Now for the more difficult news. End markets continue to weaken in the third quarter in both North America and internationally. Many of our end markets reflected underlying negative macro data. For example, North American industrial production excluding technology was recently reported at minus 3.2%. The forward-looking ISM index recently came out at 43.5%, the lowest number reported in more than five years.

And on the international side, the underlying data is also trending downward. The most recent Eurozone industrial production number was at minus 0.9%. And the September Eurozone Purchasing Managers Index came in at 45%. Many of our end markets have responded in kind and as a result, our base revenues for the quarter were minus 0.8%.

Our decreased sales volume coupled with inherently lower margins associated with raw material cost increases combined to reduce base revenue margins by 130 basis points during the third quarter. Ron and John will give you more details on these topics in just a few moments.

Looking forward, we continue to assess the local market conditions and implement aggressive cost cutting initiatives where appropriate. You can be assured that ITW managers around the world are working hard day to day to optimize their businesses in face of these difficult and volatile end markets.

Let me turn the call now back over to John.

John L. Brooklier - Vice President, Investor Relations

Thank you, David. Here is the agenda for today's call. Ron will join us in just a few moments to give us a Q3 financial overview. I will then cover operating highlights for our reporting segments. Ron will then come back and address our 2008 fourth quarter and full year earnings forecast and associated assumptions. Finally, we will take your questions.

As always, we ask for your cooperation for the one question, one follow-up question policy. We are targeting a completion time of one hour for today's call.

First, the usual disclaimers. Please note that this earnings release contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including without limitations statements regarding operating performance, revenue growth, operating income, income from continuing ops, diluted income per share from continuing ops, use of free cash, potential acquisitions, end market conditions, discontinued operations and the company's related forecasts. These statements are subject to certain risks, uncertainties and other factors which could cause actually results to differ materially from those anticipated. Important factors that could cause actual results to differ are set forth in ITW's Form 10-Q for the 2008 second quarter and our 10-K for 2007.

One other housekeeping item. The telephone replay for this conference call is 402-220-9716, no pass code is necessary and the playback number will be available through 12 midnight on October 30, 2008. You can also access our third quarter conference call PowerPoint presentation via the itw.com website. Once you access the investor information section, just look for the events tab.

Now, let me introduce Ron Kropp who will cover the financial highlights for the third quarter. Ron?

Ronald D. Kropp - Chief Financial Officer

Thanks John. Good afternoon everybody.

Before I get to the operating results, I'd like to remind everyone that last week, we released revised income statements for 2007 and the prior quarters of 2008 to reflect the reclassification of the Decorative Surfaces segment and the Click Commerce business into discontinued operations. All income statement data presented on this conference call reflect discontinued operations treatment for all periods presented.

The highlights for the third quarter were as follows. Revenues grew 11%, primarily due to acquisitions and currency translation. Operating income was down 2% and margins were lower by 190 basis points. Diluted income per share from continuing operations of $0.85 was 1% higher than last year and free operating cash flow was $600 million.

Now let's go to the details. Our 10.8% revenue growth was primarily due to two factors: First, acquisitions added 6.9% to revenue growth, which was 230 basis points higher than the second quarter 2008 acquisition effect; secondly, currency translation increased revenues by 4.7%, which was 170 basis points lower than the second quarter effect.

In addition, base revenue was down 0.8%, which was unfavorable by 100 basis points versus the second quarter. Price increases to recover higher raw material [indiscernible] offset by overall volume declines of between 4% and 5%. International base revenues increased 1.2%, which was 170 basis points lower than the second quarter. We have seen some softening in our European end markets.

North American base revenues decreased 2.1%, which was unfavorable by 40 basis points versus the second quarter. The North American businesses continue to see the effect of the overall slowing of the economy including both the industrial and consumer-related end markets.

Operating margins for the third quarter of 15.4% were lower than last year by 190 basis points. The base business margins were lower by 130 basis points, primarily due to lower sales volume and the effect of higher raw material prices. While we have recovered the dollar amount of the higher cost in most of our businesses, many of our businesses have not yet been able to recover the full margin. In addition, the lower margins of acquired companies diluted margins by 70 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 was higher by $12 million as a result of the euro bonds issued in October 2007. Other non-operating income expense in the third quarter was unfavorable versus last year by $7 million, mainly due to lower investment income.

Third quarter effective tax rate of 28.2% was essential flat versus the third quarter 2007 rate. An effective tax rate of between 28.4% and 28.6% is expected for the full year.

Turning to the balance sheet, total invested capital only increased $36 million from the second quarter as the increase from acquisitions was partially offset by decreases from currency translation. Excluding the effect of discontinued operations, accounts receivable DSO was 64.7 at the end of the third quarter versus 63.6 last year. Inventory months on hand was 2.0 at the end of the quarter.

For the third quarter, capital expenditures were $89 million and depreciation was $95 million. ROIC declined to 15.6% versus 17.9% last year as a result of the dilutive impact of acquisitions and lower operating income.

On the financing side, our debt increased $667 million from last quarter, primarily due to higher U.S. commercial paper. Our debt to capital ratio increased to 28% from 24% last quarter. Shares outstanding at September 30th were 511.2 million. Note that the effect of options typically adds 3 to 4 million shares to dilutive share calculations.

Our cash position increased $227 million in third quarter as our free operating cash flow of $600 million and net borrowings of $737 million were utilized for acquisitions of $646 million and dividends of $145 million. In addition, we spent $406 million in the quarter to repurchase 8.5 million shares under our ongoing open-ended share repurchase program.

Regarding acquisitions, we acquired 14 companies in the third quarter which have annual revenues of $847 million. Year-to-date, we have done 40 deals with acquired revenues of almost $1.4 billion. The most significant acquisitions in the quarter were CCI and Avery Weigh-Tronix.

CCI is a North American distributor, remanufacturer and installer of drivetrain components for the heavy truck aftermarket. In has annual revenues of over $400 million and will become part of our Transportation segment. Avery Weigh-Tronix is a multinational manufacturer of high quality industrial weighing products and systems with annual revenues of approximately $225 million. It will be included in our test and measurement group in the all other segment.

I will now turn it back over to John who will provide more details on the third quarter results.

John L. Brooklier - Vice President, Investor Relations

Thank you, Ron. Let's review the third quarter highlights for our reporting segments, beginning with Industrial Packaging. Revenues increased 14.7% and operating income declined 2.9% in the quarter. Operating margins of 11.1% were 200 basis points lower than the year ago period, largely as a result of a 120 basis point decline in base revenue margins in the quarter.

