Jan 31, 2011
Executives
David Speer - Chairman, Chief Executive Officer and Member of Executive Committee Ronald Kropp - Chief Financial Officer and Senior Vice President John Brooklier - Vice President of Investor Relations
Analysts
Ann Duignan - JP Morgan Chase & Co Walter Liptak - Barrington Research Associates, Inc. John Inch - BofA Merrill Lynch Stephen Volkmann - Jefferies & Company, Inc.
Terry Darling - Goldman Sachs Group Inc. Henry Kirn - UBS Investment Bank Andrew Casey - Wells Fargo Securities, LLC Eli Lustgarten - Longbow Research LLC Robert Wertheimer - Morgan Stanley Ajay Kejriwal - FBR Capital Markets & Co.
David Raso - ISI Group Inc. Jamie Cook - Crédit Suisse AG Nigel Coe - Deutsche Bank AG Deane Dray - Citigroup Inc
Operator
Welcome, and thank you for standing by. [Operator Instructions] And now I would now like to turn the meeting over to the Vice President of Investor Relations, Mr.
John Brooklier. Sir, you may begin.
John Brooklier
Good afternoon, everyone, and welcome to today's ITW Fourth Quarter 2010 Conference Call. With me today as usual is our CEO, David Speer; and our CFO, Ron Kropp.
And I'll now turn the call over to David, who will make some introductory remarks. David?
David Speer
Thank you, John. I'm pleased to report that our fourth quarter was highlighted by very solid organic revenue growth company-wide as well as our continuing operating margin improvement.
Organic revenues increased 9.1% in the fourth quarter with North American organic revenues increasing 8.9% and international organic revenues growing 9.2%. You may recall, we had initially forecasted our total company organic revenues to grow 8% in the fourth quarter.
We're also very pleased with the double-digit organic revenue growth contributions from a variety of our business platforms. These include our Welding, Electronics, Industrial Packaging and Custom Measurement businesses.
Notably, all of these businesses produced significant operating margin improvement in the fourth quarter versus the year-earlier period. While we formally announced that the fourth quarter EPS was $0.79 a share, that was 19% lower than the year-ago period, but our fourth quarter EPS would've been 30% higher than the fourth quarter of 2009 if you exclude the $0.37 per share favorable discrete tax adjustment that we recorded in the fourth quarter of 2009.
For the total company, fourth quarter operating margins of 13.9% were 120 basis points higher than the year-ago period. Our base businesses accounted for 50 basis points of operating margin improvement.
However, our fourth quarter operating margins ended up lower than our initial expectations due to price cost, inventory and acquisition-related expenses. Ron will talk more about this in a few moments.
Finally, I want to take this opportunity to thank the women and men of ITW for a job well done over the past year. Full-year 2010 was a very strong recovery year for us with our overall organic revenues growing 10.8%.
Our operating margins improved by more than 480 basis points, and our EPS increased significantly. These strong financial metrics were in large part due to the efforts of our people who very capably led our many businesses around the world.
Now let me turn the call back over to John.
John Brooklier
Thank you, David. Here is the agenda for today's call.
Ron will join us in a few moments to talk about the financial highlights for Q4. I will then cover Q4 operating highlights for our eight reporting segments.
Ron will then talk about our 2011 forecast. Finally, we'll open the call to your questions.
As always, we ask for your cooperation for a one question and one follow-up question policy with a call that will last one hour today. First, let's cover some mandatory housekeeping items.
This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding operating performance, revenue growth, diluted income per share from continuing operations, acquisition activity, restructuring expenses and related benefits, tax rate and market conditions and the company's related forecast. Finally, the telephone playback for this conference call is (402) 998-1344.
The replay is available through midnight of February 14, 2011, and no pass code is necessary. Now here's Ron Kropp, who will comment on our 2010 fourth quarter financial highlights.
Ron?
Ronald Kropp
Thanks, John. Good afternoon, everyone.
Here are the highlights for the fourth quarter. Revenues increased 11% primarily due to higher base revenues.
Operating income was $580 million, which was higher than last year by $103 million. Margins of 13.9% were higher by 120 basis points.
Diluted income per share from continuing operations was $0.79, which was lower than last year by $0.19. However, as David mentioned, the fourth quarter of last year included discrete tax benefits of $0.37 per share.
Excluding these tax benefits, diluted income per share this year would've been 30% higher than a year ago. This quarter's EPS of $0.79 was just above the midpoint of our previously provided range of $0.74 to $0.82.
Included in this $0.79 were higher income from base revenues, which added $0.01 versus the forecast; a lower than expected tax rate, which increased earnings $0.035; and favorable currency translation, which also added $0.01. These favorable items were partially offset by lower-than-expected margins, which reduced earnings by $0.03; lower contributions from acquisitions, which lowered income by $0.01; and lower nonoperating income, which also reduced earnings $0.01.
Finally, free operating cash flow was $368 million or 94% of net income. Now let's go to the components of our operating results.
Our 11% revenue increase was primarily due to three factors. First, base revenues were up 9.1%, which was lower than last quarter by 210 basis points.
As David mentioned, we have continued to see solid revenue gains worldwide led by the Welding, Electronics, Industrial Packaging and Test & Measurement businesses. North American base revenue increased 8.9%, and international base revenue increased 9.2%, which were lower than the third quarter increases of 11.5% and 10.8%, respectively, due to the tougher comparables.
Next, currency translation decreased revenues by 1.4%, which was favorable by 100 basis points versus the third quarter currency impact. Lastly, acquisitions net of divestitures added 3.4% to revenue growth, which was 10 basis points lower than the third quarter acquisition impact.
Operating margins for the fourth quarter of 13.9% were higher than last year by 120 basis points. The base business margins were higher by 50 basis points due to the favorable impact of the higher sales volume, partially offset by the negative impact of non-volume items.
