Barnes Group, Inc. (B)

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Barnes Group Inc. (B)

Q3 2012 Earnings Call

October 26, 2012 8:30 a.m. ET

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

Presentation

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.

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