Barnes Group's (B) CEO Patrick Dempsey on Q1 2016 Results - Earnings Call Transcript

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Barnes Group Incorporated (NYSE:B)

Q1 2016 Earnings Conference Call

April 26, 2016 08:30 AM ET

Executives

William Pitts - Director, IR

Patrick Dempsey - President & CEO

Chris Stephens - SVP, Finance & CFO

Analysts

Chris Glynn - Oppenheimer

Myles Walton - Deutsche Bank

Pete Skibitski - Drexel Hamilton

Bhupender Bohra - Jefferies

Tim Wojs - Robert W. Baird

Michael Ciarmoli - KeyBanc Capital Markets

Edward Marshall - Sidoti & Company

Matt Summerville - Alembic Global Advisors

Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2016 Barnes Group Earnings Conference Call. All lines have been place on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

William Pitts, Director, Investor Relations. You may begin your conference.

William Pitts

Thank you, Sarah. Good morning and thank you for joining us for our first quarter 2016 earnings call. With me are Barnes Group's, President and CEO, Patrick Dempsey, and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens.

If you have not received the copy of our earnings press release, you can find it on the Investor Relations section of our corporate Web site at bginc.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on our Web site.

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

Certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, maybe 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 the corporate Web site at bginc.com.

We'll now open today's call in our customary fashion with remarks from Patrick, followed by a review of first quarter results and our updated 2016 guidance from Chris. After that, we'll open up the call for questions. Patrick?

Patrick Dempsey

Thanks Bill and good morning everyone. Let me first say I appreciate your attendance on this call given the shorter notification. This morning I will discuss our performance in the first quarter and expectations for 2016, and then I would take a few moments to address our updated OEM sales per aircraft which drove our decision to bring forward our earnings call. 2016 has opened with first quarter performance generally in line with our expectations and we are on track with our full year adjusted earnings outlook. You may recall that last year's first half was very strong setting up a difficult revenue comparable and that we anticipated our first quarter earnings to be similar to last years. That is how the quarter played out for us.

Company wide sales were down 4% compared to a year ago, adjusted operating margin declined to 14.7% down 20 basis points and adjusted diluted earnings per share were $0.54 a 2% improvement from last year's adjusted $0.53. In our industrial segment the global macro-economic environment continues to pressure some of our end markets, though we did see sequential revenue improvement in the quarter. More telling each of our industrial SPUs, engineered components, nitrogen gas products and molding solutions all realized modest sequential orders growth which provides us with greater confidence in our ramping outlook for the second half of the year.

Industrials organic sales declined 7% in the first quarter as we continue to see mixed performance across our varied end markets, a dynamic similar to what we saw exiting 2015. Within our molding solutions business sales were up 7% over last year's first quarter reflecting the contributions of the Thermoplay and Priamus acquisitions. Organic sales declined high single-digits personal care sales remained strong while our automotive Hot Runner systems continued to experience softness in China. At NGP sales were down high teens versus a year ago. Not unexpected as the first quarter of last year was very strong, the highest quarter of 2015.

On a positive note for the second consecutive quarter now orders have improved sequentially and total sales improved 6% from the fourth quarter. In our engineered components business first quarter sales were down low single-digits on an organic basis compared to a year ago, for general industrial end markets manufacturing PMIs above 50 in North America and Europe are positive signs, while China has demonstrated recent improvement. Forecasted production for light vehicles remains favorable for 2016 with growth expected in North America, Europe and China. One area of automotive weakness is Brazil and that is having an impact on our spring business within engineered components.

Our industrial segment’s overall outlook for 2016 is consistent with our prior expectation. We forecast sales growth in the mid single-digits with organic sales in the low single-digits unchanged from our last outlook. Engineered components anticipates flat total sales growth with low single-digits organic growth, while NGP is now expecting a slight decline in total sales with organic sales being flat. Molding solutions is forecasted to achieve low double-digit sales growth aided by the full year contribution of Thermoplay and Priamus, while organic growth is expected to be mid single-digits. Operating margins for industrial are anticipated to be in the mid teens.

Before I dive into our aerospace segment let me first take this opportunity to welcome Mike Beck as our new President of Barnes Aerospace. Mike is the proven leader with vast experience in the aerospace industry, he brings a reputation for building high performance teams and a strong track record for delivering results and we look forward to his many contributions, we’re glad to have to him on our team.

For the quarter total aerospace sales declined 7% with aerospace OEM sales down 9%, as we foreshadowed in February the anticipated timing of shipments for this business is second half weighted. Backlog remains strong and supportive of our expectation. Aerospace OEM orders improved 6% sequentially as compared to the fourth quarter of last year while OEM backlog increased to 582 million up 8% year-over-year and up 3% sequentially. Aerospace after market revenues increased 1%, MRO declined 2% while spare parts were up 4% over the prior year. For 2016 we expect aerospace sales to be up low single-digits with OEM flat to up low single-digits, MRO of mid single-digits and spare parts to be flattish given last year’s strong performance. Our outlook for mid to high teens operating margin remains unchanged.