Non-volume items reduced margins by 190 basis points, which was unfavorable versus the third quarter year-over-year down by an impact by 60 basis points. Included in non-volume impact for the fourth quarter were lower costs as part of past restructuring programs, which improved margins by 20 basis points; offset by the unfavorable impact of price costs, which reduced margins by 80 basis points; inventory-related adjustments, which reduced margins by 30 basis points; and miscellaneous corporate items, which reduced margins by 40 basis points.
In addition, margins were higher by 80 basis points due to higher restructuring expenses last year and acquisitions reduced margins by 30 basis points. The fourth quarter margins of 13.9% were below our forecasted range from margins of 14.2% to 15.2% due to more negative price cost impact than expected, unfavorable inventory-related adjustments such as LIFO and miscellaneous other unfavorable items.
When I'll turn it back over to John, he'll provide more details on the operating results as he discusses the individual segments. Turning to the nonoperating area.
Other non-operating income and expense was unfavorable by $2.5 million versus last year. The fourth quarter effective tax rate of 27% was unfavorable versus last year's rate of negative 13% as a result of the previously mentioned favorable discrete benefits last year.
For the full year of 2010, the effective tax rate was 31%. The forecasted tax rate for 2011 is between 29% and 30%.
For the full year, revenues increased 14% and operating income was 70% higher. Diluted income per share from continuing operations of $3.03 was 57% higher than last year.
Free operating cash flow was $1.3 billion for the full year. For the full year, our 14.4% revenue increase was primarily due to base revenue increases of 10.8%.
Revenues were higher by 3% due to acquisitions and 0.8% due to translation. For the full year, North American base revenues increased 10.9% and international base revenues were up 10.4%.
Full-year operating margins of 14.8% were higher than 2009 by 480 basis points. The base business margins were higher by 360 basis points, acquisitions reduced margins by 20 basis points and lower impairment and restructuring charges improved margins by 70 and 80 basis points, respectively.
Turning to the balance sheet. Total invested capital increased $397 million from the third quarter, primarily due to currency translation and acquisitions.
Accounts receivable DSO was 57.8 days versus 58.9 days at the end of the third quarter. Inventory month on hand was 1.7 at the end of the quarter versus 1.8 last quarter.
For the fourth quarter, capital expenditures were $91 million and depreciation was $86 million. ROIC for the fourth quarter increased to 15.6% versus 13.9% last year.
On the financing side, our debt level decreased approximately $552 million from the third quarter and debt to capital was 23%. Cash on the balance sheet decreased to $1.2 billion from $1.6 billion at the end of the third quarter.
Our cash position decreased $459 million in the fourth quarter as our free operating cash flow of $368 million was utilized for acquisitions of $208 million and dividends of $169 million. In addition, cash was used to repay debt of approximately $550 million.
During the fourth quarter, we acquired eight companies which had annual revenues of $131 million. For the full year, we acquired 24 businesses with acquired revenues of $530 million.
I'll now turn it back over to John, who'll provide more details on the fourth quarter operating results.
John Brooklier
Thank you, Ron. Let me cover our fourth quarter segment highlights, and we'll start with our Transportation segment.
In Q4 '10, total segment revenues increased 8.8% versus the year-ago period. Our organic revenues, also known as base revenues, grew 7.1% in Q4 compared to the year-earlier period.
Operating margins in Q4, up 14.2%, were 40 basis points lower than the year-ago period. Moving to the next slide.
Our Transportation segment, which mainly consists of our Worldwide Auto OEM business produced Q4 organic revenue growth of 7.1% versus the year-ago period. Our Global Auto OEM business grew organic revenues 8.5% in the quarter with our North American Auto unit decreasing 11.1% and international units growing 6.6%.
By comparison, North American Auto builds increased 8% while our European Auto builds actually declined 4% in Q4 versus the year-ago period. Once again, these numbers clearly demonstrate our ability to grow above underlying market conditions.
Thanks to our product innovation and platform penetration programs. For full year 2011, we are forecasting North American Auto builds to be in the range of 12.4 million to 12.6 million units, and European Auto builds to be in the range of 18.4 million to 18.6 million units.
The forecast to 2011 North American Auto builds would represent market growth of 5% versus 2010. And in Europe, the 2011 forecasted Auto build would represent modest market growth of 1% versus 2010.
In our Auto Aftermarket Group of businesses contained within the segment, Q4 organic revenues were essentially flat versus the year-ago period. We believe inventory rebalancing at retail outlets and poor December weather negatively impacted our revenues in the quarter.
Industrial Packaging. Q4 total segment revenues increased 12.6% versus the year-ago period, and Q4 base revenues grew a similar 12.6% compared to the year-ago period.
Operating margins in Q4 of 9.4% were 220 basis points higher than Q4 '09. Industrial Packaging's organic revenue growth at 12.6% in Q4 was related to solid underlying industrial production fundamentals to contributions from a number of our worldwide businesses.
In Q4, our total North American Industrial Packaging units grew organic revenues 15.3% versus Q4 '09. In addition, our total International Industrial Packaging units increased organic revenues 10.2% versus the year-ago period.
Sequential indicator businesses, such as our North American Plastic & Steel Strapping businesses and their international counterparts, produced base revenue growth of 21% and 6.6%, respectively, versus the year-ago period. Finally, our Protective Packaging Products known for their protective cornerboard and specialty air bag product used for transport, grew organic revenues 10.8% in Q4 versus the year-ago period.
Moving to Food Equipment. Q4 total segment revenues increased 4.4% versus Q4 '09.
Organic revenues grew 5.5% in Q4 versus the year-ago period, making it the strongest quarter of organic growth in 2010. Operating margins in Q4 of 12.6% were 140 basis points lower than the year-earlier period.
