Barrick Mining Corp (B) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 Barnes Group earnings conference call. My name is Marie, and I will be your operator for today. At this time, all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

And now I would like to turn the call over to William Pitts, Director of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us today. With me are Barnes Group's President and CEO, Patrick Dempsey, and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. If you have not received a copy of our earnings press release, you can find it on the investor relations section of our corporate website at BGINC.com. During our call, we will be referring to the earnings release supplement slides which are also posted on our website.

Our discussion today includes certain non-GAAP financial measures which provide additional information that we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the SEC.

I want to remind everybody that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the investors section of our Company website at BGINC.com.

Before we begin our prepared remarks, I want to remind everyone that our financial results discussion is based on continuing operations. On Monday of this week, we announced that we had completed the sale of our Barnes distribution North American business to MSC Industrial Direct. Beginning with this quarter, we will report BDNA in discontinued operations. BDNA's financial results had previously results had previously been reported within the Company's distribution segment. In addition, the remaining business within the distribution segment, Associated Spring Raymond, has been realigned into the Company's industrial segment. Accordingly, we now report our results in two operating segments; aerospace and industrial. All prior period results have been adjusted to allow for comparability.

So, let's now open today's call with remarks from Patrick, followed by a more detailed review of the quarter and our 2013 outlook discussion from Chris. After that, we will open up the call for questions. Patrick?

Thanks, Bill, and good morning, everyone. Today Barnes Group reported first-quarter results that reflect 2013 getting off to a very positive start. There were a number of key initiatives that have accelerated our progress of driving profitable growth, and I'd like to take the opportunity to touch upon a few of them this morning. First, I want to acknowledge the major milestone achieved this week with the closing of the sale of BDNA to MSC Industrial Direct. This is a positive transaction for both parties. As MSC adds BDNA to its organization, it gains an established leader in vendored managed inventory in the MRO industry And Barnes Group continues to implement its strategic vision of becoming a diversified manufacturer of engineered products, systems components, and related aftermarket services.

Moving on to the quarter, sales from continuing operations increased 18%, driven by the contribution of our Synventive business. From an organic standpoint, both aerospace and industrial generated modest growth year-over-year. As we realigned our businesses into two business segments, the intention is to concentrate our resources on our core manufacturing and engineering capabilities, creating even greater value added services for our customers. This focus will allow us to accelerate our pipeline of growth initiatives and new product introductions. As such, we expect continued sales and profitability expansion for the year ad you will see that reflected in our outlook for 2013. The most noteworthy part of the storyline in the quarter has been our continued progress in improving the profitability profile of our business. To be clear, our comments regarding business performance excludes nonrecurring costs associated with our recent CEO transition and the potential impact associated with the recent adverse tax court decision which Chris will discuss in more detail shortly.

Taking a look at our segment performance, our backlog remains healthy. At the end of the first quarter, total backlog was $671 million, up 11% from last year's first quarter and down only slightly from year-end 2012's record level. In aerospace, trends that we've seen for the past several quarters have persisted into the first quarter. We continue to see solid growth in OEM, while aftermarket remains soft. OEM sales were up 7% in the quarter. In our aftermarket business, sales were down 14% on a year-over-year basis.

Looking at the current environment in aerospace, air traffic is up, capacity is up, load factors continue at high levels, and airline profitability is forecast to further improve. Nothing has changed regarding our expectations for continued commercial aircraft production growth as Boeing and Airbus backlogs remain very healthy. These are all positive signs for our OEM, MRO, and spare parts business lines. We continue to believe commercial aerospace is a good place to be these days and forecast total aerospace sales growth of approximately 10% for the full-year, and that's with a flattish expectation in the aftermarket. If the aftermarket were to strengthen sooner and stronger than we anticipate, it could represent upside.

At industrial, we saw mixed results in our end markets. Global automotive production, with the exception of Europe, is generating a nice tailwind. Demand for model changes and increased plastic content to enable improved fuel efficiency continues to trend positively.

