Illinois Tool Works Q3 2007 Earnings Call Transcript

Illinois Tool Works Inc. (ITW)

Q3 2007 Earnings Call

October 17, 2007 2:00 pm ET

Executives

John Brooklier - Investor Relations

David Speer - Chief Executive Officer

Ron Kropp - Chief Financial Officer

Analysts

Steven Boltman - J.P. Morgan

Robert Lagava

Deane Dray - Goldman Sachs

Andy Casey - Wachovia

Mark Koznarek - Cleveland Research

John Inch - Merrill Lynch

Joel Tiss - Lehman Brothers

Robert Wertheimer - Morgan Stanley

Robert McCarthy - Robert W. Baird

Eli Lustgarten - Longbow Securities

Jamie Cook - Credit Suisse

Daniel Dowd - Sanford Bernstein

Ann Duigan - Bear Stearns

David Raso - Citigroup

Presentation

Operator

Welcome to the ITW third quarter 2007 earnings release conference call. (Operator Instructions) I would now like to turn the meeting over to Mr. John Brooklier. Sir, you may begin.

John Brooklier

Thank you, Michelle. Good afternoon, everyone and welcome to our third quarter 2007 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 all of you for joining us on today’s call. At this point, David would like to make some general comments about the recently completed quarter.

David Speer

Thank you, John. I am pleased to report that our third quarter operating performance was quite strong. We grew 14% in the third quarter in earnings and that’s the second consecutive quarter in which we’ve posted double-digit earnings growth, and we accomplished this in an environment that, much like last quarter, where our international end markets were strong and our North American end markets faced difficult headwinds, especially in the new housing sector.

Even so, our third quarter top line increased 16%, operating income grew 11%, and net income rose 10%.

I am also encouraged by our operating margin performance of 17% in the quarter. While the overall margins were down 70 basis points from the year earlier period due to acquisitions, our base margins actually improved 60 basis points from the year-ago period.

Speaking of acquisitions, we continue to acquire at a pace which we will believe -- believe will be in a range of $1 billion to $1.2 billion of annualized revenues for the full year of 2007. As you know, we look at acquisitions as future earnings growth opportunities for the company.

John, let me turn it back to you.

John Brooklier

Thanks, David. Here’s the agenda for today’s call; Ron will join us momentarily to give a review of the financials for the third quarter. I will then update you on our four manufacturing segments and associated end markets. Ron will then come back and address our fourth quarter and full year earnings forecast and associated assumptions, and finally, all of us will take your questions.

Please note that as always, we ask for your cooperation as to the one question, one follow-up question policy. We hope to complete this call in about an hour today. Thank you.

First, a few items; please note that this call and the company presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation statements regarding end market conditions, base revenue growth, earnings growth, operating income, other income, tax rates, use of free cash, acquisitions, and the company’s related forecasts. These statements are subject to certain risks, uncertainties, and other factors which could cause actual results to differ from those anticipated. These risks are spelled out in more detail on the slide and also in our Form 10-Q for the 2007 second quarter.

Finally, the telephone replay for this conference call is 203-369-1278. No passcode is necessary. The playback number will be available through 12:00 midnight on October 31, 2007, and as always, you can access our PowerPoint presentation via the itw.com website.

At this point, I will turn the call over to Ron Kropp. Ron.

Ron Kropp

Good afternoon, everybody. The highlights for the third quarter are as follows: similar to last quarter, revenues grew approximately 16% versus last year. Operating income was up 11% versus the prior year, primarily due to higher revenues and improved margins for the base businesses, the favorable impact of currency translation, and acquisitions.

Operating margins of 17% were lower than last year by 70 basis points, mainly due to the lower margins of acquired companies.

Diluted net income per share of $0.89 was 14% higher than last year. Free operating cash flow of $656 million was significantly higher than last year and return on invested capital was 19%, which was higher than last year by 40 basis points.

Now let me give you the details of our operating results. Our 15.7% revenue growth was primarily due to three factors. First, base business revenue grew 2.2%. This growth rate was 20 basis points lower than the second quarter of 2007.

International base revenues increased 5.1%, which was 290 basis points lower than the second quarter. While international growth had slowed a bit from the 8%-plus levels we saw in the first half of the year, we continued to see solid performance in most of the companies end markets in Europe and the Asia-Pacific region.

North American based revenues increased 0.2%, which was favorable by 160 basis points versus the decline of 1.4% in the second quarter. The North American businesses continued to see the effect of slowing industrial production and declines in residential construction, although construction was not as negative as the first half of the year.

Secondly, acquisition added 11.7% to revenue growth, which was 30 basis points lower than the second quarter acquisition effect.

Third, currency translation increased revenues by 3.8%, which was 20 basis points higher than the second quarter currency effect. Overall our 16% revenue growth was primarily the result of strong base business growth internationally and the impact of acquisitions and favorable currency translation.

Operating margins for the third quarter of 17.0% were lower than last year by 70 basis points, primarily due to the larger amount of acquired revenues in the last 12 months and our typically lower margin, which reduced overall margins by 150 basis points.

The base businesses improved margins 60 basis points, which is better than the second quarter by 40 basis points and partially offset the negative acquisition effect. John will provide more details of the operating results when he discusses the individual operating segments.

In the non-operating area, other income was lower in the prior year by $17 million, primarily due to lower investment income of $12.5 million versus last year.

The second quarter effective tax rate was 28.8% versus 30.5% in the second quarter of 2006. The year-to-date tax rate is 29.25%, which is slightly lower than last quarter’s year-to-date rate of 29.5%.

Turning to our invested capital, total invested capital increased $67 million from the second quarter, primarily due to acquisitions, partially offset by lower operating working capital.

Accounts receivable decreased mainly due to seasonality and were at 62.5 days sales outstanding.

Inventories were essentially flat versus last quarter at 1.8 months on hand, even with inventories from acquired companies.

For the third quarter, capital expenditures were $80 million and depreciation expense was $89 million.

On the financing side, our debt increased $190 million from last quarter and our debt-to-capital ratio increased to 15.1% from 13.7% last quarter.

As we have previously disclosed, on October 1st, we issued EUR 750 million of a seven-year bond with a coupon rate of 5.25%. The proceeds from the bonds were distributed back to the U.S. and will be used for general corporate purposes. Going forward, our strong European cash flow will be used to service this debt.

Our cash position increased $121 million in the third quarter, as our free operating cash flow of $656 million and borrowings of $183 million were utilized for acquisitions of $195 million, dividends of $116 million, and share repurchases of $479 million.

For the quarter, we repurchased 8.6 million shares under our ongoing, open-ended program. Year-to-date, we have spent $959 million to repurchase 18 million shares. Due to our continued strong cash flow and available debt capacity, we have increased our full year share repurchase forecast to a range of $1.5 billion to $1.6 billion, up from our previous range of $1.1 billion to $1.4 billion.

Our third quarter return on invested capital of 19% was higher than last year by 40 basis points, as lower working capital for the base businesses and a lower tax rate more than offset the negative effect of acquisitions.

Finally, on the acquisition front, we acquired 18 companies in the third quarter, which have annual revenues of $218 million. Based on a continued strong pipeline of potential deals, we are forecasting acquisitions for ’07 to be in the range of $1.0 billion to $1.2 billion of annualized revenues.