Now with respect to the reference to OEM sales per aircraft in our press release, we wanted to update you on a review we’ve completed and that resulted in our determination that certain information we previously provided to you regarding the LEAP powered Airbus A320neo should be adjusted. Let me start with what the issue entails and what led us to update our information.

Our work began when we determined that certain unique part numbers included in our content estimate for A320neo with LEAP engines were in essence three separate designs of the same part but ultimately would only one of the designs to be incorporated into the final engine specifications. This coupled with a thorough review of all planed cost schedules drove our revised estimates. While there are often adjustments to be made in the early life of a program this one clearly created a greater magnitude of change than in the ordinary course. The need for clarification was heightened by the fact that a related to work on a narrow body aircraft which is a new opportunity for us. We also appreciate that it was generating particular investment community enthusiasm and interest given its unique high volume production profile. After careful review we determined that the previous estimate of 400,000 sales per aircraft is accurate for 2016.

However a range of 200,000 to 250,000 is more appropriate for subsequent years based on what we know today. While the 2016 number for the A320neo with LEAP engines is not changing, we are updating our 2016 estimates of OEM sales per aircraft for our other three programs as follows, for the Boeing 777 to approximately 900,000, for the Boeing 787 to approximately 200,000 and for the Airbus A350 to approximately 500,000. To be absolutely clear the revised 2016 estimates for the OEM sales per aircraft on these platforms have no impact on our outlook for 2016. The updated OEM sales per aircraft can be found on Slide 3 in the earnings supplement posted on the Investor Relations section of Barnes Group’s Web site.

As we completed our analysis of the entire process around our content on the four referenced aircraft there were many factors that go into this direction of metric. As such we feel that OEM sales per aircraft better reflects the recurring revenues we are anticipating to generate in the short term on any given program. As an example on a more stable program such as the Boeing 777 sales are generated from production engines, spare engines and spare parts, by providing an OEM sale per aircraft estimate we look to reflect all revenues generated by our aerospace business on that platform. By contrast on newer programs such as the LEAP we're making adjustments to our OEM sales per aircraft estimates to ensure that upfront initial developmental pricing does not skew the projected revenues on the platform when it is in normal production.

As a reminder OEM sales per aircraft is a directional metric and it can be highly variable overtime due to a range of factors. These could include changes in types of material and material costs, re-design of parts, quantity of parts for engine, percentage of work directed to suppliers, engine spares and cost schedules agreed to on the contract with engine OEMs. At the same time, we believe it is the useful guidepost of our current OEM activity. As it has been a standard component of our discussion for many years.

One final point to emphasize before we move on is that needless to say we are quite unhappy we having to adjust information we provided to our investors in good faith. We have now standardized a more rigorous oversight approach to calculating OEM sales per aircraft to avoid this happening again. So to close my opening remarks 2016 has started with performance generally in line with our expectations, industrial end markets that have been soft, recently now appear headed in the right direction. And Aerospace backlog should provide the support of the anticipated ramp. Our focus continues to be driving productivity, improving our competitiveness and delivering on the expectations we have laid out for 2016.

Let me now turn the call over to Chris.

Chris Stephens

Thank you, Patrick, and good morning everyone. Let me begin with highlights of our first quarter results, starting on Slide 4 of our supplement and end with our updated 2016 outlook. First quarter sales of $288 million were down 4% from the prior year period, organic sales decreased 7% as unfavorable FX impacted sales by 1% and the Thermoplay and Priamus acquisitions collectively contributed $12 million, or a positive 4%. Net Income in the quarter was 28.8 million or $0.53 per diluted share compared to 29.1 million or $0.52 per diluted share a year ago. On an adjusted basis EPS was $0.54 up 2% from $0.53 a year ago. First quarter 2016 adjusted income excludes costs related to a contract termination dispute of $800,000 or $0.01 per share. Last year's first quarter adjusted income excludes Manner short term purchase accounting adjustments of $0.01 per share.

Now let me comment on our segment performance starting with industrial. For the quarter sales were 195 million, down 3% from 200 million in the same period last year. FX reduced sales by approximately 3 million or 1% organic sales decreased by 7%, primarily driven by the continued soft industrial end markets in North America and transportation end markets in Asia. Partially offset by stronger personal care end markets in our molding solutions business. As previously noted Thermoplay and Priamus together contributed $12 million in the quarter. Operating profit in the first quarter was 29.6 million, down from 31 million last year driven by the reduced sales volume though offset impart by better productivity. Excluding the Manner short term purchase accounting adjustments last year adjusted operating profit was down 7% from 31.8 million a year ago. Operating margin of 15.2% was down 70 basis points from last year's very strong adjusted operating margin of 15.9%.

