Barrick Mining Corp (B) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Barnes Group earnings conference call. My name is Catherine and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Bill Pitts, Director, Investor Relations. Please proceed, sir.

Thank you, Catherine. 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 everyone 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 risk 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 Investor Relations section of our corporate website at www.bginc.com.

Before we begin our prepared remarks, I want to remind everyone that our financial results discussion is based on continuing operations. 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. We have got a lot to talk about today as we have had a very active quarter. Our discussion will reflect positive performance and sizable strides we have made in the advancement of our growth strategy, as well as addressing some areas that fell short of expectations, specifically our aerospace aftermarket business.

Let's begin with this quarter's most important strategic development, which is the October 1 announcement of our pending acquisition of privately held Manner. As you can see on slide two of our supplemental package, Manner is an industry leader and a highly-recognized brand in precision mold making, valve gate hot runner systems, and system solutions for the medical, pharmaceutical, packaging, and personal care healthcare industries.

At Barnes Group, we anticipate the global demand for more complex, highly technical injection molding solutions to increase over time. Accordingly, we see Manner's innovative suite of products and services and their highly complementary end markets as a good addition to our core capabilities. We look forward to adding Manner and its highly-skilled workforce to our company as we expect this transaction to close next week.

Around the date of the closing, we will host an analyst call to discuss more about Manner -- why this represents a terrific next step in the evolution of Barnes Group's portfolio and financial details about the transaction and the business itself.

Also during the quarter, the Company entered into an amended five-year $750 million revolving credit agreement, which secures financing at attractive rates for an extended period of time. This financing arrangement provides us with the flexibility to further execute our growth strategy.

With respect to Barnes Group's financial performance, we reported a 16% increase in sales in the third quarter despite softness in our aerospace aftermarket business. The Synventive acquisition was a major contributor to that increase, but companywide organic sales growth was also a respectable 5% in the quarter.

At aerospace our original equipment manufacturing business delivered a solid 6% growth, while aerospace aftermarket reflected continued softness as both MRO and aftermarket spare parts were down 4%. Aerospace operating margin was 7% in the quarter. However, results include an $8.6 million pretax inventory valuation charge related to exchange engine parts that support our MRO business.

We purchased these parts to support the expansion of our aftermarket service capabilities and to provide an exchange inventory to meet customer demand for repair services which require very short turnaround times. As we have gained efficiencies in our repair process, the required level of exchange inventory to meet customer needs has decreased and as such we have been pursuing various avenues to market this inventory.

As part of our third-quarter review, we concluded that our targeted plan to sell this inventory became less certain and more complex to execute in the near term. As a result, we recorded a valuation charge to decrease the carrying value of this inventory to net realizable value, which reflects current market pricing and readily available channels.

This charge is neither indicative of our assessment of the overall MRO end market, nor our competitive position, both of which we have full confidence in. Also, and just to clarify, these are not parts associated with our RSP programs, where we have exclusive rights to supply parts over the life of the related aircraft engine programs.

We continue to have a positive long-term outlook with respect to commercial aviation. On the OEM side, large backlogs at Boeing and Airbus support anticipated production rate increases for both narrow and widebody platforms. This should provide robust sales growth over the next several years.

New product introduction, or NPI, investments are being met at an elevated level to position us on the platforms of the future, such as Rolls-Royce Trent XWB and the GE LEAP-X. So commercial OEM remains a great end market for us.

In the aftermarket, we expect continuing softness heading into the fourth quarter which has had an impact on our expectations for the year. However, as we have noted before, near-term strengthening in the aftermarket would provide some beneficial upside to our expectations. Long-term we anticipate aftermarket demand for our services and spare parts businesses to accelerate as deferred maintenance abates, airline profitability continues to improve, and increased traffic drives growth in capacity and utilization.

At industrial we experienced strong organic sales growth in the quarter of 6%, with positive increases from each of our industrial businesses. In particular, the businesses that were most impacted by the slowdown in Europe, Seeger and Hanggi, had the largest percentage sales growth in the quarter. Industrial operating margins increased as a result of volume leverage and productivity improvements.

Overall, our industrial end markets remain generally favorable. Both the US and European manufacturing PMI metrics demonstrated strength, with Europe's PMI now crossing above the 50 threshold. Global automotive production remains solid with 2014 expecting growth in most geographic markets.

One soft spot in our industrial end markets is global construction equipment, which has led to some headwind in our Associated Spring and Raymond businesses.

