Barnes Group' (B) CEO Patrick Dempsey on Q2 2016 Results - Earnings Call Transcript

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Barnes Group, Inc. (NYSE:B)

Q2 2016 Earnings Conference Call

July 29, 2016, 08:30 ET

Executives

William Pitts - Director, IR

Patrick Dempsey - President & CEO

Chris Stephens - SVP, Finance & CFO

Analysts

Tim Wojs - Robert W. Baird

Michael Ciarmoli - KeyBanc Capital Markets

Edward Marshall - Sidoti & Company

Pete Skibitski - Drexel Hamilton

Myles Walton - Deutsche Bank

Bhupender Bohra - Jefferies

Matt Summerville - Alembic Global Advisors

Christopher Glynn - Oppenheimer

Operator

Good morning, my name is Carol and I will be your conference operator today. At this time I'd like to welcome everyone to the Barnes Group Inc. Q2 2015 Earnings Conference Call. [Operator Instructions]. Thank you. William Pitts, Director, Investor Relations, you may begin your conference.

William Pitts

Thank you, Carol. Good morning, and thank you for joining us for our second quarter 2016 earnings call. With me our Barnes Groups President and CEO and Senior Vice President of Finance and Chief Financial Officer, Chris Stevens.

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 we believe is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.

You will find a reconciliation table on our website as part of our press release and in 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, 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. We'll now open today's call in our usual fashion, with remarks from Patrick, followed by a review of our second quarter results and our updated 2016 guidance from Chris. After that, we'll open the calls for questions. Patrick?

Patrick Dempsey

Thanks, Bill, and good morning, everyone. For the second quarter, Barnes Group showed strong sequential progress over our first quarter's performance, reflected in both orders and sales growth in each of our segments. In particular, our industrial segment achieved outstanding results while our aerospace segment continued to win orders on new engine programs that are anticipated to ramp over the next several years.

Before I speak to segment performance, I'd like to start with a discussion on capital deployment. As we continue to execute on our growth strategy of focusing on differentiated industrial technologies and innovative solutions. We recently announced an agreement to purchase Adval Tech's molds business known as FOBOHA. FOBOHA is a market leading supplier of highlight complex mold systems to our molding solutions portfolio and positions Barnes Group as the go to partner for global OEM customers and molders in packaging, medical pharma, consumer and electronics. Their unique industry leading cube mold technology is employed in some of the most demanding injection molding applications. Those were large volumes, high cavitation, extra-ordinary precision and long life cycles are critical to success.

Barnes Group agreed to purchase the FOBOHA business for approximately $136 million excluding closing adjustments and we expected transaction to close in the third quarter. For 2015 FOBOHA sales were approximately $75 million. With this acquisition several synergies are expected to be realized including leverage in manners complimentary high precision Synventive systems, sharing advanced technologies across all our molding solutions businesses as well as introducing the Barnes Enterprise system to FOBOHA to further enhance overall productivity.

From a geographic expansion perspective we look to accelerate growth across molding solutions to meet the needs of our customers globally. FOBOHA will benefit from Manner's North America advanced manufacturing facility while Manner will benefit from FOBOHA's unique capabilities in it's China operation.

We look to provide additional information on this business on our third quarter earnings call following the closing of the transaction. In the meantime I look forward to welcoming the FOBOHA team to Barnes Group.

Moving to the quarter's performance and business outlook, company-wide sales were down 3% compared to a year ago. Adjusted operating margin declined 30 basis points to 16% and adjusted diluted earnings per share were $0.63, a 2% improvement from last year's adjusted $0.62. At our industrial segment, performance was excellent, especially when considering the slower growth environment over the last 12 months. Sequentially from the first quarter we saw sales increase across all three SBUs, engineered components, nitrogen gas products and molding solutions. Orders for this segment were up 10% year-over-year and 4% sequentially. Of particular note, nitrogen gas products and [indiscernible] both of which have been recently pressured given their China exposure each realized 20% plus sequential orders growth. Most impressively the industrial team generated strong productivity improvement given their relentless focus on the Barnes Enterprise system priorities of operational excellence, functional excellence and global sourcing. Operating margin in the quarter climbed to 17% on organic sales that were down modestly. This impressive performance provides us with further confidence in our full year outlook.

Within our end markets and SBUs at engineered components business, second quarter sales were down slightly on an organic basis compared to a year ago. General industrial end markets remain a bit challenging. However, forecasted global production for light vehicles remains favorable, up low single digits for 2016.

At NGP, organic sales were down about 10% versus a year ago. So, up high single digits sequentially from the first quarter. Orders here were very strong in Europe, and China appears to be strengthening for our end markets. For NGP, the second half of 2016 is expected to show positive sales growth over the first half.