The Food Equipment segment's improvement in Q4 organic revenue growth of 5.5% versus Q4 '09 was directly tied to better worldwide equipment sales. While our North American organic revenues only increased less than 1%, equipment base revenues grew 3.3% in the quarter compared to Q4 '09.
We believe this is an early sign that U.S.-based CapEx spending in this category may improve as we progress through 2011. Organic revenues for our Service business actually declined 1.2% in Q4 due to both tough comparisons and higher cost in the quarter associated with consolidating our service efforts for our French Cooking businesses.
Internationally, Q4 organic revenues grew 9.8% versus the year-ago period with both Europe and Asia-Pacific contributing to growth in the quarter. Moving to our Power Systems & Electronics segment.
Q4 total segment revenues grew 22.8% versus the year-ago period. Notably, our organic revenues increased 21.4% compared to Q4 '09.
And operating margins in Q4 of 20% were 530 basis points higher than Q4 '09 thanks to significant gains in operating leverage. Similar to prior 2010 quarters, the segment's strong Q4 organic revenue growth of 21.4% was directly related to the Welding and PC Board Fabrication businesses.
Our worldwide Welding organic revenues grew 18.1% versus Q4 '09. And from a geographic standpoint, North American Welding base revenues grew 23.3% due to ongoing strong demand from heavy equipment OEMs and assorted manufacturers.
Our International Welding Q4 base revenues increased a more modest 7.3% versus the year-ago period with Europe contributing double-digit growth. Asia Pacific's organic revenues, I should say, grew at a lesser rate.
The PC Board Fabrication businesses produced another strong quarter of organic quarter with base revenues increasing 48.9% versus Q4 '09. And once again, growth continued to be driven by strong demand by consumers for electronic products, including familiar products such as cell phones, PDAs, personal computers and iPads.
Moving to Construction Products. Q4 total segment revenues grew 10.8% versus the year-ago period, and organic revenues increased 2.6% compared to Q4 '09.
Operating margins, 11.5%, were 160 basis points higher than the year-ago period. The segment's Q4 organic growth of 2.6% was driven by relatively strong demand for construction products in Europe.
In the quarter, European organic revenues grew 8.3% versus the year-ago period. And countries such as Germany and France and assorted other Northern European countries were the best geographies for our Construction businesses.
Organic revenues for Asia-Pacific, which is primarily driven by Australia and New Zealand, were essentially flat in the quarter. In North America, the construction end markets continue to be challenging.
And for example, NAHP recently reported that Q4 '10 housing starts were actually 5% lower than Q4 '09. And Dodge reported that full-year 2010 Commercial Construction activity per square footage declined 18% versus full year 2010.
But compared to these markets, our Residential Construction and Commercial Construction businesses outperformed with organic revenue declines of 4.1% and 4.3%, respectively, versus the prior-year quarter. The best news in the segment was that our Q4 renovation organic revenues grew 1.8% versus Q4 '09, and much of this growth was due to improved performance by the large box stores, including retailers such as Home Depot and Lowe's.
Moving to Polymers & Fluids. Q4 total segment revenues grew 10.3% versus the year-ago period with organic revenues increasing 5.2% in the quarter compared to the year-ago period.
Operating margins of 13.5% were 40 basis points lower than 2009 fourth quarter. The segment's organic revenue growth of 5.2% from the quarter was tied to improving industrial demand for both Polymers & Fluids products, especially in our international markets.
Our International Polymers businesses produced organic revenue growth of 6.6% in Q4 '10 versus the prior year due to strong contributions from our Latin American and Asia-Pacific businesses. In North America, Polymers' organic revenues increased a more modest 2.1% in Q4, and International Fluids had strong organic growth of 7% in Q4 versus Q4 '09, but the North American base revenues declined 3% in the quarter.
Moving to Decorative Surfaces. Q4 total segment revenues decreased 10 basis points versus the year-ago period.
Organic revenue growth was better with base revenues increasing 2.3% compared to the year-earlier period. Operating margins of 9.2% were 20 basis points lower than the year-ago period.
Decorative Surfaces Q4 organic revenue growth of 2.3% versus the year-ago period reflect the contributions from both North America and International operations. In our North American laminate business, organic revenues grew 6.5% compared to Q4 '09.
That represents our best quarterly organic growth rate of the year and underpins our belief that Commercial Construction demand, the largest category served by Decorative Surfaces is continuing to improve. In addition, the Wilsonart business continues to be a premier innovator of high-pressure laminate products, bolstering its penetration efforts.
Internationally, our organic revenues grew 2.4% versus Q4 '09, thanks largely due to contributions from strong businesses in China and other parts of Asia. And finally, our All Other segment.
Total revenues grew 14% versus the year-ago period. Organic revenues increased 11.2% compared to Q4 '09 and operating margins of 16.6% were 170 basis points higher than the year-ago period.
The segment's strong Q4 organic revenue growth rate of more than 11% was mostly due to contributions from the four major business groups in this segment. In Test & Measurement, our organic revenues grew an impressive 19.5% in Q4 versus the year-ago period.
This core growth was largely tied to improvements in demand for equipment products in Asia-Pacific, especially China. In Finishing, organic revenues increased 16.7% in Q4 versus Q4 '09.
Both the North American and International businesses benefited from improved end-market demand for our paint, spray, equipment and consumables. Our Industrial Appliance organic revenues grew 8% in Q4 compared to the year-ago period and experienced good growth in both our North American and International businesses.
And finally, our Q4 Consumer Packaging organic revenues increased 5%, and that's mainly due to contributions from our Decorating and Graphics businesses. Now let me turn the call back over to Ron, who will cover our 2011 forecast and our underlying assumptions.
Ron?
Ronald Kropp
Thanks, John. Before I get to the 2011 forecast, I'd like to discuss a reporting calendar change that we announced today.
As you may recall, historically, our International businesses have reported on a one-month lag with a fiscal year end of November 30. Effective with the beginning of 2011, we are eliminating this one-month lag.
