Oct 25, 2013
Executives
William Pitts - Director of Investor Relations Patrick J. Dempsey - Chief Executive Officer, President, Director and Member of Executive Committee Christopher J.
Stephens - Chief Financial Officer and Senior Vice President of Finance
Analysts
Christopher Glynn - Oppenheimer & Co. Inc., Research Division Amit Mehrotra - Deutsche Bank AG, Research Division Edward Marshall - Sidoti & Company, LLC Matt J.
Summerville - KeyBanc Capital Markets Inc., Research Division Peter Lisnic - Robert W. Baird & Co.
Incorporated, Research Division R. Scott Graham - Jefferies LLC, Research Division Peter J.
Skibitski - Drexel Hamilton, LLC, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Q3 2013 Barnes Group Earnings Conference Call. My name is Catherine, and I will be your operator for today.
[Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr.
Bill Pitts, Director, Investor Relations. Please proceed, sir.
William Pitts
Thank you, Catherine. Good morning, and thank you for joining us today.
With me are Barnes Group's President and CEO, Patrick Dempsey; and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate website at bginc.com.
During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Our discussion today includes certain non-GAAP financial measures, which provide additional information that we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the SEC.
I want to remind everyone that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.
Before we begin our prepared remarks, I want to remind everyone that our financial results discussion is based on continuing operations. So let's now open today's call with remarks from Patrick, followed by a more detailed review of the quarter and our 2013 outlook discussion from Chris.
After that, we'll open up the call for questions. Patrick?
Patrick J. Dempsey
Thanks, Bill, and good morning, everyone. We've got a lot to talk about today, as we've had a very active quarter.
Our discussion will reflect positive performance and sizable strides we have made in the advancement of our growth strategy, as well as addressing some areas that fell short of expectations, specifically our Aerospace aftermarket business. Let's begin with this quarter's most important strategic development, which is the October 1 announcement of our pending acquisition of privately held Männer.
As you can see on Slide 2 of our supplemental package, Männer is an industry leader and a highly recognized brand in precision mold-making, valve gate hot runner systems, and systems solutions for the medical, pharmaceutical, packaging and personal care/health care industries. At Barnes Group, we anticipate the global demand for more complex, highly technical injection molding solutions to increase over time.
Accordingly, we see Männer's innovative suite of products and services and our highly complementary end markets as a good addition to our core capabilities. We look forward to adding Männer and its highly skilled workforce to our company, as we expect this transaction to close next week.
Around the date of the closing, we will host an analyst call to discuss more about Männer, why this represents a terrific next step in the evolution of Barnes Group's portfolio and financial details of both the transaction and the business itself. Also during the quarter, the company entered into an amended 5-year $750 million revolving credit agreement, which secures financing at attractive rates for an extended period of time.
This financing arrangement provides us with the flexibility to further execute our growth strategy. With respect to Barnes Group's financial performance, we reported a 16% increase in sales in the third quarter, despite softness in our Aerospace aftermarket business.
The Synventive acquisition was a major contributor to that increase, but company-wide organic sales growth was also a respectable 5% in the quarter. At Aerospace, our original equipment manufacturing business delivered a solid 6% growth, while Aerospace aftermarket reflected continued softness, as both MRO and aftermarket spare parts were down 4%.
Aerospace operating margin was 7% in the quarter. However, results include an $8.6 million pretax inventory valuation charge related to exchange engine parts that support our MRO business.
We've purchased these parts to support the expansion of our aftermarket service capabilities and to provide an exchange inventory to meet customer demand for repair services, which require very short turnaround times. As we have gained efficiencies in our repair process, the required level of exchange inventory to meet customer needs has decreased, and as such, we have been pursuing various avenues to market this inventory.
As part of our third quarter review, we concluded that our targeted plan to sell this inventory became less certain and more complex to execute in the near term. As a result, we recorded a valuation charge to decrease the carrying value of this inventory to net realizable value, which reflects current market pricing in readily available channels.
This charge is neither indicative of our assessment of the overall MRO end market nor our competitive position, both of which we have full confidence in. Also, and just to clarify, these are not parts associated with our RSP programs, where we have exclusive rights to supply parts over the life of the related aircraft engine programs.
