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Executives

William Pitts - Director, Investor Relations

Gregory Milzcik - President and Chief Executive Officer

Christopher Stephens - Chief Financial Officer and Senior Vice President of Finance

Patrick Dempsey - Chief Operating Officer and Senior Vice President

Analysts

Christopher Glynn - Oppenheimer & Co.

Edward Marshall - Sidoti & Company

Matt Summerville - KeyBanc Capital Markets

Scott Graham - Jefferies & Co.

Holden Lewis - BB&T Capital Markets

Barnes Group Inc. (B) Q3 2012 Earnings Call October 26, 2012 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Barnes Group Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. William Pitts, Director, Investor Relations. Please proceed.

William Pitts

Good morning and thank you for joining us today. With me is Barnes Group President and CEO, Greg Milzcik; Senior Vice President of Finance and Chief Financial Officer, Chris Stephens; and Senior Vice President and Chief Operating Officer, Patrick Dempsey.

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. In addition, we have posted a Synventive acquisition supplement to provide to with further details regarding this business.

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

I want to remind everybody that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Please consider the 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.

Today's call will begin with customary opening remarks from Greg, followed by a more detailed review of quarterly results and an updated outlook discussion by Chris. After that, we will open up the call for questions. So at this time, I will turn the call over to Barnes Group's President and CEO, Greg Milzcik.

Gregory Milzcik

Thanks, Bill, and good morning. During the third quarter we achieved a number of significant milestones for Barnes Group. First, we closed on the Synventive deal, the largest acquisition in the company's history. While I fully appreciate that we are early into integration process with this business and pleased with the initial operating performance delivered, the pace at which integration activities are progressing and the quality of the Synventive’s team.

Second, we reached another record level of total backlog which now stands at $678 million, up 35%. While Synventive’s contribution certainly helped to lift backlog, we also achieved a new record level without it. The backlog level is noteworthy as we move towards 2012 finish live as it provides a degree of support heading into what we believe should be a solid fourth quarter. As I mentioned in my second quarter remarks, the business environment remains uncertain. We have seen this for sometime in Europe and Brazil and we continue to believe these conditions will prevail for an extended period.

In the third quarter, we also saw a slowing that impacted some of our North American businesses, particularly distribution. These economic factors as well as unfavorable foreign exchange or FX, impacted our revenues in the quarter. Net sales of $306 million were up 2% from last year. Our sales growth included a 5% benefit or $16 million from the Synventive acquisition, offset by a 1% decrease in our organic sales. And a 2% or negative $5 million impact from foreign exchange.

Our reported earnings from continuing operations were $0.38 per diluted share. However, after consideration of certain Synventive acquisition related items, which negatively impact EPS by $0.06 per share, adjusted EPS from continuing operations was $0.44, in line with last year. Now turning our attention to third quarter segment performance.

Our aerospace business continues to reflect the current industry trend and outlook for commercial aircraft production and aftermarket services. Orders for our OEM business were up 7% year-over-year and led to a record OEM backlog of $540 million. We believe the industry’s forecasted growth rate in commercial aircraft production is achievable and continues to be by supported by higher order backlog at both Boeing and Airbus. We support many aircraft platforms that are forecasted to see increased production, namely the Boeing 777 and 787. And we continue to work on future aircraft and engine platforms to achieve longer-term growth, such as the Airbus A350.

After two consecutive quarters of double-digit increases and aftermarket MRO sales, third quarter MRO sales were essentially flat. However, quarterly run rate throughout the year has been relatively stable. MRO sales have been impact by a weak European economy, reduced freight traffic and a slowing of growth in flight hours. Sales in our higher margin spare parts business, our revenue program, experienced some significant decline in the third quarter, indicative of a market trend we have seen for a couple of quarters now. This weakening reflects the same factors that impacted the MRO sales as well as continued inventory compression and cannibalization of retired aircraft engines.

Soft demand for spare parts has been echoed by a number of industry participants. And although an expectation for stronger spare parts volume has been forecasted, the timing continues to get pushed out further to the right. Industrial sales increased in the third quarter, benefitting from the Synventive acquisition’s contributions, but were offset in part by FX. Our nitrogen gas products business generated double-digit sales and order growth in the quarter. And our facility expansion is on track and should benefit margins in the first quarter. In fact third quarter sales for nitrogen good afternoon products were at an all time high. However, our other European manufacturing businesses were negatively affected by the weak economic environment and waning European auto production.

At Associated Spring, sales declined modestly in the third quarter driven by slowing growth in its industrial end markets and challenging economic conditions in Brazil. Our distribution segment experienced a third quarter sales decline of 5% and the lowering sales volumes impacted segment profitability. We continue to monitor the economic environment in this region’s key markets and note that September PMI Index rose above 50 after three months of sub-50 readings.