Prior to the end of the first quarter, we will provide revised 2010 operating results to reflect this change. Now, turning to the forecast.
For the first quarter of 2011 based on the new calendar reporting, we are forecasting diluted income per share from continuing operations to be within a range of $0.81 to $0.87. The low end of this range assumes a 12% increase in total revenues versus estimated 2010 and the high end of the range assumes a 15% increase.
These revenue growth ranges are based on estimated revenues for 2010 under the new calendar year reporting. For the full-year 2011, our forecasted EPS range is $3.60 to $3.84 per share based on a total revenue increase of 11.5% to 14.5% versus estimated 2010 revenues, implicit in this guidance are full-year margins of 15% to 16%.
Other assumptions included in this forecast are: exchange rates holding at current levels, acquired revenues between $800 million and $1 billion, restructuring cost of $30 million to $40 million for the year and a tax- rate range between 29% and 30% for the first quarter and full year. I'll now turn it back over to John for the Q&A.
John Brooklier
Thanks, Ron. We'll now open the call to your questions.
And once again, we ask everyone to honor our one question, one follow-up question policy. The first question, I should say?
Operator
[Operator Instructions] Our first question comes from Jamie Cook with Credit Suisse.
Jamie Cook - Crédit Suisse AG
A couple of questions. One on the material cost price headwind.
Can you just give a little more color on which segments it impacted most and what your assumptions are for 2011 on material cost price? And then as we think about margin progression throughout the year, is there any -- do we expect a normal seasonal pattern?
Or are there any -- is material costs can be more negative in the first half versus second half? I'm just trying to think about how to think about the year.
David Speer
Yes, Jamie, let me comment on Q4 first just overall. And then Ron could add some more detail.
In terms of the cost side, the cost issues that we have seen, some acceleration in input costs really revolve around steel, plastics and some chemicals. And those impacted probably most significantly as you would've seen in some of the variable margin, overhead margin numbers on the slides, the Food Equipment group, Decorative Surfaces and Industrial Packaging were probably the ones most impacted.
Ron can comment a little bit more on the detail. But obviously, as usual, we expect to recover these costs.
There's always some lag associated with that. And I would expect that as we move forward, there's probably something on the order of a 90-day lag all-in to recover on cost.
We did see acceleration during the quarter on some of these cost increases, which were beyond what we had originally anticipated when we provided our Q4 guidance.
Ronald Kropp
So overall for the quarter, price cost had an impact of about negative 80 basis points for the total company. The segments that had a bigger impact were Industrial Packaging, negative 180 basis points; Construction, negative 90; Decorative Surfaces, negative 160; and all other, negative 120.
For 2011, clearly the based on current price levels and comparables of 2010, we'll see a much bigger impact of price cost in the early part of the year. So the first quarter, we're estimating something along the lines of 80 to 100 basis points negative, and for the full year, something like negative 30 to negative 50 for price cost.
David Speer
So in terms of your question on seasonality, obviously, as we report the new calendar, there will be some change in seasonality. But I think when you look at the comparables, when we report those, we would expect that new norm to play out in our 2011 forecast guidance.
Operator
David Raso, ISI Group.
David Raso - ISI Group Inc.
The first quarter and full year, can you give any color on the organic growth baked into the total revenue growth?
Ronald Kropp
Sure. So in the total revenue growth of -- in the 13.5% rate, basis is around 7% to 9%, and that's a little bit more skewed towards International, than North America.
North America might be in the 6.5% to 7.5% range; international, 8.5% to 9.5%. For the full year of the total revenues, about half is base, so 6% to 7%, and North America is in the 5% to 6% range, international, 7% to 8%.
David Raso - ISI Group Inc.
The reason I asked, especially with the price versus cost comment for the first quarter, if you have that say 8% core growth in the first quarter and we have the tax rate, let's assume the share count stays the same. It's implying the incremental margins, and I know the base is going to change a little bit, but the incremental margins in the first quarter have to be very strong to do $0.84, I mean, literally over 40%, 45% unless the acquired revenues coming in are uniquely profitable, which at this stage of the cycle, they're usually not.
Can you help square that off against, 8% core growth in the first quarter? You need incrementals of almost near 45%, 50% to hit the midpoint of the EPS range.
David Speer
David, remember the guidance we're providing for Q1 is with the new calendar, so the new calendar is obviously somewhat different than the old calendar with the new calendar being January through March for the international units. March is replacing December, which December traditionally in our international units is one of the weaker months.
So there may be something wrong with the math and the assumptions there, but I think John can probably cover that in more detail with you perhaps off-line.
David Raso - ISI Group Inc.
I think it's an important element because the first quarter earnings are usually only about a fifth of the year. So if you're doing 80-plus cents in the first quarter, we're talking a $4 historical run rate, which is obviously above the full-year guidance and, obviously, a positive development.
But again, I can't -- if you can at least quantify a little bit the difference of dropping off December '09 and essentially adding March of '10 into the base of the first quarter. I mean how much can that be, $50 million?
Ronald Kropp
Well, as we say, we're not ready to release the restated numbers until March, so we can't get too specific on it because we don't have it. But typically, the swing between December and March might be $50 billion, $60 billion per share.
David Raso - ISI Group Inc.
So you're getting a very profitable month and dropping a particularly, particularly weak?
David Speer
Yes, exactly.
Operator
Henry Kirn, UBS.
Henry Kirn - UBS Investment Bank
Wondering if you could give a little segment color for your organic growth expectations for 2011.
David Speer
Well, obviously the growth rates we're talking about and as, I think you saw in Q4, we're talking about pretty strong organic growth across nearly all the segments. Some of the later segments to recover that probably will show some of the more impressive growth rates will be certainly in the Test & Measurement and Food Equipment areas, which are just now starting to show some positive growth on the equipment side.
