Jul 26, 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
Walter Liptak - Barrington Research Associates, Inc. John Inch - BofA Merrill Lynch Henry Kirn - UBS Investment Bank Ingrid Aja - JP Morgan Chase & Co Holden Lewis - BB&T Capital Markets Peter Chang - Crédit Suisse AG Ajay Kejriwal - FBR Capital Markets & Co.
Robert McCarthy - Robert W. Baird & Co.
Incorporated Joel Tiss - Buckingham Research Group, Inc. Mark Koznarek - Cleveland Research Company Deane Dray - Citigroup Inc
Operator
Welcome to the ITW Second Quarter 2011 Earnings Release Call. [Operator Instructions] Today's conference is being recorded.
If you have any objections, please disconnect at this time. I would like to introduce your host, John Brooklier, Vice President of Investor Relations.
Please begin.
John Brooklier
Thank you. Good morning, everyone.
Welcome to all who've joined us for ITW's Second Quarter 2011 Conference Call. As usual, joining me this morning is our CEO, David Speer; and our CFO, Ron Kropp, to discuss our second quarter financial results.
David Speer will now make some introductory remarks. David?
David Speer
Thank you, John. Our second quarter revenues finished slightly lower than our original forecast, as we experienced some modest slowing in industrial markets.
We had good activity in the acquisition front, and we also repurchased shares during the quarter. Here are the highlights.
Our total revenues grew 17.5% in the quarter, with contributions from organic revenues, acquired revenues and currency translation. However, our total revenue growth was 100 basis points lower than what we originally forecasted in April.
Organic revenues increased 6.3% versus the year-ago period, but underperformed our original forecast to 7.5%. A combination of modest slowing in industrial production metrics in both Europe and the U.S., along with the Japanese crisis, translated into a bit slower growth in the second quarter.
However, it's important to note that we firmly believe our overall end markets will continue to be in a long-term recovery mode. Acquisitions net of divestitures added 4.8%, and currency translation contributed 6.3% to total revenue growth.
While operating margins of 15.4% decreased 50 basis points, base operating margins increased 30 basis points, acquisitions and restructuring negatively impacted operating margins during the quarter by 90 basis points. I remind everyone our net income per share was $0.99 before considering the $0.03 per share impact of discontinued operations that we highlighted in our June release.
During the quarter, we also repurchased stock of $550 million or approximately 9.7 million shares. Finally, we acquired 7 companies in the second quarter, bringing our first half 2011 acquired revenues total to an annualized revenue of $485 million.
When you add the 3 additional companies we acquired thus far in July, including our acquisition of Despatch Industries that we announced yesterday, our current total of acquired revenues exceeds more than $700 million year-to-date. Remember, we had set an acquired revenue range for the year originally of $800 million to $1 billion earlier in our guidance.
We believe the acquisition environment continues to be promising, and we look forward to more results in the second half. Now, let me turn it back over to John.
John Brooklier
Thank you, David. Here is the agenda for today's call, Ron will join us shortly to discuss Q2 financial highlights.
I will then cover Q2 operating highlights for our 8 reporting segments. Ron will then return to detail 2011 third quarter and full year forecast.
Finally, we'll open the call to your questions. As always, we ask your cooperation for our one question, one follow-up question policy.
We're targeting a completion time of one hour for today's call. Moving along, let's cover the traditional 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, diluted net income per share, restructuring expenses, acquisition activity, tax rates, end market conditions and the company's related 2011 earnings forecast. Finally, the telephone replay for this conference call is (402) 220-9704.
No passcode is necessary. The replay is available through midnight of August 9, 2011.
Now, let's move along and have Ron Kropp discuss our second quarter 2011 results. Ron?
Ronald Kropp
Thanks, John. Good morning, everyone.
Before I run through the financial results for the second quarter, I'd like to remind you that as we announced in late June, we have reclassified certain businesses as discontinued operations. All 2010 and 2011 data presented, including forecasts, reflect this reclassification.
As part of this, I'd also like to remind you that we had revised our forecast range in our June release from $0.99 to $1.05 to $0.95 to $1.01. Now here are the highlights for the second quarter.
Revenues increased 18%, primarily due to higher base revenues, acquisitions and translation. Operating income was $711 million, which was higher than last year by $85 million.
Operating margins of 15.4% were lower than last year by 50 basis points. Diluted income per share for continuing operations was $0.96, which was higher than last year by $0.17.
This EPS of $0.96 compares with our forecast range of $0.95 to $1.01. Finally, free operating cash flow is $225 million.
Now let's go to the components of our operating results. Our 17.5% revenue increase was primarily due to 3 factors.
First, base revenues were up 6.3%, with North American base revenues increasing 7.4% and international base revenues up 5.1%. Next, currency translation increased revenues by 6.3%.
Lastly, acquisition net of divestitures added 4.8% to revenue growth. Operating margins for the second quarter of 15.4% were lower than last year by 50 basis points.
The base business margins were higher by 30 basis points primarily due to the favorable impact of the higher sales volume, partially offset by the negative impact of non-volume items. Non-volume items reduced base margins by 120 basis points.
Included in the non-volume impact for the second quarter were the unfavorable impact of price costs which reduced margins by 80 basis and a one-time gain related to a licensing settlement last year which had an unfavorable margin impact of 30 basis points this year. In addition, margins were lower by 30 basis points due to higher restructuring expenses, and the dilutive impact of acquisitions reduced margins by 60 basis points.
When I turn it back over to John, he'll provide more details on the operating results as he discusses the individual segments. In the non-operating area, other income expense was favorable by $30 million due to higher interest income and higher investment income.