To wrap up my comments today, I remain confident in the strength of the aerospace industry and our long-term competitive position within it. We continue to develop new products and processes to enhance our participation on the key commercial aviation platforms of tomorrow and expect 2014 to reflect a more promising environment for our aftermarket businesses.

Industrial has been a very positive story for us over the last several quarters with global economic conditions improving, especially in Europe. And with the expected addition of a strong margin, highly differentiated business like Manner, we are well positioned to continue to make solid progress growing our industrial portfolio.

Overall, we remain very focused and committed to executing our long-standing growth strategy and we continue to make the appropriate investments in our businesses to drive organic growth. Additionally, we seek value-generating acquisitions to further add to our intellectual property base capabilities and extend our global reach, creating long-term value for our customers and our shareholders.

Now let me pass the call over to Chris.

Thank you, Patrick. Good morning, everyone. I will start by highlighting key points of our third-quarter results and finish with an update of our full-year 2013 guidance.

Turning to slide three of our supplement, sales were $269 million in the quarter, up 16%, primarily driven by the contribution of the Synventive acquisition and organic sales growth from both segments, with our Industrial segment demonstrating the more significant growth again this quarter. Income from continuing operations was $21 million, or $0.39 per diluted share, up 8% from an adjusted $0.36 per diluted share a year ago. As a reminder, last year's adjusted third-quarter earnings from continuing operations excluded the impact of $5.1 million pretax, or $0.06 per diluted share, of short-term purchase accounting adjustments and transaction costs related to Synventive.

As Bill mentioned in the opening, we have provided a reconciliation of these adjusted results to the appropriate GAAP measures as part of our press release.

Operating margins of 10.4% achieved in the third quarter was down 150 basis points from last year's adjusted operating margin. It is important to note that third-quarter 2013 operating profit includes a couple of items that have significant negative impact on our results.

First, as Patrick mentioned, we recorded an $8.6 million pretax, or approximately $0.10 per share, inventory valuation charge related to exchange engine parts within the aerospace repair and overhaul business, plus we incurred an increased level of acquisition-related costs due to the Manner transaction.

So now let's discuss segment performance starting with aerospace. In the third quarter aerospace sales were $102 million, up 3% from $98 million in the same period last year. As Patrick mentioned, 6% OEM growth was offset in part by lower sales in the aftermarket.

As was the case in the second quarter, RSPs were negatively impacted by mix and contractually scheduled incremental management fees. Operating profit of $7 million was down 49% from the prior-year period. Aerospace operating profit benefited from the impact of higher OEM sales and lower employee-related costs offset by the inventory valuation charge, lower aftermarket sales, and higher new product introduction costs. Operating margins in the quarter was 7%.

Aerospace segment backlog at the end of the third quarter was $508 million, down about $28 million from the end of the second quarter as we experienced higher-than-usual order debookings in the quarter which impacts net orders. Short-term debookings of orders is not uncommon in our business and occurs for a variety of reasons. Component design modifications can drive change in material, such as the change from titanium to inconel, a redesign of parts, or a redefined manufacturing process -- all of which we experienced in the quarter.

When these changes occur, our customers will often debook existing orders under an old part number and rebook under a new number. As a result, we do expect a portion of these debooked orders to return in the future.

At industrial, sales were $168 million, up 25% from $134 million in last year's third quarter. Synventive Contributed 19% in acquisition-related sales increase during the quarter, while organic sales growth was 6%. Please note that Synventive's July and August sales are considered acquisition related, while their sales in September 2013 are considered organic.

Operating profit of $21 million was up $7.4 million, or 55%, from last year's adjusted operating profit, reflecting the profit contribution of Synventive, the profit impact of higher organic sales growth, and productivity improvements. As previously noted, third quarter of 2012's operating profit was negatively impacted by $5.1 million of short-term purchase accounting adjustments and transaction costs related to the Synventive acquisition.

Operating margins in the quarter was 12.4%, up 230 basis points from prior-year period's adjusted operating margin. The Company's effective tax rate from continuing operations in the third quarter of 2013 was 15.8% compared with 12.7% in the third quarter of 2012 and 13.5% for the full-year 2012.

The effective tax rate increase in the third quarter of 2013 versus the full-year 2012 rate was mainly due to several discrete foreign tax related items in 2012 and an increase in the Company's effective tax rate in Sweden partially offset by the projected mix in earnings attributable to higher tax jurisdictions.

Regarding share count, our third-quarter average diluted shares outstanding was 54.3 million. During the third quarter we repurchased approximately 225,000 shares for $7 million. Year-to-date we have purchased 2.4 million shares for $69 million and we have 2.6 million shares available for repurchase under existing Board authorizations as of the end of September.

