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Barnes Group Inc. (NYSE:B)

Q3 2008 Earnings Call

October 31, 2008 8:30 am ET

Executives

Brian D. Koppy – Director of Investor Relations & Communications

Gregory F. Milzcik – President & Chief Executive Officer

Francis C. Boyle, Jr. – Acting Chief Financial Officer

Analysts

Christophe Glynn – Oppenheimer & Co.

John Haushalter for Peter Lisnic – Robert W. Baird & Co.

Edward Marshall – Sidoti & Company

Fred Bonacore – CJS Securities

Matt Summerville – KeyBanc Capital Markets

Daniel Goldberg – RBC Capital

Holden Lewis - BB&T Capital Markets

Operator

Good day ladies and gentleman and welcome to the Barnes Group Incorporated third quarter 2008 earnings conference call. My name is Katy and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today, Mr. Brian Koppy, Director of Investor Relations & Communications.

Brian D. Koppy

Good morning and thank you for joining Barnes Group’s third quarter 2008 earnings call and webcast. This is Brian Koppy, Director of Investor Relations and Communications for Barnes Group and with me this morning are Barnes Group President and CEO, Greg Milzcik, and acting Chief Financial Officer and Vice President and Controller, Frank Boyle.

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 contained in the financial statements. We encourage everyone to consider these risks and uncertainties that are described in our periodic filings with the Securities & Exchange Commission which are available through the investor relations section of our corporate website at www.bginc.com.

Our press release was issued this morning and we hope you’ve had a chance to review it. We will begin today’s call with brief opening statements by Greg and then open the call up to answer your questions.

Now, let me turn the call over to Greg.

Gregory F. Milzcik

Good morning and thank you for joining us today. This morning we released our third quarter results which reflect both the progress we have made in improving a number of our businesses as well as the challenges that lie ahead as market conditions remain in flux.

Sales were down approximately 6% in the quarter, driven by the slowing economy and changing industry dynamics within the aerospace market. However, net income improved 5% in the quarter, which we achieved through a focus on productivity and lean enterprise programs which aided our efforts to control costs.

Clearly, the macroeconomic pressures in the U.S. and abroad have made their way into our business as we have seen in our recent to line results and short-term reductions or deferrals in key market sectors. We believe we can navigate through these disruptions without deviating from the long-term objectives we have set out to achieve as a company.

Over time we have built a company with strong global diversification and a significantly differentiated business. Barnes Group’s diverse and global end markets are our greatest strength during these dynamic times. When combined with our liquidity position and overall balance sheet strength, we remain comfortable that we can operate in these turbulent markets while remaining focused on executing the necessary strategic objective to secure Barnes Group’s market leadership position for the future.

A driving force behind our long-term success will be our favorable outlook for the aerospace sector. We remain cautious of the affect airline deferred maintenance and capacity cuts will have. We are confident the disruption that the Boeing strike had will be resolved and the strong industry fundamentals will prevail.

I want to take a moment to further comment on the Boeing strike, which essentially halted half the world’s large commercial aircraft production. The adverse effect was not simply with suppliers doing business directly with Boeing, but also with tier suppliers, such as Barnes Group.

While we have been managing the Boeing 787 production slide throughout the year, the strike and its impact during the third quarter as well as the beginning of our fourth quarter adversely affected our business.

Roughly one third of Barnes Aerospace revenues are related to Boeing aircraft. Clearly the strike is short term in nature and for the most part we have seen backlog deferred rather than cancelled. It is unclear what the lasting effects will be on production related to delays. Therefore, we have acted quickly with prudent measures to implement workforce reductions, cost containment, and cost reduction actions during the third and early part of the fourth quarter to weather this difficult environment.

Similar to prior distresses in the aerospace industry, we are confident Barnes Group’s aerospace business will emerge a stronger, leaner, and more efficient producer of complex components and assemblies.

Turning to the industrial manufacturing end markets, third quarter results for Barnes Industrial benefitted from our businesses outside of North America, which have provided upside for the business as the North American slowed. Our European strategic business units, SBUs, generated sales and operating profit improvement over the prior year as their high quality products continued to be in demand throughout their diverse end markets.