The second quarter effective tax rate of 29.0% was lower than last year's rate of 31.7%. Excluding the one-time benefit in the first quarter related to the Australian tax case, the forecasted tax rate for the rest -- for the full year 2011 is between 28.5% and 29.5%.
Turning to the balance sheet. Total invested capital increased $622 million from the first quarter, primarily due to higher working capital and currency translation.
Accounts receivable DSO was 61.4 days versus 61.1 at the end of the first quarter. Inventory months on hand of 1.9 was consistent with last quarter.
For the second quarter, capital expenditures were $88 million and depreciation was $84 million. Return on invested capital for the second quarter was 15.6% versus 16.3% in the second quarter last year.
On a financing side, our debt level increased approximately $725 million from the first quarter due to higher commercial paper borrowings and currency translation. Our debt-to-capital ratio increased to 28% from 24% last quarter.
Our cash position increased $146 million in the second quarter as our free operating cash flow of $225 million in addition of borrowings of $695 million were utilized for share repurchases of $550 million, acquisitions of $205 million and dividends of $170 million. During the second quarter, we acquired 7 companies, which have annual revenues of $156 million.
As a result, for the first half of 2011, we have acquired 13 companies, representing annualized revenues of $485 million. For the full year, we are forecasting acquired revenues between $800 million and $1 billion.
I'll now turn it back over to John, who'll provide more details on our second quarter operating results.
John Brooklier
Thank you, Ron. Starting with our Transportation segment, our 2011 Q2 organic revenues grew 7.4% compared to the year-earlier period.
Segment operating margins of 14.9% were 90 basis points lower than the year-ago period, mainly due to a large acquisition we closed in the second quarter in the auto aftermarket space. The organic revenue growth in Q2 was mostly attributable to our automotive OEM businesses.
While our worldwide automotive OEM business produced organic growth of 7.5% versus the year-ago period, there was clearly a production impact from the Japan disaster. Case in point, North America auto builds increased only 1% in Q2 due to production decreases from the new domestic OEMs.
But while North American production lagged, our base revenue growth of 6.6% in Q2 underscored our ongoing product platform penetration gains. In Europe, we had similar penetration success.
While Q2 European auto production grew 4%, our base revenues increased 8.2% for the same time period. All in all, we had solid automotive results in the quarter even with the production and component problems stemming from Japan.
For the full year 2011, we believe North American auto builds will be in a range of 12.9 million to 13.1 million units, and European auto builds will be in a range of 19.8 million to 20.20 million units. These auto build projections represent year-over-year increases of 9% and 6%, respectively.
Finally, in our auto aftermarket businesses, we had modest Q2 organic growth of 1.3%, mainly due to elevated gas prices and the resulting lower miles driven by consumers. Moving to the Industrial Packaging segment, Q2 organic revenue growth of 9.6% versus year-ago period continue to reflect reasonable industrial production fundamentals around the world, with North America leading the way.
Segment operating margins of 10.9% were 20 basis points higher than Q2 '10. And in the most recent Q2, our total North American Industrial Packaging units increased organic revenues 11.2%, while total international Industrial Packaging organic revenues grew 7.6%.
Breaking down the underlying numbers from those numbers, North America strap and related equipment organic revenues grew 8.8% with North America increasing 12.9% and international growing 6.2%. For both geographies, the equipment portion of the strapping business produced double-digit growth in the quarter.
Another area of strength for us was the protective packaging units which produced organic revenue growth of 11.3% in the second quarter. Moving to Power Systems and Electronics, the segment had another quarter of strong organic growth.
Segment organic revenues grew 11.9% versus the year-ago period due to strong contributions from both the welding and segments of the electronics businesses. Segment operating margins of 20.6% were 50 basis points higher than Q2 '10.
Notably, our worldwide welding organic revenues grew 18.2% in Q2 due to strong demand from heavy equipment, OEMs and industrial manufacturers. Specifically in North America, our welding organic revenues grew a robust 19.9%.
And nearly as impressive, our international organic revenues increased 14.1%, with Europe and Asia-Pacific both contributing to top line growth. In Electronics, this category grew 4.1% in Q2, and the growth was mainly attributable to our PC board specialty equipment businesses that increased organic revenues double-digit in Q2.
Organic growth, as in the past, was directly tied to consistent demand for consumer electronic products, such as PDAs, smartphones and iPads. Moving to the Food Equipment segment.
Saw summary, retrenchment in the international demand, and as a result, organic revenues grew approximately 2% in Q2 versus the year-ago period. As a result, segment operating margins of 13.6% were 20 basis points lower than Q2 '10.
The Q2 story was simple. Equipment sales going internationally were relatively strong in North America.
Internationally, organic revenues declined 0.4% in Q2, with equipment base revenues decreasing 2.8%. Our French cooking business was impacted by lower government spending levels than originally anticipated.
And elsewhere in Europe, we also exited some revenues associated with lower-growth, lower-margin customers. The better news was that international service base revenues grew 2.1% in the quarter.
Moving to North America, organic revenues grew 4.2%, with equipment base revenues increasing 6.2%. From an end market standpoint, chain restaurants and healthcare continue to show growth in the second quarter.
In the service side of the business, organic revenues grew 3% in North America. Moving to the Construction Products segment, organic revenues declined 2.2% in Q2 versus the year-ago period as demand moderated in Europe and our Asia-Pacific businesses dealt with pricing issues.
In addition, North American markets remained very weak, as characterized by low housing start numbers and what I would describe as troughed commercial construction activity. Segment operating margins of 12.4% were 210 basis points lower than the prior-year quarter.