However, given the pending acquisition of Manner, we have suspended our share repurchases for 2013 and now expect our year-end average diluted share count to be approximately 55 million shares.

Through the first nine months of 2013 we have returned over $85 million to shareholders via dividends and share repurchases, and have capitalized the Company so that we are not overlevering our balance sheet to complete the Manner acquisition. Cash generation continues to be strong. Adjusted free cash flow, which we define as operating cash flow less capital expenditures, with the income tax payments related to the gain on the sale of DD&A added back was approximately $74 million year-to-date versus $54 million last year.

Now let's turn our attention to updated 2013 outlook on slide four of our supplemental slides. Our 2013 guidance is based on continuing operations; therefore, it excludes the results of DD&A which are reported in discontinued operations. In addition, our adjusted full-year guidance excludes the Company's CEO transition costs accounted for in the first quarter of this year and the tax charge recorded in the second quarter.

This guidance does include the impact of the aerospace aftermarket inventory valuation charge and the third quarter Manner acquisition-related expenses and operating income and operating margin.

For 2013 we now expect sales from continuing operations to grow approximately 16% and adjusted operating margin in the range of 12.5% to 13%. Adjusted EPS from continuing operations is expected to be in the range of $1.75 to $1.80 per diluted share, up 15% to 18% from 2012's adjusted earnings per share of $1.52.

Please note this guidance does not include any impact from the future operations of Manner. We will discuss this transaction's impact on guidance when we host an analyst call as Patrick noted.

For continuing operations, depreciation and amortization is expected to be roughly $64 million and $35 million of that reflects our outlook for depreciation given an updated 2013 CapEx spending estimate of approximately $55 million.

Lastly, we expect the 2013 effective tax rate from continuing operations to be approximately 20%, excluding the impact of the second-quarter tax court case. As we move forward, we expect our tax rate to increase to the mid to upper 20% due to the expiration of certain tax holidays, a greater mix of anticipated earnings from higher tax jurisdictions, and other factors.

In closing, clearly our third-quarter results were mixed; however, despite a couple of meaningful expense items, we did deliver improved earnings in the quarter. Our balance sheet remains strong, and even with the approaching Manner acquisition, our balance sheet provides us with the financial flexibility to drive further investment and fuel profitable growth.

Operator, we will now open the call for any questions.

(Operator Instructions) Christopher Glynn, Oppenheimer.

Thanks, good morning. Kind of a broad-based, deeper dive into aero. I'm looking at the trend in the revenue guidance went from low doubles to 10 to high singles, and I don't think you kind of broke out the segments in the current revenue guidance. But just wondering how the OE is coming in relative to expectation.

And also, just to clarify what you meant by a mix impact within the RSP business please?

Thanks, Chris. Relative to aerospace on a full-year basis, what we are looking at right now is a 5% sales growth for the full year. In the third quarter, as it pertains to the OEM sales side of things, our production overall was up 6% year over year and 8% sequentially.

While this was a solid result for us, at the same time we were targeting an even stronger third quarter. What happened there was we had expected one particular NPI program to start production in July, which due to normal approval process slipped to September. So overall, as we look at the OE side of the house, we continue to remain very bullish in terms of the outlook, but what we experienced was some lumpiness in the third quarter, both OE and aftermarket.

On the aftermarket, as we talk about the mix side of things, as you know our aftermarket business is comprised of a wide range of jet engine overhaul and repair capabilities. And when we talk about mix in a given quarter, it is relative to certain engine types coming in more than others.

With the RSPs what I would highlight is that directionally we saw the same type of growth from a gross sales perspective. But as you may be aware, the incremental management fees that hit in 2013 are a deduction from those gross sales, whereby our net sales reflect then a slightly negative 4%.

Okay, thank you, that is helpful. Chris, tax rate going to mid to upper 20%s; just wondering if we could put any finer points on the timeframe for that. If that is a 2014 comment and if there is any more specificity or bias within that kind of broad range that would be tough for us to model.

Understood. What we definitely want to bring attention to is we will experience expiring pioneer tax status holidays that we have as a company over time and those tax holidays' expiration are going to occur over multiple years. In addition to that, when you just think about the mix of earnings given the addition of Synventive and as we look at higher tax jurisdictions versus lower tax, it will be making a change upwards.

We are going through the planning period as well right now, Chris, and I would caution that, thinking about various factors that would impact our tax rate, we clearly will give more color in February when we provide 2014 guidance. But right now, as you can see, the past several quarters we have had some significant changes in our tax rate but we're just trying to signal the fact that we definitely are seeing it going up. Mid to upper 20%s is what we are currently outlooking.