The 14.7% increase in revenues consisted of the following: 5.2% from base revenues, 4.2% from acquisitions and 5.3% from translation. The Industrial Packaging segment produced Q3 base revenue growth of 5.2% in the quarter with Industrial Packaging North America growing 2.2% and international businesses increasing 7.5%. All that base revenue growth was driven by significant price recovery for raw materials but at much lower margins.

The standout business in the segment continued to be insulation worldwide, which grew base revenues more than 40% in the quarter. This business provides energy-related insulation solutions for worldwide customers including those in the refinery and natural gas plant sectors.

Moving to the next segment, Power System & Electronics. In the quarter, segment revenues increased 9.4% and operating income grew 6.7%. Operating margins of 19% were 50 basis points lower than the prior year period, mainly due to the dilutive impact of acquisitions. Notably, base revenue margins improved 40 basis points in the quarter from the year ago period. The 9.4% growth in revenues consisted of the following: 3.1% from base revenues, 3.7% from acquisitions, 2.5% from translation and 0.1% from other.

The Power Systems & Electronics segment increased base revenues approximately 3% in the quarter and the major contributors to base revenue growth were welding and ground support equipment. Worldwide welding base revenues grew 5.7% in the quarter, thanks to 26.4% growth in international-based operations, especially to those serving Asian specialty markets such as energy, shipbuilding and shipping containers.

North America welding base revenues decreased 0.9% in the quarter as underlying industrial production and end market demand continued to slow in the U.S. Segment growth was also helped by the ground support equipment business, which produced base revenue growth of 6.9% in the quarter.

Moving to transportation. In the third quarter, segment revenues increased 8.9% while operating income declined 22.4%. Operating margins of 11.8% were 480 basis points lower than the prior year period due to a decline in sales volumes associated with the significant ramp down in North American auto production as well as minimal price recovery on raw material increases. Base revenue margins accounted for 430 basis points of dilution in the quarter. Acquisitions diluted margins another 150 basis points in the quarter.

From a top line perspective, revenues consisted of the following: minus 9.6% from base revenues, 12.3% from acquisitions, 6.1% from translation and 0.1% from other.

As noted, transportation base revenues were down approximately 10% in the quarter. On a worldwide basis, base revenues declined 12.5% with North America down some 18%, and that's largely due to the historically weak auto production in Q3. In North America, Detroit 3 and new domestic builds declined 16% in the quarter. By category, Detroit 3 builds were down 23% in Q3 with GM down 12%, Ford down 33% and Chrysler down 31%. Those are some pretty mind numbing numbers.

By comparison, new domestic builds were down 6% in Q3. We believe that North American auto builds will de down in the 18% to 20% range in Q4. And if this occurs, 2008 full year North American builds will be down 15%. Internationally, automotive base revenues declined 7.3% in Q3 as European builds decreased 1% in the quarter.

Our negative penetration in Q3 was due to customer mix and tier suppliers holding up buying products in anticipation of lower builds later in the quarter. Key international OEM builds in Q3 were as follows: BMW down 11, Fiat down 9, Ford down 8, PSA down 6, Renault down 1, Daimler up 2 and VW Group up 6.

Finally, our worldwide auto aftermarket business grew base revenues 2.8% in the quarter. These businesses, featuring performance enhancing and maintenance extending products continue to benefit from consumers who are holding on to their vehicles for extended periods of time.

Let's move to the Construction Products segment. In Q3, segment revenues increased 1.7% while operating income declined 4.7%. Operating income was again impacted by ongoing weak fundamentals in a variety of North American and international construction categories. Operating margins of 14% were 90 basis points lower than the year earlier period as a result of 120 basis point decline in base revenue margins in the quarter. The 1.7% increase in revenues consisted of the following, minus 4.7% for base revenues, 0.3% from acquisitions and 5.8% from translation.

As noted, the segment's base revenues decreased approximately 4.5% in Q3 due to ongoing weak fundamentals in North America and more recent slowing internationally. Let's look at North America first. North American construction base revenues fell 6.2% in Q3. And despite the weak underlying North American fundamentals, we continue to all over perform [ph] in all three of our construction categories.

First, our residential construction base revenues declined 12% in the quarter even as new housing starts were down 31% versus the year ago period. Secondly, our renovation base revenues were down a modest 2% in Q3 thanks to an uptick in our business units which supply the big box stores. Finally, our commercial construction base revenues were down 2% in Q3 versus the Dodge Index which currently shows a 19% year-to-date decline in commercial construction activity on a square footage basis.

Moving to international. Base revenues declined 3.2% in Q3. The decrease in base revenues was due to overall weakness in Europe where base revenues declined 8.3% in the quarter. And while Asia Pacific's base revenues grew 3.9% in Q3, it was at a lower rate of growth than achieved in the first half of the year.

Moving to Food Equipment. In the quarter, segment revenues grew 8.4% while operating income declined 1.6%. Operating margins of 16.1% were 170 basis points lower than the year earlier period due to 100 basis points of base revenue margin dilution, and acquisitions contributed an additional 50 basis points of dilution in the quarter.

On a top line perspective, the components consisted of the following, minus 1.7 from base, 5.8% from acquisitions, 4.4% from translation and minus 0.1 from other.

Food Equipment's worldwide base revenues as noted were down approximately 2% in the quarter as a result of end market and customer softness both in North America and international. Food Equipment's base revenues in North America declined 1.2% in the quarter with institutional businesses declining 3.8% as customers such as hospitals, universities and casual dining restaurants delayed purchases.

The North American service business grew base revenues 2.8% in the quarter. On the international side, base revenues declined 3.2% in the quarter with Europe down 4%, but Asian base revenues... Asia Pacific base revenues I should say up nearly 9%.

Moving to the Polymers & Fluids segment. In Q3, segment revenues increased 46.9% and operating income grew 22%. Operating margins of 14.4% were 290 basis points lower than the year ago period, thanks mainly to 320 basis points of margin dilution from acquisitions. Base revenue margins actually improved 20 basis points in the quarter. Approximately 47% growth in segment revenues consisted of the following: 3.5% from base revenues, 36.2% from acquisitions and 7.2% from translation.