Likewise, tool and die market activity remains at a high level. However, certain of our industrial markets like heavy duty truck and construction equipment are experiencing headwinds. To offset, we have several growth initiatives underway and expect organic sales for industrial to be up mid single-digits for the year. On a full-year pro forma basis, Synventive should see a sales increase in the high single digits. However, the headline story at industrial has been the expansion of operation margins as a result of productivity improvements driven by the Barnes Enterprise system and a disciplined approach to managing costs. Our continued focus to being more selective on new businesses likewise continued to improved margins.

To wrap up my prepared remarks, I'm pleased with the operational and financial performance that our Company delivered in the first quarter. The continued execution of our strategy has led to demonstrated improvement in operating margins and has enhanced our ability to make investments in our existing business. Additionally, it has allowed us to identify and pursue strategic value-enhancing acquisitions. As I begin my tenure as CEO, I want to emphasize that our board and senior leadership team, myself included, are fully committed to our strategy of driving towards a of portfolio businesses which offer differentiated products, processes, systems and services that have a higher content of intellectual property and innovation. We believe the successful execution of this strategy has demonstrated and will continue to achieve sustained revenue growth, operating margin improvements, and an extended reach into global markets, all of which should contribute to enhance cash flow and total shareholder returns.

Now, I will pass the call over to Chris to go through the financial details.

Thank you, Patrick, and good morning, everyone. I want to start by highlighting key points of our first-quarter results and then end with an update of our full-year 2013 guidance. Turning to slide 2 of our supplement, sales from continuing operations of $264 million in the quarter were up 18%, driven by the contribution of the Synventive acquisition. Income from continuing operations was $15.4 million, or $0.28 per diluted share, down 13%. However, 2013's first-quarter income from continuing operations including $10.5 million pretax, or $0.12 per diluted share of CEO transition costs associated with the modifications of outstanding equity awards under a transition and resignation agreement for the Company's former CEO, Greg Milzcik.

Given the key role Greg has played in structuring and executing our corporate strategy, this agreement was designed to facilitate a smooth leadership transition to recognize his contribution and to maintain alignment of Greg's financial interests with that of the Company's shareholders. As with all corporate costs, this expense was allocated to our operating segments, so when I discuss segment performance, I will provide both -- the results both with and without this nonrecurring item so that you can gain a better understanding of the underlying operating results in the quarter. We have provided a GAAP reconciliation to these adjusted results as part of our press release. So, excluding the CEO transition costs, adjusted income from continuing operations per diluted share was $0.40, an increase of 25% over last year's first quarter, and we delivered adjusted operating margins of 13.5%, up 250 basis points.

Let's now turn to segment performance, beginning with aerospace. In the first quarter, aerospace sales were $98 million, up 1% for $97 million in the same period last year. As we've seen for several consecutive quarters, an increase in aerospace OEM sales was largely offset by declines in aerospace aftermarket. Operating profit of $10.3 million was down 18% from the prior year period of $12.6 million. The decrease was driven by CEO transition costs of $3.9 million allocated to this segment. Absent that expense, aerospace operating profit was higher than prior year as the profit benefit of higher OEM sales was only partially offset by the lower impact -- by the impact of lower sales in the aftermarket. So, on an adjusted basis, operating margins was 14.5%, up 150 basis points for the quarter. Backlog for our total aerospace segment was $545 million, up 11% from last year's first quarter and down slightly from year-end 2012. As a reminder, while backlog is a helpful indicator, sales can be affected by a number factors over time including insourcing decisions, material changes, production schedules and volumes of specific programs, to name a few.

At industrial sales were $166 million, up 32% from $126 million in last year's first quarter, driven by Synventive's sales contribution. Organic sales, which benefited from favorable pricing, increased 1% while FX was 1% unfavorable. Operating profit of $14.6 million increased approximately $2.6 million from last year; factors that drove the increase included the profit contribution of the Synventive business, productivity improvements and favorable pricing. These benefits were partially offset by the allocated CEO transition costs of $6.6 million. So, on an adjusted basis, operating margin in the quarter was 12.8%, up 330 basis points, which as Patrick mentioned, is a great story for the quarter.