This is the first quarter for that in Food Equipment and the second quarter in Test & Measurement. But across the whole spectrum of the segments, we expect to see at least strong mid-digit organic growth and some of those later segments that I just spoke about double-digit organic growth.
So it's pretty broad-based growth across the portfolio.
Henry Kirn - UBS Investment Bank
And on Food Equipment, you touched on earlier that the CapEx trends are starting to look more favorable. Are we in an inflection point at this point in CapEx sort of across Food Equipment?
David Speer
Well, it's hard to just use one quarter of data to call it a trend, but it certainly has moved in the right direction. Quotation activity is up.
We saw some positive actual shipment comparisons in Q4. So our belief is, and our forecast implies, that we're going to see steady improvement in the CapEx spending on Equipment, in the Food Equipment segment, throughout 2011.
Operator
Ann Duignan with JPMorgan.
Ann Duignan - JP Morgan Chase & Co
Just a point of clarification on David's question earlier, I do think it would've been helpful if in the press release you had noted that the Q1 revenue growth range of plus-15% was off an adjusted base, because I think that's for a lot of us actually backed into the same math as David presented, so I just want to make that clear. My question is just on the Construction business versus the Decorative Surfaces business.
You noted that in Construction, Asia was kind of flat to down a little bit but in Decorative Surfaces, Asia was up. Can you just talk about the differences between those businesses and why one might have been flat to down and why one was up?
David Speer
Yes, the difference in Construction products, Ann, is that we have a very large concentration in the Australia and New Zealand markets and that was flat, as John highlighted in his comments. We have very modest penetration in those markets in our Decorative Surfaces businesses.
Our Decorative Services businesses are almost all Asian-based, so we did see much stronger growth in those businesses than we did in the Construction businesses.
Ann Duignan - JP Morgan Chase & Co
I was kind of hoping that that was the reason because it had sounded first like maybe parts of the Chinese market were slowing, but that's not what you're saying.
David Speer
No. No, not all.
Ann Duignan - JP Morgan Chase & Co
And then as you look to offset input cost with pricing, where do you think -- which of the businesses, do you think, are going to face the most challenge or the most pushback on pricing?
David Speer
Well, I think pricing is never easy, but I think if you look at the areas we've seen the strongest increases, it's been most recently in steel prices, which obviously impacts our Industrial Packaging businesses, some in our Automotive businesses and certainly in our Construction businesses, and then more recently in some of the Plastic and the Films, PT Film [ph] (0:51:49) in particular. So all of those will be areas where we'll have to push hard to get cost recovery.
But I expect, again, it's more a question of timing, not whether we'll get it, it's when we get it.
Operator
Stephen Volkmann, Jefferies & Company.
Stephen Volkmann - Jefferies & Company, Inc.
I guess versus my model, I was really kind of surprised mostly by the margin on Food Equipment, which was quite a bit lower than what I was looking for and maybe I just modeled it wrong. But I noticed you didn't call that out on your price cost, Ron, when you're talking about where the impact was there.
So is there something going on there that we should be aware of margin wise and kind of how do we think of the trajectory going forward?
Ronald Kropp
Yes, there wasn't much price cost there this quarter. Some of the bigger items included in the non-volume part of margins inventory-related adjustments cost us 130 basis points, and that's things like reserves for LIFO and inventory reserves and standards, et cetera.
Mix played a factor. Also, we had some overhead increases, specifically around things like fuel in the Service business, also some higher employee benefit costs in France.
And then also there were some reserve adjustments for things like warranty. So a lot of one-off type things that all have to be negative in the quarter against the Food Equipment segment.
David Speer
You remember that I noted that in the quarter, there were associated costs with the consolidation of Service in France?
Stephen Volkmann - Jefferies & Company, Inc.
How much of the things do we think were kind of fourth quarter issues versus what's going to continue to be there going forward?
Ronald Kropp
I think the majority of the items are nonrecurring type of items. Obviously, the overhead increases will still be there, but there's plans in place to recapture some of that through price increases.
Stephen Volkmann - Jefferies & Company, Inc.
And then just to make sure I understand this right, the guidance that you have given in terms of growth rates is against an adjusted base as if you have made this change a year ago in calendar quarter or against the actual reported numbers that we have in front of us.
Ronald Kropp
This is against an adjusted 2010, which we calendarized the results. So for instance, the first quarter revenue increase that we forecast is against January through March of 2010 revenues.
Operator
Deane Dray of Citi Investments Research.
Deane Dray - Citigroup Inc
Just to clarify on the -- we understand that the first quarter impact on the calendarization, which we do appreciate getting these back in-sync now. But for the year, is it fair to say there's really no impact on the change in calendar?
Ronald Kropp
I mean, typically, there wouldn't be. We haven't rolled up the December international results yet.
So once we get it all rolled up, we'll have the restatements out sometime before the end of the first quarter.
David Speer
Our answer to that, Deane, is that it would be unlikely there would be any significant changes by just reformatting the calendar, obviously. By comparing the new restated 2010 to the new quarters to 2011, it would not be significant.
Deane Dray - Citigroup Inc
And then on the M&A outlook, I know back in December, Ron talked about in that ballpark of $1 billion in acquired revenues. We saw the Sofa Steel come through which interestingly was in that $300 million range of sort of medium-size.
So David, if you could just calibrate for us how the pipeline looks. Is Sofa these medium-sized?
Are they more to come like this, pricing and private equity? So I know there's a lot there, maybe that uses up my questions, but...
David Speer
Yes, well, obviously our range at $800 million to $1 billion is significantly higher than what we actually completed in 2010. That's almost double.
And we certainly have seen improvement, a steadily improvement in the pipeline throughout the year. We're entering the year with a solid pipeline.
As you mentioned, the Sofa Steel, which was announced in December, we expect it to close during Q1. And that is a significant deal, and there are a number of other deals in the pipeline.