The North American manufacturing industry has been in a decline since last year but had only experienced moderate declines until recently. The largest industrial slowdown has been within the transportation end market. The North American transportation unit production was down approximately 17% in the third quarter. Adding to the adverse impact of declining production has been the move toward the manufacture of smaller vehicles as gas prices rise.

While we have made strides in reducing our exposure to the transportation market, we are not able to mitigate fully the adverse effects of the sharp declines during the past quarter. Similar to the steps we implemented in aerospace, we initiated workforce reductions, cost containment, and cost reduction actions during the third and early part of the fourth quarter. Pricing discipline and productivity improvement will further strengthen the business.

Barnes Distribution continued to focus on improving service, deliveries, and executing on its operating strategy during the quarter. Sales per employee were up 9% and operating profit was up 157%. Barnes Distribution North America once again achieved double-digit operating margins for the quarter. We continue to make progress in our global sourcing effort, which provided beneficial savings to our customers while improving our financial results.

In addition, we reduced distribution costs by approximately 13% from a year ago and increased the efficiency of our inventory levels and maintained strong customer order fill rate levels, all significant accomplishments considering the challenging environment.

Our commitment to continuous improvement is reinforced by a stable level of sales personnel during the quarter, which as you recall previously, experienced a significant amount of disruption in the first half of the year.

Favorable North American results at Barnes Distribution were offset by underperformance in the European business. Our new management team in Europe is rigorously working on improving operational performance, is considering steps to stabilize the business and decisively position it for long-term, sustainable profitable growth.

Turning now to our balance sheet, our balance sheet remains strong. During the quarter operating activities generated $43.0 million of cash flow and our total cash balance on hand is $25.6 million. Cash flow generated along with our solid credit facilities is more than adequate for the company’s anticipated requirements.

I would also mention that while we did not repurchase any shares during the third quarter, we were active in the market in the past few weeks and repurchased 1.2 million shares at an average price of approximately $13 per share pursuant to a 10-B 51 repurchase program. While share repurchases are not our main focus for the use of cash, we do believe we have flexibility in our capital position and we will continue to prudently evaluate all of our options.

As the global economies are expected to continue to weaken, we are aggressively reducing costs and streamlining our operations. We believe the prospective benefits will greatly outweigh the near-term expenditures which may negatively impact near-term operating profits.

Going forward, Barnes Group will have a more diversified business with greater aerospace and general industrial sales and less transportation exposure. The company will have robust global logistics service business as Barnes Distribution Europe strengthens and grows and precision component manufacturing capabilities improve through greater customer and end market diversification.

Actions taken over the past year, combined with those in progress today, are focused on creating a more successful organization for the long term. We are positioning the company as a market leader in a very challenging environment. We are taking steps to address the downside risks in certain markets while still investing for growth in end markets that should outperform the economy.

Reorganization activities have been implemented to ensure superior performance in 2009 and provide the impetus to achieve the earnings growth we expect to deliver to our stock holders.

As far as our projections for the future, our market positions across many product and customer markets provide favorable long-term prospects though current events are distorting our near-term view of the balance of 2008. The energy shock, housing collapse, and financial crisis have reached a point where they are affecting all aspects of the economy in some manner.

Additionally, the added impact on our short-term outlook from the disruption caused by the Boeing strike, creates additional uncertainty in our outlook. We expect 2009 to be a challenging year given the unsettled economy and credit environments, coupled with the head winds from a strengthening U.S. dollar.

While we believe market conditions have become more difficult over the past 90 days, we feel the company is well positioned given the focused execution of our business model and our increasingly diversified end markets and geographies.

As you saw in our previous news release, we have discontinued our specific detailed earnings guidance given the uncertainty in the market place today. We are not managing our business for the short term and we are assessing near-term actions to secure our long-term position. I am extremely confident we will emerge from these unprecedented times as a stronger, more focused company.

We remain confident in the underlying strength of our company and our ability to execute on our commitment to deliver long-term, sustainable stockholder value.

Now I would like to turn the call back to Brian.

Brian D. Koppy

We will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Christophe Glynn – Oppenheimer & Co.

Christophe Glynn – Oppenheimer & Co.