Geographically, on the international side, organic revenues grew 2.1% in the quarter with European organic revenues increasing 6.1%. By comparison, European organic revenues grew 18.4% in Q1.
In Asia-Pacific, pricing pressure from major customers in Australia contributed to base revenues declining 2.8% in the quarter. In North America, total construction base revenues declined 10.7% in Q2, with residential construction and renovation construction base revenues decreasing 8.1% and 3.1%, respectively.
Commercial Construction reported a base revenue decrease of 24% in Q2. But when you exclude a one-time revenue gain in Q2 '10, Commercial Construction base revenues only declined 5.3%.
Moving to the next segment, Polymers & Fluids, organic revenues grew 1.5% in Q2 versus the year-ago period, and segment operating margins of 16.8% were 330 basis points lower than Q2 '10. Similar to last quarter, the margin decline was due to timing related to cost recovery around raw materials, especially in some of our international businesses.
The modest growth in base revenues in the quarter reflected moderated demand for polymer products in both North America and international niche end markets. Worldwide polymer organic revenues were flat in Q2.
And while a much smaller revenue category, the story in the fluids side of the business was much more positive. Worldwide fluids organic revenues grew 5.6% in Q2, with North America accounting for the majority of the growth.
Moving to the Decorative Surfaces segment. Organic revenues increased to surprisingly strong 6.5% in Q2 versus the year-earlier period.
But segment operating margins of 12.5% were 170 basis points lower than the year-ago period mainly due to higher raw material costs. As noted, the segment's organic revenue story was a positive surprise and reflected Wilsonart's nearly 5% growth in North American base revenues.
This growth was due to ongoing product innovation by Wilsonart and good penetration and what I earlier described as troughing commercial construction environment. Internationally, the news was equally good with organic revenues growing 8.3% in Q2 and the components of that organic revenue growth include Asia-Pacific increasing 6%, China growing 22% and Europe increasing 7% in the quarter.
Finally, in our final segment, All Other, organic revenue grew 8.1% in Q2 versus the year-ago period. Segment operating margins of 18.4% were 80 basis points higher than the year-earlier period.
Organic growth was directly tied to 2 major business groups: test and measurement and consumer packaging. For test and measurement, organic revenues increased a very strong 17%, as increased capital spending growth of equipment orders to double-digit growth levels in virtually all geographies.
For example, our businesses in China produced organic revenue growth of 23% in Q2 in the test and measurement category. For consumer packaging, organic revenues grew 5%, 5.7%, excuse me, due to strength in the decorating and consumer packaging businesses.
Finally, our base revenues for industrial/appliance businesses decreased 0.5% in Q2 as demand from appliance OEMs weakened in the quarter. This concludes my segment-related remarks.
I will now turn the call over to Ron, who will cover our 2011 forecast and related assumptions. Ron?
Ronald Kropp
For the third quarter of 2011, we are forecasting diluted income per share from continuing operations to be within the range of $0.95 to $1.03. The low end of this range assumes a 15% increase in total revenues versus 2010, and the high end of the range assumes an 18% increase.
The midpoint of the EPS range would be 24% higher than last year. For the full year 2011, our forecasted EPS range for continuing operations is now $4.05 to $4.21, based on a total revenue increase of 16% to 18%.
The midpoint of $4.13 would be 43% higher than 2010. This full year range compares to our previous forecast range of $4.08 to $4.26.
Other assumptions included in this forecast are exchange rates holding at current levels, acquired revenues between $800 million and $1 billion, restructuring cost of $40 million to $50 million for the year and a tax rate range between 28.5% and 29.5% for both the third quarter and full year, excluding the impact of the first quarter favorable Australian tax case. I'll now turn it back over to John for the Q&A.
John Brooklier
Thank you, Ron. We'll now open the call to your questions.
Once again, we're asking people to honor our one question, one follow-up question request. Ready to take our first question.
Operator
[Operator Instructions] Our first question is from John Inch with Merrill Lynch.
John Inch - BofA Merrill Lynch
A couple of sort of M&A-related questions. But first, the higher investment income, Ron, could we give them more color?
Was that from realizing a gain from, say, selling an asset or assets? Or what was the delta there?
Ronald Kropp
The biggest piece -- I mean, part of it was higher interest income. We have a lot of cash on the balance sheet invested overseas.
But we also have in our investment portfolio a ventured capital investment that we mark-to-market. So we had some mark-to-market gains in the quarter.
John Inch - BofA Merrill Lynch
And how much was that, Ron?
Ronald Kropp
A couple of million dollars above what we expected.
John Inch - BofA Merrill Lynch
Okay. Want to ask about Despatch.
The reason I'm asking this is you've seen -- because I think of some subsidy curtailment in Europe and perhaps elsewhere, the outlook for the solar industry has actually, in a short-term basis, come under a little bit of pressure. What is it about their mix that maybe makes them somewhat immune to that?
And maybe you could just sort of talk through sort of the thought process about getting into that space?
David Speer
Well, solar, John, is only one element of their business. It represents maybe 20% of their overall business.
So they have a broad array of end-markets, solar clearly being one of them. The carbon fiber business being another and general industrial process environment, process controls, a lot of which is related to electronics, the production of electronic wafers, semiconductors and so forth.
So pretty broad array of end-markets. Generally, was some very strong long-term growth profiles.
John Inch - BofA Merrill Lynch
That's helpful. One last one.
David and John, there's just perpetual speculation that you're a potential bidder for Charter. I understand there's mixed differences in terms of they're a little bit more commodity, if you will, on the welding side.
I mean, is there some obvious reasons, though that -- I mean, I realized it's a big company, $3 billion of revenues. Is there some obvious reasons why it would or potentially not fit strategically with what you're looking at perhaps, say, historical desire to sort of stick to bolt-ons?