We continue to have a positive long-term outlook with respect to commercial aviation. On the OEM side, large backlogs of Boeing and Airbus support anticipated production rate increases for both narrow and wide-body platforms.
This should provide robust sales growth over the next several years. New product introduction, or NPI, investments are being made at an elevated level to position us on the platforms of the future, such as Rolls-Royce Trent XWB and the GE Leap-X [ph].
So commercial OEM remains a great end market for us. In the aftermarket, we expect continuing softness heading into the fourth quarter, which has had an impact on our expectations for the year.
However, as we've noted before, near-term strengthening in the aftermarket would provide some beneficial upside to our expectations. Long-term, we anticipate aftermarket demand for our services and spare parts businesses to accelerate, as deferred maintenance abates, airline profitability continues to improve and increased traffic drives growth in capacity and utilization.
At Industrial, we experienced strong organic sales growth in the quarter of 6%, with positive increases from each of our industrial businesses. In particular, the businesses that were most impacted by the slowdown in Europe, Seeger and Hanggi, had the largest percentage sales growth in the quarter.
Industrial operating margins increased as a result of volume leverage and productivity improvements. Overall, our industrial end markets remained generally favorable.
Both the U.S. and European manufacturing PMI metrics demonstrated strength, with Europe's PMI now crossing above the 50 threshold.
Global automotive production remained solid, with 2014 expecting growth in most geographic markets. One soft spot in our industrial end markets is global construction equipment, which has led to some headwind in our Associated Spring and Raymond businesses.
To wrap up my comments today, I remain confident in the strength of the aerospace industry and our long-term competitive position within it. We continue to develop new products and processes to enhance our participation on the key commercial aviation platforms of tomorrow, and expect 2014 to reflect a more promising environment for our aftermarket businesses.
Industrial has been a very positive story for us over the last several quarters, with global economic conditions improving, especially in Europe. And with the expected addition of a strong margin, highly differentiated business, like Männer, we're well positioned to continue to make solid progress growing our industrial portfolio.
Overall, we remain very focused and committed to executing our long-standing growth strategy, and we continue to make the appropriate investments in our businesses to drive organic growth. Additionally, we seek value-generating acquisitions to further add to our intellectual property base capabilities and extend our global reach, creating long-term value for our customers and our shareholders.
Now let me pass the call over to Chris.
Christopher J. Stephens
Thank you, Patrick, and good morning, everyone. I'll start by highlighting key points of our third quarter results and finish with an update of our full year 2013 guidance.
Turning to Slide 3 of our supplement. Sales were $269 million in the quarter, up 16%, primarily driven by the contribution of the Synventive acquisition and organic sales growth from both segments, with our Industrial segment demonstrating a more significant growth again this quarter.
Income from continuing operations was $21 million, or $0.39 per diluted share, up 8% from the adjusted $0.36 per diluted share a year ago. As a reminder, last year's adjusted third quarter earnings from continuing operations excluded the impact of $5.1 million pretax, or $0.06 per diluted share, of short-term purchase accounting adjustments and transaction costs related to Synventive.
As Bill mentioned in the opening, we have provided a reconciliation of these adjusted results to the appropriate GAAP measures as part of our press release. Operating margins of 10.4% achieved in the third quarter was down 150 basis points from last year's adjusted operating margin.
It's important to note that third quarter 2013 operating profit includes a couple of items that had a significant negative impact on our results. First, as Patrick mentioned, we recorded an $8.6 million pretax, or approximately $0.10 per share, inventory valuation charge related to exchange engine parts within the Aerospace repair and overhaul business.
Plus, we incurred an increased level of acquisition-related costs due to the Männer transaction. So now let's discuss segment performance, starting with Aerospace.
In the third quarter, Aerospace sales were $102 million, up 3% from $98 million in the same period last year. As Patrick mentioned, 6% OEM growth was offset in part by lower sales in the aftermarket.
As was the case in the second quarter, RSPs were negatively impacted by mix and contractually scheduled incremental management fees. Operating profit of $7 million was down 49% from the prior year period.
Aerospace operating profit benefited from the impact of higher OEM sales and lower employee-related costs, offset by the inventory valuation charge, lower aftermarket sales and higher new product introduction costs. Operating margins in the quarter was 7%.
