Barnes Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Barnes Group (B)

Start Time: 08:30

End Time: 09:34

Barnes Group Inc. (NYSE:B)

Q4 2013 Earnings Conference Call

February 21, 2014, 08:30 AM ET

Executives

William Pitts - Director of IR

Patrick J. Dempsey - CEO and President

Christopher J. Stephens - CFO and SVP of Finance

Analysts

Matt Summerville - KeyBanc Capital Markets Inc.

Peter Skibitski - Drexel Hamilton

Amit Mehrotra - Deutsche Bank AG

Edward Marshall - Sidoti & Company

R. Scott Graham - Jefferies

Josh Chan - Robert W. Baird

Christopher Glynn - Oppenheimer & Co. Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2013 Barnes Group Earnings Conference Call. My name is Mark, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to William Pitts, Director, Investor Relations for Barnes Group. Please proceed, sir.

William Pitts

Thank you, Mark. Good morning. Thank you for joining us today. With me are Barnes Group's President and CEO, Patrick J. 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 our 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 that we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.

Before we begin our prepared remarks, I want to remind everyone that our financial results discussion is based on continuing operations. So let's now open today's call with remarks from Pat, followed by a more detailed review of the results and our 2014 outlook discussion from Chris. After that, we'll open up the call for questions.

Patrick?

Patrick J. Dempsey

Thanks, Bill, and good morning, everyone. Today, I'm very pleased to report solid fourth quarter performance to cap an excellent year for Barnes Group. The execution of our profitable growth strategy continues to drive our performance as we remain focused on generating a larger portion of our revenues from differentiated intellectual property-based businesses serving more favorable end markets while achieving greater global reach.

Our 2013 results further validate this strategy. For the fourth quarter, sales increased 13%, 5% on an organic basis. Our adjusted operating income increased 18% to 41 million and adjusted operating margin reached 14.2%, up 60 basis points from last year's fourth quarter. For the full year, sales increased 18% with organic growth of 4%. Adjusted operating income rose to 141 million, up 25% and adjusted operating margin increased 70 basis points to 12.9%.

The successful execution of our strategy combines organic investment and portfolio enhancement that positioned the business for sustained long-term growth. During 2013 capital expenditures increased to 57 million from 38 million last year, approximately half of this investment relates to growth capital where we are enhancing our manufacturing technologies and service capabilities at both industrial and aerospace to support future customer demand we anticipate on key strategic platforms.

In addition, during the fourth quarter, we entered into a components repair program or CRP with General Electric that principally provides for the expansion of contracts under which we are currently providing certain mark-to-market component repair services. In addition, the CRP gives us the right to provide repair services for CF6 and LM family of gas turbine engines as an OEM licensed supplier over the remaining life of these engine programs to other customers.

A total investment of 27 million will be provided over two years, 17 in 2013 and the balance in 2014. This long-term licensing agreement further solidifies our well established position as a highly specialized provider of repair and overhaul services to the aerospace aftermarket.

With respect to our business portfolio, 2013 saw Barnes Group's two most significant transactions. In April we completed the sale of Barnes Distribution North America and in October we acquired Männer. During 2013 we increased our quarterly cash dividend by 10% and for the full year with combined dividends and share repurchases, we returned over 91 million to our shareholders.

Now for a few highlights on our segment performance. In our industrial segment, our organic sales increased 4% in Q4. That's three consecutive quarters of solid performance. We ended the full year with 4% organic growth with each of our businesses experiencing year-over-year sales increases. Our nitrogen gas products and Seeger businesses both achieved record sales years.

For our recent acquisitions, Synventive also had a record sales year and at Männer the integration is progressing very well with their highly engineered products and services continuing in high demand and they ended 2013 with a record level of backlog of approximately 70 million.

The industrial performance was set against the backdrop of generally favorable end markets and global GDP expansions, in particular worldwide automotive production looks positive with growth expected in most geographic markets this year. Excluding Männer, we look for mid single digit organic sales growth again in 2014. And at Männer we forecast an annual sales contribution of approximately 120 million to 125 million.

At aerospace, our original equipment manufacturing business delivered solid sales growth in the quarter, up 12% and ended the year up 7%. OEM order activity was robust as overall aerospace backlog grew to a record 554 million, up 9% sequentially from the third quarter and up slightly from the last year end. About 60% of this backlog is expected to shift in 2014.

Our long-term outlook for aerospace OEM remains very positive and we look for high single digit sales growth in 2014. Large backlogs at Boeing and Airbus support anticipated production rate increases for both narrow and wide body platforms, which should provide healthy sales growth over the next several years.

Our elevated investment in new product and process introduction or MTI also positions us very favorably to participate on the next generation of new commercial engine platforms. Aerospace aftermarket saw continued softness heading into the fourth quarter as MRO sales were flat and spare part sales were down about 12%. MRO sales have been fairly steady over the last three quarters and our expectation for 2014 is mid single digit revenue growth as airline profitability continues to improve and increased airline traffic drives aftermarket demand.

In 2013, our RSP aftermarket spare parts business was down 8% primarily due to contractually scheduled incremental management fees. As we previously mentioned, we're at the tail end of incremental management fees. Our expectation for 2014 spare parts sales growth is in the mid single digits.

To wrap up my prepared remarks, Barnes Group delivered a very good 2013. Industrial continues to be a positive story with favorable end markets and improving global economic conditions including Europe. At aerospace, continued strength in OEM and an improving aftermarket environment should create further momentum this year.