We see this as a positive signal and we do anticipate a return to year-over-year sales and operating profit growth in the first quarter. Before I close my prepared remarks, I would like to take a moment to comment our board of directors for enacting several corporate governance changes that demonstrate their ongoing commitment to enacting sound and responsive shareholder focused corporate governance policies. The board will recommend to shareholders declassifying the board and eliminating certain supermajority voting standards. Additionally, the board amended its corporate governance policies with respect to majority voting and lead independent director policies, and provide shareholders with rights to call special meetings under certain circumstances.

In closing, we expect that the combination of the Synventive acquisition’s contributions, continued strength in nitrogen gas products and aerospace OEM, and record backlog could provide us with the ability to close out a solid year in 2012 and enter 2013 with positive momentum. Despite the uncertainties on the economic front, we believe that our investments in growth and our focus on operational excellence will allow for 2012 to be one of our best years on record.

Now let me turn the call over to Chris for some of the financial details of the quarter. Chris?

Christopher Stephens

Thanks, Greg. Let me begin by highlighting key points of our third quarter performance on slide two of the earnings release supplement which is available on our website. During the quarter, Barnes Group increased net sales 2% to $306 million. On a reported basis operating income was $29.7 million and operating margins were 9.7% in the third quarter. Our reported results include $5.1 million of pretax short-term purchase accounting and acquisition transaction cost related to the Synventive acquisition, which closed in August. So on an adjusted basis, operating income increased 2% to $34.8 million, and operating margins were 11.4%, flat with last year.

Now let me discuss the few details about the quarter and then I will wrap up with comments about our updated 2012 guidance. In the third quarter, aerospace generated sales of $98 million which was up slightly from last year. And as Greg noted, an increase in aero OEM sales was mostly offset by a sharp decline in aftermarket spare parts sales, which were down 20% while repair and overhaul sales were essentially flat on a year-over-year basis. Backlog for our total aerospace segment grew to a record $547 million, that’s up a $151 million from last year’s third quarter and up $14 million from the end of June.

As a reminder, while backlog is a helpful indicator, sales can be effected by a number of factors overtime, including in-sourcing decisions, material changes, production schedules and volumes of specific programs, to name a few. Industrial segment sales increased to $11 million to $124 million benefitting from approximately $16 million from sales from Synventive. Organic sales were relatively flat and unfavorable FX reduced sales by $5 million.

Weakness in our North America impacted our distribution sales in the quarter which were down 5% or $86 million. Turning now to operating profits. Aerospace operating profit of $15.3 million decreased 5% from last year’s third quarter, primarily driven by unfavorable sales mix. Essentially, the profit impact from lower sales of high margin aftermarket spare parts was only partially offset by the profit impact from higher OEM sales.

This dynamic is also the primary driver of operating margins coming in at 15.6% for the quarter. Industrial operating profit decreased $7.4 million, primarily due to $5.1 million in short-term purchase accounting and transaction cost related to the Synventive acquisition as I previously noted. And on an adjusted basis, operating profit increased $2.2 million to $12.5 million or an operating margin of 10.1%, up 90 basis points from last year as lower incentive compensation was partially offset by increased pension cost which benefitted operating profit.

As a reminder, the Synventive acquisition is expected to be neutral to or full-year 2012 net earnings as additional operating income will be offset by incremental financing costs and approximately $0.07 of short-term purchase accounting adjustments and acquisition transaction costs. We continue to expect the Synventive acquisition to contribute $0.16 to $0.18 earnings per share in 2013. For distribution, lower sales had most significant impact on operating profit in the quarter, which decreased 11% to $6.9 million. This was partially offset by favorable employee related cost where lower incentive compensation, partially offset by higher pension cost provided a net benefit to the quarter.

Operating margins were 8.1%, 50 basis points lower than the prior year. With respect to taxes, our effective tax rate for the quarter was 19% compared to 24% last year. The decrease in the 2012 effective tax rate from continuing operations was primarily driven by a reduction in the planned repatriation of a portion of current year foreign earnings to the U.S. as well as projected change in earnings mix attributable to higher tax jurisdictions.

Regarding share count, our third quarter average diluted shares outstanding were $55.1 million. As mentioned during last quarter’s call, with the closing of the Synventive acquisition, we do not expect to repurchase additional shares in 2012.

Turning now to cash flow, year-to-date through September operating activities generated cash flows of $77 million, reflecting improved operating performance offset by higher tax payments for 2011 employee related incentive compensation and increased contributions to the company's pension plan. In addition, our sustained focus on operating working capital resulted in lower use of cash this year than the 2011 period.