Within our molding solutions business, sales were up 9% over last year's second quarter, reflecting the contributions of Thermoplay and Priamus acquisitions. Organic sales declined mid-single digits, impacted in part by customer timing decisions related to the delivery of a few orders which are expected to ship by year end. We continue to expect at second half ramp supported by the solid orders taken in the second quarter. The industrial segment outlook for the full year 2016 is for sales growth in the mid-single digits with organic sales in the low single digits unchanged from our last view. Engineered components anticipates flat total sales growth with low single-digit organic growth, while NGP is expecting a slight decline in total sales with organic sales being down slightly.

Molding solutions is forecasted to achieve low to 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 at industrial are anticipated to be in the mid-teens. Note that the financial impact of the recently-announced FOBOHA acquisition has not been built into our outlook. At aerospace, total sales declined 9% with OEM sales down about the same. As I've mentioned before, we see 2016 as a transition year for our aerospace OEM business, as we move from declining production on some of our legacy engine programs onto the ramping of several new ones. In that regard, an indicative of this transition, aerospace OEM orders almost doubled as compared to the second quarter of last year, while OEM backlog increased to a record $646 million, up 22% year-over-year, and up 11% sequentially.

So while the transition creates some challenges in the short-term, I see it as a temporary issue that more importantly is expected to place us in a very good position for the longer term. In aerospace aftermarket, revenues declined 11%. For the MRO business, sales declined 4%, while spare parts were down approximately 20% over the prior year. You may have recalled that the second quarter of 2015 was exceptional, due in part to customer restocking on spare parts, up 50% plus over the prior year.

For our 2016 outlook, we expect aerospace sales to be flat to up low single digits, with OEM flat, MRO up mid-single digits, and spare parts to be approximately flat given last year's very strong performance. Our outlook for mid to high teens adjusted operating margin remains unchanged.

In closing, we've made very good progress on executing our profitable growth strategy in the quarter. The announced acquisition of FOBOHA further solidifies our position as a global provider of molding solutions, offering a complete range of patented technologies and worldwide service to support our customers. The Barnes Group portfolio transformation continues to reflect a growing share of differentiated industrial technologies and intellectual property-based businesses.

We exit the quarter feeling more positive about the second half ramp in our forecast, the industrial end market recovery we know that last quarter has improved further, and robust orders taken at aerospace further support the anticipated transition to ramping new engine programs. We remain committed to improving productivity and delivering on the expectations we've laid out, all with the ultimate goal of creating added value for our stakeholders. 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 second quarter results starting on slides 5 of our supplement and end with our updated 2016 outlook. Second quarter sales of $307 million were down 3% from the prior year end period, organic sales decreased 6% as unfavorable FX impacted sales by 1%. In the Thermoplay and Priamus acquisitions contributed $11 million or 4%. Net income in the quarter was $33.2 million or $0.61 per diluted share, compared to $34.2 million or a similar $0.61 per diluted share a year ago.

On an adjusted basis, EPS was $0.63, up 2% from $0.62 last year. Second quarter 2016 adjusted income excludes costs related to a contract termination dispute of $1.6 million or $0.02 per share, while last year's second quarter adjusted income excludes Manner short-term purchase accounting adjustments of $0.01 per share.

Now onto our segment performance starting with industrial, for the quarter, sales were $205 million, up 1% from $203 million in the same period last year. FX reduced sales by $2 million or 1%. Organic sales decreased by 4%, primarily driven by continued revenue softness in general industrial end markets in North America and Tool & Die end markets in Asia. As Patrick mentioned, we saw robust year-over-year and sequential orders growth at NGP during the quarter, and transportation markets served by our molding solutions business, including China, were very strong. Operating profit in the second quarter was $34.8 million, up 16% from $30 million last year, driven by strong productivity, offset in part by the profit impact of lower organic sales.

Excluding the Manor short-term purchase accounting adjustment last year, operating profit was up 14% from an adjusted $30.6 million a year ago. Operating margin of 17% was up 190 basis points over last year's adjusted operating margin of 15.1. A great result by our industrial team.

At aerospace, sales were $102 million, down 9% from $112 million in last year's second quarter, primarily as a result of lower OEM and spare parts sales. Operating profit in the quarter was $12.6 million, compared to $20.7 million in the prior-year period primarily due to the lower profit on reduced sales in the end business and higher margins spare parts businesses. And $1.6 million in costs related to a contract termination dispute. Excluding this last item, adjusted operating profit of $14.2 million was down 31% from a year ago. For the quarter, adjusted operating margin was 13.9%, down 450 basis points. Total backlog at aerospace grew to $657 million at the end of the second quarter, up 23% year-over-year and up 11% sequentially from the first quarter, reflect a very strong OEM orders on new engine programs. The company's effective tax rate for the second quarter was 27%, compared with 28.4% in the second quarter last year, and 23.2% for the full year 2015. Some of the points made last quarter, the increase in the current quarter's 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 mix of earnings attributable to higher tax jurisdiction. Partially offset by the decrease in the plan repatriation of a portion of current year foreign earnings to the U.S.