At aerospace, sales were 93 million down 7% from 100 million in last year's first quarter driven by lower OEM and MRO sales both partially offset by higher spare part sales. Operating profit in the quarter was 11.9 million down 1 million from the prior year period, primarily due to lower profit on reduced OEM sales, unfavorable productivity and $800,000 in cost related to a contract termination dispute, ex this item, adjusted operating profit was up 12.7 million was down 2% from a year ago. For the quarter adjusted operating margin was 13.6% up 70 basis points given favorable aftermarket mix. Total backlog at aerospace grew to 592 million at quarter end up 9% from a year ago and up 4% sequentially from the fourth quarter.

A further point to pass the discussion on OEM sales for content, although the issue we identified was aircraft specific it led us to quickly perform a deep dive into the data recollection process for this metric across our four large aerospace aircraft. We started to understand the root cause of the issue to verify the value of the A320neo with LEAP engines and other programs for which OEM sales per aircraft data are given and importantly to enhance and standardized the process on a go forward basis. When that deep dive analysis was completed it provided us with new information related to OEM sales per aircraft data so the other three programs for which we provide content and content metrics. Since we were providing you with updated estimates on the A320neo with LEAP engines we also wanted you to have the most current estimates for the year of aircraft as well.

As we move forward we will only provide OEM sales per aircraft data for the near term, and if there's a meaningful change in that number the OEM sales per aircraft data estimate in the course of the year either upwards or downwards, we would update you accordingly.

The company's effective tax rate for the quarter of 2016 was 24.7% compared with 29.2% in the first quarter of 2015 and 23.2% for the full year 2015. The increase in the first quarter of 2016 effective tax rate from the full year 2015 rate is primarily due to the expiration of certain tax holidays, the absence of the 2015 tax refund of withholding taxes and the projected change in the mix of earnings attributable to high tax jurisdictions partially offset by the decrease in planned repatriation of a portion of current year foreign earnings to the U.S. With respect to share count our first quarter average diluted shares outstanding were 54.7 million shares, during the first quarter we repurchased approximately 232,000 shares at an average cost of $34 per share and we will continue to be optimistic on share repurchases going forward.

Cash generation remains strong as first quarter cash provided by operating activities was 30 million versus 23 million a year ago. Free cash flow which we define as operating cash flow less capital expenditures was 17 million versus 12 million last year. Plus in the quarter we made a $15 million voluntary contribution to our U.S. pension plans. With respect to our balance sheet, debt to EBITDA ratio was 1.9 times at quarter end the same as last year end, under existing, our existing debt covenants, additional borrowings of approximately 380 million would be allowed and 362 million remained available on our credit facility at quarter end.

Turning now to our 2016 outlook on Slide 5, we continue to forecast 2016 organic revenue growth of flat to 2% with total revenue growth of 2% to 4% after consideration of a negative FX of 1% and acquisition growth of about 3%. Our operating margin outlook has been narrowed to a range of 16% to 16.5%, GAAP net income is forecasted to be in the range of $2.38 to $2.53 per diluted share excluding the expected $0.03 charge for 2016 restructuring and $0.02 per share for costs associated with the contract termination dispute. Adjusted EPS remains in the range of $2.43 to $2.58 up 2% to 8% from 2015's adjusted EPS of $2.38. As we look at our current EPS outlook for 2016 we expect first half, second half split to be roughly 45%-55% given anticipated improvements in both segments for the second half of the year.

A few additional outlook items which are unchanged from our previous view is our CapEx outlook is about 50 million and we expect cash conversion to remain strong and approximate a 100% of net income and the euro and U.S. dollar conversion rate is forecasted at a $1.10. In summary our first quarter performance was generally in line with the outlook we provided at the start of the year. We are on track with our adjusted earnings guidance and are confident in the broader outlook for the remainder of the year, with sustained good cash flow and a strong balance sheet Barnes Group is well positioned to capitalize on new organic and acquisition driven opportunities.

Operator we will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Glynn from Oppenheimer. Your line is open.

Chris Glynn

So if we look at the new OEM numbers on one level we're looking at a 10% reset on the size of your OEM business, obviously that's just more of a conceptual statement or as much a conceptual statement as a literal numerical adjustment, but as we think of this transitioning into the 17 OEM run rate, how would you qualify that thought that we're resetting that business fundamentally by 10%?

Patrick Dempsey

So Chris, relative to the data that we've provided today was, we've continued to communicate is that 2016 would be a transitional year as we move off of legacy programs such as the 777 and onto these newer programs. As we think about the new numbers in particular relative to the 777 as an example what we, we’ve already factored in, in terms of our outlook and recognize again that we only give guidance for the current year but as we look out in our aerospace business we anticipated the movement down of the Boeing 777 and then the ramping up of the Airbus A350 as well as the recently announced A320neo. In terms of our outlook what we are, we’re not surprised by Boeing’s announcement in the early part of the year that they are going to cut production and that again is in line with what we expected coming off the end of a legacy program and again the reason why we place so much emphasis on the newer product development over the last few years so that as we move forward one compensates against the other.