The Company's effective tax rate from continuing operations for the first quarter was 21.4%, compared with 17.8% in the first quarter of 2012 and 13.5% for the full-year 2012. The increase in the first quarter 2013 effective tax rate versus the full-year 2012 rate was mainly due to several discrete foreign tax related items in 2012, an increase in the Company's effective tax rate in Sweden and a projected mix of earnings attributable to higher taxing jurisdictions. Regarding share count,, our first-quarter average diluted shares outstanding were 55.5 million, essentially flat to last year.

As an update, going forward, we expect to use up to half of the after-tax proceeds of our recently completed BDNA sale to buy back shares. Based on existing Board authorizations, we have approximately 4.5 million shares available under these authorizations at quarter end. During the first quarter, we repurchased 468,000 shares for approximately $13 million. The Board authorizations -- authorization permits us to repurchase shares on the open market, including through the utilization of 10B51 plans and privately negotiated transactions. We anticipate buying back approximately three million shares by year-end, assuming we do not realized another strategic important cash need, such as an acquisition. So, for 2013, we currently forecasted a weighted average diluted share count at year-end of approximately 54 million shares and a year end share count of approximately 52 million shares.

We had an excellent first quarter on cash generation as cash provided by operating activities was $18 million versus $6 million in the same quarter last year. Free cash flow, which we define as operating cash less capital expenditures, was at -- was a positive $8 million versus a negative $1 million in last year's first quarter. Even with approximately $3 million of additional capital expenditures. Total debt to EBITDA was 3.4 times, an increase from 3.1 at year-end 2012. We will see a significant reduction in total debt to EBITDA as the US portions of the cash proceeds received this week upon the closing of the BDNA sale were immediately applied to reduce our revolving debt. We anticipate our total debt to EBITDA at June 30 to be well below 2% times -- or 2 times.

Before providing an update to our outlook, let me take a moment to address the discontinued operations in the first quarter of negative $0.04 this year and a positive $0.08 last year. For 2013, BDNA's operating profit contribution is offset by pension and transaction costs associated with the sale of that business. Plus during the first quarter we reached a settlement and recorded an expense related to a claim associated with our previously divested Barnes distribution Europe business. 2012's first quarter discontinued operations primarily reflects the positive contribution of BDNA.

Now, turning your attention to our updated 2013 outlook on slide 3 of our supplement slides. Our guidance is based on continuing operations; therefore, it excludes the results of BDNA, which is now reported as discontinued operations. In addition, on April 16, 2013, the US tax court rendered an unfavorable decision against the Company, rejecting our objections to a $16.5 million tax adjustment related to an IRS audit for tax years 2000 through 2002 and imposing penalties. We are currently evaluating our options, including appealing the decision. So, our guidance also excludes the impact on expected earnings and cash flow as a result of the court's decision. However, the decision is not expected to have a material effect on the Company's consolidated financial position, but could be material to both consolidated results of operations and cash flows in any one period.

The Company expects cash flows to be negatively impacted by approximately $13 million in the third quarter of 2013 as a result of the decision. In the second quarter of this year, following the Company's evaluation, we could record an income tax charge of up to approximately $20 million and a reduction in deferred tax assets to reflect the utilization of a portion of the Company's net operating loss carry forwards.

So, for our updated 2013 guidance, we now expect sales from continuing operations to grow 17 % to 20% with adjusted operating margins of approximately 14%. Adjusted EPS from continuing operations is expected to be in the range of $1.83 to $1.98 per diluted share, up 20% to 30% from 2012's adjusted earnings per share of $1.52. EPS guidance reflects the reclass of BDNA to discontinuing operations, the benefit of lower interest expense which is now expected to be approximately $15 million, the benefit of lower share count given the current outlook of share buyback, effective cost management given the divestiture of BDNA, and excludes CEO transition costs and any impact from the task tax court decision. Adjusting for BDNA, depreciation and amortization is now expected to be roughly $64 million, about $35 million of that reflects our outlook for depreciation given higher CapEx spending. And we expect our 2013 effective tax rate from continuing operations to be in the low 20% range.