We continue to make significant investments in our businesses to expand our engineering capabilities, manufacturing technologies and service offerings enabling us to bring new products to market as we see customer and end market demand increasing over the next several years. So we're excited about the opportunity that 2014 brings and believe we're well positioned to deliver another year of high performance.

With that, let me pass the call over to Chris.

Christopher J. Stephens

Thank you, Pat. Good morning, everyone. I will begin by highlighting key points of our fourth quarter and full year 2013 results and end with highlights of our 2014 guidance.

Turning your attention to Slide 2 of our supplement, fourth quarter sales were 291 million, up 13% over last year, driven by the sales contribution of the recently acquired Männer business and solid organic growth of 5%.

For the quarter, income from continuing ops was 26.3 million or $0.47 per share down 4% from $0.49 in the prior period. On the adjusted basis, income from continuing ops was $0.57 per share, up 14% from $0.50 per share a year ago.

The quarter's adjusted earnings from continuing ops excludes the impact of short-term purchase accounting and transaction costs which were $0.10 per share in Q4 '13 for Männer and $0.01 per share in Q4 '12 from Synventive. For the full year, sales were 1.1 billion, up 18%; income from continuing ops was 72.3 million or $1.31 per diluted share compared to 79.8 million or $1.44 per diluted share in 2012.

For 2013, income from continuing ops per share include $0.10 of short-term purchase accounting and transaction costs related to Männer, $0.12 of non-recurring CEO transition costs and a tax charge of $0.30 associated with the April 2013 U.S. tax court decision.

For 2012, income from continuing ops per share included $0.08 of short-term purchase accounting and acquisition transaction costs related to Synventive. So excluding these items, which we believe better represents our underlying operations, adjusted EPS from continuing ops was $1.83, up 20% from $1.52 in 2012. As Bill previously mentioned, we have provided a GAAP reconciliation to these adjusted results as part of our press release.

Now let me add to Pat's comments regarding segment performance beginning with industrial. Fourth quarter sales were 184 million, up 70%. The increase was driven by Männer's sales contribution, organic sales growth of 4% and favorable FX of 1.4 million.

Operating profit of 15.5 million was down 4% from 16.2 million. However, this year's fourth quarter operating profit includes 7.3 million of short-term purchase accounting and transaction costs related to Männer while last year's fourth quarter included 800k of similar costs related to the Synventive acquisition.

So excluding these items, adjusted operating profit at industrial was 22.8 million, up 34%, driven by the profit contribution at Männer, the profit impact of higher organic sales and productivity improvements. Adjusted operating margins were 12.4%, up 160 basis points. Full year sales were 688 million, up 28%.

Organic sales increased 22 million while acquisition-related sales from Synventive and Männer contributed 127 million. So full year operating profit was 71.9 million, up 46% primarily benefiting from the profit contribution of the acquired Synventive and Männer businesses, the profit impact of increased organic sales, favorable pricing and improved productivity.

In the current year, operating profit was negatively impacted by 7.3 million in short-term purchase accounting and related costs related to Männer and CEO transition costs of 6.6 million allocated to the segment during the first quarter. Last year operating profit was negatively impacted by 5.9 million in short-term purchase accounting and transaction costs related to Synventive. So excluding these items, adjusted operating margin was 12.5%, up 230 basis points.

Fourth quarter sales at aerospace were 107 million, up 6% and OEM sales increase was offset in part by a decline in aftermarket spare parts sales while aftermarket repair and overhaul sales were essentially flat. Operating profit was 18.6 million, up 3% benefiting from higher OEM sales, lower employee-related costs, primarily reduced incentive compensation and the absence of an aftermarket repair and overhaul inventory adjustment taken last year. These benefits were offset in part by lower aftermarket sales. So operating margin for the fourth quarter was 17.3%, down 60 basis points.

Full year aerospace sales were 404 million, up 3% as OEM sales increase was partially offset by declines in the aftermarket repair and overhaul and spare parts business. Operating profit decreased 11% to 51.3 million from 57.9 million. Operating profit benefited from higher sales in the OEM manufacturing business and lower employee-related costs primarily reduced incentive compensation but was negatively impacted by an 8.6 million inventory valuation charge taken in the third quarter, lower sales in the highly profitable aftermarket RSP spare parts business, increased costs of new product and process introduction and CEO transition costs of 3.9 million allocated to the segment.

Full year operating margin was 12.7% while adjusted aerospace operating margin which excludes the allocated CEO transition costs was 13.7%, down 110 basis points. The company's effective tax rate from continuing ops was 32.8% in 2013 compared to 13.5% in 2012. Included in 2013, income tax is a charge of 16.4 million associated with the April 2013 Tax Court decision. Excluding this charge, the 2013 adjusted effective tax rate is 17.5%.

Regarding share count, our fourth quarter average diluted shares outstanding was 55.3 million. For the full year, diluted average shares outstanding were approximately 55 million and our basic year-end shares outstanding were 55.9 million. Given the Männer acquisition, we did not repurchase shares in the fourth quarter.

During the first three quarters of 2013, we repurchased 2.4 million shares for approximately 69 million. We have 2.6 million shares available for repurchase under existing Board authorizations. At the present time, our expectation for 2014 is that share repurchase would be employed to offset dilution from equity-based compensation.