Thanks.

Amit Mehrotra, Deutsche Bank.

Thanks, good morning. So just a first question on the aftermarket spares. Can you just help us put a little finer point on what the gross change was in underlying demand and the impact from the management fees? Maybe just asked another way, I guess, with the management fees lapping starting next year, what type of step-up would you expect just from the removal of that incremental headwind?

Amit, what I would highlight is that the incremental management fees realized in 2013, I think was -- how I would think about it is as we look at our gross sales and we look at the performance that has been cited by the OEs on particularly the CFM56 engine and the CF6 in this quarter, we are directionally seeing the same type of top-line growth.

However it is offset by the incremental management fees being realized in 2013. So hopefully that helps give you a flavor as to the type of upside we are seeing on top-line sales.

I would add that the management fees are contractually tied over the fourth or later years, and these programs have started in 2003; the last one we signed in 2007. So we are at the tail end of what we consider these incremental management fees and the impact that is having on our net sales.

So through this year we will get through that. And to Patrick's point as we think about the gross sales element of that, we are tracking similar to industry OEs in terms of those growth rates that we are hearing about, specifically for those engines, CFM56 and CF6. So we are anticipating improvements going forward.

Right, but if we look at next year, any underlying improvement there should be some multiplier effect because you don't have this incremental headwind from the management fee. Is that an accurate statement?

It is an accurate statement. So it is a one-time stepdown. It is not incrementally changed over multiple years. And as you may know is that these revenue-sharing programs are over the life of those engines, and so we are going to benefit from this for years to come.

We will see lumpiness quarter to quarter. Clearly, management fees is an item this quarter and we talked about the mix. We will see the lumpiness on those two specific engines, CFM56 and CF6, but over time the fact that this is going to benefit Barnes Group for 20-plus years is the good news. We are dealing right now with just the step down in management fees, but we will get through that in 2013 and not have that, I will call it, headwind going into 2014 or later years.

Okay, thanks. That is helpful. Just another one, if I may. My next question is sort of around consolidated industrial margins.

These businesses appear to be quite a bit less profitable than the aerospace businesses, but yet the Company continues to allocate a lot of capital there. Is there an opportunity to narrow or close that gap between the two segments, or are these structurally lower return businesses?

And I guess just a follow-up to that, if it is the latter, how should we think about the long-term earnings growth of the Company given this part of the business has sort of exclusively been the focus for some big acquisitions over the last few years?

Amit, what I would highlight there is that on the industrial side the businesses that we have been targeting, in particular Synventive last year and Manner, the most recently announced acquisition target that we hope to close on next week, these businesses in general are much more differentiated in terms of their product offerings. Much more highly engineered products where we would own both the design and applications engineering, as well as each of these businesses host a portfolio of patents -- all of which tend towards higher margin.

As we look at our industrial portfolio, we have indicated that we are looking to move them towards mid-teens in terms of operating margins, where with aerospace we have cited mid to high teens. So the intend, clearly, is to close that gap and I think our overall strategy is aligned to do so.

Do you think that gap can be closed relatively quickly, or is this sort of a more long-term, five-year type target? Or do you think we could see some good progress there starting even in 2014?

I think as we add the Manner acquisition to the portfolio it will have a very positive impact. At the same time, this is a longer-term strategy where we are looking at it over multiple years, but looking for incremental improvement in 2014 and each year beyond that.

Okay, thanks a lot. I will hop off.

Edward Marshall, Sidoti.

Good morning. If you can just confirm; the $0.10 inventory charge in aerospace, that is not in your guidance so if I look at it on a pro forma basis it is $1.85 to $1.90 so I guess technically you are narrowing, rather than (multiple speakers)?

Yes, so the $1.75 to $1.80 recognizes that charge.

Okay. So when I think about the RSP agreements, and we just covered, I guess, the management fees and how they drop off next year, but I kind of wanted to also look at maybe where that will be a tailwind for you. I kind of wanted to frame it also as to what happens with the pioneer tax rate.

So you have got a tailwind on revenue, you got a tailwind on operating profit, but as we kind of move down the core tax rate is going up as a whole. I assume that maybe from an EPS perspective it is actually going to be somewhat of a headwind. Is that the right way to look at this business?

I think that is a fair assessment in that, as we look at the longer term for the RSPs, 2013 represents the incremental management fees effectively leveling out. And then we will only move with volume on a go-forward basis.