Now John will finish our review of the quarter with a discussion of the manufacturing side.

John Brooklier

Thank you, Ron. Let me take just a very few moments to reference some data that underlies what David referred to earlier in the call regarding strong international activity and weaker North American end markets.

The latest data out of Europe supports a relatively strong growth environment there. EuroZone’s industrial production grew 4% in August ’07 versus 2.3% in May of ’07 and the EuroZone purchasing managers index was at a reasonably strong 53.2% in September versus 55.6% in June.

On the North American side, the data continues to indicate weaker fundamentals. Industrial production excluding technology continues to perform at less than robust rates. U.S. industrial production was 0.7% in September of ’07 versus 0.6% in June, and supporting our slower growth in the North America piece is the ISM index dropped to 52% in September ’07 versus 56% in June of ’07.

With that as a backdrop, let’s review our four manufacturing segments. Starting with North America and Engineered Products, revenues increased 2.4% and operating income declined 3.2%. Operating margins of 16.6% were 100 basis points lower than the year-ago period, largely as a result of our construction related businesses.

Looking at segment results, a 2.4% increase on the top line consisted of the following: minus 1.7% for base revenues; plus 4.5% from acquisitions; minus 0.8% from divestitures; and plus 0.4% from translation.

Moving to the next slide, the notable improvement in this segment was the performance of our automotive units in the quarter. Our automotive base revenues grew 2% in the quarter, driven by a Detroit 3 build environment. Detroit 3 builds were plus one in the quarter, having been at minus 6 in Q2 and minus 12 in Q1. For Q3, the specific Detroit 3 builds were GM, down 3; Ford, plus 2; and Chrysler at plus 11. New domestic builds grew 8% in the quarter.

From an inventory standpoint, Detroit 3 inventories also modestly improved in the quarter. At September 30, Detroit 3 inventories were at 70 days on hand versus 76 days at June 30 and specifically, GM was at 66 days, Ford at 76 days, Chrysler at 71 days.

New domestic inventories also continued to improve, with 49 days on hand at September 30th versus 53 days at June 30th.

In our industrial products category businesses, base revenues declined 1%. That’s similar to what these businesses produced in the first and second quarter of this year. Key business unit performance in Q3 included industrial plastics, down 8%, largely due to weaker demand for appliance and electronics sector. On the plus side, performance polymers grew 5% and Minigrip/ZipPak increased 2%. Fluid products base revenues were flat in the quarter.

Our construction businesses, especially those in the new housing sector, continue to experience difficult end market conditions in the quarter. Total construction base revenues declined 5% in the quarter versus a base revenue decrease of 5% in Q2 and a decline of 10% in Q1. Specifically, base revenues for ITW Construction, which is made up of our tool and fastener and truss units, were down 8% in the quarter versus a decline of 9% in Q2 and a decrease of 12% in Q1.

By channel, our Q3 new housing base revenues declined 19%, which was modestly better than the seasonally adjusted housing rate decrease of 24% in Q3.

And as you may have read this morning, the near-term housing prospects don’t look promising. Today, NHAP data indicates that through September, housing starts were at 1.191 million annual units, a 14-year low.

Our performance in other construction categories was better but still not robust. For Q3, our renovation businesses were down 3%, largely due to irregular order patterns from the big box stores, such as Home Depot. Our commercial construction businesses, however, grew base revenues 4% in the quarter, mainly as a result of contributions from our trust businesses.

In our Wilsonart business, base revenues declined only 1% in the quarter, primarily because revenues associated with base laminate products were slightly up in the quarter thanks to better pricing or high-end, high definition laminate products. Flooring revenues declined modestly in Q3.

On the international side, international products in the third quarter, segment revenues increased 32.5% and operating income grew 28.3%. Operating margins of 14.7% were 50 basis points lower than the year-ago period due to the diluted impact of acquisitions.

Taking a closer look at the top line, the 32.5% increase in revenues consisted of the following components: plus 6.7% from base; plus 16.9% from acquisitions; minus 0.2% from divestitures; and plus 9.2% from translation.

What’s going on in the end markets essentially is that this [inaudible] economies are producing across-the-board base revenue growth in all business categories. Notably, total construction base revenues increased 8% in Q3. By geography, Q3 base revenues were as follows: European construction grew 9%; Asia-Pacific increased 6%; and Wilsonart International grew 9%.

Europe was aided by demand for commercial construction products for a variety of countries, including Germany and Sweden. Asia-Pacific benefited from strong performance from a variety of Australian and New Zealand business units, and Wilsonart International was largely driven by contributions from its German and Chinese business units.

On the automotive side, automotive base revenues increased 9% in Q3 on the heels of a 7.5% increase in light vehicle production in Europe in the quarter. That’s the second consecutive quarter that automotive base revenues have improved, moving up from plus 1 in Q1 to plus 5 in Q2. Key builds in Q3 included the following: BMW, up 16%; VW Group, up 8%; Ford Group, up 7%; PSA Group, up 6%; GM Group, up 2%; and Renault actually was down 4%.

The remaining part of this segment is made of our industrial base units. These units in aggregate generated base revenues of 3% in the quarter. By business group, key Q3 base revenues were as follows: Polymers, plus 8%; Fluid products, plus 9%; and industrial plastics, minus 1%.

Moving to the next slide and the North American specialty systems segment for the third quarter, segment revenues increased 10.5% and operating income increased 7.3%. Operating margins of 19.4% were 60 basis points lower than the year-ago period due to the dilutive impact of acquisitions.

Focusing on the top line, the 10.5% growth in revenues consisted of the following: plus 1.9% from base revenues; plus 9.8% from acquisitions; minus 1.5% from divestitures; and plus 0.4% from translation.

This industrial production driven segment saw our base revenues grow approximately 2% in Q3, which exceeded U.S. industrial production growth rate for the quarter by more than a point.

The major base revenue contributors included food equipment, which increased 9% in Q3. Food equipment continues to benefit from a strong institutional as well as casual dining demand for its products and follow-up services. Year-to-date, food equipment base revenues have grown at a rate of [6.2%].

Welding’s base revenues increased 7% in Q3, even with some very difficult comparisons from a year ago and some sluggishness in industrial end markets. Welding’s year-to-date base revenues have grown at a rate of 5%-plus.

Weakness in the segment continues to be centered around the Signode Industrial Packaging business, which declined 6% in Q3. Much of that decrease relates to weaker demand for packaging applications and the construction related categories, as well as primary metals.

Moving to our final segment, international specialty systems, for the third quarter, revenues increased 26.3% and operating income grew 25.3%. Operating margins of 14.4% were 10 basis points lower than the year-ago period due to the dilutive impact of acquisitions.

Again, looking at the top line, the 26.3% growth in revenue consisted of the following components: plus 3.6% for base revenues; plus 18% from acquisitions; minus 3% from divestitures; and 7.6% from translations.

Similar to our international product segment, international specialty systems benefited from notable demand across a broad set of end markets. As noted earlier, the segment’s base revenues grew approximately 4% in the quarter.

Food equipment increased its base revenues an impressive 14% in Q3, with big gains coming from Hobart branded products in countries such as Germany, the U.K., and France.

Welding’s base revenues were up 6% in Q3 with growth coming from both China and Europe, including Scandinavia.