I don't know, maybe is there anything you could say to that issue?
David Speer
Well, John, we don't comment on speculations around acquisitions. So I won't comment specifically about Charter.
I will say that we continue to be interested in growing in the welding space. And we look at many different opportunities.
Certainly, primarily in Europe and in Asia. So as we continue to look at those opportunities, I think you'll see our focus in that space will remain strong.
But certainly, no comment specifically about any target company, especially a public company.
John Inch - BofA Merrill Lynch
No, I understand. But your strategy to stick to smaller deals really hasn't -- has your thought process changed?
Did the environments change for M&A, David?
David Speer
Well, I think if you're talking about M&A in general you'll see that we've done a couple of larger deals already this year, SOPUS, and the recent now with Despatch deal. I think, obviously, we're looking hard in spaces that we think have long-term growth characteristics.
And for assets that we think have the right mix of allowing us to leverage growth in those categories. Size is one element obviously, and the ability to do some large-sized deals in those spaces is certainly attractive to us.
But that said, we're comfortable doing the smaller deals in those spaces if they make sense as well. But we have done 2 larger deals, as you noted, this year, and I think we continue to focus on what we think is a sweet spot of assets in the sort of $100 million to $500 million size.
Operator
Our next question is from Ann Duignan with JPMorgan.
Ingrid Aja - JP Morgan Chase & Co
It's actually Ingrid Aja standing in for Ann. If we could circle back to kind of the acquisition environment you noted, it seems like that it's improving and that you're likely to come into the higher end of your range given where you stand today.
Can you just talk a little bit more about the environment?
David Speer
Well, I think, clearly, the environment, as we have seen it and we've been talking about this throughout the year, has been improving. I think in terms of our own pipeline, certainly, the activity levels overall and the M&A market are in fact up.
But there are plenty of bidders out there for assets, so it's still a reasonably competitive market. I can tell you that our activity levels in terms of pre-pipeline are significant and continue to be.
And we're pleased with what we've been able to transact thus far. But as we know, the acquisition businesses, cyclical, it's opportunistic.
So while I'm encouraged with what we've been able to accomplish so far and I think the environment remains a favorable one. We haven't chosen to make any adjustment in our range just yet.
And we'll continue to look at that as our pipeline activities build.
Ingrid Aja - JP Morgan Chase & Co
That's helpful. And then I guess following the recent reclassification of some of your businesses, can you just discuss a little bit more about what your plans for selling businesses in the future are?
David Speer
Well, we've disclosed, obviously, what we have in the pipeline at the moment in discontinued operations as we restated at the end of June. But I think that contains one large asset which really drove the decision to put that into discontinued operations, those our finishing system businesses.
There's certainly nothing in the near term of that size, but we continue to look at our portfolio and we'll continue to look at divestitures and appropriate alternatives for some of those assets. We have averaged over the last several years, 8 to 10 divestitures a year.
This certainly, the finishing business would be the largest asset, single asset in that range. But we'll continue to look at divestitures as we analyze our portfolio, and you can expect to continue to see some level of activity.
We always report on those, as you might imagine, when they become material and when they're generally after-the-fact.
Operator
Jamie Cook with Credit Suisse.
Peter Chang - Crédit Suisse AG
It's actually Peter Chang in for Jamie. My first question was on the implied incremental margins for the back half of the year.
It looks like they're expected to increase meaningfully from the first half. But more specifically, I wanted to get into why it seems like Q3 implied incrementals are significantly lower than in 4Q?
Is that because of price recovery in the fourth quarter? Or is there going to be greater restructuring charges taken in the third quarter?
Could you elaborate on that, please?
Ronald Kropp
Yes, sure. The incrementals in the third quarter, we are still working through price costs.
They will get better. But it will still be negative 40 to 50 basis points year-on-year for price costs versus the third quarter of 2010, although it's positive 20 basis points versus the second quarter of 2011.
Also, contributing to the better incrementals in the fourth quarter is we had a very low margin fourth quarter last year, especially the month of December for our international businesses. So our overall margin at a restated basis last year in the fourth quarter was 12.3%.
So we're getting some incremental bump in the fourth quarter based on a weaker comparable.
Peter Chang - Crédit Suisse AG
Got you. And my follow-up is on the Transportation segment.
Compared to our model revs were a little bit lighter than our forecast. Was that -- I know you talked about the impact from Japan, can you quantify that?
Or was there maybe a greater focus on integrating SOPUS versus focus on sales?
John Brooklier
As we went into the quarter, we had anticipated the revenue decline associated with Japan on auto OEM of about $25 million to $30 million. And it turned out to be approximately around $30 million.
Peter Chang - Crédit Suisse AG
Okay. So it was on the high-end then?
John Brooklier
It was on the higher end of what we had part coming into the quarter.
Operator
Deane Dray with Citi Investment Research.
Deane Dray - Citigroup Inc
David, I was hoping you could comment on the operating environment in June with a little more color? Certainly, it caught you by surprise.
Now no sense of a disaster, just under 6% of base. But still it was a change of the margin.
So if you could just kind of, from your perspective, both your geographic, customer activity, quote activity, pushback on pricing, just take us through what was -- where was the surprise and where do we go from here?
David Speer
Yes, well, I think, obviously, the June numbers, overall, base growth of 5.7%. That was clearly weaker than what we had in our original forecast.
March numbers, it fell off and the 3 months rolling numbers were 11 plus percent, so significantly different. June, the profile in April and May, April was a little over 4% and May was just about 9%.