In terms of the positives as we look at the longer term, is the shop visit rates and the overhaul rates that go against both the CFM56 and CF6, in particular the 80C2, and the newer generation of CFM56, the -5 and -7, already we are seeing very nice upticks in terms of the volumes against that.

On a year-over-year basis, too, we are also -- we also received the benefit of pricing increases aligned with the catalog of the OE. As you mentioned, the pioneer tax agreements were also negotiated during the time of the RSPs in the 2003 to 2007 timeframe. In the future years they will begin to expire and that will represent some headwind on the EPS.

Okay. They don't all unwind; last year think there was multiple agreements signed, the bulk of which, though, were signed initially. I think there was eight or so that were signed.

Secondly, do you produce everything in Singapore or is there some domestic production as well for the RSPs?

The RSPs were signed over -- there were 13 agreements signed over a period of time from 2003 to 2007 and the arrangements in both the incremental management fees and the pioneer status are sequential. So they are over a period of time as the agreements were signed.

But eight of the 13 were signed I think initially in 2003, is that right?

No, no. They were pretty much signed on a quarterly basis between 2003 and 2007.

I think of it as two or three a year starting in 2003 through 2007.

Okay. And is the tax rate -- is the tax jurisdiction, and we can follow-up on this later, but is it per contract or is it based on the facility and the amount of hires and when you have hired, etc.?

It is based on each of the agreements. Again, I would highlight that even as we look at tax rates in Singapore obviously they are significantly below the corporate tax rates here domestically.

You mentioned the buyback and what you bought back in the quarter. I was wondering if you -- you gave us the blended rate for the quarter, but can you give us the actual share count was for the end of the quarter? If you have it handy.

Sure. On the press release --

Sorry to make you work.

At the end of the third quarter, so basic it was 53 million shares average, 54.3 million for diluted.

But is that the blended rate for the entire quarter? Isn't that an average throughout quarter? So what would (multiple speakers)

For the quarter. Yes, for the quarter.

What was the actual count at September 30? Do you have that number?

It would be about 60.2 million shares less about 7.4 million treasury.

Okay. So the shares were bought back closer to the end of the quarter I guess or is it throughout?

Throughout.

You reconciled the cash flow saying that that was less the distribution business taxes. Is that how you got to the $74 million rather than the loss of $21 million is that right?

Yes, exactly. Right, so in our press release we are just identifying that reconciliation.

Okay. Then, finally, I think if you could just confirm the OEM split with aftermarket. I think you said 6% year over year on OEM. Did you give the rate on the year over year in the aftermarket and sequential move?

Aftermarket we said was down 4%.

And down 8% sequentially.

And that is 8% --

Roughly, actually -- let me blend that, I'm sorry. It is around 5% sequentially.

Did you -- you don't break out the RSPs versus the MRO do you?

We don't have any issues with that, so the 3% down for MRO, and I am going to give you quarter over quarter. We were down 3% for MRO. We were down 4% for RSPs. Sequentially, MRO was actually up 1% and RSPs were down 8%.

Again, I would say a law of small numbers here in terms of the size of those businesses, so recognizing a $0.5 million sales miss might represent a couple percentage points there.

All right, guys. Thanks.

Matt Summerville, KeyBanc.

Morning. First, I want to talk about the inventory hit here. So can you just give a little bit more background history on that? When you bought this -- did you buy this stuff from a third party, and what was sort of behind the decision to do that? Just walk through that in more detail.

And then what is the remaining carrying value of that on the balance sheet?

Matt, the material was purchased for the purposes of an exchange pool, and so as we were ramping up a number of years ago with the expanded capabilities within our MRO business the turnaround times against these particular components were such that we required an exchange pool to meet the demanding turnaround times. As a result, the material was bought from a range of different sources that we accessed at the time.

As we have continued to improve our processes in terms of the capabilities around these components, subsequently the demand or the necessity of the inventory has decreased. So with that we look to market the material out to the open market, and based on our assessments in the third quarter, decided to take a valuation charge against what were readily available market channels.

And then, Matt, to answer your second question, so the adjustment represents less than 10% of the aero inventory. And the value that is left is -- the net realizable value that is left is also less than 10% of aerospace inventory.

I would also highlight, Matt, that this material is, in fact, still very much part of production engines that are actively used in the fleet today. And so as we look to the future we believe that this material absolutely continues to hold future value. It is just this became a timing issue.

So basically then -- I just want to make sure I understand this. So basically did you overbuy and then get caught with the aftermarket kind of in this protracted downturn with engine cannibalization playing a part of that. And then you tried to shop the parts; couldn't get what you wanted so you had to take the hit?