Key factors that could impact our 2013 adjusted guidance are fairly consistent with those discussed during our February call. To meet the higher end of the range, we would assume the benefit of aerospace aftermarket recovering faster and stronger than we anticipate, better volume leverage and stronger productivity gains. And the lower end of our range we would assume we are negatively impacted by the slowdown in the global economy, continued declines in European automotive production and softening demand in certainly industrial end markets. So, in summary, our adjusted first-quarter results provided a year-over-year improvement in sales, operating margin and EPS. Our guidance reflects an expectation of further sales growth and improvement in operating margins. Accordingly, we feel good about our ability to deliver another solid performance in 2013 and capitalize on new organic and inquisitive opportunities.

Operator, we will now open the call for questions.

(Operator Instructions)

Matt Summerville, KeyBanc Capital Markets.

Couple of questions. Good. With respect to aerospace aftermarket, are you seeing any evidence that either the traditional MRO piece of the spares piece is starting to reaccelerate? And I guess along those lines, can you guys break that out in terms of what the year-over-year declines were in both pieces of your aftermarket business?

Yes, Matt. In terms of aftermarket, I would say that as we've mentioned in a number of recent earnings calls, all the fundamentals of the industry support a recovery in the aftermarket. Revenue passenger miles are up, capacity is up, airline profitability is up. So, it is not a case of if, it is just a case of when. In the timing of the recovery is what remains elusive. However, as you may have heard over the past week, a number of the large industry participants in this earnings season have indicated a positive outlook for the second half of 2013. We, as you know, remain cautious. Our guidance for the full-year is flat on the aftermarket which, based on Q1's results, requires a little bit of an up tick just to remain flat. To your question of the split, our MRO business was down 13% on a year-over-year basis. RSPs were down 15% on a year-over-year basis.

Did you see any sequential -- or have you seen any sequential improvement in that, meaning did it start off the year even worse than that? Is it getting any better as we've gone almost through four months now?

What I would highlight is that we saw sequential improvement in the fourth quarter and in the first quarter that did not continue. Having said that, we did see some positive signs in March on a -- during that month which was positive in terms of the outlook.

Yes. And then with respect to the industrial business, now with Synventive in there for a couple of quarters, how should we think about the incremental margins for that segment overall looking out into the future?

Yes, Matt, I would say from an overall industrial point of view, that low double-digit type of margin is what I would expect for all of industrial, given the addition of Synventive in that segment.

From an operating margin standpoint, sure, I guess I'm trying to get a sense for how the incremental margin that you can generate in that business has been improved by adding Synventive in? Does that make sense?

I understand. So, obviously, what we bought the business, we talked about the EBITDA improvement in affect -- the EBITDA margin of that business adding to Barnes Group's overall average. So, clearly it is, and it is going to continue to help the industrial operating margin segments. So, without getting into too much specifics around Synventive's margins, we are profiling industrial being in that low double-digit. And as at the Company, driving towards just that mid- double-digit margin expectation coming off obviously a very good first quarter at 13.5%, we are on our way.

And then just lastly and then I'll get back in queue, can you talk about, within industrial, the performance of the nitrogen gas business? Just top line, of course, and then versus maybe what you saw at Associated Spring are some of the other bigger pieces of that business?

Yes, Matt, on nitrogen gas products, the overall market continues to look very positive in terms of our nitrogen gas springs with the tool and die industry remaining at the same highs of 2012. So, as we came out of the first quarter, it was with a great start to 2013, in particular, with a nice start with continued growth in China. So, overall, Chris have you --

Sounds good. Yes.

Thanks.

Peter Lisnic, Robert W Baird.