Chris Glynn

Okay yes I think production schedules is a little different from the question I was asking, would you say half of the shipside adjustments are absorbed in the 2016 guide?

Patrick Dempsey

The 2016 guidance had absorbed or had the current programs that were outlined in our OEM sales per aircraft, all of those were in our guidance with review to what we’ve done as we have done this deep dive is updated those numbers to reflect the most current data that we have as a result of the analysis but again the OEM sales per aircraft and our guidance for 2016 we see them as to separate items and that our guidance remains intact.

Operator

Your next question comes from the line of Myles Walton from Deutsche Bank. Your line is open.

Myles Walton

So the first one I had for you was to just clarify, so when you say the OEM sales per aircraft, you are somehow rolling in spares and spare parts as well into that?

Patrick Dempsey

So basically what we do as we think about our OEM sales per aircraft miles what we’re trying to reflect is what are the revenues that we’re generating in a given period and how is that reflected against the public or published number of aircraft that have gone through to be produced, so as an example as we think, if I look backwards to 2015 to make the point when we look at the Boeing 777 that was approximately order was 98 aircraft were produced and we had approximately 96 million in revenues generated as a result. In those revenues we believe that there are production engines, spare part engines and spare parts because as the orders come into us we cannot distinguish between what is intended to go as a spare and what’s intended to go on for the new line. So effectively what we’re looking to do and the reason we changed the terminology is because we think it better reflects what the intended information is getting that which is to provide revenues that would be generated against these platforms that are embedded into our planning.

Myles Walton

Okay, and to follow up so to look at the first quarter aerospace, can you give you the underlying rates by segment, OE, MRO and spares and then last quarter you talked about challenges on the new programs driving the OEM, OEM seems like it is probably still running lite can you talk about those new programs and where we are in the challenge profile?

Chris Stephens

Yes Myles just to be clear, are you talking about the just in terms of first quarter performance for that of our aero business to give you the details of that?

Myles Walton

That’s that first question yes.

Chris Stephens

Yes on the OEM side quarter-over-quarter we were down 9% overall we were down 7% and then basically.

Myles Walton

That’s year-on-year?

Chris Stephens

Yes year-over-year, and so quarter-over-quarter we were down 9% and sequentially we were down 7% in our OEM business.

Myles Walton

Yes.

Chris Stephens

And then after-market was up slightly both year-over-year and sequentially.

Myles Walton

So on the OEM business can you talk about last quarter you talked about challenges is that still causing that OEM to be low?

Patrick Dempsey

Well there are two primary factors Myles that are in our OEM business for this quarter one is the continued development work that we referenced last quarter with regards to the LEAP program in particular and there the really what’s happening is, is that the development work is ramping and continues to progress and we are being chased a little bit by material as an example and ensuring that that is arriving to meet the schedule. The second item that’s in our first quarter is the year-over-year comparison in terms of lost work as a result of a contract dispute that we referenced in the third quarter and so on a comp space is that work was in last year’s Q1, it’s not in this year’s and so it’s another contributing factor.

Myles Walton

The only other one so if I look at a mature program versus a new program like a 787 that amount to $200,000, should actually see nothing on our invested dollars the $200,000 on the 787 that should actually grow overtime because it has -- you would be supplying spares it shouldn’t decline overtime is that correct?

Patrick Dempsey

Well, what I'd say is that there are many factors that go into the calculation and what we had seen is that there are puts and takes in some of the factors that I mentioned, could be something as simple as a material change so we have in some instances and we are the ones that initiate in some instances the engineering work that goes ultimately result in this. With a view to working with our customers and taking out cost as we take out those costs we are actually providing a greater service and a greater value to our customer. It may in fact be margin enhancing for us but from a pure directional metric like OEM sales per aircraft it would impact us negatively because one material could be lower cost than the other, so again as we work forward what we want to make sure is that the reference we are making to OEM sales per aircraft provides a guideline as to what revenues or sales we anticipate the sale that gets generated against the given platform.

Operator

Your next question comes from Pete Skibitski from Drexel Hamilton. Your line is open.

Pete Skibitski

So just on the LEAP one content change, it is really just the guys in aerospace just kind of miscounted it’s not where it is any kind of issues with may be GE putting you guys in the [LB] box or anything like that?

Patrick Dempsey

No, it was an internal issue, internally generated and really was a result of confusion over part numbers. And it’s synonymous Pete with what happens in these development programs at the front end and it’s we have been cautious and as cautious as we have been in terms of bringing the number, if there is lot of moving parts in the early development cycle and here the confusion was that we have worked on three separate designs of the same part and in our system the three the same part numbers to this three designs, were actually mistakenly brought into the OEM sales per aircraft metric and was the primary contributor the reset and then as a result of the deep analysis that we did we also looked at updating cost schedules against the program.