Let me now discuss our updated 2012 financial guidance on slide four of our supplement. Barnes Group expects revenue growth of 4% to 6% and operating margins to be approximately 11%, inclusive of the Synventive acquisition. As a result of a softer third quarter earnings from continuing operations per diluted share are now expected to be in the range of $1.73 to $1.78. On an adjusted basis, after consideration of approximately $0.07 of short-term purchase accounting adjustments and acquisition transaction cost related to Synventive, EPS is expected to be $1.80 to $1.85. And for the full year we continue to forecast free cash flow conversion of approximately 90%. Although we have reduced our CapEx outlook from $35 million to $40 million, from $45 million to $50 million that was previously discussed.

As we look to close out another successful year for Barnes Group, key factors in our guidance range remain the following. For the upper end of the range, we would benefit from stronger aerospace spare parts sales in the fourth quarter. Better margin leverage or flow through on increased sales and further productivity improvements. The lower end of the range would be negatively impacted by a continued slowdown in the global economy, steeper than anticipated declines in European industrial activity including automotive production levels, and tighter levels in inventory management by our customers.

To wrap up my prepared remarks, as our guidance implies, we project to close out 2012 with a solid fourth quarter by driving productivity, further sales leverage and continue to successfully integrative Synventive. Additionally we look to reduce the debt level, taken on as a result of the acquisition, to improve working capital management and to strengthen our balance sheet. Enabling us to maintain investments and profitable growth that drives shareholder value over the long-term.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christopher Glynn. Please go ahead.

Christopher Glynn - Oppenheimer & Co.

Congratulations on the deal. Just wondering, so on the adjusted basis, gathering Synventive was may be a couple of cents accretive in the third quarter.

Christopher Stephens

On a net basis because I look at it as we are holding the full year that Synventive will be no significant increase to dilution or accretion. So actually for the third quarter we saw more of dilution and that would be coming back in the fourth quarter. The reason for this spike out in the adjustment to the third quarter on the adjusted numbers, basically that $0.06 was related to short-term purchase accounting as well as acquisition transaction cost. We wanted to at least highlight that it obviously does impact quarter performance.

Gregory Milzcik

Chris, the other way to look at it is the $0.16 to $0.18 performance that we expect next year is running in that level of performance currently.

Christopher Glynn - Oppenheimer & Co.

Right. But the neutral comment for this year is on the GAAP basis?

Christopher Stephens

That’s right. That is correct. We are not expecting any accretion, dilution to the full year.

Christopher Glynn - Oppenheimer & Co.

Right. But the adjusted basis that you are point out is allowing to some accretion in....

Christopher Stephens

In the fourth quarter. I mean when you think about just -- when we looked at the most impact to us from a dilution point of view and that’s [thought] that $0.06 was to the third quarter. And you could see from a guidance point of view how we are bullish on our fourth quarter, mainly because Synventive will be contributing. That’s the way to look at it. So net-net, dilutive to the third quarter, accretive to the fourth, full year, no change.

Christopher Glynn - Oppenheimer & Co.

Okay. And then if you could just give a little color on the benefits relative to the prior few quarters on the in-sourcing that nitrogen gas brings on the margin and if that was full impact of still some runaway on that?

Gregory Milzcik

I think right now we are running at the appropriate rate. The expansion was handled exceptionally well. You know usually when you are doing an expansion of that sort where you have -- you are breaking ground and buying equipment etcetera, I think it’s been done incredibly well. We are having the benefit currently and expect the benefit to continue in the fourth quarter. Third quarter actually, nitrogen gas products has the best quarter on record. Sales were up double-digits and it looked very strong.

Christopher Glynn - Oppenheimer & Co.

Greg, can you just explain why is that growth so robust? Is there some real share gain there?

Gregory Milzcik

Yeah, I think there is a couple of things. First of all, they have a product line that’s technology disruptor in the sense that they are replacing mechanical spring to a [dye set]. So first of all you have gain from a technical perspective. Second of all, the geographic expansion has gone very nicely over the past several years, especially into China. Third is, they are -- just like Synventive, nitrogen gas products support the automotive industry primarily but they are unit number dependent. They are more orientated towards changes in models or number of name plates out there etcetera. Frequently the in product is a capital purchase rather than an expensed item. So there is a number of things that drive that business that are different than the other businesses that are direct to the OE or service business.

Christopher Glynn - Oppenheimer & Co.

Okay. And then just lastly, a little spike up in the disc ops. Just what's lingering there and the outlook in that line?

Christopher Stephens

Yeah. Chris, that was just an adjustment that we had in our retained liability associated with the divestiture of (inaudible).

Christopher Glynn - Oppenheimer & Co.

Okay. Any reason it spiked up three quarters out?

Christopher Stephens

I mean it’s just, again, it’s just a retained liability for that business that we had.

Operator

Thank you. Next question is from the line of Peter Lisnic. Please go ahead.