Finishing’s base revenues were up 7% in the quarter, largely driven by demand for Gema based powder coating products in Europe and Asia.

Signode Europe and Signode Asia’s base revenues were both flat in Q3.

Let me turn the call back over to Ron who will address the 2007 forecast and --

Ron Kropp

Thank you, John. We are forecasting fourth quarter 2007 diluted income per share to be within the range of $0.86 to $0.90 per share. The low end of this range assumes a 2.1% growth in base business revenues and the high end of the range assumes a 4.1% growth in base revenues. The midpoint of this earnings per share range of $0.88 would be 14% higher than last year.

For full year ’07, our forecasted earnings range of $3.36 to $3.40 per share. The full year base business revenue growth is expected to be in the range of 1.9% to 2.5%. The midpoint of this earnings range of $3.38 would be 12% higher than 2006.

The assumptions included in this forecast are exchange rates holding at current levels, acquired revenues in the range of $1.0 billion to $1.2 billion, share repurchases of $1.5 billion to $1.6 billion, restructuring costs of $35 million to $40 million, no further impairment of good will or intangibles, non-operating income, which now includes investment income, in the range of $90 million to $100 million for the year, which is lower than 2006 by $10 million to $20 million.

As a reminder, included in non-operating income for 2007 are non-recurring gains on the sale of businesses of $36 million in the first half of this year.

And finally, a tax rate of 29.25% for the fourth quarter and full year.

I will now turn it back over to John.

John Brooklier

Thanks, Ron. We will now open the call to your questions. Please remember that we ask for one question and one follow-up.

Question-and-Answer Session

Operator

(Operator Instructions) Our first call comes from Steven [Boltman]. Please state your company name.

Steven Boltman - J.P. Morgan

A question on the base revenue growth. I’ve never been first before. It’s kind of a shock. But looking at the way the quarter ran, it looked like things kind of slowed down for you in September and I guess came in a little bit lighter than we had thought at the beginning of the quarter. Can you just comment on sort of how things went through the quarter?

And the implication I guess is that we’ll get some reacceleration into the fourth quarter and your comfort level with that and kind of the build-up to that.

David Speer

Let me answer that question first. I would say that what we saw clearly in the first two months of the quarter was in line with what our earlier guidance was. We saw a noticeable slowing in North America in the September numbers, no question, and it was really I think a couple -- John noted earlier, the auto numbers were actually slightly positive to our original projections but the housing numbers were significantly below and the housing numbers obviously slipped, probably began slipping in actually the August numbers, so clearly a weak market in housing.

The general industrial market, as we I think pointed out in our second quarter call, we continue to see slowing there and as you’ve seen the various indices bounce around, we are at very modest levels of growth now in industrial production and we clearly have seen that across our businesses. So certainly September was weaker.

I think in regard to your comment or question about the fourth quarter, we certainly have largely easier comparables in a number of key markets but with that noted, the housing numbers the way they are, the easier comparables we had originally thought we had finished in the fourth quarter don’t look as easy now because actually, the projections for the fourth quarter are probably going to be somewhat below what we actually finished the fourth quarter at last year.

I would say the summary for the fourth quarter is, however, largely somewhat easier comparables.

Steven Boltman - J.P. Morgan

So it looks like if we back into September, it was less than 1% core growth and yet we’re looking for something around 3 in the fourth quarter, and I should attribute that mostly to just easier comps?

John Brooklier

Yes, but also remember that September was essentially flat for -- for the company. The month itself, we had one less day in North America, so that skews the numbers a little bit more negatively than you would necessarily on a go-forward basis.

Steven Boltman - J.P. Morgan

And as we look forward then, can you just talk a little bit about what you are doing to size your businesses, I guess especially the housing related businesses, appropriately for the new reality here? I’m assuming we’ll get some margin expansion next year, just the roll off of some of the acquisitions from last year and so forth, but in the core businesses, I assume you are doing some things to kind of boost the margin going forward here as well. Can you touch on that?

David Speer

I think you’ve probably already seen the impact of some of that, as you saw in the quarter, our margins in our base businesses actually improved over the year-ago period. We’ve been right-sizing, if you will, these businesses, particularly in the residential construction oriented businesses, beginning actually at the fourth quarter of last year, so we have been trying to factor in now our plans for ’08 based on what we think will clearly be a lower level of activity than we thought 90 days ago.

But largely, I would say that the sizing of these businesses has been done already, significantly so I wouldn’t expect much additional reflection of that, although there is probably some additional incremental performance we’ll see as we get the full impact of some of the right-sizing that occurred during the third quarter.

Steven Boltman - J.P. Morgan

Okay, great. Thanks very much.

Operator

Our next question comes from Robert [Lagava]. Please state your company name.

Robert Lagava

Good afternoon. I just want to follow up on the space issue. I mean, if we look at the overall, the total company, not just North America, I mean the base sales comp is similar in the fourth quarter versus the third. I understand North America but you also have the international growth that is going to be facing significantly tougher comps, particularly on the specialty system side. How should we think about that end of the business? I understand North America but how should we think about the international business?

And I guess to take this one step further, what is your preliminary view relative to 2008 versus what you are seeing in the market right now?

David Speer

Well, 2008 is probably a little bit premature for us to comment on overall. I mean certainly, some of the markets we are seeing trends that we wouldn’t expect to reverse themselves. Housing is an example. I think clearly as we look at housing for next year, we are probably talking about a market that is going to be in the 1.2 to 1.3 range. You know, 45 days ago I would have probably said 1.3 to 1.4.

The auto market here probably modestly up, flat to modestly up, but frankly in a lot of these end markets, it is probably too early for us to get a read. We’ll be going through our 2008 planning process here in the next 30 to 45 days. We’ll have a better read then but those are probably the only two notables.

In terms of the fourth quarter, Rob, I would say the differences that we pretty well highlighted in North America, we’re expecting modestly better numbers in North America, primarily easier comps, so North American growth in the 2% to 2.5% range and international growth in the 4% to 4.5% range, so lower than what we’ve seen in the first two quarters -- actually, the first three quarters internationally, as we see clearly some slowing. It’s still nice growth rates but slowing from the earlier part of the year where we had 8%-plus in the first half of the year, particularly in Europe.

Robert Lagava

I guess the follow-on to that is just from a margin perspective, I know earlier in the year, a quarter or two ago, you had mentioned that pricing in the international businesses, you were trying to pass through because of -- you were trying to catch up with the cost increases. I mean, where does that stand and how should we think about the margins moving into the fourth quarter? You mentioned the acquisition impact this quarter being 150 basis points. Is it going to be a similar impact as what you are forecasting for the fourth quarter? How should we think about the margin?

Ron Kropp

On the margin side, I would expect that the margin would be in that 16% to 17% range that we’ve been at. And we will still see the margin impact of acquisitions. However, we have been encouraged by what we’ve seen this quarter. If you remember last quarter, we had a negative price cost effect on margins of about 60 basis points. A lot of that was on the international side of things where we had cost increases and hadn’t fully recovered those.

What we saw this quarter is basically price cost was flat. International, much better than they were last quarter. We put some price increases in place. We’ve also seen some raw material costs going down. For instance, steel, especially stainless steel, has gone down significantly in the last three months.