With respect to share count, our second quarter average diluted shares outstanding were 54.6 million shares. During the quarter we did not repurchase any shares given the pending announcement of the FOBOHA acquisition. Cash generation continues to be solid, as year-to-date cash provided by operating activities was $97 million versus $86 million for the same period last year. Free cash flow which we define as operating cash less capital expenditures was $74 million versus $64 million last year.

With respect to our balance sheet, debt to EBITDA ratio is 1.8 times at quarter end under our existing debt covenants, additional borrowings of approximately $390 million would be allowed and $400 million remained available on our credit facility at quarter end. Turning on to 2016 outlook on Slide 6, we now forecast a 2015 organic revenue growth of flat or up 2%.

With total revenue growth of approximately 3% to 4% after consideration of negative FX of approximately 1% and acquisition growth of 3%. Our adjusted operating margin outlook remains the same, in the range of 16% to 16.5%. GAAP net income is forecasted to be in the range of $2.43 to $2.53 per diluted share, up $0.05 from the bottom end of our previous expectation.

Excluding $0.03 per share for costs associated with the contract termination dispute, adjusted EPS is now expected to be in the range of $2.46 to $2.56, up 3% to 8% from 2015's adjusted EPS of $2.38. One change from last quarter's outlook is that we do not expect significant spend on the previously announced planned consolidation in 2016, so we remove the $0.03 charge that was in our prior outlook.

A few additional outlook items which are unchanged from our previous view, CapEx outlook is still to remain about $50 million for the year. We expect cash conversion to remain strong at approximately 100% of net income, and the euro to U.S. dollar conversion rate is forecasted at $1.10.

In summary, we continue to track towards the achievement of our 2016 financial outlook and as Patrick offered, we are feeling more positive about our outlooks for the remainder of the year. Cash flow remains strong and our balance sheet is well positioned to invest in organic initiatives and acquisition-driven opportunities like FOBOHA.

Operator, we will now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Tim Wojs from Baird. Your line is open.

Tim Wojs

I guess just kind of dovetailing on that, can you give us, you know, any sort of commentary on what you think -- why you think the order activity was up so strong? I mean, was it just some pent-up demand that was coming through and just how healthy have those orders been or how healthy were those orders through the quarter and maybe into July here?

Patrick Dempsey

So if you think about NGP in particular, highlighted was both NGP and Synventive both were up 20% plus sequentially. NGP now represents three consecutive quarters of orders being up. So as you recall, last year we saw strong first half and then a weakening second half, but since fourth quarter of last year, we've seen consistent trends in terms of orders growth within NGP. So they're primarily coming out of the European markets, but overall we're seeing some strengthening as well within China, and so order activity continues to be positive, and Q2, a very strong quarter. In terms of our molding solutions also a strong quarter overall with Synventive in particular being up plus 20% and, again there with orders being up, low double digits across all three regions, North America, Europe and Asia.

Tim Wojs

Okay. And then maybe thinking about margins in industrial, I think you said mid-teens for the year, is that correct?

Patrick Dempsey

That's correct.

Tim Wojs

And so I think you guys are about, you know, towards the high end of mid-teens for the first half and we should start to see sales growth in the back half of the year, so I guess why should we maybe see a little bit more leverage on the industrial line as we start to see sales come back?

Patrick Dempsey

Well, we remain positive on industrial and clearly the second quarter reinforced that positive outlook. The team in industrial has done an outstanding job in the quarter with 17% adjusted operating margins achieved as we move forward, clearly we're looking to challenge the team to maintain those types of levels. Our forecast for the full year is anticipating a second half ramp, as you mentioned and also I can't say enough about the impact of productivity in the second quarter. So, in general, we're holding to the mid-teens for the full year but the team remains very confident in what they can accomplish and we're going to tread lightly as we move forward but the team is very confident.

Tim Wojs

And then just last question for me. In aerospace, it looked like the OEM guidance for the year was ticked down a little bit, and I'm just curious, is that really the -- a little bit of a push out of a new program or is that just a little bit of a bigger hit to existing programs? Just a little bit of commentary on the slight reduction in OEM would be helpful. Thanks.