Aerospace segment backlog at the end of the third quarter was $508 million, down about $28 million from the end of the second quarter, as we experienced higher-than-usual order debookings in the quarter, which impact net orders. Short-term debookings suborders is not uncommon in our business and occurs for a variety of reasons.
Component design modifications can drive change and material, such as the change from titanium to inconel, a redesign of parts or a redefined manufacturing process, all of which we experienced in the quarter. When these changes occurs, our customers will often debook existing orders under an old part number and rebook under a new number.
As a result, we do expect a portion of these debooked orders to return in the future. At Industrial, sales were $168 million, up 25% from $134 million in last year's third quarter.
Synventive contributed 19% in acquisition-related sales increase during the quarter, while organic sales growth was 6%. Please note that Synventive's July and August sales are considered acquisition related, while their sales in September 2013 are considered organic.
Operating profit of $21 million was up $7.4 million, or 55%, from last year's adjusted operating profit, reflecting the profit contribution of Synventive, the profit impact of higher organic sales growth and productivity improvements. And as previously noted, third quarter of 2012's operating profit was negatively impacted by $5.1 million of short-term purchase accounting adjustments and transaction costs related to the Synventive acquisition.
Operating margin in the quarter was 12.4%, up 230 basis points from prior year period's adjusted operating margin. The company's effective tax rate from continuing operations in the third quarter of 2013 was 15.8%, compared with 12.7% in the third quarter of 2012, and 13.5% for the full year 2012.
The effective tax rate increase in the third quarter of 2013 versus the full year 2012 rate was mainly due to several discrete foreign tax-related items in 2012, and an increase in the company's effective tax rate in Sweden, partially offset by the projected mix and earnings attributable to higher tax jurisdictions. Regarding share count, our third quarter average diluted shares outstanding was $54.3 million.
During the third quarter, we repurchased approximately 225,000 shares for $7 million. Year-to-date, we have purchased 2.4 million shares for $69 million, and we have 2.6 million shares available for repurchase under existing Board authorizations as of the end of September.
However, given the pending acquisition of Männer, we have suspended our share repurchases for 2013 and now expect our year end average diluted share count to be approximately 55 million shares. Through the first 9 months of 2013, we've returned over $85 million to shareholders via dividends and share repurchases, and have capitalized the company so that we are not overlevering our balance sheet to complete the Männer acquisition.
Cash generation continues to be strong. Adjusted free cash flow, which we define as operating cash flow less capital expenditures, with the income tax payments related to the gain on the sale of BDNA added back, was approximately $74 million year-to-date versus $54 million last year.
Now let's turn our attention to updated 2013 outlook on Slide 4 of our supplemental slides. Our 2013 guidance is based on continuing operations.
Therefore, it excludes the results of BDNA, which are reported in discontinued operations. In addition, our adjusted full year guidance excludes the company's CEO transition costs accounted for in the first quarter of this year and the tax charge recorded in the second quarter.
This guidance does include the impact of the Aerospace aftermarket inventory valuation charge and the third quarter Männer acquisition-related expenses and operating income -- and operating margin. For 2013, we now expect sales from continuing operations to grow approximately 16% and adjusted operating margin in the range of 12.5% to 13%.
Adjusted EPS from continuing operations is expected to be in the range of $1.75 to $1.80 per diluted share, up 15% to 18% from 2012's adjusted earnings per share of $1.52. Please note, this guidance does not include any impact from the future operations of Männer.
We will discuss this transaction's impact on guidance when we host an analyst call, as Patrick noted. For continuing operations, depreciation and amortization is expected to be roughly $64 million, and $35 million of that reflects our outlook for depreciation, given an updated 2013 CapEx spending estimate of approximately $55 million.
And lastly, we expect the 2013 effective tax rate from continuing operations to be approximately 20%, excluding the impact of the second quarter Tax Court Case. And as we move forward, we expect our tax rate to increase to the mid to upper 20% due to the expiration of certain tax holidays, a greater mix of anticipated earnings from higher tax jurisdictions and other factors.
In closing, clearly our third quarter results were mixed. However, despite a couple of meaningful expense items, we did deliver improved earnings in the quarter.