Just wondering about your comments on Boeing creating ongoing uncertainty, talk a little about what that means with the strike now done.

Gregory F. Milzcik

Keep in mind that the strike isn’t done yet. They are voting tomorrow and we are assuming that that will be accepted by the union. But then we have to look at a rescheduling of all the schedules, both with the tiers as well as Boeing has not announced their scheduling, although the CFO stated the other day that there would be at minimum a one-to-one movement of the schedule.

In other words, for every day of the strike there will be a push out of one day, which is what we anticipated internally, and that is that there is going to be no attempt to recover these aircraft in the current period.

With that, until the schedules are re-established with the tiers, as well as with Boeing, as well as the acceptance of the strike, we don’t have real good visibility on what is going to occur in the OE side of the business.

Christophe Glynn – Oppenheimer & Co.

And just on the announcement for some facilities and cost improvement on the OE side. I mean, you just put up a record OM on lighter revenue quarter at Aerospace on OE issues that you described as temporary.

Gregory F. Milzcik

Exactly.

Christophe Glynn – Oppenheimer & Co.

So I’m not sure why the need for these OE actions on the cost side, especially where you just added capacity.

Gregory F. Milzcik

We haven’t closed any facilities at all. We have restructured workforce as far as the work week and things of that nature for a temporary basis. Where there were excess capacity in the overall manpower we did have some reductions but it was all anticipated and based on what we expect for schedules but we still haven’t finalized everything.

Christophe Glynn – Oppenheimer & Co.

So certain peculiar areas of you OE business.

Gregory F. Milzcik

Right. That’s a good way to put it.

Christophe Glynn – Oppenheimer & Co.

You had mentioned some streamlining efforts might negatively impact near-term operating results. I will assume that is somewhat across the segments, correct me if I’m wrong. But will you break out restructuring charges or will those just be eaten in the segments?

Francis C. Boyle, Jr.

If and when we incur those charges, we will definitely provide detail behind those. As far as the financial statements, obviously we can’t do that, but from a MD&A perspective, from a press release perspective, we will definitely break those out.

Christophe Glynn – Oppenheimer & Co.

Barnes Industrial is still showing some European growth is sounds like within the overall more intense volume declines. What sort of decremental operating margins would we think this business runs at?

Gregory F. Milzcik

First of all, keep in mind, some of the products we have in our European operations, such as in our nitrogen gas products, have a global market output. In other words, we have demand from China, we have demand from North America, Europe, etc. And that has been very robust. So we don’t necessarily rely on Europe alone with some of these product lines.

But at the same time we do expect Barnes Distribution Europe, we are looking at a variety of different directions there. There is a little bit of softening there but I don’t think it is as dramatic as what we have seen in the North American and transportation market.

Christophe Glynn – Oppenheimer & Co.

At just at Barnes Industrial the margin sensitivity to volumes?

Gregory F. Milzcik

Well, we haven’t given margin guidance for next year and for the balance of this year.

Christophe Glynn – Oppenheimer & Co.

Structurally.

Gregory F. Milzcik

I think that would be hard to dissect and to give you that information right now without knowing what the end markets are doing, because we do have a variety of different products within that segment. As soon as practical, we will provide those guidances, as soon as things are settled down a little bit.

Operator

Your next question comes from John Haushalter for Peter Lisnic – Robert W. Baird & Co.

John Haushalter for Peter Lisnic – Robert W. Baird & Co.

With the re-segmentation that you announced that you are going to be implementing with going to two segments, could you talk about the benefits to your actual operating costs that that could bring about?

Gregory F. Milzcik

First of all, the primary reason for the realignment was to really drive our business efficiency and the way that we are looking at the businesses along the lines of precision components, which is primarily a manufacturing business that has a lot of cost-driven factors to it, with a differentiated process, while all the manufacturing operations support is value selling, where there is value proposition involved in that business.

We do expect some savings but we have not announced that. I think that is a secondary effect. The primary effect is to allow the individual strategic business units within the individual segments to act more responsibly to the customers.

John Haushalter for Peter Lisnic – Robert W. Baird & Co.

From our perspective, will you continue to be reporting results by end market just so we have an idea of how aerospace is doing within the new reporting and all that?