So pretty mixed baggage if you look at it by month. But clearly, the trend in June was slower than what we had anticipated.
And that really, I think in the end, is the story why we were 100 basis points lower than our original base revenue forecast. If I look at it geographically, North America was 7.4%.
So a little bit lighter than our base forecast originally, which is a little bit north of 8%. Europe was at 4.6%, that was clearly the weakest link.
The overall Asia-Pacific region was just under 6%, China at 18%. So I think, clearly, the big drivers were weaker industrial numbers in both Europe and North America, and primarily in June.
Deane Dray - Citigroup Inc
How about just on the construction side? You called out the pricing on the Asia-Pacific.
Was that just one business, Australia-related? And they take us through the commercial, residential, renovation color at the margin?
David Speer
Yes. Well, the continued construction markets here, or the 80 of the story, if you will, that's the majority of the issue in construction.
Housing starts are well below what our original forecast was and frankly below what we thought was going to happen in Q2. The numbers now are in the 570 range for housing starts.
We started the year at a range of about 670, which was actually lower than most of the estimates that are out there from NAHB and others. So the housing market has continued to be extremely weak, and that obviously underperformed what we thought was only a modest expectation in Q2.
The commercial numbers that John pointed out down 9% for the quarter, that's the start data or the contracts awarded data. Still weak, but we think getting close to the trough.
So that end market was obviously weak as well in North America. The European numbers came in, as John pointed out, was 6%.
So pretty much in line with what our expectations were. In Australia, we have some price-related issues, but also some business that we shifted away from and some lower margin categories that drew the negative comparable there in terms of base revenue growth.
But I'd say, again, the majority of the story is what happened in construction in North America.
Deane Dray - Citigroup Inc
And was the deck surfaces uptick more product line specific? Or was it a readthrough in terms of commercial activity?
David Speer
Yes, there's a -- it was based on 2 things. One is product innovation, new designs they've introduced in their high definition category, which has driven significant market penetration in several commercial categories, including the case goods area and office furniture.
Operator
Robert McCarthy with Robert W. Baird, your line is open.
Robert McCarthy - Robert W. Baird & Co. Incorporated
The mismatch between price costs in the quarter is particularly severe in both Construction and Decorative Surfaces. We've been talking about that.
But also in Industrial Packaging and Polymers & Fluids, could you talk about the latter 2? Why such a severe effect, particularly in Industrial Packaging?
And how you see those trending through the balance of the year?
Ronald Kropp
Yes, Industrial Packaging, the overall non-volume impact on margins is 230 basis points. Of that, 110 was price cost.
Now that's better than the negative 200 that it was last quarter. This segment has the most sensitivity to raw material price increases, but also how has the best ability to get price.
For example, when the price of steel goes up, they're buying from the steel makers and selling back steel strap to them. So it's much more transparent than most of our other businesses.
So it does go up and down quite a bit. So it's gotten better, we've continued to get price.
We are recovering margin dollars. But given the extent of the price and the cost, dollars still has a negative impact on margins.
Robert McCarthy - Robert W. Baird & Co. Incorporated
Extension, Ron, you're saying that you expect it to moderate. Does it turn positive by the end of the year?
Ronald Kropp
Yes, by the fourth quarter, if price stays where it's at and costs stay where they're at, it will be positive.
Robert McCarthy - Robert W. Baird & Co. Incorporated
Okay.
David Speer
So the price increases that are out there, that they put in place, we haven't seen the full impact of. We also saw some modest drop in some of the strapping volumes which we didn't get leverage on, some of the growth and revenue there that we wouldn't have expected.
Ronald Kropp
On the Polymers & Fluids side, the price cost impact was negative 180 basis points, which is similar to what it was last quarter. Here, the primary raw material is chemicals, and we have a basket of chemicals that we kind of track the market prices.
And those chemical prices were up about 25% for this quarter versus last year. So while steel and plastic prices have stabilized a bit and in some cases, gone down, we have not yet seen that in the mechanical business.
And we do have price increases in place. We're continuing to put them in place.
And have less of an impact if everything stays the same. In the third quarter, they'll still be negative, but have less of an impact.
Robert McCarthy - Robert W. Baird & Co. Incorporated
Is it the only segment where you expect to still be running negative by the time you get to the fourth quarter?
Ronald Kropp
The third quarter, we're looking at still negative year-on-year, 40 to 50 basis points. So in the third quarter, there'll be other segments that have a negative impact.
For the most part, as we start to anniversary some of these cost increases and price increases stick, we should be generally positive slightly in the fourth quarter.
David Speer
I think the only other one where it might be modestly negative, Robert, will be Decorative Surfaces where we've got significant increases in phenol and resins that are again oil-drive products that we haven't seen yet bottom out in terms of cost.
Robert McCarthy - Robert W. Baird & Co. Incorporated
If I might add, I'd also like to ask about specifically, John, when you were going through the Industrial Packaging fundamentals, you mentioned specifically that international equipment sales in the strapping-related businesses were up double digit, but actually in North America --
John Brooklier
And North America too.
Robert McCarthy - Robert W. Baird & Co. Incorporated
So the implication then would be that strapping volume growth was nominal or even negative, yet you're taking price increases. So can you talk a little bit about what you saw in the quarter?
And whether we have some kind of a leading indicator of something here?
David Speer
Well, we did see strapping volumes moderate. I'd say nominal is probably a good word to use.
What we saw in the quarter, it's a mixed bag again between steel and plastic and in general it is probably related to what we've seen happen in some of their core end markets, moderating activities. So I'm not sure that based on what we saw in the quarter that it would be drawing any huge conclusions about early indicators as it relates to strap volume.