I think a number of different factors. We purchased the material -- we didn't over purchase the material at the time because it was based on what the demand was and what the process capability was within the shops, our overhaul shops. The demand was procured or the amount of inventory we procured was to meet the demand.

What has occurred is that we have continued to improve our processes and improve yields to where the amount of inventory required is no longer needed at the levels at which we originally required.

To your point, over the last number of years the market has been slow to recover in terms of the aftermarket; did play a role to where it is -- the value of the material today compared to where we bought it at required this valuation charge.

Got it. Then, Chris, I believe you mentioned it in your remarks that there were some acquisition costs in the quarter. Could you please quantify that?

Sure. I would view it as -- think of it as almost like a $0.02 incremental spend to last year. If you recall, we had Synventive activity last year as well, but Manner -- a lot of activity in the third quarter related to the transaction.

Then I want to make sure I understand the whole debooking thing. So what was your OEM backlog at the end of the third quarter here versus a year ago, and how much of that change was this debooking? And then how much of that do you expect to be recaptured?

Right, so we ended OEM backlog at [501] versus the end of the second quarter we were at [529], so think of that $28 million of debooking.

And just to highlight what is driving that, Matt, is the fact that it is not uncommon from a quarter to quarter for there to be volatility in orders, especially as this time period where we are in heavy NTI. And so as we continue to develop new capabilities and design changes occur, or something as simple as a material change occurs, what happens is invariably a component that had been issued as an order under one part number is then debooked in one quarter and potentially then rebooked in the next quarter as a different part number.

It also could be at a different unit value. So a $1 million debooking may not come back as $1 million. It may come back as $800,000, as an example, if there is a material benefit to be had by the design change.

Okay. Just a couple on the industrial segment. So organic growth was 6%; can you talk about kind of going forward where Synventive is shaking out around kind of that segment average? And then what you saw in nitrogen gas and how the backlog looks there.

In terms of Synventive I would highlight that we continue to be very pleased with its overall performance, similar to -- a number of our businesses we do see some lumpiness quarter to quarter, region to region. So whilst one region may be up in a particular quarter, another might be up the following quarter.

In terms of Synventive overall, as we look to that business we are looking at high single-digits growth compared to the average. And answering your question on NGP, we saw 3% growth in the quarter and that was impacted somewhat by FX.

How is the backlog in that business? I believe at this time last year you were looking at an all-time record. Is that still sort of the case that you are seeing?

I think all-time records continued to be met in terms of sales for that business, but I would also highlight that it is a short cycle business by comparison if you make a contrast to aerospace. So the backlog within NGP may be just a couple of months.

Exactly. And I would say the orders activity probably was a better correlation to sales and we are seeing that book to bill be consistent with the top line.

Thanks a lot, appreciate it.

Peter Lisnic, R. W. Baird.

Good morning, gentlemen. First question, I guess just on the ramp up of the RSPs I guess. As you look to 2014 does the absolute dollar level of those management fees step down at all in 2014?

We talk about the management fees as being incremental, recognizing that that incremental kicks in once during the first four-plus years of the program. Then once they step down, there is no additional step down. It is an ongoing business for the remaining life of the program.

But it is tied to volume, correct?

Yes.

Absolutely, yes.

So over the life of the program, two big factors that will drive them on a go-forward basis will be unit volume and catalog price increases.

Okay, okay, perfect. Thank you. And then just continuing on aero and maybe this is more broadly, you talked a couple different times about new product development costs. I think that was largely aero. And also, Chris, if I heard you right, the CapEx going up $10 million, from $45 million to $55 million.

Right, on the CapEx side it really is just to support the number of growth programs we anticipate on the aerospace OEM side. The XWB we have been making investments in, getting prepared for that, as well as LEAP-X. So we have increased our near-term CapEx spend to be ready for those volume increases.

I would just also highlight to that that what we have challenged the businesses to do is to focus very deliberately on technologies that are going to carry us forward, not only for the current engine programs but those future engine programs, with a view to creating competitive advantage.

And so today we continue to make investments in what we believe will be key technologies that will support not only the engines of today, but the engines of tomorrow.

Okay, all right. So as you look to 2014 and beyond, can you maybe give us a little feel as to what sort of impact some of these new product development costs might be having on the aerospace segment today?

Is it kind of a steady run rate as you look to 2014; is it a stepdown at all? I realize it's continuous, but just trying to get a flavor there.

Yes. I guess we don't view it in a negative way at all. We actually hope it increases if you think about it. That is how we in effect go after winning new business on new engine platforms. So if we have an elevated increase in new product introduction, that speaks to the favorable side of what we anticipate in terms of growth in our aerospace OEM business.