Gregory F. Milzcik

We will report by segments but we will give some color to the end markets. In fact, I think that will add more clarity because we will help define the end markets that are driving the results more clearly.

John Haushalter for Peter Lisnic – Robert W. Baird & Co.

The aerospace margin being off, is a fair amount of that just mix with kind of the BOE side actually being a little bit softer and then after-market being good. And then just for looking at 2009, with after-market being flat this quarter and this being the first quarter that really planes went out of service in September, what is your outlook for the after-market for 2009?

Gregory F. Milzcik

Your first assumption is exactly right. Obviously the after-market business has a higher return on sales and therefore a lowering of the original equipment sales base will have that effect of increasing the margin.

The second thing is, it is a short-cycle business when you look at the after-market side of the business. We do anticipate some deferred maintenance in the business based on just the general economic conditions, that’s a common reaction of the airlines, as well as the number of aircraft coming out of the fleet. I look at that as a secondary effect because most of those aircraft are aging aircraft that are even our core product lines which are typically more fuel-efficient aircraft types.

So we do expect some softening in the after-market but I don’t think it is going to be dramatic.

John Haushalter for Peter Lisnic – Robert W. Baird & Co.

So not relative. You ‘re coming it with the past downturn in 2001, nothing like that?

Gregory F. Milzcik

No, I wouldn’t forecast that. In fact, if you look at Airbus had an announcement that they were going to reduce the increase for next year but they’re not reducing the number of aircraft. Boeing has not rescheduled yet. But I expect the growth rate of the two primes, Airbus and Boeing, to moderate someone but not decline.

Operator

Your next question comes from Edward Marshall – Sidoti & Company.

Edward Marshall – Sidoti & Company

We know that the after-market drove the operating margins at the Aerospace segment. But this is despite a lower revenue base and therefore lower absorption rate. Is the new level sustainable as the revenues come back and the absorption rate goes up here?

Gregory F. Milzcik

I don’t think that is necessarily sustainable. I think that you will have a dilution of the return on sales simply because the lower margins on the OE work.

Edward Marshall – Sidoti & Company

You generally, too, the military business is lower margin, isn’t that right, and that drove the OEM side of the business in this particular quarter, am I wrong in that assumption?

Gregory F. Milzcik

A little bit but I don’t think it had that dramatic of an effect.

Edward Marshall – Sidoti & Company

What’s the sales breakdown in Europe on the Distribution segment between Europe and North America?

Francis C. Boyle, Jr.

If you look at Barnes Distribution North America they’re probably running about $90.0 million or so and Europe would be the remainder of that.

Edward Marshall – Sidoti & Company

So margins at the North America Distribution, they were double digit, but what’s that number? Can you give that to us?

Gregory F. Milzcik

No, we have not disclosed that. But I will also comment that that’s an impressive feat. That is something that has been strived for for almost two years now and it is really a tribute to the efforts of the team out in the field. I can’t say enough good things about that. I think another very important factor is the stabilization of workforce. Our attrition rate is basically neutralized to normal levels and I think that from this point on we’re going to be looking more at investing in sales training as well as hiring and I think that that will take some time but we had a stated objective, not necessarily of sales growth but of margin improvement, and we were going to allow some sales to attrit accordingly.

So I think that the results in Barnes Distribution North America are extraordinary.

Edward Marshall – Sidoti & Company

How bad is Europe then?

Gregory F. Milzcik

It’s pretty bad.

Edward Marshall – Sidoti & Company

Has it deteriorated from the second quarter from the third quarter?

Gregory F. Milzcik

I will make a couple of comments on distribution. First of all, we put a very strong management team in place and we have been working through the summer and into the fall on working out planning. And we are currently evaluating multiple options that will give us a step function change for 2009. But we have not completed the planning, we have not executed or completed any program at all yet so it’s hard for us to disclose anything.

I am very confident in the management team.

Edward Marshall – Sidoti & Company

Is this going to be something similar to the Project Catalyst that was in North America.

Gregory F. Milzcik

We modeled it on Catalyst but it is not a perfect model simply because there are differences in the regional delivery process as well as the general geographic market.