Unidentified Analyst

This is [Josh Seain] filling in for Pete. So if I look at your guidance, if you back out all those Synventive charges, it seems to imply a pretty meaningful acceleration in margin for the third quarter to the fourth quarter. Is that the right way to think about it?

Gregory Milzcik

Absolutely. The thing that people have to recognize is if you look at historical reported numbers, we are a different business now then we were before. For example Barnes distribution Europe was in the reported numbers over the past number of years. Also we have aerospace OE business where we are expecting a significant improvement in the fourth quarter that will lead into 2013. And this mirrors the acceleration of the actual production of the aircraft. So I think that ties in very nicely.

Once you have Synventive contributing into the fourth quarter, all those things combined as well as our distribution business, we are looking at it a significant uptick year-over-year in operating income. All those things combined leads us to forecast a record fourth quarter.

Unidentified Analyst

Thanks for the color there. That really helps. On the industrial businesses, could you give some color on monthly progression or cadence in terms of what you are seeing through the quarter and maybe into October, if you will?

Gregory Milzcik

I have been looking at this with great intensity because it was concerning at some point. There are several things that are going on in our industrial business and let's say a variety of driving factors. I missed nitrogen gas products in Synventive have different driving forces. The rest of the industrial business is, if it’s direct automotive, it’s certainly being impacted by Brazil and Europe. Europe is certainly suffering as well as, Brazil does not get a lot of attention but Brazil is certainly a real issue. They have had nine consecutive quarters of reduction in GDP. They are not in recession yet but if that progression continues it won't take like a quarter or two more to impact that.

But at the same time one of the things that we are pleased with is the, if you look at the PMI Index was actually nine consecutive quarters above 50. When you look at the or 13 consecutive quarters above 50, and in the summer it was June, July, and August were all negative to 50 and it was September that rebounded. And I reflected on it for past of couple of years. It actually three years in a row where we had slow summers that recovered in the fall. This one was a little more extended but I think that we are expecting it to be slow on the industrial side for the next -- for the foreseeable future.

Unidentified Analyst

Okay. And last question is on the aerospace OEM businesses. How much did the OE business increase year-over-year and I guess the aftermarket as well in the business?

Gregory Milzcik

Well, the aftermarket was what really impacted us the most. And I will make a couple of comments on that not to go on forever. But there is a couple of things going on in the aerospace aftermarket that are unusual compared to a normal cycle. We have been talking about you know the rebound for years actually. And we thought we saw the beginning of it at one point and it never really materialized. And if you look at the way the OEs are reporting, where Pratt and Whitney is down 21% on spares and GE is down 18% etcetera. And our business reflects that.

The thesis currently however is that a lot of that is being driven by cost conscious European airlines. High fuel prices combined with the economic factors there. And the thesis for 2013 is that there will be a rebound. And it’s based on the fact that load factors are around 80%. Anyone who is flying lately knows center seats are not empty anymore. Combined with air traffic growth at 5% and flight hours are only growing 3%. So the math works basically to say you are going to drive flight hours up and if flight hours are up than it’s inevitable you have to maintain your airplane.

So the current thought is that 2013 should be a good year for aerospace aftermarket. I am not going to be on that and we are going to be a little more conservative in our forecasting for next year, simply because we haven’t seen the rebound last year or the year before like we expected.

Operator

Thank you. Next question is from the line of Edward Marshall. Please go ahead, Edward.

Edward Marshall - Sidoti & Company

I think you just answered my question but I just want to get some clarity. One of your customers said they saw stabilization in the aftermarket hit in the third quarter and I was particularly referring to spares. You mentioned earlier in the prepared remarks that you are seeing kind of a flattening and it’s been flattening for most year, but then you talk about the spare parts business seeing significant inventory compression. Can you kind of parse those comments together for me so I can kind of understand exactly what's happened on your side related to maybe your major customer.

Gregory Milzcik

Well, there is a couple of things going on. One of the things, our MRO business over the past couple of years has grown above market largely because of significant investments being made in new process introductions. New repairs being introduced etcetera. So I think that we are happy with that over the past couple of years. However, we haven’t seen a great improvement in our MRO year-over-year, although going into the fourth quarter we have seen an uptick in orders. You know one month does not a make a quarter so we will -- on these short cycle we have got to kind of hold back.

I think what the OEs are saying about the stabilization is probably accurate. I think that there is only so much inventory you could take out, there is only so much deferred maintenance you can do. And I think there thesis about air traffic growth and load factors and flight hours are all accurate. It’s a matter of when will that occur. And modern aircraft engines are very durable and you can do a lot to keep them flying without harming the safety or flight issues.

Edward Marshall - Sidoti & Company

And the information you gave on the backlog in the release here. Is that the aerospace backlog I am referring to? Is that inclusive of what goes on in the aftermarket business?