This is Josh Chan filling in for Pete Congratulations, Patrick, on the promotion. Yes, so your aerospace margins was up very nicely in the quarter, and that's kind of surprising to me, at least given the OE and aftermarket mix shift. Could you give some color as to what drove that improvement, despite the mix, and then whether that level of improvement is sustainable without any mix improvement?

Well, what I would highlight, Josh, is that on our aerospace business, we've continued to put a tremendous amount of focus on driving continued and productivity improvements utilizing our Barnes enterprise system. As we continue also to drive a focus on new product introductions across the business, while in the initial stages they represent a drag on the of business in terms of expense, at the same time we are moving some of the products through the development phase to where we are now starting to see the benefits of the engineering efforts that have gone into those products. Overall, I think we are -- we continue to drive the businesses in terms of margin expansion. That is a clear metric that is utilized across all of our businesses, and we are very pleased with the first quarter's results in that regard.

Okay. And then if I can switch over to industrial. Could you talk about some of the trends that you are seeing in the legacy industrial businesses? I know they were about flat for the quarter, but did you see any monthly variability in order rates, if you will?

I would -- what I would highlight is that overall it's been a mixed bag in the size of our industrial businesses. As I mentioned, we have tailwinds from global auto production and -- with the exception of Europe, which is somewhat stagnant. But, we are also seeing good trends in terms of the tool and die industry, as I mentioned. Were also seeing good trends with our Synventive business as a result of the continued global usage of plastics and the continuing increase in model changes as a result of shorter lifecycles in the products and services that they provide.

I guess I was wondering if there were monthly variability in terms of January or through March, how that progressed? Was at a relatively steady quarter for those businesses?

Josh, we didn't have much variability month-to-month, really. One thing I maybe would highlight is obviously from the industrial side, the fourth quarter typically is a more challenged quarter, just given end markets and customer management of inventory. So, we did see a nice sequential improvement in the first quarter. But just echoing Patrick's comments, there was nothing significant month-to-month that caused us to react good or bad.

Okay. And then lastly, I know it's only been one week, but have you had the opportunity to buy back any shares already, or is it way too early for that?

No, it's a good question. I think we are going to continue to be an active buyer of our stock. So, we bought back roughly 0.5 million shares in the first quarter and we will continue that, as I mentioned in my opening comments. So, we will continue to do what we said we were going to do.

Okay, great, thanks for your time, and congrats on the quarter.

Ed Marshall, Sidoti & Company.

So, I don't know, did you mention the aerospace backlog for the quarter?

Yes, overall backlog for Barnes Group was $671 million, with aerospace making up $545 million of that. So, it was up, I think 11% on a year-over-year basis and just slightly down from a high of the year-end 2012.

Now, looking at the first quarter and the OEM arrow and then parsing it back to what you look for the entire year of 10% and noting that aftermarket's flat in that 10% range, it looks like there was some delays maybe in some of the aerospace OEM, which is somewhat surprising. Did you have anything in there that was related to maybe delays around the 787 or something along those lines? Can you talk about why the relative to the full-year expectations, the first quarter was a little bit weak?

I would highlight that we remain bullish on our double-digit forecast for the full-year, and in terms of the -- there was nothing in particular that stood out in the first quarter, no impact experienced as a result of 787 issues. And of course with this last week's news relative to the close fix on the batteries, we expect that, that would kick back now into output by Boeing. But production at our end had never been impacted.

You have a healthy backlog and have had a healthy backlog in that business. It is it just a timing thing for Q1 or mix, or?

Yes, there is a timing element of -- what we have highlighted is that on a full-year basis, our average is around 60% of current backlog will ship in the year. But it is not linear. It's very much based upon the customers' order schedule. And so we're going to see some fluctuation quarter to quarter, but again, with the full-year outlook of 10%.

Okay. When I look at -- I wanted to focus on the margins, if I could for a second. And two things stand out. The margin on the industrial business was very nice. I want to know if it is a function of maybe any of the efforts that you've done to reduce costs. And I'm sure there's a portion of it, but is it have anything to do with the growth that you saw in Synventive which sequentially, at least, showed a pretty sizable increase if you back out some of the different metrics there?