Overall from a margin standpoint, we don’t see much impact on price cost. We will however continue to see some impact of acquisition but also, as the acquisitions become part of base, you know, remember we had a big chunk of acquisitions in the fourth quarter of last year that will partially come into base in the fourth quarter. And as we [improve a little bit], we will see pick up in margins from recently acquired businesses.

Robert Lagava

If I could just sneak one more in, just on the acquisition front; you raised the range, but you raised only the bottom end by about $100 million. The top end is the same at $1.2 billion. What’s the pipeline look like? Is that just a conservative estimate? What are you seeing out there just in terms of multiples, especially in light of the credit crunch?

David Speer

It is always difficult to predict the closing dates of acquisitions. The pipeline remains robust. We are happy. We haven’t seen any notable change in the size of the pipeline. As we’ve said in the past, our pipeline has about four to five months of visibility. We’ve closed $837 million during three quarters. Clearly the pipeline could yield more than what we have in those numbers but the range I think is based on what we think is likely to close during the next three months.

Things do slip. Last year we saw a couple of deals slip into the beginning of this year, so it is very difficult to peg an exact number there but I think the range of $1 billion to $1.2 billion suggests that the quarter activity will be somewhere in the $200 million to $350 million range in terms of acquired revenues, and I think that is very realistic.

Robert Lagava

And then just the credit turmoil impact from the multiples that you are turning out there?

John Brooklier

That’s four questions, Bob.

Robert Lagava

It was all part of one.

David Speer

I think it is too early for us to have seen any significant change in the pricing of acquisitions as a result of the private equity credit crunch. But we are certainly seeing at least early indications that that’s likely to play out. I suspect we are going to see that impact maybe last this quarter but certainly early in the first quarter of next year, I think we’ll have a better read on that.

Robert Lagava

Terrific. Thanks very much.

Operator

Our next question comes from Deane Dray with Goldman Sachs. Sir, your line is open.

Deane Dray - Goldman Sachs

Thank you. Good afternoon. I would like to drill down, if we could, on the North American construction businesses and David, if you could walk us through new housing, renovation, commercial. And we’ve got the data points as to how it compared versus second quarter, but just qualitatively, what you are seeing in your businesses, maybe even sequentially through the quarter, but buying behavior, sentiment, and so forth. So start with new housing, down 19. That’s what we saw in the second quarter but certainly it worsened in September.

David Speer

Correct. I think if you look at the new housing market, probably 60 days ago we thought we were going to see the bottom of that in the 1.3 to 1.4 range. That clearly hasn’t happened. I think it has trended further downward.

At the risk of sounding like I understand where the bottom is, you know, 1.2 would sound close but 1.2 wasn’t in our thoughts 30 days ago.

The market clearly as a result of the steps down, we’ve seen it clearly in the marketplace. I’m not surprised by the numbers that came out because we saw it clearly from probably early August on, some pretty significant push-back. Clearly the sub-prime issues that hit the market full fold. We’ve not seen any change, although it’s still early, since the rate drop but certainly the mood in the market is not very optimistic. If you look at any of the national home builders that have put out data in the last month, you would see it reflected in what they are saying as well.

So it is not a very pleasant picture. It’s been a very dramatic slide very quickly. If you think that at the end of the third quarter last year the housing market was operating at just under 1.7 million annualized starts, and we are now talking about just below 1.2, I mean, that’s a 40% drop. So it’s been pretty dramatic.

So that market is clearly pessimistic and it has undoubtedly affected buying patterns as well, so hard to qualify how much of the degradation in the buying patterns is there, but it has rippled over to renovation. There’s no question the renovation market, if you look at any of the major indices now, the HRI index, which we follow, has gone negative now. They are predicting for the year it is going to be negative. That’s not a surprise. Clearly a lot of the renovation market, particularly residential, is funded by home equity lines and certainly the credit crunch in the sub-prime lending areas have created some big issues there as well.

I expect the renovation area is going to be an area that is going to be under pressure well into next year as we look at the retrenchment there and the costs associated with that category.

And of course, we’ve seen the buying patterns impacted from the home centers, which are large outlets that feed that renovation and new housing category, so you’ve got a lot of moving parts going on there and the general drift is clearly downward in those markets.

Deane Dray - Goldman Sachs

Can I interrupt just for a second? That was exactly that last point you made regarding renovation. Last quarter, it was up 6% but you were clear to say that you felt there was some restocking going on.

David Speer

Correct.

Deane Dray - Goldman Sachs

Is that just from a sequential standpoint, you’re not seeing the benefit of restocking? Actually, in a 3% down is actually pretty favorable compared to the severity on new housing.

David Speer

Our same-store sales numbers in the categories that we pay attention to are still reasonable but the category is clearly under pressure and I would say what we saw was more buying behavior in our negative numbers than we did in actual same-store growth, so some shrink in inventory. That would suggest that some of that will get replenished at some point in time but there is a general mood, a very cautious approach in purchasing habits so it is hard to get a read on that. I expect it is going to continue to be bouncing around in the slightly negative to flat kind of category for us.

Deane Dray - Goldman Sachs

That’s helpful. And then on commercial?

David Speer

Commercial construction year-to-date, the numbers on a square footage basis on starts, or awards, if you will, are down 6%. There are only a couple of categories that are positive. Most of the categories are negative. The numbers that we are seeing that have been somewhat better than that are really related primarily to finishing buildings that were begun in 2006.

The early indicators of the construction, commercial segments, at least, are beginning to show clearly a negative drift and that will clearly head towards 2008. If you look across the major categories that are fairly significant, the warehousing category, which is a significant category in terms of awards this year, down 4.5% year-to-date; the manufacturing category is down 14.5%; education is down 6%; hospitals are down 17%; so you are seeing the impact I think now in the awards or the contract categories of what I think will bode to be a relatively difficult year next year in non-residential construction in North America.

Deane Dray - Goldman Sachs

But probably too premature to say how your commercial business would fare in an ’08 environment with awards down?

David Speer

Yes, it’s -- we’ll have to get a better look at these numbers in the next 30 to 45 days. We’ll be able to tell you more when we see you in New York in December, but it is going to -- it will have a negative impact but it is hard to read at this point how much.

Deane Dray - Goldman Sachs

And just to clarify, for the quarter, your commercial business was up 4%?

David Speer

That’s correct.

John Brooklier

Steve, that’s primarily because of our truss businesses. I don’t think that’s necessarily predictive of what we might see in Q4. They actually had a very strong September.

Deane Dray - Goldman Sachs

Thank you.

Operator

Andy Casey with Wachovia, you may ask your question.

Andy Casey - Wachovia

Good afternoon, everybody. Just back quickly on one of the questions Deane had on renovation. If I recall, David, in the fourth quarter and part of the first quarter last -- earlier this year and last year, there was a significantly destocking from the channel. Are you saying the bounce around flat to maybe negative is a year to year comp or is that a sequential statement?

David Speer

You’re talking about for the fourth quarter this year?

Andy Casey - Wachovia

Yes, fourth quarter this year versus fourth quarter last year.

David Speer

It’s a sequential statement and it’s really based on -- I’m not predicting what they are going to do with destocking. What I am saying is that the activity levels that we see in the categories that they serve, which are primarily renovation, number one, and then new housing, number two, is that we should be flat to maybe down slightly. If there is a significant destocking that occurs on top of that, it would be obviously a larger negative number.