Year-to-date, they performed much better in the quarter, particularly in the latter part of the quarter. June and probably the latter half of May were weaker in volume that some of the metals categories, in particular and in the construction materials categories as well.
Other than that, they were pretty much in line with what we would have expected.
Robert McCarthy - Robert W. Baird & Co. Incorporated
But you wouldn't point to China as the source of the significantly slower volume trend?
David Speer
No, we don't have enough penetration in China with strapping for that to be a consideration. Certainly, the equipment side, one of the reasons that strengthen the equipment side to focus on that is clearly the underspend that took place from a capital standpoint over the last several years, and now we're starting to see that break loose with some larger system orders that I think loom well in the future for strapping volumes over with it.
But certainly, the recovery and equipment businesses was expected perhaps a little bit stronger in the quarter than what we have thought, but largely in line with what we would expect at this point in the recovery.
Operator
Our next question is from Ajay Kejriwal with FBR.
Ajay Kejriwal - FBR Capital Markets & Co.
Just on capital allocation. So on acquisitions, you're trending well.
You're more than halfway done on your full year goals. And buybacks, you did buy back fine, $50 million.
But there's a substantial amount of authorization left. And it looks like balance sheet is still very underlevered, lot of cash in the balance sheet.
So maybe any color on how we should be thinking about buybacks from here? Clearly, second quarter, very decent run rate, but part of that's to offset the dilution from the discount.
But any color there will be helpful.
Ronald Kropp
So a couple of comments. First of all, although we do have cash on the balance sheet, essentially, all of that is overseas.
So it's not readily available for dividends and share repurchase, et cetera. We do use it for acquisitions, However, to the extent we have international acquisitions.
Our debt-to-cap is currently at 28%. Our target range in a normal acquisition period is 20% to 30%, absent any significant large acquisition, would obviously go above 30%.
So we're at the higher end of the range. But that's with a strong acquisition year, stronger than last year.
And some amount of buybacks are ready in the first half of the year. The way to think of share repurchases now, this is a bit different than it was a couple of years ago, when we were underneath our range.
We were in the teens and we had to do a significant amount of buybacks even to get into our target range. The way to think about it now is we will have a normal level of share repurchases to the extent we have a normal level of acquisition activity.
We much prefer to use our capital for acquisitions. So if we continue to see acquisition activity go up and we end up above our range, you'll see less share repurchases.
If acquisition activity is lighter, you'll see more share repurchases.
Ajay Kejriwal - FBR Capital Markets & Co.
Good color there. And then just on your full year guidance, the top end, of taken it down by I think $0.05.
So I imagine, part of that is the quarter, but maybe talk about the acquisition impact? Historically, acquisitions have been dilutive in the first year.
So is it possible to quantify what's the impact from acquisitions?
David Speer
Well, first of all, the range decreased by $0.04, $0.02 for Q2 and $0.02 for the balance of the year, not $0.05. In terms of acquisitions, as you accurately note, they are dilutive in the first year.
We get down with amortizations and step ups. I think Ron got some flavor he can add to that.
But clearly, given the activity levels we had in the first half of the year, we've not a significant amount of earnings impact yet which is normal. And what our expectation would be is I think Ron pointed out one of the reasons for the margins for the quarter being lower is in fact the acquisition activity and the lower margins associated with those after amortization and step ups.
So Ron, if you want to add some flavor to that?
Ronald Kropp
Yes, so typically, we're buying companies that have margins in the 10% range before amortization. Once you factor in amortization, especially in the first year, which was the higher amortization rate, it's more like 4% to 5% incremental margins.
So say, if you take about a acquired of revenues and you don't acquire them all at the beginning of the year and it's only a partial year and you take 4% to 5% of that, that's about what the acquisition impact would be. And that will have a dilutive margin impact on the total company in the 40 to 50 basis point range.
Ajay Kejriwal - FBR Capital Markets & Co.
Thanks for the clarification. My comment on the guidance was just on the top end, but yes, it's $0.04 at the midpoint.
Operator
Our next question is from Walt Liptak with Barrington.
Walter Liptak - Barrington Research Associates, Inc.
I wanted to ask about the Transportation segment and just the operating leverage. And if you can run through and talk about whatever impacted profits, maybe Japan had a bigger impact on the operating profits or price costs, and where we stand through the rest of the year?
David Speer
Do you have anything on [indiscernible]
Ronald Kropp
So on the margin side, margins were down 90 basis points. The non-volume piece of that was 110.
And of that, price cost was negative 90 basis points. Slightly better than last quarter when it was negative 100 basis points.
David Speer
That's the segment where it takes us a little longer to recover price. We have price plans in place, price increase plans in place now.
But as Ron pointed out, we'd expect that GAAP to close somewhat in Q3 and be neutral or potentially positive for Q4.
John Brooklier
Well, if I would add one other thing to your question on volumes. If you look at the second half of the year, particularly in North America, the production decrease we saw in Q2 should largely would be made up in the second half.
Operator
Joel Tiss with Buckingham Research Group.
Joel Tiss - Buckingham Research Group, Inc.
I just wondered if your drop in guidance a little bit for the full year means that the slowdown in June is continuing into July?
David Speer
I don't have enough on July numbers, Joe, to give you that reflection. But largely, what we have projected in organic growth for the balance of the year is between 6.5% to 7%.
So lower than what we would have originally forecast by probably 100 basis points. So it's -- I think what I would suggest is that it looks more like what we saw in Q2, not what we saw in June.
June was under 6%. But yes, moderating demand in some of these markets that have been under recovery now for, in some cases, 8 to 10 quarters.
Joel Tiss - Buckingham Research Group, Inc.