Yes, so let me comment on the industrial margins. So, you are right, they did have a very good quarter on an adjusted basis, delivering 12.8%. Synventive continues to -- as we talked about, let me go back to last year's comments, we talk about Synventive's contribution to EPS. In 2013 we said $0.16 to $0.18; they continue to track very well towards that range for us. So, they are doing exactly what we expected them to do, how we are planning, and we are very consistent with what we communicated to our board.

So, Synventive contributes, right? The other piece of our businesses, and I will go back to our opening comments that Patrick made and I reiterated, we are being selective. We are getting pricing in the marketplace. We clearly are managing costs in each of our businesses, given where they are in the environment, whether it's Europe, US, China etcetera. So, we're just focused in on it. Those productivity gains in price improvements to get margin expansion has been paying off and will continue to pay off.

And then on the other side of the business, on the aerospace, the decrement from Q -- the decrement from Q4 on a sequential basis, only a $2 million.$3 million reduction in sales, but yet an equivalent amount of decrement to the margin. Was there anything unusual, or is that just the slowdown in the aftermarket business when you had a pretty good aftermarket business in Q1 -- or Q4.

No, understood. What I would highlight is recognise that as BDNA coming out of our -- BDNA coming out of the business in discontinued operations, we had to go through the reallocation of corporate costs. So we did issue a supplement, so I would make sure that you take that into consideration when you compare quarter over quarter or sequential quarters. When you normalize it and when we look at overall performance of the business, aerospace fourth-quarter last year was roughly that 18% this quarter is 14.5%, most of which is a reflection as we think about the reallocation of corporate costs, the mix of earnings performance on the OEM side versus the aftermarket side. Aftermarket had a pretty good fourth quarter. So, that it; it's a combination of the number of items.

To be fair Chris, the restatement and the supplement that was provided on Monday had the corporate reallocation, is that right?

It did, so 17.9%, exactly.

So, the decrement there, then basing back on what your comments said then is really all aftermarket.

Exactly. Aftermarket being down basically 14% in the quarter.

Plus, I would just add that we had a couple of strong programs, shipments from an aerospace OE perspective in the fourth quarter which also boiled it down.

Okay, how much is on the revolver right now?

Well, we paid it down quite a bit on Monday. Yes, so Monday we received the funds from the transaction from MSC and reduced our revolver. In the supplement we try to highlight for you the fact that the after-tax proceeds, the combination of what is US versus what's in Canada, those US proceeds will be used to reduce -- immediately used to reduce debt.

And if I look at the cash flow statement, the incoming cash of, was it $217 million or something like that, that came in? I thought it was closer to $400 million, is that just the assets going out the door? What is the difference there?

Ed, I'm not sure I'm tracking it.

We can follow that up later, that's not necessarily relevant here.

Are you referring to the net gain on sale?

Yes. So, we can follow-up on that later, just so I get my reduction right. And then finally, are you going to be a buyer of opportunity with your stock, or are you going to go through, and I think you mentioned it already, how are you going to look at it and how are you going to set up the 10B form if you have to, with certain collars or something along those lines?

Yes, so Ed, we will be opportunistic, clearly, in the marketplace, and we will go -- we will do what we said we would do, which is basically buyback the three million shares in the full-year. That's what we've got in our guidance. If -- obviously, if something comes up like in acquisition for us, that might change our overall plans but right now, we plan on buying back three million and we will be opportunistic as well as utilization 10B, as I made comments on.

And how does the acquisition pipeline look?

I would highlight that we continue to put a tremendous amount of resources into filling the pipeline and remain very optimistic in terms of opportunities that we are evaluating. What I would highlight is that we continue to hold a high bar in terms of our strategic criteria for what a good acquisition looks like. And so, that in of itself makes for a more protracted process as we hold to a high standard.