Cash generation continues to be strong. For 2013 adjusted free cash flow which we defined as operating cash flow less capital expenditures with the income tax payments related to the gain on the sale of BDNA added back was approximately 83 million. So adjusted free cash flow to adjusted net income came in at 110%. Even with the recent Männer acquisition, our year-end debt to EBITDA ratio was 2.3 times.

Now let's turn our attention to 2014 continuing ops outlook on Slide 4 of our supplemental slides. For 2014 we expect sales growth between 14% and 17% with organic sales growth of 5% to 8% and adjusted operating margins in the range of 14.5% to 15.5%. Adjusted EPS from continuing ops is expected to be in the range of $2.15 to $2.30 per diluted share, up 18% to 26% from 2013's adjusted EPS of $1.83. Cash conversion is expected to be approximately 100% to net income.

Our 2014 guidance excludes an estimated 10 million pretax or approximately $0.13 EPS impact of the remaining short-term purchase accounting adjustments related to Männer. And speaking to Männer, given the strong performance to close out 2013 which exceeded our original expectations and with this business ending the year with strong orders and a record backlog, we've updated our view of Männer's 2014 EPS accretion. Excluding the impact of short-term purchase accounting, we now see a Männer EPS contribution on the higher end of our previously stated range of $0.21 to $0.24 and this assumption is reflected in our 2014 guidance.

A couple of other items related to our guidance for '14. Capital expenditures are forecasted to be about 60 million in 2014 while depreciation and amortization is expected to be roughly 80 million, and about 40 million of that amount reflects our outlook for depreciation. Interest expense is expected to be approximately 14 million given the increased level of investments planned for the year. For the full year, average diluted shares outstanding are anticipated to be in the range of 54 million to 55 million shares. With excellent returns on our pension investments in 2013 and a higher discount rate, we expect approximately an 8 million tailwind on pension expense in 2014.

Lastly, we expect our 2014 effective tax rate from continuing ops to be in the high 20s due to a greater mix of anticipated earnings from higher tax jurisdictions, the expiration of certain tax holidays and an increased level of planned repatriation of current year foreign earnings.

So in closing, the last 24 months have seen significant portfolio enhancements with the recent Synventive and Männer acquisitions and the exiting of our European and North American distribution businesses. Coupled with a heightened level of organic investment, we're well positioned to deliver continued profitable growth. 2013 strong financial performance and solid cash flow generation have allowed us to position our balance sheet to support this growth and continue to execute on our strategy.

Operator, we'll now open the call for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Matt Summerville from KeyBanc.

Matt Summerville - KeyBanc Capital Markets Inc.

Morning.

Patrick J. Dempsey

Good morning, Matt.

Matt Summerville - KeyBanc Capital Markets Inc.

Can you help me understand the difference between the CRP versus the RSP? And if you have to pay 27 million to extend that contract, what would be the original investment when you did the deal initially?

Patrick J. Dempsey

Well, the difference is, Matt, between a CRP and a RSP is the fact that the RSPs were on spare parts and were exclusive for the life of the engine. With regards to the CRP, it's more MRO so it's repair and overhaul services on a set of existing repair agreements that we had in place as well as a new licensing agreement for the CF6 and LM family of gas turbine engines. There was no original payment, Matt to your question on that, initially and this is a new program that we have entered into in the fourth quarter which will solidify our position in the aerospace aftermarket as a repair provider.

Matt Summerville - KeyBanc Capital Markets Inc.

Got it. And then can you talk about within aerospace what your spare parts volume did in the fourth quarter and for the full year, please?

Patrick J. Dempsey

What I would indicate relative to RSP and it's a great question because what continues to put us out of sync with the industry is the incremental management fees that took place in 2013. When we take them out of the equation, what I would indicate is directionally our sales in the RSPs were directionally in line with the industry.

Matt Summerville - KeyBanc Capital Markets Inc.

And then just with respect to the industrial businesses, can you just sort of talk in a little more detail around what you've seen in terms of incoming order rates, perhaps add a little geographic color with the larger business units there; Associated Spring, Nitrogen Gas, et cetera?

Patrick J. Dempsey

In terms of industrial, I would indicate that from our perspective the end markets – right now if you think about our sales are pretty much evenly split between industrial, transportation and aerospace. In terms of the industrial side, our end markets continued to show slow to modest growth with the U.S. and European PMI indices in about 50 for some time now indicating continuing expansion. On the transportation side, the outlook remains positive where we see global life vehicle production forecast to grow in the low to mid single digits for the next three years. In terms of our businesses, I would suggest that as I mentioned both Seeger and NGP both had record sales years coming off 2013 as did Synventive. And as we go into 2014 whilst it's not totally without its challenges, we continue to remain positive on the outlook across both industrial and transportation.

Matt Summerville - KeyBanc Capital Markets Inc.

Got it. Thank you.

Patrick J. Dempsey

Thank you.

Operator

Your next question comes from the line of Peter Skibitski from Drexel Hamilton.

Peter Skibitski - Drexel Hamilton

Good morning, guys. Nice quarter.

Patrick J. Dempsey

Good morning.

Christopher J. Stephens

Good morning, Peter.

Patrick J. Dempsey

Thank you.

Peter Skibitski - Drexel Hamilton

I have a bunch of small questions here, I guess, but one thing I want to ask about – I guess on the industrial margin side, the adjusted margin for industrial in the fourth quarter, I think were 12.4%, they were kind of flattish – I mean it's kind of been flattish for a few quarters now despite the higher volume in the fourth quarter. And you already touched on this but what kind of drove that flat margin rate despite the higher volumes?