Edward Marshall – Sidoti & Company

Do you think it is as easy to perform in something similar to Project Catalyst in Europe as it was in North America? And I don’t say it was easy because I know it was a long-term thing.

Gregory F. Milzcik

I can’t say enough good things about the work that people did in North America. And it was absolutely painful, there’s no doubt about that. I think that it’s complicated in Europe, basically because we have multiple methods, channels to market and I think that the geographic differences and the different countries make it a far more interesting planning process.

But in general, I think that it will work pretty well.

Edward Marshall – Sidoti & Company

And the one-year turnaround that we saw on Project Catalyst is probably too aggressive to assume that that’s going to happen in Europe, would that be right?

Gregory F. Milzcik

I would not comment on that until we finish our planning process.

I would also mention that it was more than a year, if you look at the pre-planning that went into that as well.

Edward Marshall – Sidoti & Company

Is it more front-loaded or back-loaded that the improvements actually happen?

Gregory F. Milzcik

Until we finish the decision-making process and evaluate our options, I can’t really go there yet.

Operator

Your next question comes from Fred Bonacore – CJS Securities.

Fred Bonacore – CJS Securities

Just following along on the European Distribution discussion, are you divesting that business, are you considering measures that might be that extreme?

Gregory F. Milzcik

We are not going to comment on anything that we’re planning right now. We are looking at our options in order to make sure that we’re driving the business long-term and that’s what we really have in our mind. We have done a pretty thorough evaluation of the business over there. And I think there are a lot of good aspects to the European business. I think that we have a variety of different sets of work that we have to complete before we can finish up the planning process, but we do expect it to be done some time in the fourth quarter.

Fred Bonacore – CJS Securities

And not to beat a dead horse on this, but can you outline the persisting issues that you are seeing in that business. Is part of it a pick up from customers or is it [overtalk]?

Gregory F. Milzcik

What’s interesting is if you look at the sales, sales have actually held up fairly nicely over the past year. It has been more around the integration process and the cost of the integration as well as some disruptions of sales force in Europe.

Fred Bonacore – CJS Securities

In terms of the Industrial business, clearly transportation has been the big difficult spot and you are kind of stuck in a position that was a good place to be a year or more ago and larger vehicles which I guess were your sweet spot. Is there an opportunity for you to shift towards making components for smaller vehicles and kind of broaden your product line there or is that even a desirable mix change for you?

Gregory F. Milzcik

It actually has a negative effect and the negative effect is, for example, on engine valve springs, V-8 engines have two to four valve springs per cylinder. While shifting to smaller cars you may end up with the additional valve springs because of the more fuel-efficient nature of multiple-valve operation, you typically have four or six cylinders. So you actually have a negative trend when fuel efficiency goes up.

I think the real interesting component to this whole transportation side is how well our profitability has held up compared to years past, simply because we have done such a good job of shifting away from the transportation end market and buffering our business with international operations and with things outside the transportation industry.

Fred Bonacore – CJS Securities

And just throughout your businesses, as raw material costs have come down in certain areas, like copper and so forth, have you begun to see any benefit on that side of things?

Gregory F. Milzcik

First of all, there’s usually somewhat of a delay, both up and down, and it is a different market place than basic steel, for example. We use very little basic steel, it’s usually things like high-strength valve spring wire, which is a specialized product that operates under a different commodity group. And there are certainly going to be some downward pressures on commodity prices in that area. But we haven’t seen the dramatic moves that we were pushing for.

Fred Bonacore – CJS Securities

So that might be something that could help Q4 or possibly into early 2009?

Gregory F. Milzcik

We’re certainly hoping. It is a very small number of organizations out there that provide this product so it is not as broad-based and opportunistic as basic steel.

Fred Bonacore – CJS Securities

On foreign exchange, that could clearly become a head wind to the extent the dollar continues to strengthen. Do you have strategies in place to mitigate that potential head wind, or not at this point?

Francis C. Boyle, Jr.

I would say at this point in time, just like when we had the tail winds, we just had to ride with it. When it comes to the balance sheet, we definitely take hedging positions on any currency exposures that we have.

As far as trying to forecast the future and trying to put in hedges for future revenue, it’s a very difficult thing for us to do and it leaves us, in our opinion, with too much exposure. And I’m talking about P&L exposure.