The Polymers & Fluids produced worldwide base revenue growth at 3.5% in Q3 as noted. Geographically, the North American polymers business grew base revenue at an impressive 15.4% in the quarter, thanks to specialty adhesives and epoxy products for a variety of customer and specialized applications. International polymers produced essentially flat base revenues in the quarter.

On the fluids side of the business, North America base revenue declined 3.3% as manufacturing demand slackened and international base revenue were essentially flat in Q3, which is in keeping with some of the underlying macro data we're seeing in Europe these days.

Finally, our last segment, all other. In Q3, segment revenues increased 5.9% and operating income declined 0.3%. Operating margins of 19.4% were 110 basis points lower than the year earlier period. Base revenue margins declined 130 basis points in the quarter. The 5.9% increase in revenues consisted of the following: minus 0.7% from base revenues, 2.9% from acquisitions and 3.7% from translation. As noted, base revenues in this all other segment declined 0.7% in the quarter and, as we noted before, the segment principally consists of four major categories: test and measurement, consumer packaging, finishing and our industrial appliance products.

The worldwide base revenues for these four sub-categories were as follows: test and measurement grew at the most impressive rate, 11.2% in the quarter. And that was largely based on strength of their specialty equipment products into Europe, Asia and Latin America. Consumer packaging worldwide was down 2.4%, finishing was up 0.8% and industrial appliance products worldwide was down about 4% and that's certainly no surprise given what we've seen underlying appliance numbers to be over the last two to three quarters.

At this point, I'll conclude my remarks and I'll turn it back over to Ron who will address the 2008 forecast and related assumptions.

Ronald D. Kropp - Chief Financial Officer

Thanks John. We are forecasting fourth quarter 2008 diluted income from continuing operations to be within a range of $0.74 to $0.82 per share. The low end of this range assumes 6% growth in total revenues and the high end assumes 9% total revenue growth. The midpoint of this range of $0.78 will be 5% lower than the prior year.

For full year 2008, our forecasted earnings range is $3.24 to $3.32 per share. Full year total revenue growth is expected to be in a range of 10% to 11%. The midpoint of this earnings range of $3.28 would be 6% higher than 2007. Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues in the range of $1.5 billion to $1.6 billion, share repurchases for the year of 1 billion to 1.2 billion, no further impairment of goodwill or intangibles, net non-operating expense which includes interest and other non-operating income in a range of $110 million to $120 million for the year which is unfavorable versus last year by $65 million to $75 million and a tax rate range between 28.25 and 28.75 for the quarter and 28.4 to 28.6 for the full year.

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

John L. Brooklier - Vice President, Investor Relations

We'll now open the call to your questions. We'll ask one more time that you keep your questions to one question and one follow up. At this point, we are ready.

Question And Answer

Operator

Thank you. [Operator Instructions]. We have Deane Dray, Goldman Sachs. Your line is open

Deane Dray - Goldman Sachs

Thank you. Good afternoon.

David B. Speer - Chairman and Chief Executive Officer

Good day.

Deane Dray - Goldman Sachs

I'll start off with David. Could you address the...you mentioned that ITW would look to be making more to cost cutting initiatives depending on the severity of the economic slowdown. Just give us a perspective of what the game plan here is. How centralized might this effort be, the size and timing and so forth, because... and the reason I asked about centralize is so much of ITW is decentralized, so how do you go about telling each business unit what kind of cost cutting measures that you are looking for and the timing and so forth?

David B. Speer - Chairman and Chief Executive Officer

Sure, Deane. Well, first of all, if you look at what our outlook for the year would consist of, it's roughly $50 million in restructuring, which is about $15 million more than what we spent last year to put it in perspective, with most of that delta occurring in the fourth quarter, as you would expect.

As it relates to the decisions and the process by which we decide what restructurings to do, that also is decentralized in our environment. So it really does not come from the top. It's really our business units assessing their local market conditions and what they are hearing from their customers and getting their selves sized, if you will, to meet what they see is the near-term demand, near term being the next 6 to 12 months.

Obviously, it's a fairly volatile economic environment at the moment. It's very difficult to get firm reads on some of these end markets as witnessed by the fairly dramatic reduction that the auto industry has just gone through and their outlook for the fourth quarter. So we tried to get as close a read on that as we can. Our business units really look at what they think the demand profile is going to be going forward for the next to the 6 to 12 months and as a result tried to size their organizations and their efforts accordingly.

So, as you would imagine, that's not a precise exercise, but one what we follow obviously quite closely and work with them that come up with the right solutions.

Deane Dray - Goldman Sachs

And you would still expect a pay as you go type of approach to this restructuring?

David B. Speer - Chairman and Chief Executive Officer

Yes, absolutely. The numbers I just cited are all in our current outlook data. And I think the total number for the fourth quarter approaches $20 million in restructuring, which, as I mentioned earlier, is about $15 million higher than the fourth quarter of last year. But it's all pay as you go as we've traditionally done.

Deane Dray - Goldman Sachs

And just one other broader question if I could. In past cycles, ITW's operating margin appears to have troughed somewhere in the 14% to 15% range. The mix has obviously changed quite a bit since then. But what at this point would you consider to be a trough operating margin for ITW given the current mix and current expectations of a downturn?

David B. Speer - Chairman and Chief Executive Officer

Well I'm not sure I can answer that with a very long-term view, Deane, obviously given the current economic real scenario and the lack of certainty around some of that. But I certainly don't see any reason why our numbers would be significantly different if you measure them looking at the past troughs. And in fact if you look at the opportunity for us to make... continue to make some improvements in the margin rates on acquired businesses, I think that provides us some, if you will, delta or cushion versus what we may have seen in the past. As we entered the last downturn, we didn't have quite as much acquisition activity to improve margins off of. But I think the 14% to 15% range, without doing a detailed analysis, is probably still a reasonable range.

Deane Dray - Goldman Sachs

That's helpful. Thank you.

Operator

All right, thank you. Next, Jamie Cook, Credit Suisse, your line is open.

Jamie Cook - Credit Suisse

Hi, good morning. My first question, can you guys just give a little color on sort of what you are seeing in the emerging markets and whether that has started to slow following Western Europe, and if so, where? And then my second question, can you address where if any of your customers are having any types of financing issues and if so, sort of what markets or any color in that respect as well?