Patrick J. Dempsey

Well, I think on our industrial side at least from our perspective, we've been pleased with the improvements both between the base businesses as well as of course the contributions from the new acquisitions. As we look at the overall margins being up on a year-over-year basis, big contributors there for us continue to be productivity improvements across the businesses. And as we look at overall productivity in 2013, we benefited from some of the moves that we took in 2012. In particular we have done a lot of heavy lifting in terms of transfers of work and Associated Spring. In Synventive we had the heavy lifting of the integration in the fourth quarter of last year. And then if you recall, we expanded our NGP business in 2012 and we had the benefit of a full year of in-source work over the course of 2013. So, having said that there was a lot of noise in terms of different aspects of both the gives and takes of CEO transition plus the overall impact of the acquisitions as well as divestitures, but overall we thought it was a solid year.

Peter Skibitski - Drexel Hamilton

Okay. Well, maybe I'm going to dovetail into post Männer now. Do you guys have an updated view on kind of what you think peak margins could be? I know previously you had talked they'd be not quite as high as the prior peak cycle but you're talking maybe 17% to 18%. Is that still what you think post Männer or those kind of goalpost change all for you?

Patrick J. Dempsey

Well, what we indicated I think in the past was the fact that we were targeting mid teens for overall Barnes Group in terms of operating margins. As we continue to transform the portfolio, I would indicate that we're moving that to more high teens on an outlook basis. Relative to 2014 of course we'd indicated that we're looking at a 14.5 to 15.5 range for the full year.

Peter Skibitski - Drexel Hamilton

Got you. And just one quick one for Chris. Chris, if the purchase accounting run out in 2014 will there be nothing left in 2015 or is that a little bit ongoing?

Christopher J. Stephens

Yes, Pete, the short-term purchase accounting probably in the first half of the year that will be up of our results and we'll Reg G and adjust accordingly. We've got about 10 million left to run out.

Peter Skibitski - Drexel Hamilton

So kind of $0.05 a quarter for the first two quarters?

Christopher J. Stephens

Yes, I'd say most of that is going to be in the first quarter actually.

Peter Skibitski - Drexel Hamilton

Okay, got it. Thanks very much guys.

Christopher J. Stephens

Thank you.

Patrick J. Dempsey

Thank you. Next question.

Operator

Ed Marshall, press star 1 to ask your question.

William Pitts

Mark, are there technical issues?

Operator

Hello.

William Pitts

Yes, Mark, are there any more questions coming in please?

Amit Mehrotra - Deutsche Bank AG

Yes. Amit Mehrotra here from Deutsche Bank. Am I live here or…?

William Pitts

Yes, Amit, you're live.

Amit Mehrotra - Deutsche Bank AG

Thanks. So my first question is on margins. If my math is right, the guidance for '14 implies an incremental operating margin in the high 20% level versus sort of the high teens that Barnes Group has achieved over the last few years. So, I mean, the question is, is this sort of the new level of operating leverage in the business that we should assume on the incremental volume growth on a go-forward basis?

Patrick J. Dempsey

Amit, your calculation is correct for 2014 and it is indicative of how we are continuing to change the portfolio of businesses as part of our transformation. So, clearly what you're seeing is the benefit of both Synventive and Männer being part of the group as well as continued productivity improvements that we're seeing across the businesses.

Amit Mehrotra - Deutsche Bank AG

Okay. That's great. Just a couple of follow-ups here. One question on Männer. Can you just give us some color on what kind of organic growth that business is expected to achieve this year given the disproportionate sort of return profile of that business? And then also longer term, can you talk about some of the growth opportunities in Männer over the next few years beyond 2014?

Patrick J. Dempsey

Yes. Relative to what we're projecting for 2014, it's in the mid single digits. As I mentioned earlier, we had – what we're looking towards is a 120 million to 125 million in revenue. For that business this year we're making some significant investments in terms of increased capacity. And when I say significant not so much outside of what we had anticipated from a CapEx dollar amount but more in terms of where we have now accessed the business overall and have identified where there's key critical capacity constraints and how we would address those through new technologies as well as in some instances to automation with a view to allow the existing footprint to continue to expand and grow overall top line sales. As we look outward into multiple years, we clearly see the opportunity for further expansion globally and the leadership team, our business leader as well as the head of sales are currently in China on a two-week trip with a view to gaining a better understanding of our Asian customer base and their needs and requirements over the next couple of years and how Männer might best support them in that region as well as in the United States where we already have a manufacturing footprint in Atlanta, Georgia.

Amit Mehrotra - Deutsche Bank AG

Okay. That's great. And then just on M&A, it wasn't lost upon me that you highlighted further acquisition opportunities in the release and in that context, can you just give us an update on what the pipeline looks like, maybe the size or potential magnitude, the size of deals and where you're looking to invest either from an end market or regional standpoint?

Patrick J. Dempsey

Yes. Relevant to our M&A activity, what I would indicate is that we are actively continuing to source potential businesses that will continue to add to our intellectual property base strategy. As we continue that, we do it in parallel to the organic investments that we're making but we see that there is a number of opportunities to where we can continue to build upon not only the acquisitions that we've already acquired in terms of the plastic injection molding industry as an end market but then even as subsets within that. As you know with Männer, we moved into the medical packaging and pharmaceutical industries which is a diversification – a further diversification of our portfolio offerings. And so as we look at our potential acquisitions that would indicate that the criteria that we've outlined remains – we remain firm in terms of what that entails. And we hold the bar high. So in doing so, it will clearly affect timing as we've continued to look at new opportunities.