And so we would probably not go on the offensive as far as that is concerned. And keep in mind that at the end of the day, while we did get some nice tail wind on the sales line, the bottom line impact to the exchange, while it was favorable, the magnification was not nearly as much. Because it’s just the margin that falls through and depending on the business it will depend on the size of that margin. So right now, no, we don’t have any plans.

Operator

Your next question comes from Matt Summerville – KeyBanc Capital Markets.

Matt Summerville – KeyBanc Capital Markets

Just on European Distribution, we have been talking now for several quarters about trying to stabilize that business and it appears perhaps it might actually have gotten a little worse. I’m wondering what has changed over the last couple of quarters and why up to this point have you not been able to stabilize it?

Gregory F. Milzcik

That’s a great question. And the first is the new management team just went in place within those last two quarters and I think we’ve done a pretty good job going around and surveying the issues and identifying all our options. As I mentioned earlier, during the fourth quarter we will complete measuring those options and complete our planning process.

I think the management team has done a very thorough job of coming up with items that could make a step-function change going into 2009.

Matt Summerville – KeyBanc Capital Markets

When I look at Distribution North America versus Europe, can you give us some color about how the top line in those geographies performed during the quarter?

Francis C. Boyle, Jr.

The revenues were clearly down in both North America and Europe. As we mentioned earlier, the focuses continue to be on profitable growth and profitable sales so we’re still working through that process.

Gregory F. Milzcik

In other words, some of it was expected. I think the softening of the market in general, though, amplified that.

Matt Summerville – KeyBanc Capital Markets

I’m really trying to understand the reason for the change in reporting in a couple of ways. First, how exactly are we going to get more detail out of less segments? And why now for this change? If this is theoretically the way the company should be running, why wasn’t this change made earlier? And I guess I want to make sure I have this right, you’re basically splitting the Aerospace business into OEM and after-market and you’re putting Distribution with after-market in Industrial with OEM. I’m trying to find where there might be possible synergies here.

Gregory F. Milzcik

I’ll start from the beginning. First of all, ten years ago we had a fairly simple business model. We had Associated Spring, Barnes Aerospace, and Bowman Distribution. And the business models looked fairly straight-forward and clean. Over the years we have grown the businesses, we have diversified through acquisition and the like to where we developed strategic business units within these groups.

What we are doing is essentially eliminating the group structure and aligning them along the processes and end markets. If you take for example, Aerospace after-market and Aerospace OE, you have different technologies involved, you have different end markets. The way you go to market, one is more cost-based, the other one is more value-based. So there are definitely differences in these businesses.

The way they are aligned is along those lines. If you look at the precision components, it is all primarily manufacturing and primarily all based on a cost approach, where it is build-to-print manufacturing with concurrent engineering. While you look at the manufacturing operation support, it’s much more of a value-based sale. The channels to market are different. The selling proposition is different. And I think that that more closely aligns itself.

Matt Summerville – KeyBanc Capital Markets

So the main synergies on the cost side, are we talking about re-aligning manufacturing, closing facilities, putting facilities together or is this more a corporate G&A sort of?

Gregory F. Milzcik

A big part of it is corporate G&A. We eliminated basically a layer. And by doing that we make the business more efficient. The businesses, from a strategic business unit perspective, are aligned along the processes and their end markets.

Matt Summerville – KeyBanc Capital Markets

With respect to the 10-B 51, would it be your intention to resume that after reporting here?

Gregory F. Milzcik

It’s all dependent. We’re going to weight our options and then we will make a decision as time goes on. It is not our primary goal but at the same time, when you are trading at book value and you have the outlook I think our business has, it didn’t make any sense not to.

Matt Summerville – KeyBanc Capital Markets

Are you finding that your customers are having credit issues at this point?

Gregory F. Milzcik

I haven’t gotten that feedback. We have so many customers that I’m sure some of them are but we have not had that in our pulse meetings that we do weekly, we have not had that feedback.

Operator

Your next question comes from Daniel Goldberg – RBC Capital.