David B. Speer - Chairman and Chief Executive Officer

Sure, Jamie. Let me take the question on emerging markets. I'm assuming you're talking about emerging markets in Asia and in the East of Europe, potentially Latin America. If you look at our businesses in emerging markets, I would say we have begun to see at least some early indications of some slowing in the Asian markets. Although nothing dramatic at this point, certainly early indications that I think the impact of what's happening in Europe and North America certainly on countries like China, we would expect to see lower growth rates as we move forward, but still on positive territory. For the third quarter, not really reflected in our current numbers. Our China businesses as an example grew over 25% in the third quarter. So certainly, we're still seeing dramatic growth there.

Our businesses in South America which are primarily based on Brazil were up double digits in the third quarter. So we're still seeing strong growth there and similarly in the East of Europe. So I wouldn't say we've seen any dramatic impact yet, but what we're hearing from our businesses and from our customers is an anticipation in the slowdown in some of those markets. Certainly, the East of Europe spends a fair amount of its time and activity servicing customers in the West of Europe. And so that slowdown is certainly going to impact their businesses as well.

As it relates to the financing and credit question, I think we have begun to see that clearly emerge, particularly in North America, to a lesser extent in Europe. The impact is probably best described as fairly broad in terms of its impact on small to medium-sized both customers and suppliers where their terms and availability for credit have changed dramatically in the last 90 days. We have seen some pushback in terms of how people are looking at building inventories, managing their businesses. And that's obviously rippling over into the order books and the activity levels. And certainly as some of their customers in some of these end markets that have been under pressure continue to cut back their production schedules, that creates other issues as well.

Many of these small to medium-sized manufacturers have traditionally used their lines of credit to help finance their working capital. And certainly, as those terms have changed and their cost of credit has changed, it's clearly created some challenges, in some cases the ability to access the funds; in other cases, access to the funds, but at a significantly higher rate.

Jamie Cook - Credit Suisse

And then David, my last question. I guess what type of visibility do you have today? How many quarters or is it just one quarter out, which is what we're hearing from a lot of industrial companies, do you have today and how would that compare to if we were sitting here last year?

David B. Speer - Chairman and Chief Executive Officer

Well, our tradition of visibility is really not even as long as a quarter. I mean most of our order books and our businesses will be measured in less than a month, usually in weeks. So we don't get a great visibility. Probably the greatest visibility we get is with the auto industry, but that visibility is not very good because they change their schedules regularly. So while we get a three month schedule, I would say for the last several years at least here in North America, none of those schedules have proven to be close or accurate. They typically have been overestimated.

So visibility is I would say limited. What we rely on less than the order book is really more the feel that our business have by working in their markets and around their customers as to what their activity levels are and what their plans look like, some of which may not even be on paper yet. So we're reflecting what we see in our fourth quarter outlook based on a continuing decline in the U.S. and Europe, and we built that into our numbers. How accurate those are going to be will have to remain to be seen. But we have counted on things continuing to weaken in the fourth quarter both here and in Europe.

Jamie Cook - Credit Suisse

All right, thank you. I'll get back in queue.

Operator

All right, thank you. Next, Henry Curhan [ph], UBS. Your line is open.

John L. Brooklier - Vice President, Investor Relations

Henry, are you there? I think we lost him. Can we go to the next one? Hello?

Operator

Yes, thank you. Next we have Mark Koznarek, Cleveland Research. Your line is open.

Mark Koznarek - Cleveland Research

All right, thank you. Just a question here on the... power business with regard to welding, North America being down 9%. Could you split that between the consumables business and the electrical power system business?

Unidentified Company Representative

That was... Mark, that wasn't down 9% in North America.

Mark Koznarek - Cleveland Research

Sorry, 0.9%.

Unidentified Company Representative

0.9%. Yes, I'm sorry. So the question is what, I'm sorry?

Mark Koznarek - Cleveland Research

Consumables versus equipment.

David B. Speer - Chairman and Chief Executive Officer

Well, consumables would have been up slightly and the equipment would have been down. It's about a 70:30 mix here in North America. So tilted more towards equipment. I couldn't give you the exact numbers, but equipment probably in the 5% range down.

Mark Koznarek - Cleveland Research

Okay. And then the price versus raw materials overall for the quarter, how would you characterize that and how is that expected to change in the fourth quarter?

Ronald D. Kropp - Chief Financial Officer

Well clearly, for most of the third quarter, we saw continued high raw material costs starting to drop a bit towards the end of the quarter. And we expect to see more of that in the fourth quarter, especially steel and resin. Chemicals will continue to be... to increase. So it did have an impact clearly on our costs. They have been able to recover all the dollar amount of the costs, but not all the margins. So it did have an impact on our variable margins of about 110 basis points during the quarter.

Mark Koznarek - Cleveland Research

So Ron, does that mean since raw materials are dropping in the fourth quarter and presumably you've got some momentum in past positive price actions, would you expect to see that 110 basis points being recouped in 4Q?

Ronald D. Kropp - Chief Financial Officer

I don't know if you could say recoup, but definitely be lessened.

David B. Speer - Chairman and Chief Executive Officer

Yes, I would think it would be less than what we saw obviously in the third quarter, but certainly not recouped because as you might imagine some of these price increases that have been implemented at a time when the costs began to drop even though our costs hadn't dropped yet, we didn't get full realization on those price increases. And now of course with the costs dropping, the expectation is we'll clearly have to share some and ultimately all of that reduction in the marketplace. So we won't be a perfect process, but certainly shouldn't be near what we saw in the third quarter.

Mark Koznarek - Cleveland Research

Okay. So there is some benefit, but eventually that will kind of lapse.

David B. Speer - Chairman and Chief Executive Officer

Yeah.

Mark Koznarek - Cleveland Research

Okay. Thank you.

Operator

Thank you. Next Henry Curhan [ph], UBS. Your line is open.

Unidentified Analyst

Sorry guys. Phone glitch on my end.

John L. Brooklier - Vice President, Investor Relations

You there, Henry?

Unidentified Analyst

I'm here. Can you hear me?

John L. Brooklier - Vice President, Investor Relations

We can hear you.

Unidentified Analyst

Okay.

John L. Brooklier - Vice President, Investor Relations

You've already forfeited one of your questions however.

Unidentified Analyst

That's fine.

John L. Brooklier - Vice President, Investor Relations

Now go ahead.

Unidentified Analyst

Could you describe the progress on the divestitures? How much longer do you think it's going to take to get those done and what are you seeing from the M&A market in general?