Amit Mehrotra - Deutsche Bank AG

Okay, that's helpful. Thanks and congrats on a great quarter.

Patrick J. Dempsey

Thank you very much.

Christopher J. Stephens

Thank you.

Operator

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

Edward Marshall - Sidoti & Company

Good morning, guys.

Patrick J. Dempsey

Good morning.

Edward Marshall - Sidoti & Company

I don't know what happened there, mechanical difficulties. I was hitting star 1 as often as possible. I think I burnt the key on my phone. Listen, so as I look at kind of the aerospace margin in the quarter and obviously it's a noticeable jump, roughly 200 basis points and I don't know that we've addressed this yet. But looking back last year, it looks like there was some seasonality in the fourth quarter, two around that margin. So I'm just kind of curious what's been running through that? And is that a repeatable event going forward and something we should assume?

Patrick J. Dempsey

How I would categorize the fourth quarter was just a great effort on behalf of the aerospace team. And at nearly 17.5% I thought was interesting. It was down 60 basis points. And that said, the team there have continued to put a heightened focus on overall margin expansion within aerospace. We do see lumpiness from quarter-to-quarter but from our perspective, we're continuing to as we've always indicated with aerospace to drive that business from mid to high teens. And so the team has done a very nice job. Clearly RSPs have a large impact on overall aerospace results. And even with what was achieved in the fourth quarter, you saw that our RSPs overall sales were down in the year. So, clearly that represents even further upside.

Edward Marshall - Sidoti & Company

Yes, and that's what's surprising with MRO being flattish and RSPs being down as much. You're 200 basis points above any quarter in 2013 give or take a couple. So it just leads me to believe that and looking at the trends this year over last year, it's very similar that something is flowing through in the fourth quarter. I'm just kind of curious what's different in the fourth quarter than the preceding three over the last two years?

Patrick J. Dempsey

Edward, what I would add to that is the incentive compensation. I mean that's kind of – that's an annual – typically a fourth quarter adjustment. So when you think about that, I would say, quarter-over-quarter or even full year, the adjustment on incentive compensation, employee-related costs primarily was definitely a key driver.

Edward Marshall - Sidoti & Company

Okay. And then looking at the guidance as I kind of back into some numbers and I guess it depends on what you're going to use for a growth rate on aerospace. But if you look at kind of the mid to high single digit range, which I think is what you guided to, you back out the Männer 1.20 to 1.25. On the low end of your guidance range, it looks like you're almost guiding to kind of flattish revenues on industrial if you strip out Männer. Can you kind of talk to what maybe went into some of the thought process and the guidance there and what are some of maybe the weaker and some of the stronger points on the industrial side?

Patrick J. Dempsey

I think relative to overall BGI and what we – when we put the guidance together relative to 2.15 to 2.30 on an adjusted basis that would indicate that what we felt was that covered the span of possibilities both on the downside and the upside. And as we indicated in our supplement, what we've looked at that would drive the high end would be clearly a strong aerospace aftermarket recovery both in MRO as well as RSPs and continued expansion of European auto production and of course the leverage that comes from that. Whereas on the low end what we were trying to capture within the $0.15 spread was potentially some of the uncertainty that we're seen across the economy and our businesses are not all experiencing just positive outlooks with – there are some examples of where we're seeing some clouds gathering, but we have many NPI programs in place that we believe will overcome that. But the overall spread I think covers the range of possibilities in 2014.

Edward Marshall - Sidoti & Company

And then if I can ask on the tax rate, as we look kind of 2014 versus 2015 and I know I'm going out one more year than what your guidance looks at, but I just kind of want to talk maybe directionally. You mentioned for 2014 you will be in the high 20% tax rate. As we look out to 2015, I also – I think there are additional RSP agreements kind of that expire on the Pioneer tax rate. Is that right or is that 2016? And if so, if it is 2015 did that rate go even higher and where do you think that kind of shakes out after all through these RSP kind of Pioneer tax rates?

Christopher J. Stephens

Ed, it's Chris. So I would say you're right. I mean all else being equal we'll continue to see pressure on our tax rate going up as a result of the retirement of the Pioneer tax status which retires over the next three to four years. So each year we'll see that. But again, a lot of things can happen to adjust that tax rate going forward. But again, like I said all else being equal, we would expect that that tax rate would go up year-over-year.

Edward Marshall - Sidoti & Company

Okay. And I was curious, I saw the jump in the deferred tax liability. Not to get granular, but I'm curious if that's related maybe to the Pioneer tax rate. If not, what is the rather large jump?

Patrick J. Dempsey

No, that's acquisition related. It's related to Männer.

Edward Marshall - Sidoti & Company

Okay. And then finally if I could, the 8 million tailwind on pension expense, speaking to the segment level, how does that kind of flow through? Is it even across the segments or I think it probably is more weighted to the industrial, but I just want to get your opinion.

Patrick J. Dempsey

Yes, it's more weighted on a sales basis if you think about just the top business…

Edward Marshall - Sidoti & Company

I see.

Patrick J. Dempsey

You know what I mean, it's the overall…

Edward Marshall - Sidoti & Company

The weighting of sales for the segment via the – okay, because it runs at the corporate level and then you segment it out accordingly. Is that how it works?

Patrick J. Dempsey

That's correct. That's a fair way to look at it.