Daniel Goldberg – RBC Capital

On financials, I noticed sales were down $23.0 million, inventory was up $27.0 million, rough terms. Could you talk about that a little bit?

Francis C. Boyle, Jr.

What two points in time were you referring to? As far as the inventory is concerned.

Daniel Goldberg – RBC Capital

Year-over-year on sales. And inventory right now.

Francis C. Boyle, Jr.

If you look more recently, inventories have been coming down. In other words, if you look from June to September, inventories are heading in the right direction. As you go back to a year ago, we had specific issues that we were addressing in inventories. One related to a new business that we had entered into where we needed to do a significant buy of finished product. We had some strike protection that we were doing at that time and in addition to that we were doing, at that time commodity prices were heading in the wrong direction so that we were buying ahead.

Now we have to start working that down because the majority of those issues are no longer applicable but it does take time to work that down. So if you look more recently you will see that the inventory is heading in the right direction.

Daniel Goldberg – RBC Capital

But still more work to go.

Francis C. Boyle, Jr.

Absolutely. One of our main focuses right now is generating cash and that is one area that we definitely have the opportunity of generating additional cash, is in all components of working capital, not just inventory.

Operator

Your next question is a follow-up from Christophe Glynn – Oppenheimer & Co.

Christophe Glynn – Oppenheimer & Co.

On the cash flow, running at a somewhat lower percentage of net income year-to-date. Anything structural about the RSPs, including maybe payment subsequent to the initial upfront cash when you win the deal, or other parts of the business, why we shouldn’t think of you or use 100% free cash flow net income as a benchmark?

Francis C. Boyle, Jr.

As you look at the cash flow for the quarter, I think you have to look at two components. If you look at what I will call operating cash flow, which was fairly strong at $43.0 million, if you look year-over-year. But if you look at the $2.0 million uses of cash, it’s the investments in capital, which ran around $16.0 million and that was largely invested in Aerospace.

And the other one was we spent $22.0 million on our last RSP payment. So as you go out into the fourth quarter into next year, we have no more RSP payments and in addition to that, we are watching capex very carefully. So that those two components of cash chew will come down, particularly in the case of RSPs and should come down as far as capex is concerned.

Christophe Glynn – Oppenheimer & Co.

And are RSP payments done permanently?

Gregory F. Milzcik

I will comment there. We will continue to pursue RSPs and do RSPs when they make financial sense for both parties but we have none on the table right now.

Christophe Glynn – Oppenheimer & Co.

But for the existing ones is the net income in the cash flow for that one-for-one?

Gregory F. Milzcik

We haven’t dissected the RSPs out to that point.

Francis C. Boyle, Jr.

Free cash flow and net income, when you try to correlate the two, it’s highly dependent, in my opinion, on which way your working capital is going. And in a downturn you should be seeing reductions in working capital, which in fact could give you higher cash flow. But a lot of that depends on which way the net income heads in the near term.

Operator

Your next question is a follow-up from Edward Marshall – Sidoti & Company.

Edward Marshall – Sidoti & Company

You had mentioned that there were currency benefits in the quarter and that they are muted through the margin. But there is a slight benefit that you did say that there was. Can you tell me in both the distribution and the industrial segments separately what that small benefit was for each segment?

Francis C. Boyle, Jr.

I can’t tell you on the bottom line but I believe we disclosed in the press release that in the case of Distribution, the impact on sales was $1.1 million, which is a relatively small number and in the case of Industrial it was $3.7 million, so you could just tell off of that, even in you have margin flow through, that there is not a lot of impact there.

Edward Marshall – Sidoti & Company

But in previous quarters that was a larger benefit and if we see the head winds on the currency going forward, just trying to get a ratio maybe to the operating margin that we could see.

Francis C. Boyle, Jr.

We don’t disclose that.

Operator

Your next question comes from Holden Lewis - BB&T Capital Markets.

Holden Lewis - BB&T Capital Markets

As I am thinking about 2009 and I understand that you are not going to guidance, you know, we are obviously going to have revenue and margin head winds, just from under-absorption, that’s pretty clear you are seeing that now. But I’m just trying to get a sense of what you think the offsets are going to be. And I guess one of the questions if this re-segmentation that you’re going through. What do you think that the cost benefit is of taking out that layer and when do you expect to recognize that? Do you have a sense of order of magnitude?