Was there any meaningful due diligence expense in the quarter?

There was not.

There was none.

Scott Graham, Jefferies.

Good morning, and congratulations on the sale of that business and to you, Patrick. So, my first question is more for Chris. Chris, would you be able to carve out the nonrecurrings in the discontinued operations line so I can get a feel for like to like here a little bit?

Right, so, what -- the way I would look at that, let me get the exact number. The way I would look at it is the $2 million, think of it as the -- about $1 million related to the Toolcom settlement and $1 million related to BDNA disposition, which would include a combination of like my opening comments in terms of pension and other things that are in a number. So, those two events are removed in discontinued -- or are a part of discontinued operations.

Okay. But, I guess what I was trying to get out was the operations on a net income basis of BDNA - ex everything, ex charges, ex -- or are we -- you follow what I'm saying?

Yes, so within discontinued operations. So, I would say it is pretty consistent with last quarter's results and then the noise of transaction costs, pension related items, other areas that's related to the transaction and disposition is in that number.

Okay. All right, that is good. All right. The other question is, it sounds like you guys have given your backlog in aerospace very high expectations for execution of shipments on the OE side. And if my math is right there, it seems like you guys are expecting teens type of growth out of the OE side. And I was just wondering, assuming that that is right, of course, that you are agreement with that, what you see as any potential stumbling blocks there? Is there anything that can get in the way of that as you sit there today?

Not that I would say we anticipate, albeit there is always -- we are cognizant of any type of factor that may not -- we may not be within our control. What I would highlight is that the OEM side of the business is executing very well on a track record basis, and our continued focus on and the resources we've applied to new product introductions and the discipline we've put in place around that have in fact allowed us to exhibit a high degree of confidence in terms of execution. Aerospace also, as you know, last year was awarded the Shingle prize, which is a worldwide recognition of manufacturing excellence, which I think is also a credit to the team in terms of the Barnes enterprise system and its ultimate effect on how it is performing. So, overall, we are confident against the double-digit growth in our OE side, and that remains pretty robust in terms of our outlook.

Okay, got you. Really, I think the only other question was maybe harping back to early ones. That the aerospace margin, I'm wondering what you guys are more specifically doing in the factories because that margin was a surprise to me.

Yes, what I would highlight is, and I mentioned it, but without going into all the details. The Barnes enterprise system is an initiative that we launched probably more than five years ago. And within aerospace, they have -- they were the early adapters in that the teams within our aerospace businesses have embraced all of what is involved with lean manufacturing across the businesses. There has also been a concerted effort in terms of quality and the overall systems that we've put in place to drive reductions in scrap, increase customer delivery rates, and increase customer satisfaction. So, with all of those efforts, it is -- ultimately it is not anyone item, but it is a combination of all those factors that has resulted in continued steady improvement in terms of margins within the aerospace. And of course, we are getting some leverage from sales volume, but also in time we are also seeing the benefits of our new product introduction taking hold.

Got you. All right, thanks. That is all I had.

Matt Summerville, KeyBanc Capital Markets.

Just a couple of things, in aerospace, what is your outlook for RD&E expense in 2013 versus '12? If you don't want to give absolute numbers, maybe what the delta looks like.

Yes, Matt, what I would say on the --remember that aerospace -- we don't do program accounting, so from an aerospace point of view, our, call it, development is actually on new product introduction. So, I would say from a high-level point of view, not significant difference '12 to '13. And I think when you think about the major programs, and Patrick can add on, but I would say the major programs for us in aerospace, you think about the XWB with the A350, as an example, obviously some of the new businesses that we won of the military side, as well as additional content expectations and other programs, there's not a significant change, but it will be on program.

And from my perspective, Matt, I would expect and plan on our level of NCI continuing all of this year and into next year in so far as that even as we speak, we continue to be in active discussions on even some of the newer programs, The leap on the narrow body in addition to where we traditionally played in the wide body of the 787, the XWB.