What we saw last year was a very significant destocking that occurred in the fourth quarter and into the first quarter. We saw some significant restocking that occurred during the second quarter of this year. So we knew that the activity levels we were seeing in the first quarter last year weren’t reflective of the purchases but at the end of the day, it caught up in the second quarter as the stores began to get more fully stocked.

Andy Casey - Wachovia

And the last question; the industrial packaging performance in North America took a step down I think sequentially, negative 3 last quarter to negative 6 this quarter. Can you comment on the sub-segments in there? Was it again lumber and brick and block that was causing the down-tick?

David Speer

It was two categories. It’s the primary metals category, which is steel and aluminum, and as you’d expect with the continued downturn leveling in the auto business, they are a huge consumer of steel, as is the appliances right goods area. So the steel market collectively here in North America is down.

And the second category is clearly the building material related categories -- lumber, brick, block, et cetera. Those are the two largest categories in our Signode businesses. Collectively, those two categories represent about 45% of the business.

We’ve also seen that decline occur in the equipment businesses where we are not seeing any significant capacity expansions, and so what we are seeing now is really only replacement sales and that’s had an impact on the equipment side as well. And that would impact in our general industrial markets even more so than the commercial or construction related markets.

Andy Casey - Wachovia

Thank you.

Operator

Mark Koznarek with Cleveland Research, you may ask your question.

Mark Koznarek - Cleveland Research

Good afternoon. A question on the international specialty systems business with the base revenue growth having contracted by about half of where it was in the second quarter and industrial packaging went to flat. And you guys have said in the past, at least with domestic industrial packaging, that that’s -- you often use that as a leading indicator for trends in the region. I wonder if that dynamic is true internationally, if this is pointing to some kind of slower activity in the international markets in the foreseeable future.

David Speer

I would say in Europe, it certainly would be at least some note of caution in terms of what we saw. Some of it was related to price actions. As Ron noted in his comments earlier, we saw some decrease in some steel pricing that did impact pricing, so the unit volume activity wasn’t impacted as negatively as the dollar volume or Euro volume, if you will.

However, we have seen some slowing in some of those European markets as is reflected in some of the other numbers. I think in Asia it was more a question of timing -- timing as it related to a couple of major units in our welding business that deal with people that use a lot of stainless steel who in fact were anticipating and waiting for the major drop or decrease in steel prices before they increased their activity levels.

I think if you factor that out, Asia I still think is a reasonably good growth story in those categories. I think in the Signode or industrial packaging categories, it really is reflective I think more of the European slowing in demand and some price adjustments.

Mark Koznarek - Cleveland Research

Given that there’s price adjustment in this quarter and Asia has some one-time dynamics, it sounds like it would be reasonable to forecast that that core sales of specialty systems international ought to be better in the fourth than we are seeing here in the third? Is that a pretty reasonable assumption?

John Brooklier

Are you talking about for the entire segment, Mark?

Mark Koznarek - Cleveland Research

Yes, that’s right, John.

David Speer

Yes, I think that for the entire segment, that’s reasonable.

Mark Koznarek - Cleveland Research

Very good. Thanks.

Operator

Our next question comes from John Inch with Merrill Lynch.

John Inch - Merrill Lynch

Thank you. First I wanted to just ask about the non-operating other income. It obviously benefited you by a couple of pennies versus what you thought last quarter. Was there something obvious that was in there? Was there some sort of gain or real estate transaction or something? Why did it not move around next quarter?

Ron Kropp

The difference between what we originally forecast there and what we ended up with was about $0.015 in the quarter. And the biggest piece of that was some mark-to-market adjustments on some of our venture capital investments. Also, we sold some idle properties for a little bit of a gain as well. So nothing that was of a recurring nature that we can expect to change what our forecast is for the fourth quarter.

John Inch - Merrill Lynch

Just to be clear, Ron, when you say mark-to-market, that’s something that you weren’t aware of heading into the quarter or that you were required to do as a function of some other external event? Just what’s the dynamic there again and why couldn’t that happen in the fourth quarter?

Ron Kropp

It could, I guess, but we don’t forecast mark-to-market adjustments in our venture capital fund because those go up and down with the market, obviously. So that is our one investment in this portfolio that is tied to the market and typically we haven’t forecasted any gains in that segment.

For the year overall, non-operating income is up a little bit because we’ve been fortunate enough to have some mark-to-market gains on that fund, but sometimes that can turn around on you.

John Inch - Merrill Lynch

No, I understand. There’s a lot of moving parts with all of these sub-segments and so forth. I mean, it’s pretty clear that manufacturing in North America has begun, not unexpectedly, to soften. Can you just put everything together in terms of Europe? I know you have touched on all these different businesses but has Europe in the quarter, David, has it begun to get worse?

And as you look at your outlook and the guidance, are you expecting that trend to continue or -- because it seems a little bit more mixed, if you will, versus North America. North America is clearly decelerating but what is going on in Europe? Because I know you’ve got some pockets of strength and weakness, but if you could give us an overall view, that would be helpful.

David Speer

I think my overall view in Europe, John, is the numbers you are seeing now are really more reflective of slower growth based on tougher comparables. I mean, we had very strong growth in Europe the second half of last year and the first half of this year. The growth levels, or the rates, if you will, of activity remain good. But clearly we saw 8% growth in our businesses the second half of last year. We saw the same growth rates in the first half of this year, so I think these are in line with what we were expecting as we prepared our plans. So not wildly out of sync.

Some areas, the general industrial areas in Europe clearly have trended to slower levels. Again, not so unexpectedly. I don’t think I would say at this moment that there’s been any big surprises in terms of what we’ve seen in Europe. I think it’s pretty much been in line with what we’d expected but certainly the growth scenario in Europe is a slower growth scenario than what we’ve seen for the last four quarters and that’s exactly what I would expect as we head into 2008, that we are going to see albeit positive growth and by European standards, strong growth, but compared to the kind of growth rates we’ve seen the last four to five quarters, it will be more modest.

John Inch - Merrill Lynch

One more question; if you were to -- as we sort of think of the touch points of what’s changed this quarter, clearly housing has gotten a lot worse, there’s some manufacturing deceleration, you just talked about Europe -- I mean, as you are thinking about managing ITW and the prospects of what could turn out to be a significant U.S. recession, are you in the process of planning for that sort of a risk? And what does the company do? Do you have plans in place to begin to right-size businesses quickly or do you think 80-20 takes care of it? Or maybe just a little bit of your own thought process, as clearly things have gotten worse here versus where your expectations were fairly recently.

David Speer

I think first of all, I don’t think we’re headed towards a significant recession. I think we clearly are at a level in the economy here that is a broader pause than what many were predicting, certainly in the industrial cycle. We are still seeing modest positive numbers but certainly not anything that is significant measurable, so I think we are -- it is likely what we are in is a pause now. The question is for how long and how it impacts certain end markets and segments remain to be seen.

In terms of right-sizing the businesses, in our decentralized environment, that is a constant process for us and we are constantly paying attention to that. And as I mentioned in my earlier comments, we’ve been right-sizing in particular our construction and automotive businesses for the last four to five quarters.

So our response as we see things slow is a measured response that says what do we think the activity levels are going to look like over the next several quarters, not over the next several months. And we are pretty good at moving as we sense those activity levels.