Christopher J. Stephens

I think the split, Ed, in 2013 is 63% industrial in terms of revenue, 37% in aerospace.

Edward Marshall - Sidoti & Company

Did you say 2013 or did you say 2014?

Christopher J. Stephens

2013.

Edward Marshall - Sidoti & Company

Okay, I thought you were giving me additional guidance for 2014. That's why I was asking. Okay. Thanks, guys. I appreciate it.

Patrick J. Dempsey

Thanks, Ed.

Operator

Your next question comes from the line of Scott Graham from Jefferies. Please proceed.

R. Scott Graham - Jefferies

Hi. Good morning.

Patrick J. Dempsey

Good morning, Scott.

Christopher J. Stephens

Good morning, Scott.

R. Scott Graham - Jefferies

So in the guidance for the margin if we sort of choose, let's say, 13% as the adjusted to final for this year. That's up 150 to 250 basis points. I was hoping you guys can maybe give us the buckets for that? How much of that is on Männer, how much of that is productivity, how much of that is maybe aerospace aftermarket recovery? Those are the three big ones that I was hoping for.

Patrick J. Dempsey

Scott, let me maybe it can help a little bit on just – I would say from a high level point of view, a couple of things that were impacting the margin and again we don't get granular to the SBU level, but if you think about the adjustments that we made in the current year for the exchange inventory and aftermarket as an example, so that gives us an opportunity to increase that over time. If you look at the makeup and the mix of our business between what Synventive and Männer are contributing, clearly higher margin businesses in terms of our acquisition strategy, so they're adding to it. Männer, we talked about in the call; EBITDA margins in excess of 30%. So I would say it clearly is a reflection of us driving productivity, focus on profitable growth in the segment and doing a nice job through the acquisition strategy of purchasing, acquiring if you will higher margin businesses in our industrial segment. We commented on this before, we see industrial margins in kind of that low double digit, aerospace being in the high double digits and very pleased to be able to guide this year to be 14.5% to 15.5% operating margin. But I would say it's the absence of a few charges as well as the mix of our earnings in terms of an acquisition strategy has given us the confidence of driving margins into that mid teens.

R. Scott Graham - Jefferies

Okay. So if you were to say that – let me just ask the question this way. If we were to say that – would you say that Männer and productivity and the costs – the swings in those costs are maybe the big three?

Christopher J. Stephens

Yes. The absence of that inventory charge I'd say the introduction of Männer into the mix of our performance and again productivity improvements as we look to drive profitable growth and as we invest (indiscernible) we're making, ending the year of $57 million of CapEx and Pat's comments in terms of the new technologies as well as adding to our capacity are driving productivity improvements across all of our businesses.

R. Scott Graham - Jefferies

So then – and I don't want to put words in your mouth here in anyway, particularly seven weeks into the year, but would it be fair to say that if you have a good development in the aerospace aftermarket businesses that something more toward the high end, perhaps even above the high end is possible?

Patrick J. Dempsey

We would hope so, clearly if we felt that. Right now we're guiding a high margin RSP business kind of in that mid single digit, but that clearly has a big impact – it can have a big impact on aerospace margins, on the company margins.

Christopher J. Stephens

The only thing I'll highlight, Scott, on that walk is our comments on pension expense. Getting a tailwind of $8 million would also be reflected in the operating results of our two segments and that's also contributing to that margin improvement.

R. Scott Graham - Jefferies

Yes, and that was my second question actually, Chris. Could you split that between the segments?

Christopher J. Stephens

Well, as we talked about before, I would just say do it on a sales basis.

R. Scott Graham - Jefferies

Fine, good.

Christopher J. Stephens

Call it two-thirds industrial, a third aerospace that would be a fair way to look at it.

R. Scott Graham - Jefferies

Thanks, guys.

Patrick J. Dempsey

Thank you, Scott.

Christopher J. Stephens

Thank you, Scott.

Operator

Your next question comes from the line of Josh Chan from Baird. Please proceed.

Josh Chan - Robert W. Baird

Good morning, Pat, Chris and Bill.

Patrick J. Dempsey

Good morning.

Josh Chan - Robert W. Baird

Just clarifying on the margin question, would it be fair to assume that most of the margin expansion you're going to experience next year will come from the industrial side, because presumably you'll get somewhat of a negative mix in the aerospace business as well? Is there a way to sort of add more color to that?

Patrick J. Dempsey

I would think from our perspective we're looking for both businesses to contribute. And one of the things which we mention often is productivity improvements. An area that we continue to place a lot of focus on is our Barnes Enterprise System and there I would indicate that what we're very pleased with is some of the recognitions that we're getting outside from external entities for some of the great improvements that are being met across the aerospace side of the equation. In particular just this year we won the Utah Manufacturer of the Year award on our aerospace Ogden facility and that is again for manufacturing excellence. You also hear us continuing to make reference to the investments we're making with equipment and a lot of that is focused on few technologies with a view to drive overall efficiencies into the businesses as well of which today that evenly added to both aerospace as well as industrial. So, a number of factors driving I think the efficiency on both segments.

Josh Chan - Robert W. Baird

Okay, thanks for that. And now that you have owned Männer for a couple of months, have you identified any type of revenue or cost-related synergies between Männer and Synventive, or are you thinking about those two businesses largely separately at this point?