Ronald D. Kropp - Chief Financial Officer

Well, as you know, we announced the divestiture plan in August. So that was really the start of the process. So over the last couple of months, we've been in the process of pulling together data et cetera for the offering memorandums that go out in the marketplace. So we're still in that process and I think it's going as expected. I think one question that we'll have to address is from a timing perspective, when is the right time do this and we are working through that. Clearly, the credit markets have had an impact on the M&A markets, but we expect to continue to be able to sell these businesses and be done by the middle of next year.

Unidentified Analyst

Okay. And recognizing that it's early, but how is October trending so far?

David B. Speer - Chairman and Chief Executive Officer

We don't have any data at this point to be able to give you, any read on October, Henry. But my expectation is we're going to see... we saw a significant slowing in September. And my expectations we're going to see the same kind of trend when you compare October of '08 to October of '07

Unidentified Analyst

Okay. Thanks a lot.

Operator

Thank you. Next, Eli Lustgarten, Longbow Securities. Your line is open.

Eli Lustgarten - Longbow Securities

Good afternoon.

John L. Brooklier - Vice President, Investor Relations

Hey Eli.

Eli Lustgarten - Longbow Securities

Couple of quick questions. One, can you talk about your assumption for currency in the fourth quarter? And as you look out to 2009, and I'm making bold assumptions and I don't think you're going to have much currency next year. Your share repurchases so far have been additive. Do you intend to buy enough shares to make up for the currency plus any additive [ph] parts in the earnings, or how do you handle that?

Ronald D. Kropp - Chief Financial Officer

So,first of all, from the fourth quarter currency impact, what we do is we use the end of the quarter currency rates for the forecast. So that would have been September 30th rates and year-on-year, the impact of currency will be about flat versus the fourth quarter of 2007 based on that end of quarter rate. Clearly, if we see continued weakening, they'll have some downside.

David B. Speer - Chairman and Chief Executive Officer

To answer the question about 2009, Eli, we have not formulated our plans for 2009 yet, so we couldn't give you any read yet on what we would anticipate with share repurchases and acquisitions which is really the way we would look at how we're going to utilize our free cash flow as we look at what we think the landscape will offer in 2009. It really won't be a look that is intended to try and offset the difference in the currency translation. Certainly the more share repurchases we do will have that... it will have some impact on that, but that's really not the metrics we use in developing that.

Eli Lustgarten - Longbow Securities

And can you give us some insight in transportation and I guess maybe the food service businesses? You've sort of increased your exposure to transportation with the big acquisition you made in the projects [ph] you outlined. I guess the $400 million one. Yet the market conditions continue to deteriorate and are not likely to do much better next year. Can you give some insight as to you expect to be able to improve profitability in these markets under pressure? And can you give some insight on what's going on in food services with that?

John L. Brooklier - Vice President, Investor Relations

Well, first of all, let's go... Eli, go back to transportation first. Your question on the acquisition we did on CCI is really a truck aftermarket business. What they're basically doing is they're basically redoing trucks, drivetrains, and it's essentially a parts and service business. So we think it has a whole different set of fundamentals than anything you're looking at on the auto OEM side. Different growth, perspective, different growth trajectory I should say. So in the long term the business has been growing at a rate of about 4 to 5 plus. We think it has enhanced profitability built into the model they currently have in terms how we're going to change it. So we think there is some great 8020 initiatives that are really applicable to the business.

So it's clearly encompassed within the transportation segment, but it's very different than what you're seeing in terms of the auto OEM businesses that we are currently supporting both in North America and internationally. Your question on food equipment was what?

Eli Lustgarten - Longbow Securities

Just some sense, that market started to deteriorate after being up pretty much across the board. Do you expect that deterioration to go through 2009 --

John L. Brooklier - Vice President, Investor Relations

Well, again, I mean we're not going to get into any real 2009 projections, but I think it's clear that the trajectory of the buying cycle on the business has been trending down. To my commentary earlier, in the third quarter, we have lots of customers who are delaying purchases that it's essentially a smaller CapEx decision they've made in terms of how they're going to purchase products, whether it's for an institution or whether it's for a series of restaurants. So I would say that the trajectory is probably going to be flat to slightly down as we move though the next couple of quarters?

David B. Speer - Chairman and Chief Executive Officer

Remember also Eli that as the equipment sales trend down, the service revenues generally trend up as they customer service the equipment that they keep in place that they are not replacing. But it certainly is not an equal offset, but I would certainly share John's sentiments that the trajectories there clearly have decelerated. And I would expect that that's probably the environment we're going to be looking at as we head into 2009.

Eli Lustgarten - Longbow Securities

All right, thank you.

Operator

Thank you. Next, Robert Wertheimer, Morgan Stanley. Your line is open.

Robert Wertheimer - Morgan Stanley

Thank you. Good afternoon everybody.

John L. Brooklier - Vice President, Investor Relations

Hey Rob.

Robert Wertheimer - Morgan Stanley

I wanted to ask about the acquisition pipeline and just generally about the acquisition, it seems as though public company evaluations are falling faster than private. And then the question I guess is have you seen private company evaluations fall? Have you asked your managers to bid lower just given what's happening in the public market? And has that changed your appetite for buying back your own stock private company assets?

David B. Speer - Chairman and Chief Executive Officer

Well I think if you look at our acquisition pipeline and the way we manage it, we clearly are looking at current sort of market pricing, if you will, when we look at these areas of businesses and opportunities. We certainly have taken a much closer look at valuation in the last 90 days, particularly for deals that we were already working on in the pipeline, primarily based on looking at what their business outlooks were going forward and did they need modification. Clearly, there has been a very significant change in people's views about the go forward conditions in a number of these end markets. And we wanted to make sure those were accurately reflected in our assumptions. And to the extent those assumptions change significantly, they may well have led to a change in valuation. And that certainly has been the case in a number of potential acquisitions.

I would say as it relates to the delta between private and public companies, the vast majority that we look at is private, we only occasionally looking at public. I don't know that have a lot of data to describe whether that delta is change my sense is that they have come down together in terms of both expectations and actual transaction prices.

I will say, however, that what I think we are beginning to see in the acquisition environment is the impact of the latest credit crisis which is leaving a lot of people, it don't already have liquidity in there hands wondering where that liquidity would come from if you going to close deals and leaving some potential sellers, I think pushing back and wondering wonder when the right time is to actually move forward aggressively with any kind of a sale process.

So it's a little bit of an interesting time, kind of reminds me a bit of what happened when we saw the initial downturn in the private equity funding leverage more than year ago.