On the other hand, there is clearly a point of view that says that we want to keep these things sized properly but also properly to the point where if in fact this is a pause, that we are not cutting ourselves to the point where we are not able to respond in any reasonable up-turn.

I think we are in a flat spot in the U.S. industrial economy and my guess is we are going to be in that flat spot for a number of quarters to come. But I certainly don’t view it as a recession.

John Inch - Merrill Lynch

Thanks much.

Operator

Our next question comes from Joel Tiss with Lehman Brothers.

Joel Tiss - Lehman Brothers

Thank you. I just wonder if we can dig a little bit more into what’s behind on the welding markets and the food equipment markets. Can you talk a little -- new products, pricing, volumes and which particular end markets are really strong?

David Speer

If you look at our food equipment businesses here in North America, we’ve done well in the casual dining segment, we’ve done well in the institutional segments. Those are our two primary focuses. We have had a number of new product introductions in several of our key businesses, which have clearly helped.

In general, I would say that we are beginning now to identify what we could call a trend, which is we are creating some reasonable growth opportunities in these markets. This is the second year in a row that we’ve been able to do that, after four or five years of sizing and focusing on where we really thought we could grow with these businesses, so I think it is encouraging to us in that regard.

And we’ve seen solid margin improvements in those businesses along the way, so I think we are clearly now in a position where we have I think targeted where we think we can grow and our innovation initiatives are beginning to pay off in that regard as well.

I think the service business continues to be a major area of growth for us in our food equipment area. We’ve done well and continue to expand that organization and focus on the after sale of service of the restaurant equipment, so that’s been a growing area for us.

We’ve done very well internationally. We’re up in the quarter 14% and very strong in both Europe and more recently in the Asian region. I think it’s more of the same there as well. We’ve had a number of years of getting these businesses refocused, re-segmented and in many cases reorganized, and now we are beginning to see the benefit of that and some reasonable growth prospects in front of us as a result.

Joel Tiss - Lehman Brothers

Okay, and the same on welding?

David Speer

On the welding side, clearly here in North America, the general industrial markets have slowed but the markets that are impacted by some higher end growth opportunities, like the energy infrastructure markets still go quite well. Our large equipment category has done very well.

Internationally, the Asian growth story is largely focused around what we are doing in China and our China business is focused largely on the energy infrastructure and ship building.

We’ve done well in our European businesses as well. We’ve participated well and gained some penetration there, and a nice blend of new products and some new segment focus has helped us in those businesses as well.

Joel Tiss - Lehman Brothers

And just quick, for Ron, is the lower tax rate, is that just the mix in the quarter?

Ron Kropp

Yes, as we’ve had higher revenues overseas, we’ve seen some lower tax rate overseas and more of a shift in places like China, which have naturally lower tax rates.

Joel Tiss - Lehman Brothers

Thank you.

Operator

Our next question comes from Robert Wertheimer with Morgan Stanley.

Robert Wertheimer - Morgan Stanley

Good morning, guys. Just a quick follow-up -- I hope I’m not beating a dead horse here but on the renovation side, should I understand that the sell-through at the Home Depots is still pretty solid and it seems like that’s been the case and it’s surprisingly been the case.

And then on the commercial construction side, I understand some of the macro indicators have been weak, or the macro forecasting, but are you hearing the same things from the field in terms of seeing some of the manufacturing down, the healthcare, the education down? Or is it more just the macro you are going on?

David Speer

Let me comment on the renovation category first. There has, for a long period of time, been a disconnect between the purchasing patterns from the big boxes and the actual sell-through activity, so that’s not new. It gets I think fairly dramatic in these period of uncertainty in some cases of contraction where the buying patterns and inventory levels are altered but aren’t necessarily reflective of individual category sales.

We have generally seen, on the same-store sale growth, numbers that are still reasonably positive for our categories overall, or for our products overall. They get exacerbated when they get caught up in inventory reduction or destocking programs. So it’s hard to create a direction connection.

With all that said, there is no question that the market that they serve, the markets that they serve, primarily renovation and residential construction, are down and so you can expect to see overall activity levels out of those outlets down as well. But the dramatic swings up and down are exacerbated by what they do at their inventories and their purchasing decisions along the way.

Robert Wertheimer - Morgan Stanley

Thanks. I guess I understand that it should turn down. From what I understand, it has not yet turned down on a sell-through basis.

David Speer

That’s correct. It’s still been reasonably good.

Robert Wertheimer - Morgan Stanley

Okay, and then on commercial construction, are you hearing from the field the same thing that you are seeing in the construction starts?

David Speer

Oh, yeah, we are definitely seeing that in the bid activity, clearly. You know, it is also geographically dependent. I mean, you are still seeing strong growth in some markets, but you are seeing the growth largely based on build-out.

The bid activity is clearly down and it’s down, depending on the categories, fairly significantly and these are contracts awarded, so given that these projects are generally 18 to 24 months duration, if the contracts aren’t awarded you can kind of see the void, if you will, coming in the coming months.

I think these numbers are real. I mean, the [dodge] numbers year-to-date are down 6% in terms of square footage that have been awarded this year, so it’s clearly having an impact going forward, no question.

Robert Wertheimer - Morgan Stanley

Okay, thanks.

Operator

Our next question comes from Robert McCarthy with Robert W. Baird.

Robert McCarthy - Robert W. Baird

Hi, guys. Mostly asked and answered -- restructuring expenses forecast for the year, $35 million to $40 million. It has been 35 to 50 all year long. It’s not unusual for you guys to true-up the estimate at the end of the year but my question goes to organic growth prospects having been disappointing really so far and prospectively for the fourth quarter. You got a lot of questions earlier about right-sizing construction businesses, et cetera. Why don’t we see that translate into the restructuring expense numbers? Or does it mean that we are likely to see that number increase next year?

David Speer

Let me answer it from my perspective, Rob, and Ron maybe can add some flavor to it. First of all, I think the right-sizing that we’ve been doing, we’ve been doing all along with those units that have been impacted the greatest by the significant declines -- what we’ve seen clearly in the residential markets here would be the most notable.

As a result of that activity, I wouldn’t expect to see any significant change in the fourth quarter activity. So as you correctly point out, we try to true those numbers up as we head towards the end of the year.

As we look at next year and we look at the budget process, we’ll come up with a range for restructuring next year. I expect the range for restructuring next year to be somewhat larger but not necessarily based on right-sizing base businesses. It is really more a reflection of what we do with these businesses that we acquire.

So it is probably more reflective of the major restructurings that will occur in recently acquired businesses than necessarily those that have been with us for a while. They usually come at a more measured rate.

Robert McCarthy - Robert W. Baird

Okay, thank you and I would just like to follow-up -- I think it was Mark’s question earlier, I’m not sure, but regarding industrial packaging internationally, more specifically Asia. You talked about Europe and how we might understand what is happening there but in Asia specifically, given what is going on in terms of GEP growth or industrial production growth or whatever you like, why no growth for you? Is it a heavy Australian exposure or what?

David Speer

Well, I would say it’s a couple of things. One is yes, we do have a heavy Australian exposure but more importantly, we are just in the process of opening two new facilities in China in our industrial packaging group, one around plastic and one around steel strapping. So we are not fully participating yet in the growth there, so that is really going to be a 2008 story for us.