And then you mentioned military, I remember, I think it was towards the end of '11, you guys got a pretty good slug of business that is rolling through an over multiyear period. Are there -- or do you see a lot of risk with government spending, DOD, all that, to the military programs that are sitting in your backlog right now?

Well, clearly, we are cognizant of sequestration and all of the impacts that, that may have on a broader military budget basis. However, for us, the military is a smaller portion of our business and as such, we don't see it as being a negative for us, and it's really because of we are working off of a small base. So, it's a lot of small numbers in that regard.

And then just, Chris, briefly, what sort of interest expense would you recommend we use for the full-year for modeling purposes? And then I guess with Synventive in distribution out, if we should be thinking about your quarterly earnings seasonality differently going forward?

Good question, Matt. First of all, I made the comment on interest expense that we expect full-year to be approximately $15 million as a result of that number. And then seasonality, it's a good question because you'd think about our distribution business, the BDNA piece of the business, which was typically a first-half benefit, a little second-half challenge. We actually look at our portfolio across industrial and aerospace and view it more as a, I'll call it a 50-50. We don't expect significant seasonality to the year.

However, I would caution the fact that a number of our businesses are a build to print or in effect, an outsourced model, we do occasionally run into year-end customer managed inventory type of events. We didn't see much of that in the fourth quarter, and that played very favorably to us having a terrific fourth quarter, but that could hit us. And that is the only quarter I would spike out to say we would try get more color on that as we close out the third quarter.

Okay, great. Thanks.

(Operator Instructions)

Scott Graham.

Hi, I just wanted to ask this one, and this is maybe more of something -- anything that you've heard anecdotally from the channels. But obviously we've got this situation with aircraft controllers and reduction of budgets and what have you austerity. And I was just wondering if, have you guys have started to hear anything at all about what is going on in the skies here little bit, which I think they tried to band-aid on in the last 24 hours. But it seems like only a band-aid, and there is the delays that seem to have been mounting over the last week or so. I'm just wondering if you've heard anything at all anecdotally from the channels that maybe that starts to back up a little bit onto the OEM side?

No, I don't think we've heard anything, Scott, that is not in the public domain. And of course, as we drove in this morning, we heard the same news relative to the air traffic controllers being taken off furlough. Ultimately, I think, again, we don't make a connection from it to any impact to the production side of our business. Again, recognizing Boeing and Airbus have seven years of backlog in place. And so, I think short-term issues like this are not going to impact that overall trend outlook.

Okay. Sounds good. Thank you.

Ed Marshall, Sidoti & Company.

Ed? Are you there?

I'm sorry, would you -- I had you on mute, sorry about that. Would you provide the A350 content on the engine?

We will when it becomes more substantial for us and I think when it gets firmer up. We are clearly very active on the development side of new business wins, or if you will, content. But it would be our expectation, once we have better visibility to that and it's more meaningful to us going forward, which we absolutely expect it to be, we will provide at that time.

Do you think it will be a meaningful difference from what you have in the 787?

I'll hold my comments until we are in -- we're closer to delivery.

What I would add, Ed, is there is wide fluctuation over the course of the development phase. And so as one of our goals as a partner to our OE customers is to take costs out of the early production, early development parts. And so as a result, that drives a wide variation in what is ultimately will end up being the sales calculation into content per platform.

Are you saying there is an L-RIP type function where you are getting a little more content than you would normally get at this stage in the process?

I would say that we have been partners with Royals Royce on this program from the beginning and continue to have a very strong set of activities around the program, working closely with them in this development phase.

And I just want to confirm the existing platforms that we talk about quite often, the 777 is still about $1 million, 787 is about $300 million.

That is correct.

Okay, thanks, guys.

And now I would like to turn the call back to William Pitts for any closing remarks.

Great, thank you, Marie. We would like to thank all of you for joining us this morning. We look forward to speaking with you next quarter and so with that, we will conclude our call.

Thank you, ladies and gentlemen, that concludes your conference call for today. Thank you for joining us, and you may now all disconnect.