Patrick J. Dempsey

Well, I would indicate that the two businesses have clearly brought together their engineering folks in the early stages with a view to sharing opportunities on the technology front. And as I think about that, the teams have done a wonderful job in terms of identifying where each of them have unique capabilities that they bring to market and where there's opportunities to share technologies, and that could be anything from intellectual property in their patent portfolios to product development and how each of them go about the upfront heavy engineering size of both of their businesses down to simple things like the gating styles that are used within the hot runner systems. Each of these are with a view to leveraging overall technological distinctions in the marketplace not so much to drive costs but to leverage the capabilities of both businesses, so ultimately position them even stronger in their respective markets.

Josh Chan - Robert W. Baird

Thank you. Congrats on the quarter and the outlook.

Patrick J. Dempsey

Great. Thanks.

Christopher J. Stephens

Thanks.

Operator

Your next question comes from the line of Christopher Glynn from Oppenheimer. Please proceed.

Christopher Glynn - Oppenheimer & Co. Inc.

Thanks. Good morning.

Patrick J. Dempsey

Good morning, Chris.

Christopher Glynn - Oppenheimer & Co. Inc.

Just wondering just to try to build some context around the aero outlook for next year, if we look at 2013, the top line guide kind of slid pretty consistently through the year. I know the aftermarket stayed a little softer than might have been, but seems like maybe multiple layers there. So can we just take a little time and peel back the onion on the narrative of how aerospace sort of transpired during the year?

Patrick J. Dempsey

Yes. For us overall I think as we entered into 2013, we were much more bullish on aerospace aftermarket, in particular the impact that RSPs and MRO could have met to our overall guidance. As the year progressed and it became evident that the aftermarket recovery wasn't happening at the rate at which we had hoped, subsequently we began to taper our overall growth expectations for 2013. As we look into 2014, today you see that with mid single digit growth being projected for both RSP and MRO, it's somewhat a reflection of cautious optimism. We continue to remain bullish on the aerospace aftermarket recovery but just somewhat more cautious as a result of our experience in 2013. On the OEM side, clearly we ended the year with a record backlog and so as we go into the year with 60% of that projected to shift in 2014. And our participation on some of the key critical strategic platforms that we've identified include into 787 which as you know has recently in January achieved a rate increase of 10 per month with Boeing announcing that they're hoping to move that to 12 by 2016 per month and to 14 by the end of the decade. So in each instance we feel very comfortable and very confident in terms of our aerospace outlook.

Christopher Glynn - Oppenheimer & Co. Inc.

Okay. And then the fourth quarter, if we calculate it on an adjusted tax rate, maybe 15%, maybe 20% was guided. Was that just geographic mix of profits?

Christopher J. Stephens

Absolutely.

Christopher Glynn - Oppenheimer & Co. Inc.

Okay. And then if we look at the 2014 tax rate, depending on how one interprets high 20%, I can span two-thirds of the guidance range. So wonder if we could put a finer point on the 2014 guidance or if that maybe toggles with the segment level guidance?

Christopher J. Stephens

I'm calling it a low end of the high 20s.

Christopher Glynn - Oppenheimer & Co. Inc.

Perfect.

Christopher J. Stephens

That may help you, Chris.

Christopher Glynn - Oppenheimer & Co. Inc.

That helps. Thank you.

Operator

Your next question comes from the line of Peter Skibitski from Drexel Hamilton.

Peter Skibitski - Drexel Hamilton

Yes, just a couple of follow-ups on aerospace. You touched on the OE side a little bit there a minute ago, but on the strong OE growth expected in 2014, is that primarily 787? Is it 787 and A350 or is anything else kind of contributing?

Patrick J. Dempsey

Well, the 787 clearly is a factor in terms of if you think 12 or 18 months ago Boeing was producing them at 5 a month and in January they're now up to 10 a month. So that is a factor coming into play. Recognizing that we're ahead of that schedule, so we saw some of that benefit in the second half of 2013. But as we move in, also was the GE90 which is a key critical program for us is forecast at approximately 100 for the year, that was – it's looking somewhat consistent at that rate for a number of years and what fluctuates is spares and so the spares can influence above and beyond what the platform rate of production might be.

Peter Skibitski - Drexel Hamilton

Okay, yes, so you won't see 777 on the OE side growing, but you'll see it through the MRO and spare parts?

Patrick J. Dempsey

Yes, exactly. But what it is recognized that we manufacture spare parts – when we manufacture components for OE, some of them may find a way into actual production engines, some of them may go to the spare parts side of the business within GE.

Peter Skibitski - Drexel Hamilton

Okay, I see. Okay. So in terms of the A350, is that more so kind of a year out for you in terms of the ramp there do you think?

Patrick J. Dempsey

We continue to invest heavily in the XWB with regards to NPI and yet, as you know, the actual ramp against that particular aircraft is projected more out into 2015 of which some of that will flow into the backend of 2014, again because of lead time.

Peter Skibitski - Drexel Hamilton

Got it, okay. And then on the RSPs, guys, now that we're kind of through the incremental management fees I think. If we avoid a recession, is there any reason to think that RSPs can't kind of grow kind of mid single digits kind of along with the global traffic growth kind of annually, like I said if we avoid a recession?

Patrick J. Dempsey

I think that's reasonable. At this point we're looking at mid single digits ourselves for 2014 as our outlook and as the DASH7 continues to come off wing for first-time overhauls, we believe that will be another contributing factor to driving spare part sales.