We have seen some adjustments in pricing there, like we did in Europe as well, which has impacted the revenue comparables. But I think from a positioning standpoint, I think we are in the right spot. It’s just a question of timing now.

Robert McCarthy - Robert W. Baird

So there’s been some volume growth and there’s been stronger volume growth yet outside of Australia and New Zealand?

David Speer

Yes.

Robert McCarthy - Robert W. Baird

Okay. All right, thanks.

Operator

Our next question comes from Eli Lustgarten with Longbow Securities.

Eli Lustgarten - Longbow Securities

Good afternoon. A couple of quick follow-up questions, if I may; what is your [inaudible] in the fourth quarter, both domestically and overseas? When you are looking at ’08 being [relatively flat to up], would you say is that back-end loaded for improvement?

John Brooklier

Well, we know Detroit 3 in Q4 is down about, prospectively down about 4%, 4% to 5% in Q4. We don’t have any estimates for ’08 at this point in time. On the international side --

David Speer

New domestic is up about 5% in the fourth quarter, so overall the market will be down I think about 2%. That’s what we’re predicting for the fourth quarter.

John Brooklier

And on the international side, we would expect sales in the fourth quarter to be 2% up, up 2 to 3, kind of come off a very robust Q2 and Q3.

Eli Lustgarten - Longbow Securities

Can you talk a little bit -- the other income number, $9 million is what the fourth quarter is suggesting, that’s what the guidance was. You had gains from divestitures in the first half of the year. Is there anything planned the second half of the year or ’08 and is the run-rate still in the $35 million range for that other income number?

Ron Kropp

The fourth quarter is about where we would thought it would be at the beginning of the year. There are no unusual items planned for that, whether it’s in our investment portfolio or any potential significant divestitures. Also, we don’t see any for ’08 as well.

From a run-rate perspective, there’s different parts of this. The biggest part has been the investment income from our [inaudible] investment segment. That will be in the neighborhood of $40 million to $50 million this year and the run-rate on that is probably more like a 25 to 30 going forward.

Eli Lustgarten - Longbow Securities

So 25 to 30 is the kind of number we should be thinking for that group next year and there will probably be some -- there is always something that will happen, I realize that.

Ron Kropp

And the rest of non-operating income is a lot of -- things like interest income and translation and those kinds of things. Those are hard to predict, which way they go year on year.

Eli Lustgarten - Longbow Securities

And the tax rate stays flat for next year with this year?

Ron Kropp

We’re not in a position now to talk about next year’s tax rate.

Eli Lustgarten - Longbow Securities

Thank you.

Operator

Our next question comes from Jamie Cook with Credit Suisse.

Jamie Cook - Credit Suisse

Good morning. Most of my questions have been asked. Just I guess one bigger picture question; as you guys look at your longer term goals, you had given organic 5% to 6% growth rate. I mean, in the face of a slowing North America, moderating Europe, do you guys feel like you need to do anything dramatically to change your mix of business in order to achieve those goals? Focus more on energy infrastructure and if so, how do you get there?

David Speer

Well, I’d say Jamie, first of all, the 5% to 6% obviously is a long range growth goal, so it is not next year. The good news that comes out of these terrible comparables this year is that there will be easier comparables next year. But frankly, no, we focus as you know, through a lot of what we are doing at our base businesses is already directing them towards their finding their way towards some of the higher growth end markets that they already participate in. And certainly our acquisitions have been focused more, but I wouldn’t say that we are looking exclusively at any one particular end market segment.

Certainly the energy market segment that you highlight is one that we’ve done quite well in with our welding businesses and there may well be other businesses in the future that will be focused or centered around that.

But we clearly are looking at organic growth at higher levels and we’ve got a number of measures we put in place to help us get there. But clearly with a year like 2007 in auto and residential housing here in the U.S., those are the kind of years where you have to take a step back and recognize that we are looking at this for the long term and fundamentally, the kinds of markets that we think will yield that growth long-term is going to be a blend of not only new end markets, but new geographic markets as we continue to diversify our portfolio.

Jamie Cook - Credit Suisse

All right, thanks. I’ll get back in queue.

Operator

Daniel Dowd with Bernstein, you may ask your question.

Daniel Dowd - Sanford Bernstein

Good afternoon, guys. Can I actually return to the acquisition strategy for just a minute? You know, with the decline in private equity activity, does that change -- you know, we had talked about the multiples you might be paying, but does that change the pool of companies you might be interested in bidding on in terms of size or anything?

David Speer

Dan, what I think what it changes potentially going forward is that I think there will be more things that are in the private equity portfolios that will probably come out, so I think in that regard, there is likely to be more potential assets that will be available than there might normally have been.

I think some of these portfolios, if they were to get unwound prematurely as a result of what’s happened to the credit and the cost of credit in these markets for deals that they’ve already done.

I think as it relates to the larger deals that we look at, which are sort of that $300 million to $700 million range, that’s clearly been an area where the primary buyers in that category for the last several years has been the private equity folks. So I think we are going to see an increase in activity where they actually begin to sell some assets probably earlier than what their original plans were in the portfolio.

So instead of holding some of these assets perhaps four or five years, we may see them coming out in two years. But it is really early to say. We’ve heard a lot of things, there’s a lot of speculation, but I can’t say that we have any hard data yet that would suggest that there is going to be a dramatic -- there’s been a dramatic change downward in valuation, but all the indications would lead to that with the decrease in their leverage and the increase in their cost of capital. It would certainly lead to valuations that are going to be more realistic than what we’ve seen.

Daniel Dowd - Sanford Bernstein

Does this have any implications for the rate at which your percentage of revenues that come from emerging markets is likely to change? If you assume that potentially some of these bigger acquisitions are more likely to be in developed markets, could that slow the rate of your total percentage of revenues that come from emerging markets?

David Speer

Actually, we have been focused, as you know, on our acquisition program, looking now at beginning to build out in some of these newer markets. If you look at our acquisition activity year-to-date, 75% of the acquired revenues year-to-date have been in our international markets, so there’s been a significant increase, if you will. It was 50%, slightly over 50% last year.

I don’t know that private equity is going to have much of an impact, the change in private equity is going to have much of an impact in the Asian markets. It will likely have an impact in Europe as it has here. We haven’t seen that much activity in our acquisition programs in Asia from private equity in the past but we clearly have in Europe, so I expect we’d see more of it in Europe than we would necessarily in Asia. Although the presence of private equity in any market in the past several years has had an inflation in valuation, there’s no question.

Daniel Dowd - Sanford Bernstein

Thank you.

Operator

Our next question comes from Andy Casey with Wachovia.

Andy Casey - Wachovia

Hello, again. Just a quick question; are you seeing any upward bias on resin prices because of what is going on in the petroleum markets?

Ron Kropp

During the quarter, we saw resin come down a bit but we are expecting that it may tick up a bit, given the oil prices recently.

David Speer

It really depends on the grades of material too, Andy. We have some that, as Ron points out, have gone down. We’ve had some that have gone up. In aggregate, they’ve probably been slightly up but frankly, there’s no way that $85 a barrel oil has been factored into a lot of this pricing, so I expect that we are going to begin to see some more pressure on resin prices in the fourth quarter.

We are already seeing early indications of that and I suspect that’s going to play out in the fourth quarter.