Robert Wertheimer - Morgan Stanley

Okay. Thanks. And just from my follow up, the higher volume of acquired revenues in this quarter, was that things coming on because sellers were getting more rational and the pipeline getting bigger, or was that just some of the lumpiness that happens from time to time?

David B. Speer - Chairman and Chief Executive Officer

Well I think in terms of timing, it was some of the lumpiness. But certainly in terms of ability to execute, it was definitely based on what I would suggest are peoples expectations having come into a more realistic zone for us. But those are thing that would have occurred six or seven months ago, not in the last 60 days. It just so happened in fact the CCI deal that John's spoke about earlier, the $400 million plus deal was actually scheduled to close in the second quarter and due to a variety of a reasons it didn't get closed until the third quarter.

Robert Wertheimer - Morgan Stanley

Great, thanks.

Operator

Thank you. Next, Andy Casey Wachovia Securities. Your line is open.

Andrew Casey - WachoviaCapital Markets

Thanks. Good afternoon everybody.

John L. Brooklier - Vice President, Investor Relations

Hello Andy.

Andrew Casey - WachoviaCapital Markets

Question, a different take on the acquisition. The impact on margins this quarter was a little bit more dilutive than the prior quarter in that kind of broke a trend of becoming progressively less dilutive quarter-to-quarter. Was that pretty much the concentration of activity in acquisitions during Q3 or was it something else?

Ronald D. Kropp - Chief Financial Officer

Yes, in the current quarter it was minus 17 basis points and overall company margins negative impact. And that's primarily being driven by just a higher volume of acquisitions. So overall, the acquisitions were almost 7% of revenues and those acquisitions have about 5% margins after the impact of amortization. That 5% margin after amortization is similar to what happened in the earlier in the year we just had lower volumes of acquisitions in the first and second quarter, so it had less of an impact in the overall margins.

Andrew Casey - WachoviaCapital Markets

Okay. And then thanks for that Ron, on acquisition impact in Polymers & Fluid, it was 320 BPs, what was causing that?

David B. Speer - Chairman and Chief Executive Officer

We had several major acquisitions or several acquisitions that closed. The major one which was the Stoke [ph] business which closed during the quarter. Actually, I guess it closed at the end of the second quarter, but the impact would have been felt primarily in the third quarter.

Andrew Casey - WachoviaCapital Markets

Okay. So more timing issue?

David B. Speer - Chairman and Chief Executive Officer

Yes. Timing issue and a large acquisition. I mean it was a $225 million, $230 million acquisition, so big acquisition for that group in terms of the overall size.

Andrew Casey - WachoviaCapital Markets

Okay. And so with the concentration this quarter, the impact of that carrying over into this quarter, do you expect a similar drag in 4Q? I know you're not making any comment on '09.

Ronald D. Kropp - Chief Financial Officer

Yes, definitely, the carryover impact of these bigger ones will also occur in the fourth quarter. So we will have a similar dilutive impact on overall company margins.

David B. Speer - Chairman and Chief Executive Officer

Remember, Andy, usually takes us three to four quarters before we flush through all of the amortizations and steps up that occur. What we look at in the interim from an operating standpoint are really the pre-amortization margins. And those margins for the third quarter were actually 12%.

Andrew Casey - WachoviaCapital Markets

Yes.

David B. Speer - Chairman and Chief Executive Officer

So very much in line with; in fact, probably slightly above our original expectations.

Andrew Casey - WachoviaCapital Markets

Okay. I just wanted to make sure we weren't going south of 100 basis points again.

John L. Brooklier - Vice President, Investor Relations

Well, we will try to cap it, Andy.

Andrew Casey - WachoviaCapital Markets

Thank you. See you.

Operator

Thank you. Next John Inch, Merrill Lynch. Your line is open.

John Inch - Merrill Lynch

Thank you, good afternoon.

John L. Brooklier - Vice President, Investor Relations

Hey John.

John Inch - Merrill Lynch

So I just wanted to know the increase in the short-term debt, are you... do guys have plans to term that out? And if so, what would that cost your incrementally? I mean how should we be thinking about that?

Ronald D. Kropp - Chief Financial Officer

Well, we primarily are financing our operations these days through commercial paper. We've had no issues with placing our commercial paper given our high credit rating. So that's been the good news versus what some other companies have had. Clearly, at some point we had to term out that short-term debt, but that time is not any time soon given the situation to credit markets. So, something that we are monitoring and if we get to the right point with the rate, rates in the right place, we will term it out, at that point we will have a better gage on what the long-term rate might be. We have our commercial rate... paper rate is probably in the 2.5% range for the quarter.

John Inch - Merrill Lynch

And Ron, how much CP do you have outstanding and sort of I guess where do you see... what level of short-term commercial paper you're comfortable holding based on sort of market conditions of ITW, that sort of thing?

Ronald D. Kropp - Chief Financial Officer

The balance at the end of the quarter was about 1.5 billion. We have play of additional capacity under our existing and credit facilities to go, what way we're above that and we would be comfortable with that, we would, we don't think we have any issue placing substantially more commercial paper either. So there is nothing in the short-term that would say we would need to term out just based on the capacity.

John Inch - Merrill Lynch

Okay. And then just my follow up here. There's a lot of chatter that General Motors might actually go bankrupt. If that were happen, could you guys give us a sense of what are you on the hook for in terms of receivables from them and/or just remind us again sort of how significant GM is specifically to ITW?

David B. Speer - Chairman and Chief Executive Officer

Well, I mean I don't have a specific number to give you on what the exposure would be in bankruptcy. GM is obviously an important customer overall to ITW in our transportation segment. They would be I think actually the largest single customer in North America followed closely by Ford. So we have obviously reasonable exposure there. But I couldn't give you an exact number, John. And should we have a pretty tight credit terms with them that they pay within, so our exposure from a DSO standpoint is under 60 days. I certainly don't have an exact number to share with you. But I... my belief is that as we move forward we continue to watch and manage that. We would have some exposure if they were in fact to go bankrupt. But I certainly don't think that's the... an issue that we're concerned about at least at the moment. We continue to manage them within the credit terms, they continue to pay within the credit terms and on that basis, we're comfortable.

John Inch - Merrill Lynch

Yes. That's helpful. Thanks David.

Operator

All right. Next, Shannon O'Callaghan, Barclays Capital. Your line is open.