I wouldn't say of that size, but certainly larger than the average that I expect will continue to give us strong optimism that this is going to be a better year. Valuations are still -- from a historic standpoint, somewhat challenging, but we're able to make, I think, headway.
And we've proven that, I think, in the last several quarters with the improvement in the actual close transaction. So the pre-pipeline activity remains strong, and I'm optimistic as we head into the year that we're going to continue to see improvement in the acquisition environment for us.
Deane Dray - Citigroup Inc
The private equity change, is it normalized in terms of their bidding?
David Speer
I'd say it hasn't changed remarkably in the last couple of quarters, but I think you'll also recall that my expectation, as the year unfolds, is that we're going to see private equity in a position where they're going to be selling assets that they acquired between '05 and '08, which we really haven't seen that change yet. I do think that will happen, and I think that will be a good solid indication for us in terms of improved activity.
Operator
Eli Lustgarten, Longbow.
Eli Lustgarten - Longbow Research LLC
Two quick questions. One, you are kind enough to give us the margin impact of a major sector that was the 80 basis points.
Do you have a somewhat breakdown for how the inventory affected these divisions? And I assume the corporate items are below the line?
Or are they also in a breakdown where it affected each division?
Ronald Kropp
So yes, in the fourth quarter of each year, typically there are some inventory adjustments for the standards change and LIFO calculation, et cetera. We had a greater-than-expected negative impact to that.
The segment that had the biggest impact, Industrial Packaging, at about 60 basis points; Transportation, 100 basis points; Food Equipment, 130 basis points; Decorative Surfaces, 50. Those are the biggest segment that had an impact.
Some of the corporate items, those are considered part of operating income. And typically, what we do is we spread those on an allocated basis, so they would have an equal impact across all the segments.
Eli Lustgarten - Longbow Research LLC
And second question. You talked about most of the operating groups showing good revenue growth given a good revenue outlook.
Can you give us some color on your profitability expectations for 2011 to expect margins to be up in every sector? Where are the problems?
If you can give us some idea what to expect among [indiscernible] (0:59:14)?
David Speer
I think you can certainly expect -- across the segments, we would expect to see improved margins. Certainly, those businesses that are later in the recovery like Food Equipment and Test & Measurement, we'd expect stronger margin improvement in those businesses.
But all of the segments have built into their plans margin improvement during the year. As Ron highlighted, the margin range for next year is between 15% to 16%, overall margins for the company.
And I think if you look at the first quarter as an example, you'll see the margins back in the high-14% range. So I think we would expect to see margin improvement and continued growth in margins reflected on the strong organic base revenues that we expect to see as well.
Operator
John Inch, Merrill Lynch.
John Inch - BofA Merrill Lynch
Guys, if you adjust for all of these items, where do you expect variable contribution margins to be kind of first quarter and 2011?
Ronald Kropp
So if you look at the forecast and where we expect to be on margins, overall incrementals for the year are in that 35% range, which is pretty typical for our base businesses.
John Inch - BofA Merrill Lynch
And they are what in the first quarter, Ron? Because that’s when -- you're still not getting the price recovery yet.
So what is the first quarter?
Ronald Kropp
It will be less than that. We don't have an exact number because we haven't fully restated 2010, but it'd be slightly less than the 35%.
John Inch - BofA Merrill Lynch
It seems like it'll be over 30%. Is that a fair statement?
Ronald Kropp
Yes, I can’t say with any specificity around that, but that's a reasonable approximation.
John Inch - BofA Merrill Lynch
So that implies variable contribution margins from first quarter, which can be higher than the 25% you just put up appear like they're going to be accelerating throughout the year.
David Speer
Yes.
John Inch - BofA Merrill Lynch
I just want to clarify around that. The second thing is around divestitures.
I think, David, you, meaning ITW, have been stepping this up a little bit. Could you talk about what you did in terms of total divestitures in 2010 and what your plans are for, say, pruning businesses, maybe whittling down the number of reporting segments or something heading into '11 and '12?
David Speer
Yes, I don't have the exact number of business units that we divested during the year. And my guess is it's somewhere around eight or nine business in total, the largest of which was the Cigarette Stamp Tax business that we talked about back in Q3.
Probably all in with all those businesses, it was probably $60 million to $70 million of revenue, something like that we divested. I think as I've indicated in past discussions, we have, in fact, built into our planning process, a review of our portfolio of businesses.
And at any given time, we clearly have a number of businesses that were active in the divestiture mode. Obviously, we don't report those until they're actually divested.
But that process continues, and I would expect that we'll continue to see some acceleration of that as we head into 2011 just looking at what we've been working on.
Operator
Andy Casey, Wells Fargo Securities.
Andrew Casey - Wells Fargo Securities, LLC
Can you comment on the channel inventory actions you're seeing? Is there any de-stocking at this point?
And where would you potentially be seeing the most restocking?
David Speer
Andy, I can't say you said we're seeing -- did you say de-stocking to start with?
Andrew Casey - Wells Fargo Securities, LLC
I'm wondering if there's anything like that going on.
David Speer
We have not seen any evidence that I'm aware of any significant de-stocking. Certainly, as the channels have rebuilt their inventories, most of the de-stocking for us was gone early in 2010.
At the same time, I would say that we've seen in some businesses some modest level of restocking, but it's still fairly modest. I think as the channel adjusts perhaps to maybe some more favorable forecast and outlooks for 2011, maybe we'll see more of that in the coming quarters, but nothing that I could highlight as being significant at the moment.
Most of the above market gains, as John pointed out, we've seen thus far have been more related to market penetration than to restocking.
Andrew Casey - Wells Fargo Securities, LLC
And then lastly, I guess on the fourth quarter cost side, was that all raw material driven? Or are you incurring other costs like labor add back or something like that?