Pete Skibitski

Okay. And then, as I look at the three other platforms, aircraft platforms they all seem to be kind of down may be 50,000 to 100,000 versus prior estimates, has there been some systemic kind of material change I’d like you mention a low material cost across those aircraft platforms or some other reason kind of were adjusted down?

Patrick Dempsey

Yes, I think there are a number of factors Pete that are in play material may be just one the other is that the split between, suppliers so if we are getting 50-50 or we are getting 70-30 there is a host of reasons that go into the ultimate calculation. As we have seen the end of the program sometimes our volume is split between ourselves and the OE and the OE may pull on some of the volume in some instances if they need volume for their shop so what we have done is we reset all of the known information we had around what those various factors are and subsequently updated the information.

Pete Skibitski

Okay, so as rate goes down there is an incentive for the OEM to pull some volume back on a percentage basis to shop?

Patrick Dempsey

Potentially, if in fact they don’t have volume coming in to that particular location to offset it, it also can be temporary. What happens in our case is that when we have a volume declining as a result of a legacy program we may be cusped with a period of time where one is coming down before the other has ramped up and in that instance we are absorbing overhead where the OE may elect not to because the bridge the small gap they will pull on the percentage of volume to bridge them and then they will release the back out as soon as the new product that they are planning on ramps up.

Pete Skibitski

Okay got it, I will just ask one and then get back in the queue, when do you see the ongoing MRO weakness you have the MRO weakness set for one particular OEM, what do you think that will have annualized?

Patrick Dempsey

Right now what we are seeing in the first quarter is our after-market was plus 1% overall MRO was down 2%, what I will make reference to there, Pete is that the impact of the engine shop that closed that we announced -- that was announced by one of our major customers in the third quarter, that has impacted one of our location significantly. The good news is that the negative two, is a reflection of the strength of the other two facilities. And again what we are guiding to for the full year is that our MRO business to be up mid single-digits and that again is as a result of the continuing progress we are making with CRPs which goes into the other two facilities in addition to customer wins that took place in the back half of last year that we see building into 2016.

Operator

Your next question comes from Bhupender Bohra from Jefferies. Your line is open.

Bhupender Bohra

Patrick on the previous question here on the MRO you said you were down minus 2 for the quarter. Could you give us some color on the CRP programs if you ex out or even those two faculties the work had been driven by the CRP programs if we can give some color on CRPs?

Patrick Dempsey

So CRPs primarily goes into of the other two facilities and we continue to closely monitor the CRP progress and the teams are making very nice progress along the lines of meeting our expectations. That said we're holding ourselves to a high standard and continue to push the team to continue to make the improvements we're making and then some. With regards to MRO absent the one facility the progress we made is in terms of the year-over-year growth has been in the high single to low double-digits.

Bhupender Bohra

Okay, got it, and going back to the LEAP program here, we talked about LEAP variant A on the last call you had mentioned when you gave the 400,000 number you said like there was potential for that number to go up. Now we are revising that to 200-250, is there any potential for that number to go up?

Patrick Dempsey

There is but I will tell you that we've clearly pulled in our horns a little bit as a result of this. We are actively working additional volume on the LEAO as we speak and any potential future wins are not included in the number that we've provided. The other point which I think is very pertinent to make is that I would highly recommend that you do not read across one for one the LEAP on the A320neo to the 737 Max was we're continually actively working on the 737 Max version of the LEAP until such time as the number is meaningful and closer to the entry to service we will not come out with a number on the 737 Max.

Bhupender Bohra

And lastly on the industrial business here, on the second, as we go into 2Q and we are in 2Q right now so you'll be comping about like core sales from last year about 5%, how should we think about from the perspective of NGP and AJF component when you talk about like weakness in Brazil, any color, like are we seeing any improvement in Latin America?

Patrick Dempsey

Well what I might mention is the fact that last year we referenced it as a tale of two halves. The first half of last year we had a very strong Q1 and then a strong Q2 but less than Q1. The drop off that we saw was in the second half of 2015 which was Q3 and Q4, as we moved into Q1 of this year what we've seen is sequential reference in nitrogen gas products, as you mentioned, in that particular business we've seen two quarters of sequential orders growth now plus a sales growth in the first quarter sequentially. So again a nice trend in terms of recovering from the lows of Q3 and Q4 and yet on a comps basis Q1 is still a tough comp to last year's Q1. So the signs are moving in a positive direction and we see that momentum continuing. We have experienced some softness in our automotive molding solutions in particular in China and as you mentioned in Brazil we're being -- our engineered components business has been impacted by the softer automotive market that it's experiencing there.

Bhupender Bohra

And lastly, what kind of growth rates are you assuming for China auto for 2016.

Patrick Dempsey

Low to mid single-digits.

Operator

Your next question comes from the line of Tim Wojs from Baird. Your line is open.