Okay. And I wonder if you can sort of tie together the shape of the economic recovery and how you're seeing it unfold to the more of the medium-term margin potential?
So you know what I mean, like it's a tough environment, price cost is a little bit negative, it's been kind of an issue for a little while. Is this going to be the -- or is this feeling like the kind of recovery where operating margins a couple of years down the road get back to historic peak levels or don't because of more acquisition activity or just sluggishness?
You know what I'm trying to say? Just any sort of color you can give me around about that.
David Speer
I think from a base standpoint, Joel, I think, yes, absolutely. I think margin recovery or margin rates a couple of years down the road clearly back to historic peak kind of levels.
I fully expect that. I think the major factor if you're looking out a couple of years is more about the dilutive impact of acquisitions than anything else.
What we're seeing right now is clearly one of those spots in the middle of an economic recovery where you've got costs going up relatively faster, faster than anybody had anticipated for this part of the recovery. And that's led to some short-term disruption to price and cost, but nothing fundamentally, I think, that alters the margin outlook long term.
Joel Tiss - Buckingham Research Group, Inc.
And the customers aren't pushing back on price increases harder than before?
David Speer
Well, of course, they are. But that's all part of the process.
Nobody is asking for price increases. But the reality is that these -- they've not been modest increases that we're talking about, and they've been multiple increases.
With that said, I think as Ron pointed out earlier, we have seen in some cost categories some moderation in cost increases, certainly on the steel side and certainly, more recently, as Ron pointed out, on the plastic side. So it's the normal sort of environment that you have to fight through with probably more volatility and raw material input costs than what we would've expected heading into the year.
Operator
[Operator Instructions] Henry Kirn with UBS..
Henry Kirn - UBS Investment Bank
Wondering if you could talk a little bit about where the base business expectations for the second half of the year might have become a little more robust than they would have been a few months ago?
David Speer
I'm sorry, those are that more?
Henry Kirn - UBS Investment Bank
Yes, where might things have actually gotten a little bit better?
David Speer
Well, certainly, the test and measurement has shown particular strength. And some of that, obviously, is projected in what we see going forward in the second half of the year.
And as John pointed out in his earlier comments, the welding segment, those are probably 2 of the more notable areas where we've seen strength beyond what our original estimates were. And with reasonable momentum, we expect to continue through the second half of the year.
So those are probably the 2 most notable ones that I would highlight. John also pointed out the comparables in transportation.
The auto build in the second half of the year is going to be much better than it was in the first half, as the expectation, particularly in the U.S., is that a lot of the volume that lost in the second quarter due to the Japanese crisis and parts is going to be made up in the second half of the year. And that certainly would bode well for us.
You saw our penetration gains in the first -- or in the second quarter in both Europe and the U.S. were nearly 5 points of penetration gains.
So you put a little bit more volume on that and we're going to see a lot stronger performance in that category as well.
Henry Kirn - UBS Investment Bank
And then in the M&A market, could you talk about where -- whether seller expectations are higher or lower now than they were earlier in the year? And the likelihood that acquisitions could be higher in the second half in 2012 than you're currently begin?
David Speer
You talk about second half of 2011, I think, right?
Henry Kirn - UBS Investment Bank
Yes, second half of 2011 and into 2012?
David Speer
Yes. Certainly, we've done, as John pointed out, a little over $700 million in acquired revenues through this stage in July.
I would say that the pipeline and the buyer and seller expectations, I wouldn't note any particular change in that. I think the expectations are about similar to what they would've been a quarter ago.
I think the opportunity for us to have a stronger, strong second half is there. And as you know, we'll revise our range as we see the pipeline activity grow.
And it may will be that sort of the run rate we're at right now, which suggest that we could see a stronger than the current forecast in acquisitions, and that may well be the case. But we need a little bit more data before we'll adjust our range.
But I described the market activity is very similar to what we've seen over the last couple of quarters. So definitely improved from what we saw this time last year, no questions.
Operator
Our next question is from Holden Lewis, BB&T.
Holden Lewis - BB&T Capital Markets
Sort of back on that acquisition question. In terms of the numbers of acquisitions, it seems like the numbers that you've been closing each quarter is kind of stabilized in sort of this mid to high single-digit number.
Based on sort of how you're seeing the pipeline, I mean, would you expect that the numbers of deals that you can do would continue to go up? Or is there sort of a limit to the number just in terms of resources.
And if that's the case, I mean, are you just seeing that the average revenues that you're looking at is going up? How do you sort of grow from the current rates or extend the sort of buy end from the current rates?
David Speer
Well, obviously, the metrics that we look at are based on the individual assets that we're looking at. So we don't have a number of deals, if you will, that we're trying to close.
It's more a question of looking at the underlying assets and how they fit with our strategies for growth. So the numbers can vary, obviously, from quarter-to-quarter.
Obviously, larger size assets have a bigger impact in terms of the overall revenue numbers and certainly, the activity levels. But we continue to do smaller acquisitions that we think are well suited to bolting on to existing platforms.
So I'm not sure I can give you any flavor. There's not a metric that says we're going to do a lot more smaller deals.
I can tell you that we have spent a fair amount of time consciously looking at larger deals and spaces that we think have got good, long-term growth characteristics. And I think you're starting to see some of that pay off with some of the larger transactions that we closed thus far this year.
But those are not at the exclusion of looking at smaller deals that make sense, particularly in markets spaces that we've highlighted that we think have good, long-term growth characteristics.
John Brooklier
I'm just sort of wondering, in the past, I think in '06 or '08, you're kind of in that $1.6 billion, $1.7 million in acquired revenues. I mean, are you -- I'm just trying to get a sense of it.