Patrick Dempsey

So relative to aerospace, as I mentioned, we're going through a transition in 2016 where we're seeing some of the legacy programs falling off, whilst the newer programs continue to ramp. I think a milestone that was very positive for us internally during the quarter was the progress made on the LEAP program, as materials started to move more freely and we continued to loan out some of the manufacturing challenges with our program.

But at the same time we're seeing record backlogs but what we're also seeing is a reduction within that backlog on the GE90, as an example, whilst we're seeing a significant ramp on some of the newer programs, where the newer programs are out there a little further, and as Chris mentioned, the split of our backlog shipping in the next 12 months has come down slightly to reflect that ramp. So I don't see it as significant in terms of what we forecast for the full year but clearly the outlook is very positive.

Operator

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

Michael Ciarmoli

Maybe just to stay on the arrow transition theme, how are you guys thinking about, you know, the 777? It certainly sounds like with Boeing's comments you could see another rate step down there to maybe 5.5 or so, you know, maybe -- and I think you just mentioned the GE90 trending down. You know, do you think that creates more of a headwind in AERO as we move into the latter part of this year and early next year?

Patrick Dempsey

I think we've anticipated what we're seeing in our backlogs for the rest of the year, so, really where the impact of the G90 or the 777 is impacting us is in backlog as we move out. As you know, we ship engines probably -- engine components about six to nine months ahead of the actual aircraft production rates. So what has been announced to occur in the first quarter, second quarter of 2017 has already been reflected into our backlog and so I think right now our outlook for the full year anticipates the full impact of the 777 in 2016.

Michael Ciarmoli

Okay. And then just on margins in aerospace, it looks like you're going to have a pretty strong second half there. Should we be thinking about operating margins that were sort of in line with second half, '15, I think you guys did around a 19% margin there, you know or any you know puts and takes around that second half ramp-up in margins?

Chris Stephens

Well, last year in both first and second half we had the strong impact of RSPs with a restocking that took place with our primary distributor there. As we look to the second half of the year, we're still in the mid to high teens for overall guidance, so clearly we're looking for a stronger second half and that stronger second half is a combination of materials starting to flow through our OEM business as these programs ramp, RSPs continuing at a similar or slightly better rate than they have in the first half, and MRO, we're projecting as up mid-single digits for the full year. And CRPs also continue to do well, albeit that our MRO overall results are somewhat dampened by the reference we made a couple of quarters ago to the closure of an engine overhaul shop, which our team is working to overcome.

Michael Ciarmoli

And then just last one housekeeping, can you give us -- what is the revenue exposure within aerospace to the business jet market?

Patrick Dempsey

Very small, primarily we're wide-bodied, narrow-bodied and military.

Operator

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

Edward Marshall

Just a quick follow-up on the last question, the military business that you have, can you remind me what the major program is there?

Patrick Dempsey

One of the major programs we're operating on is the B2 bomber, and there we're making probably what are some of the most sophisticated parts in the industry for that particular program.

Edward Marshall

Any work on the JSF?

Patrick Dempsey

Minimal, and not meaningful.

Edward Marshall

Not meaningful. Okay. I was curious about the -- an earlier question as well, the response was about the NGP strength for the last three-quarters and that you were up 20% sequentially and I'm just curious, when I look at the outlook for the year, you're showing low single-digit declines. And with that type of order growth I would have anticipated a little bit stronger growth in the back half of the year. Is it timing or is it you just dug yourself in such a big hole in the first half of the year, it's hard to dig out of that?

Patrick Dempsey

What I would say is that again as we look at the order growth on a year-over-year basis, recognize that Q1 was outstanding last year for NGP in terms of comps. The sequential improvement that we've seen has been high single digits, mid-single digits, and, you know -- at Q1 and then up now 20% plus in the second quarter. There is a strong comp challenge in the -- relative to the full year, but we do expect a ramp in the second half, and in particular in Q3 based off of the strong orders in Q2.

Edward Marshall

But you'll still be down for the year.

Patrick Dempsey

That's what we're indicating, just down low single digits.

Edward Marshall

I don't know that I caught the breakdown of the aerospace pieces, OEM, MRO and spares. Do you have that data with you?

Chris Stephens

Yes. Sales -- are you talking outlook?

Edward Marshall

I'm talking about in the quarter itself.

Chris Stephens

In the quarter performance, so performance in the quarter for aerospace, OEM was down approximately 10%. Aftermarket was down 11%, which was a combination of MRO being down 4% and spare parts being down approximately 20%.

Edward Marshall

And you would tribute that 20% decline in spares to timing?

Chris Stephens

If you recall, last year in the second quarter, and I also made note we had a strong Q3, that we had major restocking that took place, and so orders in Q2 of 2015 were up 50% plus in the quarter.