Tim Wojs

I just had a couple of follow up questions, I guess on just the cadence of guidance through the year, I just want to make sure I've got it the right way, if the first half of the year is supposed to be 45% of the full year and I take the midpoint, I think that implies EPS in Q2 is down year-over-year, I just want to make sure I'm in the right ballpark?

Chris Stephens

Yes that's a fair assessment.

Tim Wojs

And is that really driven by just margins in aero?

Chris Stephens

Well it's driven by, I think as Patrick mentioned before in terms of just the first half, second half, what we experienced last year was a strong first half and we're anticipating a stronger second half this year, right, so it's really just a comp, a tough comp over second quarter of last year.

Tim Wojs

And then if I think about just the restructuring program that you guys implemented could you just give us a little bit a color to how much that helped industrial in the first quarter and if that is kind of falling in the run rate now?

Chris Stephens

Yes in the last quarter call we talked about the restructuring actions we announced in the fourth quarter, we anticipated $7 million of full year cost saving as a result to that. We’re on track in the first quarter mostly correct contributions coming from our industrial business which are actually ahead of schedule which is good and -- but for the full year we still remain on track to deliver on that 7 million.

Tim Wojs

And then I mean maybe this a little more of a basic question but just the content dropping off on the A320neo in 2017 and beyond is it just because development work is being kind of included in the 2016 numbers I am just curious why it’s 400,000 in ’16 and then it drops off in out years?

Patrick Dempsey

It’s correct you are correct in your assumption what it was is that as we get the number initially we had development pricing and other developments benefits that were in 2016 as we get the number we get the number assuming that they would be -- the number we get for OEM sales per aircraft was to be reflective of more production rate pricing and our OEM sales per aircraft and so it continues to remain intact for 2016 but as we’ve indicated needed to be adjusted in 2017.

Operator

Your next question comes from the line of Michael Ciarmoli from KeyBanc Capital Markets. Your line is open.

Michael Ciarmoli

Just to may be follow up on that or there any lessons learned here that have to be applied to the LEAP 1b and 1c I mean has that already have you identified differences in the dollar content, there already that kind of this is uncovered?

Patrick Dempsey

I think that as a result of this which it came about as a result of an ongoing analysis of our data collection and in that the lesson learned was how we’re scrubbing and verifying and over checking so we have put in rigor around the process, we’ve involved a number of different functions into the process on a go forward basis and so here it’s truly a case of there is no loss of any physical part it was a miscalculation of the part -- a triple counting of certain part numbers and the steps we have taken to address this have been robust and swift.

Chris Stephens

And I would add recognizing and this can change literally, I want to call it daily but it can changed often and the one I guess caution that we use is making sure that anything that’s meaningful because there is a number of variables that can change this metric in terms of sales per aircraft is that more rigorous process clearly without a doubt and at the same time, that validation process and any meaningful change, positive with any meaningful change up or down as we execute on this progress especially the newer ones we will update accordingly.

Michael Ciarmoli

And part of the revision the downward revision on some of the older -- the other programs you mentioned is there any sort of pricing step downs you guys are seeing is there more broader based pricing pressure you are feeling from the OEMs?

Patrick Dempsey

Yes is the short answer but it’s not uncommon to a normal mode of operation for, how we do business on an everyday basis as announced previously by Boeing in terms of partnering for success and as they look to expand the life of the 777 the base program there are -- throughout the supply chain there was a continue of effort to look to reduce costs in those instances as I mentioned earlier we may and we always do bring suggestions to our OE customers with a view to how to take out price, it requires engineering on both sides and then in some instances as I said before, it actually ultimately results in a margin enhancement for us as we share that but the end goal of bringing down price is achieved by the customer.

Chris Stephens

Sure and I would add that price reduction can come from two areas right our value adds to the program in addition to the material reductions in price that get negotiated by our customer directly with the supply base, so we can experience price changes on not only material buy but also on our value added in terms of executing on those more mature programs.

Michael Ciarmoli

And then just the last one I mean may be going back to Myles’ question, I mean presumably if you are trying to capture better overall revenues with productions, spares, spare parts how does that impact your aftermarket assessment on a go forward basis if you are pulling out some revenue on the OE side that is presumably tied to spares, I mean should we see your aftermarket then straighten as a result of that?

Patrick Dempsey

Well let me clarify the commentary just so the separate and distinct for us in that as a primary supplier to the old engine OEs, if we’re making a part which is going into a production engine and that same part is a replacement part or is going to a spare engine then those orders will be placed on us and what I highlighted was that we may not know the ultimate end application of the part, but we do know that it is a an active spare part in the after-market. It has no bearing on our after-market sales, we don’t capture it as aftermarket sales what the intended reference to OEM sales per aircraft is saying that, once we’re making the part for the OE whether it goes production, to a spare engine or to a spare part we’re capturing all that revenue as part of our metric.

Operator


Your next question comes from the line of Edward Marshall from Sidoti & Company. Your line is open.