Peter Skibitski - Drexel Hamilton

Okay. And I promise this will be my last one. But guys I'm going to assume you have a dearth of healthcare analysts on the line. And so I'm wondering now that you've closed Männer and you've got this additional kind of healthcare and medical exposure, how are you guys thinking about kind of the drivers to that business? I'm not sure how it's kind of grown historically and what drives it, but any way you can help educate us to what to look for Männer?

Patrick J. Dempsey

Overall, Männer continues to be – on the hot runner and on the mold side. What I would indicate is that Männer is the very high end of precision engineering as it pertains to molds and hot runner systems. As you look at the overall drivers for what drives their business and to some degree Synventive, it's the overall usage patterns of plastics in general. So if you think about what plastic offers as an advantage over its counterparts which might be metals or ceramics, it's lighter and less expensive, has greater flexibility in terms of the types of contours and shapes that it can conform to. It's also corrosion and environmental resistance. So, its quick production rates and so all these factors bode well for plastics in general. And then as you think about the hot runner systems and the precision molds that Männer produces, what it allows for is increased injection precision. So in the medical markets where there's a high degree of preciseness or precision on the end product and high volumes, so what the hot runner systems allow for is reduced downtime and reduced scrap and waste. So in all of these factors, they all bode well for both Männer as well as Synventive as it pertains to the plastic injection molding industry in particular with the hot runner systems and the precision molds.

Peter Skibitski - Drexel Hamilton

Okay. So it sounds like you think it's really more kind of a secular story of plastics displacing metals and other materials as opposed to just a pure cyclical GDP type of growth kind of story?

Patrick J. Dempsey

Absolutely. From my perspective it's more even trends across the globe as you think about in Asia and movement into middle class and the demographics of that and the requirement and consumption rates that are associated with every day products that produced from plastic, I think that also bodes well for Männer.

Peter Skibitski - Drexel Hamilton

Okay. Thank you very much.

Patrick J. Dempsey

Thank you.

Operator

Your next question comes from the line of Matt Summerville from KeyBanc.

Matt Summerville - KeyBanc Capital Markets Inc.

Thanks. Just a couple of quick follow-ups. What would the total year-end backlog have been if you back out Männer? So I'm looking at the organic backlog, if you will.

Christopher J. Stephens

Sure. Matt, it would be 688, so think about 70 million.

Matt Summerville - KeyBanc Capital Markets Inc.

Got it. And then does your effective tax rate assumption assume the R&D tax credit comes back into play or not?

Christopher J. Stephens

It's not a big driver for us.

Matt Summerville - KeyBanc Capital Markets Inc.

And with Männer coming in a little bit better in 2013, what would the accretion have been excluding acquisition-related accounting and transaction costs?

Christopher J. Stephens

Matt, I'm going to ask that you repeat that?

Matt Summerville - KeyBanc Capital Markets Inc.

Okay. So you mentioned early on that Männer sort of closed out the year quite a bit stronger than what you originally anticipated. And I was just curious as to what the EPS accretion would have been from that business in 2013 if you back out the inventory step-up in the (indiscernible)?

Christopher J. Stephens

Got it, good question. $0.04 to $0.05. So when we think about the adjusted number at $0.57 for the quarter, Männer clearly was more meaningful that we originally anticipated.

Matt Summerville - KeyBanc Capital Markets Inc.

So then you're looking for roughly an incremental $0.20 of earnings out of Männer in 2014?

Christopher J. Stephens

That's right.

Matt Summerville - KeyBanc Capital Markets Inc.

Okay, cool. I just wanted to clarify. Thank you.

Christopher J. Stephens

Sure.

Patrick J. Dempsey

Thank you.

Operator

Your next question comes from Edward Marshall from Sidoti & Company

Edward Marshall - Sidoti & Company

Two quick ones. D&A for '14, do you know what that's going to be?

Christopher J. Stephens

Yes, it's in my prepared remarks. Ed, it was 80 million.

Edward Marshall - Sidoti & Company

80 million for 2014, okay.

Christopher J. Stephens

That's right, and 40 million of that depreciation.

Edward Marshall - Sidoti & Company

Okay. And then curious on the engines – we've been hearing a lot for the last maybe year or so from the engine – metal suppliers about supply chain destocking. And it's been kind of a long grind here and I'm curious if you're seeing any of the destocking. I would assume it would've been at your level. But has that progressed at a level up and your customers are starting to see some destocking? I mean, I know that you're about a year or so in advance of an aircraft delivery. So if you kind of think about that dynamic, I'm curious if there is any kind of inventory in the supply chain that's starting to back up a bit?

Patrick J. Dempsey

What I would indicate, Ed, is that relative to the destocking that was referenced throughout 2013 in the industry overall, I think a part of that was also based upon the expectations around the aerospace aftermarket recovery. And so spare parts were forecast at a certain level going into 2013 and with those not being realized, then orders that have been placed against those types of components would have been pushed to the right or would have been canceled. And subsequently maybe the term destocking was all encompassing of capturing some of that activity. There was definitely a degree of destocking that took place in 2013 and as we move into 2014, my personal beliefs are that that has run its course and now the OEs are forecasting against what they believe to be true demand again.

Edward Marshall - Sidoti & Company

Okay, thank you.

Patrick J. Dempsey

Thank you.

Christopher J. Stephens

Thank you.

Operator

There are no further questions in queue.

Patrick J. Dempsey

All right, we would like to thank all of you for joining us this morning. We look forward to speaking with you next quarter. So, this will conclude our call.

Christopher J. Stephens

Thank you.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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