Gregory Milzcik

Yes, but it’s only -- aftermarket is such a short-cycle that it’s only a fraction of that total number. So that’s dominated by aerospace OE.

Edward Marshall - Sidoti & Company

And you said you saw significant -- you are going to see significant improvement on the OE side on the aero for the fourth quarter and into ’13.

Gregory Milzcik

Exactly.

Edward Marshall - Sidoti & Company

Is that related to the GE-90 and GEnx engines that you are on?

Gregory Milzcik

It’s a wide swath of thing. Everything from some military programs that we won. 777 was announced to hit the 8.3 per month of run rate, this month. 787 is going from 40 aircraft this year of production to almost 75 next year. So there is a number of things going on. I have said many times in the past that after 30 years in aerospace it’s hard to see the OE side look much better. On the commercial side anyhow it’s amazing.

Edward Marshall - Sidoti & Company

While looking at the fourth quarter number and while I can just talk about guidance a little bit, and I know you don’t give quarterly guidance but there is one quarter left. At the low end I think it’s coming out to $0.54.

Christopher Stephens

Yeah, $0.49 to $0.54 is the math.

Edward Marshall - Sidoti & Company

I mean the seasonality usually says, and I understand that Synventive is in there and it looks like you are basically saying that you could reverse this $0.07 charge that hit this quarter, $0.06-$0.07 charge. So if I look at the core business and say normal seasonal trends of what would happen, and you have talked about some weakening in the industrial businesses. How do I make -- is aerospace that strong that it’s offsetting some of the other weaknesses including normal seasonality that you would see in 4Q?

Gregory Milzcik

Exactly. Aerospace is the biggest driver. Synventive of course is an adder. Our distribution business we have year-over-year comps that we are confident in. So when you look at it from that perspective, we rubbed hard and we believe it’s going to be in that range. And like I said earlier in the commentary, if you look at the historical reported numbers we also had Barnes Distribution Europe which traditionally had a seasonally weak fourth quarter.

Edward Marshall - Sidoti & Company

Synventive, you said $160 million that you expect in 2012. Is there any seasonality in that business? The third quarter alone looked a little bit weaker but I guess it’s just based on timing when you actually acquire that business at 15 point, we are talking about $160 million in revenue. I think that went back to the last quarter in which you said it would do annually.

Patrick Dempsey

Hi, this is Patrick Dempsey. As we look at the Synventive business moving into 2013, basically we feel very confident in terms of a continued growth. And again remembering that the drivers behind that business are very much the number of model changes or name plates that re introduced by the auto OEs with automotive making up the dominant amount of its end markets. So selectively as we move in to 2013, we see continued growth and robustness in there end markets and the number of model changes that are taking place. So not any real seasonality so to speak over the course of the year.

Edward Marshall - Sidoti & Company

Okay. I want to get back in line but these questions just keep coming to my head so I will ask one last one. It’s always dangerous when that happens. $0.16 to $0.18 is what you said for 2013?

Christopher Stephens

Exactly.

Operator

Thank you. Next question is from the line of Matt Summerville. Please go ahead, Matt.

Matt Summerville - KeyBanc Capital Markets

Couple of questions. First, on pension expense, Chris, can you remind me what that looks like in ’12 and what are you thinking on that for ’13?

Christopher Stephens

Sure. When we started the year we talked about coming off of 2011 and looking at about a $5 million headwind on pension expense. Kind of reflected every quarter throughout the year. We have been commenting on that on our quarterly performance. You know going into 2013, I think it’s not going to be pretty. I think the discount rate clearly is going to be less. We won't know that until December 31 of course but going into next year if we were -- we kind of ended this year -- the discount rate at the end of last year was about 5%. You could think if that’s going down to essentially 4%, represents you know $4 million-$5mi headwind based on current pension accounting on that.

So it is going to be a headwind going into 2013 without a doubt. But we won't know that Matt until the end of the year. And we will provide color on that on our fourth quarter call.

Gregory Milzcik

But, Matt, think of how lucky we will be when interest rates move up.

Matt Summerville - KeyBanc Capital Markets

You and everyone else. So just a couple of other kind of modeling items. You mentioned in your prepared remarks that your CapEx -- that’s actually a fairly big cut given that you have one quarter left. So can you describe what you are actually cutting from your CapEx budget. And then, Chris, the fourth quarter implied tax rate please?

Gregory Milzcik

I will take the first part. One of the things that I would reflect on over the past number of years is we had actually above the average capital expenditures for a number of years preparing for the aerospace uptick. So some of the reduction is appropriate overtime. As far as the fourth quarter, it’s simply moving it to the right slightly. And I think that’s significant.

Gregory Milzcik

Exactly. I mean we are not holding back on CapEx spending. We just kind of take a look at the business conditions as things come through, we look to execute on that. But looking at the full year and the timing at which CapEx came in, we are seeing a reduction. And then Matt on your question on the tax rate. Kind of in that low 20% is what we anticipate for the fourth quarter.