David Speer
Well, there's some labor add back, there's some overhead costs. But as Ron pointed out, between the price cost and the inventory adjustment, some of which are driven by cost increases, that probably represented 60% or so of the negative impact.
Ronald Kropp
Also included in overhead is things like transportation cost going up, related to fuel and other things.
Operator
Ajay Kejriwal, FBR Capital Markets.
Ajay Kejriwal - FBR Capital Markets & Co.
Just a couple end-market questions. First on Transportation.
Clearly, you're getting some nice product penetration. So maybe share some thoughts on what the contribution could be on top of the end-market growth rates this year.
And then any thoughts on what you're seeing in Asia and your expectation there?
David Speer
Well, I think if you're talking about primarily Automotive OEM business, which I assume that's what your question is directed towards. We would expect in 2011 to see penetration gains overall in the portfolio between 4% to 5% above market growth rates, which is fairly similar to what we've seen in 2010.
In terms of how that plays out, obviously, it does vary somewhat by platform and geography. But overall, that's a pretty good estimate.
We clearly are driving higher penetration gains in Asia at the moment as we are entering platforms that we've not participated in, in the past, particularly that is true in China and to somewhat of a lesser extent in Korea.
Ajay Kejriwal - FBR Capital Markets & Co.
David, and maybe if you can update us with your thoughts on Commercial Construction markets and overall construction markets in North America. You had given some good color in December, but any update you have there?
David Speer
Yes, I mean, I don't know that I have much additional color to add from December. Obviously, the 2010 housing numbers were less than what we'd predicted and certainly less than I think what everybody had predicted.
While we expect to see some modest recovery in the housing number in 2011, it's certainly after we see that, it will be the beginning of a turnaround. I wouldn't want to call that until we see it, but we'd expect to see some modest improvement.
The fourth quarter number, as John pointed out in his segment highlights, was actually down year-on-year. So I can't say we could call the turn yet in housing.
In the commercial side, commercial was down 18% last year on a square-footage basis. The forecasts for 2011 are modestly negative.
But frankly, until we see a quarter worth of data, I'm not sure that I'm ready to feel like that's turned the quarter yet either. We still have high vacancy rates in a number of those categories.
So while I expect to see an improving environment, I guess my sum for North America would be probably a back-end loaded improvement latter half of 2011 before we see any solid signs that things are really improving.
Operator
Terry Darling, Goldman Sachs.
Terry Darling - Goldman Sachs Group Inc.
I had just a follow-up, Ron, I guess the concept of 35% incrementals kind of typical, yet on the other hand, full year 30 to 50 basis point headwind from raw materials, which I don't recall being typical but maybe that's my problem there. Is there a stronger productivity offset or something else in the mix?
Or is it just kind of hard to calibrate because of the change in the reporting period and so we should be thinking of these 35% incrementals more as a ballpark? Or I'm just trying to put those pieces together.
Ronald Kropp
Yes, it is a little bit hard to gauge until we fully restated everything and re-calendarize, but 35% is really kind of the long-term average. It does bounce around quarter-to-quarter.
There's always a variety of issues in each quarter. And sometimes it's what happened in the prior year that matters when you're talking about incrementals.
So for instance, we've had some unusual corporate items in third to fourth quarter of this year that's pulled down margins, and that'll have a beneficial incremental impact next year.
David Speer
I think the other thing to remember is we do have several businesses that we expect to see even stronger incrementals as they are later to recover. And certainly, some of the businesses like Transportation that have been at the recovery longer than Industrial Packaging, we'd expect those incrementals not to be as strong.
So if you look at the individual segments, there will certainly be a range there. But I think as we look at these numbers, 35% seems like a very plausible number for 2011.
Terry Darling - Goldman Sachs Group Inc.
Maybe another way of asking it is if we go back to okay the '04 to '07 period, the typical year-over-year raw material impact that you would have absorbed during that period, was it in that negative 30 to 50 basis points range?
David Speer
Certainly for the first 2.5 years of that, yes, because we saw dramatic increases particularly in steel and to a lesser extent in plastics. But as an example, between 2004 and 2006, our steel costs went up by more than double.
We did not get full recovery on that, certainly on a margin basis. And in some cases, we struggled to get it on a cost basis.
So we certainly don't see that as the kind of cost inflation environment we're in today. But certainly, what we saw in Q4 was accelerated from what we'd seen earlier in the year end 2010.
Terry Darling - Goldman Sachs Group Inc.
And then just trying to understand better the visibility that you guys have on your own raw material position. I guess I'm wondering as a little unusual, I think, across the group here to have had a meeting in mid-December, and then get surprised this much on raw materials.
And I'm just wondering if that's really a function of the year end and you just got an unusually high amount of accrual adjustments and so forth into year end. So where on a normal kind of Q1, Q2, Q3 basis that the chance that you get surprised like this would be a lot less.
David Speer
Yes, I would agree with that. It would be a lot less.
I mean, certainly, at the end of the year, there are a lot accrual true ups, particularly LIFO, as Ron mentioned. And a lot of that is driven by what happens with costs.
So while we were talking with you in early December, we were really using data through October. We did not have November data when we were talking with you at that point.
It became clearer to us by late December that clearly, the cost increases were higher than what we'd anticipated. And as we went through the LIFO calculations in January with the year-end numbers, the numbers obviously came out more significant.
But those are items that we would expect obviously not to recur at that level particularly as we note these cost increases and look to make adjustments and also price increases as we now see that sort of trajectory.
Operator
Nigel Coe, Deutsche Bank.
Nigel Coe - Deutsche Bank AG
Can we just take up on the last comment you made, Ron, about pricing? How much price do you need to get to get to the 30, 50 bps pinch from raw materials?
And to what extent, have you already gone out with price increases? And any color you can give by business would be very helpful.