Edward Marshall

So I find it interesting that all these programs are changing at the same time and I just wanted to get a point of clarification, was this something that I guess you said you did a deep dive because it was restricted by the changes in 320 but is it something that you are defining differently or you are a little bit gun shy because there is some conservatism built into these numbers as you kind of think about your program broadly or was there something specifically changed in each one of these programs from a dollar prospective?

Patrick Dempsey

I think Ed what we did was as a result of the analysis we went in and we went in with a much more critical eye in terms of how the data was being collected and looked at the different ways we could enhance the collection process as well as provide rigor and oversight to it. In the numbers that we have revised, what happens is even within our systems if we are actively working on a project to take out costs on a particular part and may be sharing those cost savings in this exercise we encompass them into the calculation so it is a much more rigorous approach to how we have took the second look at it and again these numbers will change and it’s not a case of whether they will or won’t, they will due to the number of factors that we sighted and we will continue to update as we go forward as well if it’s meaningful either up or down.

Edward Marshall

Let me ask you a different way I guess then 1.1 was the old 777 kind of content value, if you went back and you looked at actual content value in 2015, what was the number?

Patrick Dempsey

What I mentioned earlier is this that we shipped approximately 96 million in revenue and there was approximately 98 aircraft that were produced.

Edward Marshall

So technically there is a modest if very little change to the actual content value?

Patrick Dempsey

Yes that is right.

Edward Marshall

Okay.

Patrick Dempsey

And yet as we move forward we know that we’re actively in discussions around how to take out cost and the new revised number reflects that.

Edward Marshall

Got it now we talked a lot about top-line in this discussion but I think throughout the call you have trickled kind of discussion about the profitability, as we look at 2017 kind of across the board on the programs and let’s ex out the 320 for a second because that’s a little bit more difficult to discuss, how does your profitability in aerospace look with these new changes that you’re coming out, is there a meaningful change to profitability of the programs?

Patrick Dempsey

The guidance we have given and have continued to say today is mid to high teens against our aerospace business as you know we don’t break out the individual elements so guidance wise we still believe we’re in that range the…

Edward Marshall

So there is no change to the profitability in fact I guess technically it’s going up slightly?

Patrick Dempsey

From an overall business prospective the mid to high teens still captures any fluctuations whether it’s in MRO, spares or our OEM business we give that one range for to capture and there are fluctuations that occurred in all three of those plus we feel that that accurately captures our projected margins for that business.

Edward Marshall

And let’s think of ’17 for a second I know it’s early you don’t give guidance for it but are there any kind of thought process that you want to talk about for profitability as we look into ’17 is there any meaningful changes to kind of?

Patrick Dempsey

Well we continue to be very bullish on the RSPs and the CRPs that we’ve entered into as it pertains to our aerospace business, primarily because of the CFM56 and the continuing strength that we’re seeing in particular the -5 and -7, so those two programs we see as meaningful contributors as the OEM business continues into ’17 the transition is going to continue with respect to the ramp against the LEAP program and the XWD, our backlog as you saw continues to build and as this quarter was primarily driven by the LEAP program so again the momentum to -- as we move into 2017, we feel good about it.

Edward Marshall

Now, the LEAP I guess, the change is disappointing, but the content value when you look just to the left and you look to 787, the content value is still relatively high for a high volume aircraft. But I guess my question is what is the intricacy of the part that you’re making relative to what you made for the 787 that gives us such a high content value, and then secondarily, I guess is that program profitable for you on a go forward basis, even though the revenue has been cut in half?

Patrick Dempsey

Well, let me say that the, we wouldn’t have entered into the program if it didn’t meet the hurdle rates that we set for any of the programs we enter into. And so profitability for the overall program was determined independent of the OEM sales per aircraft calculation. So we’re still very bullish. And as you stated, we continue to be very excited about this. Even though it’s a lower number to what we initially indicated, this is a complete new program where as you are aware Barnes historically has been a wide-body supplier to the OEs and in this entry into the narrow body we see it as a great opportunity for future growth.

Operator

Your next question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is open.

Matt Summerville

I wanted to ask a couple on the industrial side of the business. You mentioned that you have been sequential improvements to some extent in orders and revenue. Is that above and beyond the normal seasonality and I guess what I’m trying to do at the end of the day is square up how you come into the year down 7 organically but then the year up, we’ll call it 2 to 3, if we’re speaking low single-digits. Just help bridge that gap if you will. What kind of ramp should we expect organically in revenue? And I guess at the same time I have a hard time believing you’re going to be up in Q2. So just mathematically that implies a pretty big second half of the year and we’re still kind of in this general industrial malaise globally at least that’s my opinion. So if you can help that would be great?

Patrick Dempsey

Great and welcome back Matt.

Matt Summerville

Thank you.