Shannon O'Callaghan - Barclays Capital

Good afternoon guys.

John L. Brooklier - Vice President, Investor Relations

Shannon.

Shannon O'Callaghan - Barclays Capital

Can you talk a little bit about Europe and how it trended kind of more recently? Obviously, it slowed down. I mean when did you first start to see it hit in September, or do you have any visibility into the first couple weeks of October?

David B. Speer - Chairman and Chief Executive Officer

Well, we don't have any visibility in the first couple of weeks of October. I can tell you that the most dramatic part of the slowdown in Europe did occur in September. It's hard to get a read on numbers out of Europe in the August and July timeframes given the holiday period there. But definitely have seen a steadying slowing. I think we first raised our awareness or at least raised our hand about the slowing in Europe actually during the second quarter. And in fact, we've seen a steady slowing there. And I am talking about outside the early markets that we talked about, even back in the first quarter which were some of the residential construction markets in Europe.

So we've definitely seen a consistent slowing there. Again, I don't have any October data, but our expectation is that we are going to continue to see slowing in Europe.

We've already seen some revisions in the European auto builds as an example. And the European appliance builds I expect will continue to see a slowing period in Europe for the fourth quarter. Don't know what will little happen in 2009 at this point. But early indications are that the auto build will certainly contract in 2009 overall as well. So some of the early indicators for some of the larger industries would suggest that the slowing is not temporary. And I think what we're seeing obviously in the latest data as reported from the Purchasing Managers Index and the Eurozone ISM data would suggest that slowing is obviously evident in many places as well.

Shannon O'Callaghan - Barclays Capital

Okay. And how about for 4Q? I mean what are you assuming now kind of overall base revenues and kind of split North America international?

David B. Speer - Chairman and Chief Executive Officer

We're seeing base revenue somewhere between minus 1 to minus 3% overall, North America minus 3 to minus 4 and international somewhere between flat to up 1.

Shannon O'Callaghan - Barclays Capital

Okay. And then just one clean up. The phone, either your phone or my phone broke up when you were talking about the price and volume in the quarter in the minus 0.8 base. Can you just give that again?

Ronald D. Kropp - Chief Financial Officer

The overall base revenues were 0.8% and it's made up of price increases in the 3% to 4% range and volume decreases in the 4% to 5% range.

Shannon O'Callaghan - Barclays Capital

Okay, great. All right, thanks a lot guys.

Operator

Thank you. Next, Joel Tiss, Buckingham Research. Your line is open.

Joel Tiss - Buckingham Research

Thank you. Good afternoon.

John L. Brooklier - Vice President, Investor Relations

Hi Joel, how are you doing?

Joel Tiss - Buckingham Research

All right, how is it going?

John L. Brooklier - Vice President, Investor Relations

It's great.

Joel Tiss - Buckingham Research

Just two things I wanted to get into a little bit. Can you talk about, I'm not looking for a forecast, but can you talk about going forward how easy it's going to be to try to better match your raw material contracts with your pricing actions? I mean it seems like you are a little bit out of whack in the near term.

David B. Speer - Chairman and Chief Executive Officer

Yes, we've definitely been out of whack in the near term. When you look at what happened during the third quarter, we still had the hangover of some fairly significant cost increases that occurred during the second quarter that we were trying to recover. And in the middle of some of those price increases, we actually had some of the input costs begin to go down. So hard to sell a price increase when somebody has just read about input costs going down. And that's really been happening in the steel and to some extent in the plastic market. So clearly, what we saw in third quarter was not... the actual result was not in line with what we had projected going into the quarter. So that 110 basis point delta there on price cost was clearly not what we'd expected. We were looking for something more like 50 to 60.

In terms of going forward, I would expect normally as we see the supply line is open up and I think we're beginning to see that. The in balance capacity and demand or supply and demand clearly in some markets and the profile is clearly begin to change. Steel is one of those. Generally, in those kind of environments we do much better...we do much better but those are our purchasing power then allows us to really exercise better contract prices than what we have been able to do in the past. As an example of past, two plus years in steel what we been able to get supply as a result of our purchasing power hasn't really impacted our ability to get better cost than anybody else. So, I expect going forward that while the raw material cost are trending downward, we will be sharing those obviously with the market but at a rate that should allow us to disclose some of these gaps that we've seen in the past.

Joel Tiss - Buckingham Research

Okay. And just on a quick follow up. Would it seem reasonable that as we move forward that the price of acquisitions come more into line with what the public markets are doing and that the attractiveness of share repurchase starts to diminish a little bit?

David B. Speer - Chairman and Chief Executive Officer

Well certainly, as you know, Andy, we've always talked about... or Joel, sorry, we've always talked about acquisitions ahead of share repurchase. So if we see the opportunity to have a significantly higher volume of acquisitions, it certainly would impact our view of the level of share repurchase activity we would go through. Obviously, when we set our guidance for next year, we will give you our view on that. But we obviously adjust that as we go along. If we see the opportunities in the acquisition area open up, we'll clearly adjust our sights accordingly.

But I would expect what we've seen, as you've seen through the data we reported, we're not paying significantly less than what we've traditionally paid but we're able to look at lot more deals because things in our valuation range now are able to make sense and be closed. Whereas in the past year, it was quite difficult that one-time revenue was 7.5 times EBITDA, there were a whole lot of deals we couldn't even get to the final round with. So I do expect that that's going to change. And certainly with some of our deals we closed during the third quarter, the valuations were in fact lower.

Joel Tiss - Buckingham Research

Right. Okay, I'm sure you are happy you missed out on some of those deals at this point too. All right, thank you.

Operator

Thank you. Robert McCarthy, Robert W. Baird. Your line is open.

Robert McCarthy - Robert W. Baird

Good afternoon, guys.

John L. Brooklier - Vice President, Investor Relations

Hey Rob.

David B. Speer - Chairman and Chief Executive Officer

Hey Rob.

Robert McCarthy - Robert W. Baird

Can you... just following on Joel's question, I don't believe I've heard you quantify your acquisition pipeline. And could you talk about whether your expectations right now are that maybe closing whatever you have in your pipeline might tend to stretch out, maybe your hit rate goes down a little bit given current conditions?