So as we look to 2014, I would say that we will continue to make significant investments in the XWB, as well as also the LEAP-X engine. And as we continue on into next year also and as the GE9X starts to become more firm in terms of its design, we will actively look to participate there as well.

Can you give us a little color on how you are viewing your positioning on some of these new programs, i.e., increasing share, constant, etc.?

As I said, we are clearly -- in some instances our position on the newer programs will continue to improve in terms of we are still bidding on certain types of products, certain types of work packages, as well as developing the ones that have already been won.

Why we haven't necessarily indicated what our content per platform will beyond these newer engines is basically because the movement, and even as we reference bookings, debookings in terms of unit values, in these early development stages it doesn't necessarily make the most sense until it is more solidified in terms of that final design. And so at that point we will communicate content per platform on each of these new engines.

Okay, perfect. Then just one last one on industrial, if I may. Can you give us just a little color or sense of what your customers might be telling you in regards to their inventory positions? Are they relatively lean? Any spots where inventory liquidation has been somewhat of an issue impacting growth? Just some feedback there would be great.

I think what I would say in general is that feedback from our customers continues to be that they remain cautious on their inventories. And as such, it is actually creating some lumpiness into our order patterns because they are monitoring closely still. So I would suggest that they are somewhat lean and I think across the board we are seeing that increased discipline, if you like, in ensuring that they are not over ordering and at the same time not being caught.

I think in turn they are turning to companies like Barnes Group, which are able to provide rapid responses in terms of making sure that they have their material just in time. And so I think we are also looking to leverage that in terms of the service and value that we are providing.

All right. Thank you very much. That was very helpful.

Scott Graham, Jefferies & Co.

Good morning. So a couple of additional questions. Could you tell us on the aftermarket and industrial sides what the order progression was as the quarter moved forward?

Sure. On the order side of aerospace, you mentioned aftermarket as an example, so sequentially we saw MRO up 1% while RSPs was down somewhat 8%, recognizing that we view the MRO business more of a backlog business. RSP is kind of it happens when it occurs, so --.

Then from an industrial point of view we saw -- well, I've got to be careful because Synventive is in these numbers. So, in general, we saw an improvement quarter over quarter, but I would say that each of our businesses saw a little bit of softness on orders, but not terribly to say we got a book-to-bill type of issue.

We had a very strong second quarter, as we commented last time, and this quarter the order patterns were slightly down. We are talking low single-digit kind of on average.

Chris, sorry. I actually meant within the quarter. As the quarter progressed, how did these sales or orders in those businesses on a year-over-year basis -- did they modestly accelerate? Were they kind of up the same throughout the quarter? That is what I meant.

No meaningful difference, Scott.

Okay. Could you also -- I think that there was an earlier question that was kind of after this. If Synventive is rising or expected to rise organically high singles, yet only kind of had one month, would you be able to maybe pro forma what that would have meant? Would it have added another point or two to industrial organic?

Good question, I guess I would have to do the math. I look at it as we have seen year-over-year growth in Synventive, recognizing that we have owned them since September, end of August/early part of September of 2012. But just thinking back looking at their 2012 full-year performance, and when we put out guidance this year and as we still kind of track to, the fact that we are going to be high single digits out of Synventive, it is good news.

I mean we see continued improvement, continued growth out of our Synventive business that is helping complement the fact that industrial had another very strong quarter.

I think I would also just add to that, Scott, that Synventive is very much representative of a global footprint in that it is business is generated out of North America, Europe, and Asia almost equally. And with the highest growth coming out of Asia.

Got it. Next question is on this debooking. I have not heard that word used, though I am an industrial analyst, so what do I know? Patrick, you are the aerospace -- more experienced on this call than anyone. So has this occurred before with Barnes?

You say that this is not unusual to see. I guess I haven't heard of that and maybe it is just the semantics of the word. But why would someone debook something knowing that they were going to -- why wouldn't they do that at the time that the order closed ready for shipment as opposed to during the quarter beforehand?

Well, orders may be placed not with a view to being shipped in a given quarter. So you may have an order placed on you this month that is for 20 million that is going to ship over the next 18 to 24 months, so it is not as if there has to be a rapid response to any change.

As you think about NPI and you think about a demand profile that is expected, an order is placed against that demand profile and it is at a unit value. So if there are design changes and the single unit was $100,000 and because of material changes, as an example, the unit value now was going to be $80,000 because of a change of material, then that delta of $20,000 into the demand profile that had been placed on you will -- one part number will be debooked, the new part number will be reissued, and you will get a delta in the orders.