Patrick Dempsey

We have laid out the year for our industrial business to ramp in the second half versus the first half. So to your point, we are looking at growth on a gradual basis Q2 to Q3 and Q4. With that the drivers behind it for us is we continue to see strength in our molding solutions business in particular with regards to the personal care and the medical side of the business. As I mentioned on the automotive side of the molding solutions business we did see softness in China in the first quarter. But what looks promising is the activity in coating that we’re seeing moving into the second quarter, so an increase there is another good sign relative to the China market.

As it pertains to our nitrogen gas products business, as I mentioned, we did see a major drop in the second half of last year and orders have continued to sequentially improve for two quarters now and that’s starting to translate into sales into the first quarter. So what we experienced on the nitrogen gas products business in the second half of last year was that distributors basically turned off the spigot with regards to depleting their inventory levels and now we’re seeing that picking backup.

Of particular strength for us in the first quarter as it pertains to the tool and die side of things was Europe and Europe has been a good story for us in terms of Q1 and the momentum that its building is also a positive sign. But I don’t want to take from the fact that the global macroeconomic conditions are not the type of conditions that are instilling a major tailwind, but we definitely have pockets of strength and we have our challenges as it pertains to the overall industrial side of the business.

Matt Summerville

And then just one or two maybe real quick on aerospace, if you look at the backlog build that you have had here, how much of that is and I will just use the generic term real versus things that have been pushed out delinquencies either driven by you’ve mentioned your own execution productivity challenges or customer induced design changes? I guess how much of that can we look at as kind of being real?

Patrick Dempsey

I think from my perspective if you think about the LEAP program, you think about the XWD, which are two primary contributors, and I believe it’s real. In our backlog as it’s rising I will also highlights that our backlog against the 777 is coming down. So we are seeing the OEs deplete pulling back on the orders that are being released against the 777 in anticipation of the lower production rates. And as you know, we’re six to nine months ahead of the announced, the announced reduction by Boeing. So subsequently we’re seeing that starting to reflect into our backlog as it pertains to that program.

Matt Summerville

And then just lastly, given a lot of numbers and data out on the call so I apologize if I missed this, but what is your outlook for the full year for the MRO side of the business and the spare side of the business at least as it pertains to aerospace?

Patrick Dempsey

So MRO we see as up mid-single-digit is our outlook and RSP, which is the spare parts flat, and that is flat based against a very strong performance in 2015.

Operator

Your next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is open.

Pete Skibitski

I stepped off the call for a minute so I am sorry if it got out but if you get anywhere next year guidance for the full year, you’re going to have a good amount of cash in the balance sheet. I don’t think you’ve ever had 100 million in cash in the balance sheet for your bigger company, better margins and cash probably ramped from there. So you’re probably maybe thinking about that as a good problem to have more than maybe have in the past. Could you give us a sense on where you’re at today with your capital deployment options, and how you’re thinking about it if there’s a lot more M&A or CRP efforts in there out there or maybe at this valuation level that you’re at maybe you should more sort of share repurchases give us a sense of where you are at?

Chris Stephens

So we’ve got, it is a good problem to have as you mentioned. A lot of our cash generation is outside the U.S. And as we look at, I will just comment on the M&A side, we continue to have a robust pipeline. We want to make sure we’ve got available capacity not only in our revolver but also in the cash side to make those acquisitions. Our deployment of capital hasn’t change it really is we are focused on those internal investments followed by the M&A and then a distribution back to shareholders. We were an active buyer in the quarter as I commented in terms of our share repurchase, if you recall to Board did up the authorization of 5 million shares, so we have that authorization execute on, when we feel it’s appropriate given the balance between the M&A opportunities, the internal investment opportunities as well as redeployment back to our shareholders.

Pete Skibitski

As just a follow-up, how much of your cash typically on a percentage basis is overseas?

Chris Stephens

You could look at our balance sheet and most of that cash is actually outside the U.S. To the extent we have cash generation, it’s to fund and I’ll call it corporate needs in terms of the dividend and share repurchase, but also to reduce our debt levels in the U.S. does that makes sense to you. So most of our cash is actually sitting outside the U.S. to the extent we have cash generation in the U.S. excess if you will it’s going to be reducing our U.S. debt.

Operator

There are no further questions at this time. Patrick Dempsey, CEO I turn the call back over to you for closing remarks.

Patrick Dempsey

Thank you. So I wanted to just close out the call by saying highlighting a couple of items and one is to thank you for getting on the call at short notice. Two I want to, once again, welcome Mike Beck as our new President of Barnes Aerospace and we’re excited to have him on the team. Three, I want to reference again what we talked about on the call, which is our excitement around the A320neo LEAP-powered aircraft as a new opportunity for Barnes and we think that it’s going to provide some nice growth for our aerospace business as we move forward. Four, I would just mentioned that I want to highlight again that the OEM sales per aircraft is a directional metric and that is it is highly variable overtime due to a range of factors. And finally I want to reassure you that we have put in place a robust standardized oversight process as we look at OEM sales per aircraft going forward. And with that I want to thank you for joining the call.

Operator

This concludes today’s conference call. You may now disconnect.

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