Matt Summerville - KeyBanc Capital Markets

Okay. And then I would be interested in just some color as we think about general industrial markets here in North America. Greg, can you may be spend a moment speaking to, in distribution how the DSA evolved July, August, September? And then what you saw from an incoming order rate standpoint in your industrial segment, kind of that cadence if you will through the quarter.

Gregory Milzcik

That’s a great question. I mentioned earlier that this is the third summer in a row where a couple of summers ago it was talking about the, are we entering a new recession and last year there was talk about slow down on the rest of the things. It’s almost like this is the same cycle that we went to three summers. This year I think however what we saw is an inventory compression based on the in customer’s outlook. Clearly China slowing, clearly Europe has got troubles etcetera. And what they -- and this is my perception, what they do is they basically cut back on inventory which is a onetime compression and it’s kind of like a slinky, we get sandwiched in there.

So we kind of saw that going through the summer. When I look at the latest reports from our distribution businesses that in October the number of orders are growing and work in process is very strong. So I think we are seeing that same type of thing. If you look at companies like Caterpillar, they are very vocal about the fact that they are compressing there inventory and when you are a supplier to the OEs that has the effect. Our distribution business similarly when we look at the order size and the frequency of orders during the summer, it reflected that type of inventory progression.

Matt Summerville - KeyBanc Capital Markets

And then can you sort of make similar comments on the industrial business in North America as you went through the quarter.

Gregory Milzcik

Exactly. The industrial business, the direct automotive, clearly direct automotive continues to improve year-over-year. The big three are not as robust as the Japanese transplants but at the same time there is improvement. General industrial is flattish depending on which market. And I think that’s reflective of the PMI Index. So I think that returning in September where September numbers were fairly robust, even excluding aircraft. And I hope that will continue into the fourth quarter. But I think for the foreseeable future we are expecting a low to no growth GDP in some areas and overall it will be based on specific markets.

Matt Summerville - KeyBanc Capital Markets

If you look at kind of the 49 to 54, mathematically implied for the fourth quarter, you just talk a lot about the aerospace business. Can you sort of help us kind of fill in the blanks? How you are thinking about OE, you said up, is that up 15, is that up 20, is that up 30? And aftermarket, what is your assumption, aftermarket for the fourth quarter because that is obviously a big swing factor.

Gregory Milzcik

Personally I am looking at flattish for aftermarket. OE should be upper single digit. As far top line distribution, a lot of it has to do with the customer mix and year-over-year expense changes etcetera. So the net benefit is largely from aerospace and to a lesser extent distribution in Synventive.

Matt Summerville - KeyBanc Capital Markets

As you sort of had Synventive now for a couple of months, can you talk about how you are thinking? You mentioned the word, integration. To me there doesn’t seem like there is a whole lot to integrate. It’s not really all that related to your other businesses. But as you have owned it for a couple of months, what level of synergy if any, are you finding with that business?

Patrick Dempsey

Matt, this is Patrick. How are you? Well, let me say that the integration of sales is going very well and we personally continue to be impressed with Synventive management team and the entire workforce in terms of their overall talent as we continue to work together through the integration. As you mentioned, you know Synventive represents a new strategic platform for Barnes Group and our intent has been very much focused on building on this success to date and the development of the leading edge technology that Synventive has in the top runners.

The integration doesn’t require any restructuring as I mentioned. There the focus has been more on introducing the Synventive team to the Barnes enterprise system which we use as our operating system, and bringing the operations and engineering teams together to leverage the various talents that exist between both organizations with a view to exploiting and leveraging best practices.

Matt Summerville - KeyBanc Capital Markets

I am looking at the supplemental you posted at the website on Synventive. And thank you for doing that, we appreciate it. If you look at the geographic breakdown, 46% Europe, 28% Asia on page two. Then you look at page three, Europe and China 74%. So pretty much all of Asia is China. What's your view on the level of automotive investment or incremental investment that you are anticipating in China over say the next 12 months.

Patrick Dempsey

For the Synventive as you point out, one of our fastest growing areas is the Asia market, in particular China. I have been to China twice already since the acquisition. And the facility there continues to grow at you know at a great rate. We are also, even as we talk about some of the investments capital wise. Some of those are already allocated to the Chinese operations with a view to expanding its capabilities. So we are also looking at investing in the workforce with continuing expansion of both our engineering capabilities as well as the production side of the equation.

Operator

Thank you. Next question is from the line of Scott Graham. Please go ahead, Scott.

Scott Graham - Jefferies & Co.

So, Chris, you know my favorite question. I like to ask about the inertia on productivity across the company. And I know that this has been a big focus here and I was just kind of wondering any type of update, type of metrics that you are using. It’s something that I know is accelerating and we are just kind of hoping maybe you can give us any type of things that you are watching to show that what you are doing is happening.