If you look out beyond 2012 into the pipeline, do you think that whatever the number is this year that you achieve, I mean, can you build on top of that? Or is there something different about the environment where the '11 levels kind of look stable and we're not going to go back to sort of the high ones towards 2 type of level of M&A activity?
David Speer
Well, I fully expect that as the M&A environment continues to improve, as the markets continue to improve, we're going to see higher acquisition levels. As you accurately noted, we closed deals during that '06, '08 time frame.
Each of those years was north of $1 billion. I think we did $4.2 billion for those 3 years, so the average was like $1.4 billion.
I fully expect that we'll see those opportunities. I think the difference this time, Holden, is that we have definitely seen the ability to close several larger deals this year and last year, and I think we're purposely focused on deals of that size.
So it may be that we get to those numbers with fewer deals. But I think the opportunities, from an acquisition standpoint, turns overall impact.
They're still in that 5% to 7% annualized revenue range that we've been talking about that we've done historically. And that I think we're comfortable we'll be -- a good look of the future as well.
John Brooklier
Holden, if you look from a capacity standpoint, look historically in that '06 to '08 time frame, we were doing 45 to 50 deals per year. So I don't think we're constrained by the number of deals.
I think that David's point, it's really a question of the combination of bigger and smaller deals.
Holden Lewis - BB&T Capital Markets
Okay. And then just lastly, if you can comment, the implied sort of margin on your acquired revenue this quarter was especially low and lower than we've seen in quite some time, I think.
You're sort of building up the pipeline. And at what point would you expect that these numbers remain low or at some point to get better?
Is there something about the acquisitions in this quarter that was notable?
Ronald Kropp
It really comes down to how much amortization you have for the deals so it's fairly deal specific. You go through a process of identifying step ups and intangibles, and each deal is different.
So it is in on the lower end this time from where it would normally be. I think it was about 3%, 3.5% incremental margin, typically, it's more like 4% to 5%.
And for these deals, as they anniversary their first year and the next year, these deals will become part of base. And some of that amortization goes down.
So you'll see a bump up for these deals, but you won't necessarily see it in the reported numbers because we'll have new acquisitions that have new amortization. So typically, our general margin profile is we're buying things that are in the 9% to 10% range and we want to get those to the overall company margins within a 3- to 5-year time frame.
And I think that's still true.
David Speer
For Q2, Holden, it's no question that the higher-margin profile, particularly of the acquisition we did late Q1 of SOPUS had a dramatic impact on the amortization for Q2, which is, as Ron points out, as that anniversaries and we get into a more normal operating environment, that's the high margin business with good returns. And so we'll see a different profile as we look at these numbers a year from now.
Holden Lewis - BB&T Capital Markets
So it doesn't reflect more competitive bidding or easing up on some of the expectations of acquired deals?
David Speer
No.
Ronald Kropp
No.
Operator
Our next question comes from Mark Koznarek with Cleveland Research.
Mark Koznarek - Cleveland Research Company
Nobody beat up on Food Equipment yet, I don't think. And so I was just wondering, what kind of visibility do you have with regard to shipments in the second half?
And if you could also address the really lackluster service revenue growth, that really surprising to see kind of flattish service activity of you guys having such a well-regarded service organization? I'm wondering what is going on with the market?
Or is there a competitive dynamic unfolding there?
David Speer
Well, first of all, the historic growth rates in the service business, which is a high margin business, is in that 2% to 3% range. So that's pretty normal, pretty typically.
Perhaps, you would have expected that to be a little higher in the basis of where we are in the recovery, but not significantly. I think the big challenge for us in the Q2 numbers Food Equipment were, as John pointed out earlier, the international numbers, particularly in Europe, on the equipment side, were negative due to us exiting a couple of categories of lower performance businesses that we consciously get out of.
And as he pointed out, some pullback and institutional spending, particularly that supported by government spending in our French market businesses. So I think I would characterize that as what I would view as not a normalized expectation going forward.
We don't have a lot of visibility. There's not big backlogs in these businesses.
However, for the institutional categories, there's a fair amount of planning and project activity before the order arrives. That activity clearly has increased, which bodes well for continued improvement of equipment revenues in those categories.
But not a great deal of visibility long-term in terms of backlog.
Mark Koznarek - Cleveland Research Company
Okay. But that international comment if you're exiting, just you're exiting customers, not divesting?
David Speer
That's correct.
Mark Koznarek - Cleveland Research Company
But if you're pulling back from customers, that's going to sort of a weak -- some pressure on the growth until we anniversary that a year from now, right?
David Speer
Correct. That's built into our expectations here forward.
So we expect that and we factored that into our overall guidance.
Mark Koznarek - Cleveland Research Company
Okay. And then just one final clarification on the repurchases.
Forgive me if I should know this, but I don't -- has finishing closed yet? Number one, has the finishing deal closed?
David Speer
No, it has not closed yet. As you might have noted, there was an announcement made, I think, a week and a half ago by Graco that the FTC has done a second request.
So they're looking for more data in their analysis of the transaction before they provide HSR approval. No, it has not closed yet.
And based on the timeline that we're on, it probably would not close until probably late this quarter at best.
Mark Koznarek - Cleveland Research Company
Okay. And those proceeds are still slated towards our repurchases.
Is that right?
David Speer
Yes, correct.
John Brooklier
Thank you. Thanks, everybody, for joining us on today's call.
We will look forward to talking to everybody again. And I'll be talking to a number of people later this morning and this afternoon.
Thank you very much. Have a good day.
Operator
Thank you for your participation. Today's call has concluded.
Please disconnect at this time.