Gregory F. Milzcik

First of all, I think that we are recognizing that we have some head winds going into next year and we are assessing a whole slue of options in order to control our costs and aggressively pursue those. We will have a much clearer idea of what we are able to achieve and as soon as we have completed that we will probably, sometime after the first of the year, look at re-establishing that. But we have to complete our planning process before we do it.

The fact is that I think there is a lot of opportunity, I think that this business is in relatively good shape. Our balance sheet, I think if you look at the Aerospace sector, even if things decline a little bit, it will be a flat year-over-year, for the market as a whole I’m saying. And I think that we have a very good team in place, that are paying close attention.

So I think that there are a lot of things besides the market segmentation that we are looking at in order to improve our cost structure.

Holden Lewis - BB&T Capital Markets

Have you been able to put a number to the re-segmentation in particular?

Gregory F. Milzcik

We have basically internally but we haven’t released that because I think it wouldn’t provide as much information as the investor would need in order to make a complete decision because of all the other components that are involved in it that we haven’t completed the planning process yet.

Holden Lewis - BB&T Capital Markets

But what we can expect in Q4 is to hear not only maybe that but also it seems you are pretty clear to in Europe in Distribution, pretty good at putting in a framework for reorganization there, but it also sounds like in the Industrial business you’re also looking at maybe taking some big swings, whether that’s addressing headcount or production facilities or whatever, but it sound like in Q4 we are probably looking towards hearing about a bunch of different initiatives and that those are probably going to have charges that bleed into the first half of 2009. Is that the way to look at how this progresses?

Gregory F. Milzcik

It all depends on the final outcome, but potentially, yes.

Operator

Your next question is a follow-up from Matt Summerville – KeyBanc Capital Markets.

Matt Summerville – KeyBanc Capital Markets

On the Industrial segment, I think you mentioned that the nitrogen gas business, I’m not sure if it was just relegated to the European export portion or just more globally, has held up thus far. Is that still true in the fourth quarter and if so, what do you think is driving that?

Gregory F. Milzcik

First of all, we have one point in time and that’s October and the final numbers aren’t in so it’s hard to assess that. We do get weekly pulse meetings that I see nothing that’s shocking me.

I think that the reason is two-fold in the nitrogen gas products portion. First is they still export out to growing areas of the global economy, and the second is they provide a replacement, or a technical obsolescence for mechanical spring systems used in the tool and die industry, so even if the market doesn’t grow there’s actually the technical obsolescence side of it that improves the performance of the end product. And I think that helps them.

Matt Summerville – KeyBanc Capital Markets

With respect to acquisitions, just curious as to how you are thinking about that right now?

Gregory F. Milzcik

First of all, we have seen some acquisitions withdrawn from the market by the seller. Second we have seen multiples come down. In Q3 we did withdraw from a large acquisition. When we weighed the risk/reward calculation for a large acquisition, it didn’t make sense at this time.

Matt Summerville – KeyBanc Capital Markets

I think it was three or four weeks ago you put out the press release talking about the Boeing strike and how you’re suspending your guidance as a result. If the Boeing strike essentially ends over the weekend would you anticipate putting guidance back out there?

Gregory F. Milzcik

Not just yet. There are two components to that memo we issued a couple of weeks ago. One was the transportation end market as well as Boeing, although Boeing was the primary reason for the fuzziness to the outlook. But until Boeing re-establishes their schedules and sends that out to the tiers and those tiers feed it to us, I think that we would be hard-pressed to come out with an accurate schedule.

We have no idea of the inventory levels or the philosophy that has been at a wide variety of our customers that stand between us and Boeing. So that would be difficult.

The second thing is in order to give you guidance that is helpful to the shareholder we would have to have completed and made decisions on all the various planning that we are doing right now for the cost control as well as assessing various other costs. So it would be very difficult for us to do in the short term.

Operator

At this time there are no further questions.

Brian D. Koppy

Thank you very much. As always, if there are any additional questions about any matters discussed this morning, please feel free to contact me. And once again, thank you for joining us today.

Operator

This concludes today’s conference call.

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