David B. Speer - Chairman and Chief Executive Officer

Yes, I think as you look at the pipeline right now, the pipeline is a little over $1 billion in size. If you look at our number to date, $1.4 billion close in a range of $1.5 billion to 1.6 billion for the year, that would suggest we don't expect to close any significant number of deals or size deals during the fourth quarter. And that's really based on what we see on the pipeline at the moment. That doesn't mean we don't have sizable deals in the pipeline, but none of them are in the fourth quarter.

I would expect going forward, as we look at the acquisition environment, we're going to continue to see some impact of what's going on in the credit world. And I think that's going to probably dictate when and how people look at selling assets. And it's unclear at the moment for me to see what that landscape is going to look like. But I would expect that as 2009 unfolds, maybe by the second or clearly by the third quarter, we'll have a much better view of that. And I would expect that valuations in fact would trend downward as a result of that. Certainly, the cost of funds is going to be higher and you could then also anticipate that the amount of leverage available on sizable deals is going to be a lot less. And that would clearly work in our advantage.

Robert McCarthy - Robert W. Baird

Yes. Okay, thank you. And then the other thing I wanted to ask about is the North American construction products business. In residential market, there is an interesting patterns developed in the three quarters so far this year. In each of the first three quarters, housing starts have been down about 30% compared with prior year. But your comparisons have improved from down 20 in the first quarter to 16 in the second and now down only 12 in the third. So I'm interested in what's driving this improvement. I suspect a piece of it would be pricing. But I find myself wanting to make the in fronts that if the year-to-year decline in housing starts to narrow to something like 10% to 15% you all might be reporting flat or even up revenue in that market. So could you just talk about what you're seeing there?

David B. Speer - Chairman and Chief Executive Officer

Yeah. Clearly, we've positioned ourselves in this kind of a difficult market to be able to take advantage in share position, and that's really what we've been doing. We've being doing it on several fronts. Certainly, from a new products standpoint, we've done a number of things that have helped there. But primarily, I think it's the position that we have in the marketplace vis-à-vis most of our competitors who are importing products into this market. Their import advantages from a cost standpoint and a supply standpoint have clearly changed over the last 18 months. And local availability of product is extremely important because they aren't... the buying patterns are different. People aren't --

Robert McCarthy - Robert W. Baird

Nobody is carrying inventory.

David B. Speer - Chairman and Chief Executive Officer

Nobody is carrying inventory and the capability for people to buy multi container loads and rely on them arriving on timely basis are clearly are not there, so you find a lot of people that may have bought a container before buying a quarter of a container or a quarter of a truck, if you will, of product.

Robert McCarthy - Robert W. Baird

Yes.

David B. Speer - Chairman and Chief Executive Officer

So they need local availability of product that we clearly have been able to take advantage of that with our geographic footprint on our supply base here in North America. That's certainly been helpful.

Robert McCarthy - Robert W. Baird

Okay, thanks David.

Operator

Thank you. Next, Daniel Dowd, Bernstein. Your line is open.

John L. Brooklier - Vice President, Investor Relations

Candy, this will be the last question we will take. Thank you.

Daniel Dowd - Bernstein Research

Thanks for taking this last one guys. Actually, I'll ask about your acquisitions as well. As you think about 2009 certainly being very weak in North America end markets and European end markets, are you adjusting your acquisition appetite to focus a much higher percentage of that acquisitions on Asia Pacific? Or is there any geographic strategy or alternatively a strategy to be more focused on certain kinds of end markets... certain kind business units where the end markets are likely to be less painful in 2009 and 2010?

David B. Speer - Chairman and Chief Executive Officer

Yes, I think clearly as we develop our acquisition strategies at the group level, we clearly are looking at obviously a number of different dynamics. But the long-term view on those markets is really what drives our appetite for wanting to acquire. We want to be comfortable. But after we have acquired these businesses, we've done our 8020 work, and that we're on the growth side four or five years down the road that those businesses that going to be solid contributors. So we certainly don't want to be acquiring into end markets that we think are going to continue to contract or that have fundamentals that don't fit our profitability profile. Those are natural parts of the way we look at acquisitions.

With that said, clearly, opportunities we've seen from a valuation standpoint have driven our interests or our capabilities to be primarily more international in focus the last two years. Certainly, if you look at the numbers year-to-date, that will change significantly. The CCI acquisition that John spoke about earlier is a complete North American acquisition, is a large one, $400 million. So the concentration of revenues of that's all in North America. So I suspect that if you look our year-to-date numbers, that more than 50% of the acquired revenues are probably in North America as a result of that acquisition.

If you strip that one out, probably closer to 70% of the revenues were international. So as you look across our business base and the opportunities, it will obviously skew what the impacts are. But the valuations and the capabilities to execute in the space is probably what's driven more of what we've been able to close in the past. I think the opportunities have been there, but the valuations were out of line

I expect going forward that the opportunities will be there and the valuations will be much more in line. So I would expect over time that to mean that some of the larger opportunities we missed out on in '06 and '07 will be opportunities we could transact on in '09 and '10 going ahead.

Daniel Dowd - Bernstein Research

Correct. And then I guess one last thing, so certainly one of the issues that investors have talked about a lot is that your debt to equity ratio over time has been quite low compared to a lot of other companies. Clearly, that has turned out to be a significant strength in this environment. Has the tightening of credit made you think you should become even more conservative on your balance sheet? Or are you going to be more comfortable continuing to increase the debt to equity level?

David B. Speer - Chairman and Chief Executive Officer

I think as we've said, we are comfortable in the 20% to 30% range with our current profile of acquisitions, acquiring revenues somewhere in the 5% to 7% of our annualized revenues annually. Going above that means that is better opportunities, larger opportunities and we are certainly comfortable going above that range. So I don't think it's changed our profile. Certainly, we've looked at what's happened in the credit markets and we follow closely the impact not only on ourselves, but on our customers and our markets. And as Ron highlighted earlier in his comments about our commercial paper and short-term financing, we've done well in this environment, which makes me comfortable that even in this kind of a market of turbulence, we've been able to continue to place our commercial paper at reasonable rates, which is a pretty good reflection of I think the quality of our balance sheet.

So I don't see any reason for us to pull our horns in, if you will, but certainly for us to leverage significantly. Higher than this, it's going to be based on really looking at acquisition opportunities that we think fit the long-term growth profile. If those come along, we are comfortable going above the current levels that we are at.

Daniel Dowd - Bernstein Research

Thank you.

John L. Brooklier - Vice President, Investor Relations

That will end the call for today. So we thank everybody for joining us and we look forward to hearing from you again. Thank you.

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