Ronald Kropp
Well, so I think have we gone out with price increases to reflect the higher costs you've seen in the fourth quarter, absolutely. And I think the challenge is can you continue to try to stay ahead of that and costs have continued to rise even in the first quarter for things like steel.
So we have put price increases in place. Our goal is to recover, not just the cost, but also the margin.
And there is a 60- to 90-day lag like we talked about. It's hard to quantify it by business because even as I went through the actual price cost impact in the quarter, it's all over the place depending on what's their input and where they were in the prior year as well.
So it's hard to do that especially in a forecast.
Nigel Coe - Deutsche Bank AG
But the effective price increase you need to get for that range, is it 2%?
David Speer
No, it's about a little over 1%, 1.25%.
Nigel Coe - Deutsche Bank AG
And then just a follow-on, I'm surprised you didn't talk about Polymers & Fluids as an area of raw-material inflation given what's happening with oil prices. Are you seeing any pressure there that maybe might come through in the first half of the year?
David Speer
Yes, I mentioned that in the category of chemicals. Most of the products input materials we use would fall in that chemical category.
A lot of it is based on oil prices, and we have definitely seen some rise in raw material content or pricing there. We have got obviously price increases already underway in some of those businesses as well.
And the impact overall in materials in that segment is not as significant as it is in some of the higher material-content segments like Industrial Packaging. We've definitely seen cost increases in resins and chemicals.
Ronald Kropp
And just to give you a little specifics on that, in the chemicals that we used in our Polymers business were up about 10% to 12% in the quarter. And the price cost impact in Polymers and Fluids was negative 60 basis points.
Operator
Kohl Scoverson [ph], Barrington Research.
Walter Liptak - Barrington Research Associates, Inc.
Walt Liptak with Barrington. I wanted to ask about -- the operating leverages is extremely good in Industrial Packaging and Power.
Is it that some of the ones with the lower operating leverage, it's just that they've got lower organic growth rates and they’re mid or later cycle. And that you'd expect to get similar sorts of operating leverage.
Or is the Power segment, Industrial Packaging just extremely good segments that have been able to perform well because of restructuring or whatever?
David Speer
Yes, I think if you look at the Power Systems & Electronics segment, while you'll see that some of the best revenue increases were in that segment. So clearly, I believe the Welding component section of that was in the 20-plus percent range, and the PC Board businesses were close to 50%.
Obviously, those kind of revenue growths drive extremely strong incrementals, and they would force others that would -- with only revenue growth rates in the 10% to 12% range, obviously, to pale in comparison. So that is obviously a segment that traditionally has very strong margins.
At the last peak, the margins in that segment were above 25%. So certainly, those incrementals there will continue to be impressive with those kinds of incremental growth rates, or I should say revenue growth rates.
Walter Liptak - Barrington Research Associates, Inc.
And as some on the Food Equipment or Construction, as those start to recover whenever it is, back part of 2011 or 2012, can you see the same sort of higher-than-35% operating leverage?
David Speer
Yes, I think particularly, that would be the case particularly in the Food Equipment group. I think if you look at the traditional margins in Food Equipment, I think our last peak was above 18%.
And as we reported in Q4, it was 12.5%, I think 12.6%. So obviously, growth in that segment's going to power some pretty strong incrementals.
The same is true in Construction. I think in Construction, it's going to be a more a story of when we see strong improvement in the North American market from an incremental standpoint because we are certainly poised and ready to see some significant growth in that segment.
We've already seen reasonable growth in Europe, and we certainly continue to see it in Asia. So in Construction, it's probably more a story of North America.
Operator
Robert Wertheimer, Morgan Stanley.
Robert Wertheimer - Morgan Stanley
I'm sorry for beating the dead horse a little bit here on the materials cost. I think you were negative 90 bps last quarter and 80 bps this quarter, and I understand the LIFO.
But do you think you've seen it all? Or was it -- I guess the question is it potentially going to be more negative in the 1Q?
Do you think you've got it covered? And then second, and I'll just ask them both and let you respond.
On a more happy note, your cash flow should be more than ample to allow you to do the sort of acquisition level that you're talking about next year. Are you thinking about keeping some in reserve in case deals come in higher or you're prioritizing buybacks?
David Speer
Wow, there's a lot there. Let me start with the price cost.
You're right, our price cost headwind from Q3 was in that negative 80 bps, negative 90 bps range. I would expect, as Ron pointed out, that we'll catch up in 2011 as the year unfolds.
We expect for the year probably to be closer to negative 50 bps for the year. This year, you may recall, we started off with a very strong positive number, and we ended with obviously some headwinds.
So it's not a straight-line environment. We have, at the moment, got price increases in place to cover what we know are the current cost increases.
But I do believe that we are probably going to continue to see, at least in some categories, some ongoing cost increases, which will require further pricing actions. So I think at this point, our view of the year being negative 50 basis points is probably realistic based on what we know.
But we'll take further action as necessary should costs escalate beyond where they are today. In terms of the cash-flow question, obviously, we would expect as we signal in our acquisition range a stronger environment next year for doing acquisitions.
And as we did in 2010, we'll do the same in 2011, we'll evaluate as we approach the midyear to see if that activity that we expect materializes. And if we do, we certainly would expect to see the opportunity perhaps to have even stronger acquisitions than what we've embodied in our initial guidance.
But we'll wait and see. And if in fact that doesn't materialize, there are other options we obviously can use for utilizing that strong free cash flow.
As you noted, this year in 2010, we did do that review midyear. And in Q3, we repurchased $350 million of shares.
So we've shown, I think, willingness and the discipline to look at cash flow on an ongoing basis and make appropriate adjustments.
John Brooklier
Thanks, everyone. This concludes our call.
Thanks to all who joined us today, and we look forward to speaking to all of you throughout 2011. Have a good day.
Operator
Thank you for participating in today's conference. You may disconnect at this time.