Edward Marshall

So a tougher comp there.

Chris Stephens

Tough comp.

Edward Marshall

All right. I know you've given some additional information on the acquisition and I'm just curious, if you'd go a little bit further I mean, and talk maybe about the accretion that you anticipate from the business and will you anticipate that that it will be accretive this year? I guess two questions there.

Patrick Dempsey

So I would -- you know, relative to accretion, Ed, we would expect it to be fully accretive in the first full year of ownership until we close on it and we get through the purchase accounting and the other elements, we won't comment on it till the end of Q3, which we anticipate is hopefully to close in the third quarter. But as a business overall, we're extremely excited to have it become part of our molding solutions business. This company is renowned in the industry in terms of its reputation for the most highly complex, highly patented cube technology in the industry, and so its addition and marrying it to our existing capabilities, we clearly see synergies in -- as I highlighted in my prepared remarks as well as the fact that, you know, the combination of these businesses allow us to expand geographically and leverage both Manner's footprint in North America as well as FOBOHA's current footprint and established operations in China.

Edward Marshall

Dovetailing to that response, when I look at the synergies, they look very revenue type synergies to me. Do you anticipate that there will be some cost synergies as well? I think you've talked about scales synergies in the past from -- you know, across the entire molding division. Maybe we can talk about some of the puts and takes around cost synergies.

Patrick Dempsey

So what I mentioned,, again, in my commentary, was that we will look to roll out the Barnes enterprise system across FOBOHA and the enterprise system itself, which is our primary driving force relative to how we manage the company from an operating system perspective, two elements of it are focused on top line, three elements are focused on the bottom line or cost. And what you've seen in the second quarter in industrial is a reflection of those initiatives now starting to take hold, and we would roll that same set of requirements out against FOBOHA and expect the same type of results. So we're very optimistic and positive about the benefits of FOBOHA that can be achieved with FOBOHA becoming a part of Barnes Group.

Edward Marshall

Any update on the LEAP B?

Patrick Dempsey

We continue to work it in terms of development, but not in a position yet to publicly state a content in terms of OEM sales for aircraft.

Operator

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

Pete Skibitski

I just want to ask just so we're clear, the lead time at NGP, the lead time in converting orders to revenue, how long is that?

Patrick Dempsey

It's probably six to eight weeks on average.

Pete Skibitski

Okay. So you deliver inside the quarter. I guess [indiscernible] understand, if you're getting three straight quarters of up orders, why revenue wouldn't be up, given you can deliver inside the quarter?

Patrick Dempsey

Well, one item that's within that, which is -- as NGP continues to diversify in terms of adjacent markets, an area that we focused on in particular, and have been working through our innovation process for the last couple of years, is an area that we refer to as machine and vehicle. You'll hear us often reference it as M and V. The team done a nice job there in terms of securing a major order in the quarter as well, which is on a suspension program against military type transportation and in achieving that, the one caveat I'd say to the typical lead time is that that particular program has a longer a lead time than their your traditional business.

Pete Skibitski

Okay. Okay. So that could move the average around a bit, okay.

Patrick Dempsey

Correct.

Pete Skibitski

Okay. And then just on aerospace margin, I guess to get the expansion in the second half of the year, you'll need RSPs to pick up in the mix. I think or at least pick up volume wise. How is the visibility in the second half of the year on RSPs?

Patrick Dempsey

So as you know, the business itself is driven by shop visit rates. The program is primarily on the CFM 56 engines, the dash fives and dash sevens [ph] continue to be projected to come into the shops for their -- a large number of the engine is coming for the first engine overhauls and so we do see -- we’re anticipating a slight uptick in the second half. I also will note that all of our comps in the first half have been based on no restocking. So there is also the possibility of restocking occurring in the second half.

Pete Skibitski

Okay. And then the engine overhaul JV, the impact from that, is the third quarter the last quarter we'll have that negative impact?

Patrick Dempsey

That’s correct.

Pete Skibitski

So after that, the comps in the MRO business should be a bit easier.

Patrick Dempsey

That is correct.

Pete Skibitski

Okay. Okay. Last question I'll ask is just on auto, the tough, I think Forbes [ph] results this week, maybe more talk of peak auto. Are you guys seeing any incremental weakness globally in any geographies in terms of your auto kind of inquiries and whatnot?

Patrick Dempsey

Relative to -- our outlook against the automotive, we actually have a very nice Q2. The molding solutions reference to Synventive is auto-driven and as you know that's more model changes than it is production, but Synventive was up 20% in the quarter, and that represented low double digits across all three regions. As we look across the total spectrum of our transportation business, globally we see it as being up about low single digits this year. We definitely anticipate a slowing of the overall industry in time, in pockets, North America is not necessarily a surprise with the announcement this week from Ford, but again, as they highlighted, I think it will be incremental over time as opposed to a step function.