Andy Casey - Wachovia

Thank you.

Operator

Robert Wertheimer with Morgan Stanley, you may ask your question.

Robert Wertheimer - Morgan Stanley

Very quickly, do you have the diluted share count period end for the quarter?

Ron Kropp

The diluted share count period end -- without dilution, it’s about 544. Dilution has tended to be 4.5 million to 5 million on top of that, so about 550.

Robert Wertheimer - Morgan Stanley

Thank you.

Operator

Ann Duigan with Bear Stearns, your line is open.

Ann Duigan - Bear Stearns

I guess my only question remaining is just more philosophically, David, could you tell us why you wouldn’t consider doing a more formal accelerated share repurchase program? If I look at -- you expect to spend 7 on share repurchases and that has drifted up through the course of the year. I’ve got to wonder why it wouldn’t have been better for shareholders if you had spent that $1.3 billion right up front at the beginning of the year and taken the share count down immediately.

David Speer

Well, as we said from the outset, Ann, we provide these ranges based on what we see the growth prospects are and then we adjust as we go along. As you would know, we changed our capital structure allocation during the year and as we changed that and began to look at more accelerated repurchase of shares, we put those in place, but we’ve traditionally looked at our capital structure and our acquisition programs on a quarterly basis, and we’ve consistently for the last two years moved those ranges upward as it made sense.

None of that to us looked like an accelerated repurchase program as you’ve outlined was particularly necessary. We’ve been comfortable with the way we approached it, so by the end of the year, we’ll have repurchased about 1.5 billion shares. We’ve done that in basically four quarterly programs and we think its achieved our objectives.

If we had done it one accelerated share repurchase program in the first quarter, it would have been a much smaller program than what we completed because we would not have committed to 1.5 billion at that point in time with the data that we had.

Ann Duigan - Bear Stearns

What changed during the course of the year then? I mean, you knew you were going to significant cash and you knew you were underleveraged, so I don’t understand fully why you would not have considered 1.5 billion at the beginning of the year.

Ron Kropp

Well, remember the key part of our capital structure in use of cash is acquisition, and that’s our preferred use of free cash. So going into the year, after a very strong 2006 year with $1.7 billion of acquired revenues, and we had an estimate of $1 billion or so, it could have been higher and it still could be higher but -- so that’s the key measurement.

As we get into the year, we see how the acquisition pipeline shakes out, we see how our free cash flow works, and then we adjust as we go.

I will point out as we have become more active in share repurchases starting about a year ago and we have met with all the different investment banks that do this for a living and talked about a lot of the different structure that are out there, including the accelerated repurchase programs. And one thing that struck us with the accelerate repurchase programs is for the most part, even when you enter into a big program up front, you are kind of exposed to the change it the stock price anyway. So it doesn’t get you too much at the end of the day from what you paid for the stock versus doing it as you go, versus committing to it up front and then buying it over a six- or nine-month period.

Ann Duigan - Bear Stearns

But by our back-of-the-envelope calculation, it would have reduced your -- it would have increased your EPS by about $0.20 and the incremental cost of doing it that way would not have shown up in the P&L.

So I would disagree with you that it is not of value to your shareholders, plus --

Ron Kropp

-- that’s an accounting metric, right? I mean, the accounting rules allow you to reduce your share count even though you don’t own the shares.

Ann Duigan - Bear Stearns

Yes, so --

Ron Kropp

Economically, there’s really no difference.

Ann Duigan - Bear Stearns

There’s no difference to your cash but there is an impact to your EPS. Anyway, we can talk about it offline, but --

David Speer

There is for the quarter of the year you do it in, Ann, but over the long haul, the points meet. So it’s just a question of -- you know, our approach in looking at this is measured. We look at this quarterly and we have made some significant changes in the capital structure and I think that’s really reflective of what you see going on. We would not have been in a position to predict or to be able to offer an accelerated share repurchase program of this magnitude at the beginning of the year.

Ann Duigan - Bear Stearns

Your debt to capital is still only 15%, so --

Ron Kropp

Let’s move on.

Ann Duigan - Bear Stearns

Okay, we’ll talk about it offline. Take care, guys.

Operator

(Operator Instructions)

David Raso with Citigroup, your line is open.

David Raso - Citigroup

Thank you. A quick question on the acquired revenues, the margins; we’ve seen them drop from 9% in ’05 to 5%, a little below 5% in ’06 and now we’re in the low single. There’s a couple of ways to look at it. Your multiples you are paying don’t seem high but obviously it appears you are getting businesses that either A, you are buying at particularly low margins relative to history or you are buying businesses and maybe they’ve been a little more of a struggle to run the first say two, three, four quarters.

Can you help me understand why the margins are so low on the acquired sales? And then if you want to take the glass-half-full view of it, you could say if we could still think of these businesses as eventual ITW businesses, can they get to 10% over the next couple of years.

I understand international businesses might be inherently lower margin, but not low single digit.

Ron Kropp

The typical metric we use before any amortization charges, our typical acquisition is maybe between 8% to 10% margin. And after amortization, depending on the earlier quarters of the acquisition, sometimes they have a bigger hit. And we’ve seen some of that, especially in the first part of this year because we did so many acquisitions in the fourth quarter, that the first quarters after the acquisition have a bigger chunk of amortization on things like inventory step-ups and backlog.

Now that we’ve gotten to this quarter, we have seen some improvement in that. For instance, before the effect of amortization, the margins on our businesses are around 8% to 10%.

So it’s about where we expected. It’s fairly close to historical. There are some international businesses that are lower, lower than typical but we see a lot of room for improvement there, and our metric of doubling those margins of 8% to 10% over a five-year period is still the metric.

David Raso - Citigroup

I apologize if I missed it; why is this different than two years ago when the acquired revenue margins were a lot higher? Can you help me understand?

Ron Kropp

I think part of it is timing. We didn’t have such big quarter’s worth of acquisitions all at once like we did in the fourth quarter of last year. I think what you are seeing now is a little bit more normalized revenue. But also the international does play a part as well.

[Multiple Speakers]

David Speer

-- acquisitions for ’06 were done in the fourth quarter of last year, so in terms of pace, it was completely different than we probably would have seen in say ’05, or even the impact in ’06 in acquisitions and in ’05.

David Raso - Citigroup

Okay, we can talk offline. I just want to make sure structurally, we’re not looking at -- I mean, obviously the margins in the company are coming down as you get more international and the acquisitions have picked up. I’m just trying to understand the pace of the margin degradation. Are we looking inherently at businesses out there that -- and you would think the last couple of years had a decent economy globally. I’m not sure what businesses we’re looking at where we find a low margin, but you’re saying it’s not the case -- it’s some accounting issue with the amortizations and inventory changes on the valuation of it, but the margins themselves are literally still kind of a traditional ITW model, 8% to 10%, five years later, get them up to mid-teens.

David Speer

That’s exactly what they are and in fact, the profile might even be slightly better than that with the portfolio of what we’ve done in the last 18 months.

David Raso - Citigroup

I appreciate it. Thank you.

Operator

I’m showing no further questions.

John Brooklier

Thanks, everybody who joined us for the call and we will talk to you next quarter. Thank you.

Operator

That concludes today’s call. Thank you all for joining. You may disconnect your lines at this time.

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