So this has happened to you before then?

Oh, it happens all the time in the industry. As a build-to-print supplier, where you are building to the OE's actual engineering drawings, this is a very common occurrence.

Understood. Last question, I was under the impression that we were going to be talking about Manner today with that deal potentially having closed. It didn't, so I can understand why -- I guess that is why you are not talking about it.

But is there anything that has happened there to push this thing back a little bit? And is there anything you can provide more than the press release when you issued it I guess a little over a month ago?

Look, we are very excited about adding Manner to the portfolio. Currently we are targeting October 31 to close on the deal. And as I think Chris might have indicated, either November 1 or November 4 we will hold (multiple speakers) shortly after we will hold a call with a view to speaking specifically to Manner. But it's just a tremendous business and it's a great addition to our current capabilities.

Very good. Thanks.

Peter Skibitski, Drexel Hamilton.

First question, maybe this is for Chris maybe. Chris, pension in 2014; I know it has been a bit of a headwind here for you in 2013. I am just wondering what your -- all your assumptions, if they held today incrementally, what would pension before you in 2014?

Good question, Peter. I think, as most companies with defined benefit plans, that discount rate go back two months and we are anticipating a higher discount rate, the benefit of which -- and lately maybe it has come down a little bit. So it really is a pretty volatile question in the sense of trying to give a number.

What I can say is that the returns of our investments have been terrific this year when we think about the funding profile being at a very good spot. I would say that we would expect some improvement, not so much of a headwind on pension expense, but it is a little too early to tell. And we would provide color on that, Pete, in our February call when we give guidance where I specifically highlight pension expense or income, depending on the situation, into that year.

Okay, okay. You would think incrementally it would be better, though, even if it is less.

At this stage I would suggest that we are not going to have a headwind on pension expense, incremental headwind on pension expense, that is right.

Got it, okay. Then it looks like you are expecting fourth-quarter margins to be probably your high for the year. Is that just due to volume or is aerospace aftermarket mix going to improve? Can you talk about what the drivers are there?

I think we are looking at a very strong fourth quarter in terms of our aerospace OE side was we have indicated that we are expecting continued softness in the aftermarket. Again, primarily as a result of the dampening effect that we are experiencing on the RSPs due to incremental management fees.

Right, okay. So it is all OE volume primarily?

Yes.

Okay. Then the other thing I was wondering is European auto I think is still down kind of year to date. It has probably given industrial some headwinds this year.

I am just wondering if your sense is, from talking to your units over there, if you think that European auto has kind of bottomed this year and if you think that maybe going to next year it might actually accelerate for you.

Yes, we remain -- we are optimistic about Europe for next year in terms of seeing gradual improvement. What I would highlight is that our European businesses, whilst they service the European market, they also -- their customers are net exporters. So even this year we have seen nice improvement in our European businesses as their customers' end markets continue to improve.

Okay, so Europe is only a modest headwind for you?

Yes, I would consider it modest.

Okay, okay. Okay, last question. Again on the management fees. My sense is you guys probably largely knew what the management fees would be entering 2013, so is it fair to say that gross aftermarket sales have been below your expectations?

And what is your sense? Is that due to maybe some of the older A320s and 737s being retired more quickly than expected? Just wanted to get your thoughts there.

What I would highlight is I think that expectations coming into 2013 for the aftermarket in general were high. Really I think what has occurred is that, whilst the earnings releases of this quarter obviously are much more positive from the OEs, still I would argue that it is two quarters later than originally anticipated. So in general, we would have thought that 2013 was a higher gross sales overall in terms of the RSPs. I think on a longer-term continues to look very positive, but just the timing issue.

Okay, okay. Thanks very much.

Amit Mehrotra, Deutsche Bank.

Thanks, just a follow-up. On M&A, can you just characterize the acquisition pipeline now? Is it safe to say that now we are entering sort of the integration phase and we shouldn't expect more transactions for awhile? How are you guys thinking about that?

Great question and what I would highlight is that clearly our focus right now is on integration as a priority in terms of ensuring that it is flawless and seamless, both to our new customer base as well as to making the integration a pleasant one for all of the new employees that will join Barnes Group. That said, we are actively keeping the pipeline current with a view that we are still very much looking at all opportunities in parallel.

But priority-wise is integration and to make that flawless, whilst at the same time keeping our finger on the pulse to what our longer-term overall strategy is.

Okay, that is clear. Thank you.

Ladies and gentlemen, thank you for joining in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.