Operator

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

Myles Walton

I wonder if I can start on cash flow, obviously a good performance here in the quarter in the first half and looking on a year-over-year basis you had a discretionary cash contribution in the first half, your implied guidance for the year would mean the second half is lower than the first half at 100%. I'm just struggling why this year's cash conversion, given where you are right now, won't be significantly above a 100%

Patrick Dempsey

That's fair. I would say the outlook in terms of approximately 100% conversion is on the conservative side. As you mentioned, we made a $15 million or at least a pension funding of discretionary pension funding contribution in the first half. We've got tremendous, tremendous first half performance. We would anticipate that that would continue, probably projecting us to be better than 100% but right now we'll continue to guide at approximately 100% cash conversion.

Myles Walton

Okay. But nothing that you'd call out in terms of building inventories out of the ordinary or anything like that.

Patrick Dempsey

No. The working capital initiatives that we continue to drive across the corporation is driving improvement, and if I just talk to aerospace for a second, aerospace in terms of the second half deliveries primarily of the OEM businesses is going to be able to relieve that inventory or at least anticipating based on material flow and shipments, so we continue to drive working capital reduction across the company, made good progress first half of the year, expect it to continue.

Myles Walton

Okay. And you mentioned that you took out the restructuring that you were planning previously. Can you just talk through the reason to take it out of the forecast and not pursue that angle of restructuring in terms of the end market. Did it mature on you? Did the payoffs not meet thresholds or what was the decision there?

Patrick Dempsey

Really, it was priority-driven, and so as we mentioned, the original commentary was around consolidating two facilities in Connecticut. One of those facilities right now is, you know, in the midst of the challenge of ramping on the LEAP program, and as you know in the second quarter we brought in a new leader into the businesses and as he made his assessment of different priorities and the relative timing of such, in order to meet the needs of our customers and to make sure that the LEAP ramps flawlessly, we made the decision not to incur any costs relative to that action in 2016.

Myles Walton

And the last one, you increased the sales guidance at a company level. You decreased the sales guidance mostly at the AERO level. You reiterated the same range for industrial. But just making sure that all you're doing is moving up to the upper end of the industrials. Is that the idea that drives the whole formula?

Patrick Dempsey

Yes, that's a fair comment.

Operator

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

Bhupender Bohra

Patrick, just on the aerospace, I think the question on the second half margins, could you give us -- you know, guide us on how we should think about the margins, especially with the third quarter and the fourth quarter you know as you kept your guidance like mid to high teens here?

Patrick Dempsey

So basically what you've seen in the first half is a lower volume of output in our aerospace OEM business in particular, and in that was what we're experiencing is the challenges of NPI in terms of costs and then also the under absorption as a result of lower volumes going through the shop. The second half, relative to the ramp of the LEAP program, the XWB, and in addition the military program that I referenced earlier, the B2, has a key number of shipments in the second half. All those combined is the basis on which we're guiding towards higher operating margin in the second half.

Bhupender Bohra

Okay. And on those programs, I believe they're pretty strong programs, right? I mean, risk--?

Patrick Dempsey

Well, what we're experiencing in 2016 is the challenges of a transition and as I continue to communicate to our team, it's a wonderful problem to have and not so nice in the short-term but wonderful in the context of the long-term. By that I mean that, as we go through these [indiscernible] problems, they're very similar in nature to what we did on the GE90 back in early 2000, and then that became one of the most successful programs for Barnes.

As we move through this transition period, there are repeating problems they are unexpected curveballs that have been dealt over the course of this year, where the team has wonderful job of taking them in their stride and as we move through the second half, they have a clearer line to sight as I mentioned, material flow is starting to happen from our supply base and also through our shops. So in totality, the guidance we think has encapsulated all of those nuances, yet the team is dealing with the challenges of new programs on a weekly basis.

Bhupender Bohra

Lastly, on the FOBOHA acquisition here, just give us some color on what your thinking is? You know, you've been acquiring, especially the [indiscernible] systems here and I think this is kind of on the molding side now you're acquiring a molder. Is this like a one-off or your strategy is more towards like highly intellectual problem, high IP businesses, and this is kind of just makes more sense with Manner right now?

Patrick Dempsey

Yes. Relative to molds, the identification of FOBOHA was such that it is on par with the premium type of molds that Manner produces. As we continue to pursue our strategy, it's very much on identifying those intellectual properties and those differentiated technologies that are truly adding value to the plastic injection molding industry. As we pursued FOBOHA, it was with a view to leveraging both its capabilities and Manner's in particular to create a global network of both manufacturing and service to their combined customer base, which are all the household names that are associated with medical pharma, consumer products, and packaging. And so we were tremendously excited about the combination of this particular molding business.