Gregory Milzcik

Well, I will take that one. This is near and dear to my heart. I think productivity is key to future prosperity. And the last quarter was not as good as it should have been, largely because of some investments we are making in particular businesses where we are bringing on workforce without the production behind it. And it’s forward thinking. We know that we have to train people and get ready for some production in 2013 etcetera. So as we move forward we continue to express a desire and force the metrics throughout the organization and drive the productivity.

Our investment through the Barnes enterprise system in lean enterprise is significant. We have a lean leadership program that has been terribly or wonderfully successful, not terribly. Wonderfully successful in bringing people in to the organization and introducing them to the operation. We expect productivity to continue to grow into next year, however.

Scott Graham - Jefferies & Co.

Okay. Is there any -- at any point is there going to be some type of by segment margin targeting, you think?

Gregory Milzcik

Sure. I think that for the business as a whole we are looking at an adjusted number approaching 12% for Barnes Group. That will be perhaps a multi-decade record. And that’s not a goal necessarily but an end result of our strategy. Our strategy is to focus on more intellectual property orientated products and processes. And that by nature drives a higher operating margin. When we look at aerospace we expect mid to upper teens in the business. Our industrial business should grow on an adjusted basis its double-digits currently and it should be in the low to mid-teens overtime. And there is no reason why our distribution business can be double-digits overtime.

And I think that, again, driving the right initiatives for internal cost is one thing but it’s also about driving the investments in top line growth. That will benefit from improved flow-throughs at the various businesses.

Scott Graham - Jefferies & Co.

Very good. That’s very helpful. So completely separate question. Because this Synventive acquisition, obviously, you know really kind of far off the map here. I am there is some synergies with respect to your knowledge of the auto end market but not product wise per say. So I guess my question is, you know as we look at this Greg, it’s a situation where it feels to me like you have a desire upgrade sort of a quality of the margin profile of the company as well as the potential for organic growth. And if I am right on that, what's next? Where are you looking for the next larger acquisition, if any, I assume it’s either in aerospace or industrial? But if you can just maybe talk about your thought process over the next couple of years.

Gregory Milzcik

Well, it’s pretty much part of our public presentation on investor presentations, it’s exactly that. We are trying to change the nature of our business by investing organically in differentiated products and processes and through acquisitions the differentiation. In this sense Synventive fits extremely nicely in the sense start with leading market position. We find that businesses that are leading market positions tend to have higher margins and tend to be price leaders and have better grasp of the market. Intellectual property and that could come in the form of product or process.

Looking at global access, in other words being able to capitalize on the growth outside of Western Europe and the U.S. which should be higher for the foreseeable future. Synventive does that very nicely. And then growing markets. And we are looking at growing end markets. If you look at the number of name plates in the automotive industry, the automotive industry as a whole is growing about 6% globally. But if you look at the number of name plates, being the number of brands and the number of models and model changes, that’s growing much faster than the overall. And that’s what's driving this business.

So when we look at it from a strategic sense, we want to build this segment out. So if you look at acquisitions that would be a highest priority for us right now would be something that could supplement the Synventive acquisition.

Operator

Thank you. Next question is from the line of Holden Lewis. Please go ahead.

Holden Lewis - BB&T Capital Markets

You had talked about or made some comments that you are expecting North American distribution that profits would be up nicely in Q4. Can you give as to sort of what's, given that conditions remain sluggish, what provides that confidence?

Gregory Milzcik

There is a couple things. The year-over-year comparison, we has some higher expenses in the fourth quarter of last year that we don’t expect to recur. And that’s one of them. The other one is that we are looking in the improvement in October and the number of orders and the in-process workload that’s being worked on. If you notice that business has had incredible flow-through rates well above normal for the past couple of years. And even under normal circumstances, the flow-through rates for operating profit is about 40%. So I am pretty confident in our distribution business right now.

Holden Lewis - BB&T Capital Markets

Again, just so I can frame the message. When you talk about sort of seeing improvement in the margin, are you comparing that just to Q4 last year or you are comparing that to the 8% that you did in Q3?

Gregory Milzcik

No, I am comparing it to year-over-year Q4.

Holden Lewis - BB&T Capital Markets

Got you. Okay. And then I just want to make sure, the cadence question. So it sounds like what you saw was relatively weak July and August, perhaps inventory culling maybe ran its course. But it sounds like you then sort of saw the [total] of markets in industrial distribution, maybe firm up in September. And that firming has continued in October. Is that sort of correct how I am reading your message about total?

Gregory Milzcik

It’s close to that. I will take a broader brush to that, to the industrial businesses as a whole. And I think it’s reflective of the past couple of years too.