Our focus is on those patented technologies and intellectual properties, and FOBOHA met all of that criteria and subsequently why we thought adding it to the molding solutions business within our industrial segment made tremendous sense.

Bhupender Bohra

Okay. And lastly, on the Manner, you know, over the last year and a half, I believe you have been talking about some capacity expansion, especially in the U.S., that predominantly being the European business. Can you give us an update on that, like, you know, how the progress is on the Manner side, especially in the U.S.? Thank you.

Patrick Dempsey

Absolutely, the progress has been moving extremely well with the Atlanta team continuing to expand that facility and the capabilities with a transfer of technology and known how from our German operations to leverage their capabilities into the U.S. even more excitedly, as I just mentioned, as we add FOBOHA to our molding solutions business, is FOBOHA has always looked at the opportunity of expanding within North America and having a greater presence here, and Atlanta will enable them to do so. By contrast, on a secondary priority, Manner was always intending to expand in Asia, in particular China, and now the addition of FOBOHA will accelerate Manner's ability to, you know, expand its business in China as well. So, highly complementary on both fronts.

Operator

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

Matt Summerville

Patrick, can you just give a little more specificity as to the technological differentiation you're acquiring with this latest acquisition and maybe just comparing contrast versus what your current molding capability is in that regard?

Patrick Dempsey

So basically the Manner business which we initially acquired had two capabilities, that had the mold capability as well as hot runner systems, in the acquisition of FOBOHA it is purely on the molds themselves, what Manner's traditional expertise has been stack molds which are fundamental molds which is open and close. The unique capabilities of FOBOHA is what's referred as cube technology or stack [indiscernible]. So it brings a unique set of capabilities that also requires the highest standard of hot runners. So again today was the two businesses work at a distance in terms of Manner being a provider of some hot runners to FOBOHA. We see the opportunity to expand that as we move forward.

By contrast, the cube technology, what it does, is it allows the customer to double the output in the same -- and reduce cycle time. By doubling the output, it also reduces unit cost as well as increasing the overall productivity and efficiency of their system. By doubling output on the same machine, it allows for advantages in terms of not requiring two presses, the same volume can be produced on one press, so a lesser capital investment outlay. And then finally, it's one of where the cube technology actually allows assembly to occur in the molding process which is a very unique feature of the technology.

Matt Summerville

Does this cannibalize anything you're currently doing or is it more complementary? Are there different specific applications for one versus the other?

Patrick Dempsey

It's complementary because each has its own unique application, and there are definitely pros and cons to one technology versus another, but in that pros and cons, there are clear economic advantages to using either technology against a given application. So if it's lower volumes than you would use traditional Manner technology. If it's extremely high volume, then FOBOHA has carved out a niche in the marketplace where it is -- you know, it provides the best in class technology to achieve that.

Matt Summerville

And then how do you guys just plan on funding the acquisition in terms of cash versus debt? Basically what I'm trying to get at, Chris, is, post deal what is your dry powder?

Chris Stephens

Yes, sure. So the purchase price being roughly $136 million U.S., I think about a third of that is going to come from cash and about two-thirds from our revolver. And from just a liquidity point of view, we'll still have, you know, close to 200 million to 300 million left in terms of dry powder, so it's not stopping our push for continuing to acquire as a strategic initiative for Barnes Group.

Matt Summerville

And then just lastly, if the year were to end today, what would happen with your pension expense in '17 versus '16, and then longer term, I'm not talking about this year, these tax holidays continue to expire, which I assume is going to happen, what is the longer term effective tax rate we should be thinking about?

Patrick Dempsey

So we’re getting a lot of noise in terms of the discount, right, that’s probably one area where we’re getting, it's getting a lot more attention, a simple rule of thumb is about a quarter point change and our discount rate is about a $1 million of headwind. So if you assume it we have a whole percentage point probably looking 4 million to 5 million of income headwind going into 2017.

And on a tax rate point of view, we continue to look for tax holidays across the organization, across the company. You know, we're in that 26% to 27% range now, but we would expect that to move up somewhat. Internally we think about a 30% range on the high end, call it 28% on the lower end as we move over our strategic planning period.

Operator

Your next question comes from Christopher Glynn from Oppenheimer. Your line is open.

Christopher Glynn

So on the AERO backlog, being a changing breed on the next 12 months conversion dynamic through the transition that’s obviously up a lot. Does it feel like 2017 is geared more for still transitional dynamic or more of an emergent dynamic on directionally normalizing backlog conversion?

Patrick Dempsey

I think it will be I would say two half again in 2017 we will continue, the transition won't stop 12/31, appropriately it will roll over into the first half of 2017 and then you know as this transition continues as mentioned earlier on the call if there is a further rate cut on the 777 it will bleed through as well of course as we march towards the volumes on the XWB and the LEAP. So in total we think of 2017 as being a much more firmer year than 2016 but I will be remised to say that all the transition will come to an abrupt end, I think there will be some bleed over but moving more towards normality as the newer program start to become more learned out and the entire supply chain ramps to the new requirements.

Christopher Glynn

And industrial, very strong margin in the second quarter. As we look from the second quarter moving into the second half, would you expect mix generally consistent with the second quarter and is there any timing of any strategic spend that's weighted to the second half or anything?

Chris Stephens

No I think, second half for us we’re looking at a steady improvement over Q3 and Q4 relative to the industrial team, they feel very good about progress in Q1 into Q2 so the momentum is there. So as I mentioned on the productivity front and through the Barnes Enterprise system they are really pleased with some of the initiatives are starting to really take effect and that is flowing through. So in general we’re very bullish on the second half for industrial business.

Christopher Glynn

Okay. And then as we just kind of shape the back half, I'm thinking maybe 3Q, 4Q looked pretty similar, industrial stronger third quarter and AERO probably it's strongest in the fourth? Is that linear thought on the back half good?

Patrick Dempsey

That's a fair assessment.

Operator

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

Pete Skibitski

Just a couple clarifications on aerospace margins, some of that commentary in the release, guys. When you talk about unfavorable productivity in aerospace in the quarter, I guess the context is basically you've got a higher comp right now on LEAP because you're ramming up so it's a tougher comp year-over-year but I think you made comment that you are ramping up the learning curve there, is that a fair assessment?

Patrick Dempsey

Yes basically what's happening, Pete is that the shops aren't operating optimally as they absorb the NPI.

Pete Skibitski

And then just last one on the pricing headwind mention, you've talked about that in the past, I guess primarily on OEM, is this a structurally lower margin unit now because of those pricing headwinds or are there offsets? How are you thinking about that Patrick?

Patrick Dempsey

Pricing-wise in the quarter we spiked it out but not meaningful, if you look at the quarter at a higher level, what you see is that the predominant impact was as a result of overall sales volume, and that was driven, Pete, by three primary things. One was, if you recall, the pistons and cylinders that we lost last year and are currently in a dispute over, that, you know, was a portion of it. The lower RSPs, which are high margin in the quarter, and then the combination of those two with the new program ramps were, you know, the majority of what made up the change in up [ph] margin.

Pete Skibitski

Okay. So you're still thinking about it longer term as a high teens business?

Patrick Dempsey

Correct.

Operator

Your next question comes from Ed Marshall from Sidoti & Company. Your line is open.

Edward Marshall

A quick follow-up, historically I would say the NGP business' unit within industrial has been one of the higher margin business units, and with the capacity that you've added, I'm just kind of curious if you can kind of update us maybe on the pecking order as far as the margins in industrial, and I realize that you don't give out, you know, the individual business unit numbers, but if you can talk about it generally, it would be helpful.

Chris Stephens

Yes, this is Chris. So on the operating margins side, as you mentioned, right, NGP, we went through a significant investment to increase the internal capacity given the global growth out of NGP as well as their expansion into machine and vehicle as Patrick noted before. We went through a period of time where we had to outsource a lot of that work. We're now in the throes of being able to I know source and take on that capacity in house. We've gone back to margin profiles that were consistent with the past as you mentioned the higher margin profile of NGP, higher margin profile out of Synventive within molding solutions. Those are driving some pretty good favorability on the operating margin side, with the fact that we closed out to quarter at 17%.

As you noted, we don't disclose margins below that but you know we're on the higher end of that mid-teens clearly and hope to continue to drive productivity improvements and leverage the growth we talked about before in the second half. We had a very strong second quarter, both in terms of operational performance as well as productivity. We continue that into the second half of the year. We'll definitely be on the high side of those mid-teens driving the Barnes enterprise system is clearly a global sourcing, functional excellence, you know the operational excellence, clearly has taken root within our industrial segment.

Operator

And this concludes our question-and-answer session. I now turn the call back over to Mr. Pitts for closing remarks.

William Pitts

Great. Thank you, Carol. We'd like to thank all of you for joining us this morning, and we look forward to speaking with you once again in October with our third quarter 2016 earnings call. We will now conclude today's call.

Operator

This does conclude today's call. You may now disconnect.

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