Holden Lewis - BB&T Capital Markets

Okay. But in both industrial and distribution, you are seeing some recovery from where we were a couple of months ago.

Gregory Milzcik

Yeah. As I mentioned, in October we are seeing the number of orders growing and the in-process work is looking very good. So I think that will continue. We hope that continues. It’s difficult with a short cycle business like that where you look day to day. Some days I like the aerospace OE because you could see backlog out for years.

Holden Lewis - BB&T Capital Markets

Okay. But that’s true for both your industrial segment and your distribution segment. It’s just one or the other.

Gregory Milzcik

Yes. Both.

Holden Lewis - BB&T Capital Markets

Both. Okay, got it. Just a couple of numbers I may have missed. I think it was asked what your OE aerospace grew and I didn’t catch the number if it was provided.

Christopher Stephens

Yeah, OEM grew 4% in the quarter.

Holden Lewis - BB&T Capital Markets

Grew 4% in the quarter. Okay. And then I guess going all the back to the first question that was asked. I think what we are trying to get a sense of in terms of Synventive numbers is, you have sort of the $0.06 related to acquisition cost of purchasing accounting but what was the operational accretion in Q3 from Synventive. I know you are stripping of the cost but what was the income from the quarter.

Christopher Stephens

At a high level we have stripped out the $0.06 to just provide some color to the quarter. We did note that the third quarter will be dilutive. Roughly $0.04 if you kind of net down. And adding it back in the fourth quarter which gives us confidence in our full year outlook in an effective fourth quarter, which was an earlier comment, to be net neutral for the year.

Holden Lewis - BB&T Capital Markets

Got it. Right. So $0.06 in cost $0.02 in accretion, so $0.04 in that drag and then it’s the reverse in Q4.

Christopher Stephens

Exactly. Think of it that way. And the reason for flowing out those one times is just to give you some color on -- they are not going to repeat, right. We are talking about short [throughput] accounting, mainly the flow through of -- step up to cost of goods sold as well as acquisition specific transaction cost on the deal. So it won't repeat. So that $0.07 is truly just those onetime items. So when we look at our full year guidance at $1.80 to $1.85, we are just trying to give you a better apples to apples to when we profile out 2013 which will be in February.

Holden Lewis - BB&T Capital Markets

Got you. And then last thing. As it relates to $0.06 in cost, I am assuming this quarter it’s sort of heavy on acquisition costs and light on purchase accounting that flips in Q4. But can you tell us, in Q3, what was sort of the impact on -- what was sort of the split between COGS and SG&A?

Christopher Stephens

Yeah, of that $5 million that we highlighted, think of it as $4 million in cost to goods sold, about $1 million in SG&A.

Holden Lewis - BB&T Capital Markets

Okay. So actually it’s pretty heavy purchase accounting even though you have only owned it for like two-third a quarter.

Christopher Stephens

Yeah, about five weeks.

Gregory Milzcik

Yeah, I have been complaining about that for some time now.

Christopher Stephens

Most of it is because the business is able to turn their inventory pretty quickly. It really just reflects mostly the short-term step-up that gets flushed through cost of goods sold which occurred in September.

Holden Lewis - BB&T Capital Markets

Okay. And I am guessing that the extra bit in Q4 is going to be mostly, again sort of purchase accounting for COGS impact.

Christopher Stephens

Yeah, think about the backlog flushing through. Yeah.

Operator

Next question is from the line of [Josh Chan]. Please go ahead.

Unidentified Analyst

Yes, I had a question on distribution but you just answered it, so thanks.

Gregory Milzcik

Thank, Joe. It’s the easiest question so far.

Operator

The next question is from the line of Matt Summerville. Please go ahead.

Matt Summerville - KeyBanc Capital Markets

I just had one quick follow up. The nitrogen gas business continues to be strong. It sounds like your order book still looks good there. You know given that -- to your point that is somewhat -- I guess I would think about it as somewhat of a CapEx item. Maybe you are thinking about it a little bit differently. I guess given how that business has responded in previous cycles, what is your confidence level that that backlog holds and that you don’t see deferrals and cancellations. That’s obviously a very nicely profitable business for your industrial segment.

Gregory Milzcik

I will dive in a little deeper on that. First of all in the previous recession we were hit extremely hard but that’s largely because it was exceptional period for the auto industry where things just basically stopped and we have a 50% reduction in orders almost instantly. But if you look at previous recessions, we didn’t see that level or pruning. And I also think that there is much more diverse global base than there was in the 2000 recession for example. Many more product lines. So any future recession, as long as it’s not of the magnitude of 2008 era, I think the business will hold up fairly well. What we are expecting currently when we look at the number of name plates etcetera, is we don’t expect it continue to grow a double-digit rate into 2013. But we expect it to hold up.

Operator

Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.

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