Our balance sheet remains strong, and even with the approaching Männer acquisition, our balance sheet provides us with the financial flexibility to drive further investment and fuel profitable growth. Operator, we will now open the call for any questions.
Operator
[Operator Instructions] First question is from the line of Christopher Glynn from Oppenheimer.
Christopher Glynn - Oppenheimer & Co. Inc., Research Division
Yes, kind of a broad-based deeper dive into Air, I'm looking at the trend in the revenue guide went from low doubles to 10 to high singles, and I don't think you kind of broke out the segments in the current revenue guidance. But just wondering how the OE is coming in relative to expectation.
And also, just to clarify what you meant by a mix impact within the RSP business, please?
Patrick J. Dempsey
Okay. Thanks, Chris.
Relative to Aerospace on a full year basis, what we're looking at right now is a 5% sales growth for the full year. In the third quarter, as it pertains to the OEM sales side of things, our production overall was up 6% year-over-year and 8% sequentially.
While this was a solid result for us, at the same time, we were targeting an even stronger third quarter. And what happened there was we had expected one particular NPI program to start production in July, which, due to normal approval process, has slipped to September.
So overall, as we look at the OE side of the house, we continue to remain very bullish in terms of the outlook. But what we experienced was some lumpiness in the third quarter, both OE and aftermarket.
On the aftermarket, as we talk about the mix side of things, as you know, our aftermarket business is comprised of a wide range of jet engine overhaul and repair capabilities. And when we talk about mix in a given quarter, it's relative to certain engine types coming in more than others.
With the RSPs, what I would highlight is that directionally, we saw the same type of growth from a growth sales perspective. But as you may be aware, the incremental management fees that hit in 2013 are a deduction from those growth sales, whereby our net sales reflect then a slightly negative 4%.
Christopher Glynn - Oppenheimer & Co. Inc., Research Division
Okay, that's helpful. Chris, tax rate going to mid to upper 20s, just wondering if we could put any finer points on the time frame for that.
That's a 2014 comment and if there's any more specificity or bias within that kind of broad range that would be tough for us to model.
Christopher J. Stephens
No, I understood. So what we definitely want to bring attention to is we will experience expiring pioneer tax data holidays that we have as a company over time, and those tax holidays' expiration are going to occur over multiple years.
In addition to that, when you just think about the mix of earnings, given the addition of Synventive, and as we look at higher tax jurisdictions versus lower tax, it will be making a change upwards. But we're going through the planning period as well right now, Chris, and I would caution that thinking about various factors that would impact our tax rate, we clearly will give more color in February, when we provide 2014 guidance.
But right now, and as you can see the past several quarters, we've had significant changes in our tax rate. But we're just trying to signal the fact that we definitely are seeing a good going up.
Mid-to upper 20s is what we're currently outlooking.
Operator
The next question is from the line of Amit Mehrotra from Deutsche Bank.
Amit Mehrotra - Deutsche Bank AG, Research Division
So just a first question on the aftermarket spares. Can you just help us put a little finer point on what the gross change was in underlying demand and the impact from the management fees there?
Maybe just asked another way, I guess, with the management fees lapping starting next year, what type of step-up would you expect just from the removal of that incremental headwind?
Patrick J. Dempsey
Amit, what I would highlight is, is that the incremental management fees realized in 2013, I think, was -- how I would think about it is, as you look at -- as we look at our growth sales and we look at the performance that has been cited by the OEs on particularly the CFM 56 engine and the CF6 in this quarter, it is directionally -- we're directionally seeing the same type of top line growth. However, it's offset by the incremental management fees being realized in 2013.
So hopefully that helps give you a flavor as to the type of upside we're seeing on top line sales.
Christopher J. Stephens
Yes, Amit, I would add that the management fees are contractually tied that over the fourth or later years and we've been -- these programs have started in 2003. The last one we signed in 2007.
So we're at the tail-end of what we consider these incremental management fees and the impact that's having on our net sales. So through this year, we'll get through that.
And as we, to Patrick's point, as we think about the growth sales element of that, we're tracking similar to industry OEs in terms of those growth rates that we're hearing about, specifically for those engines, CFM56 and CF6. So we're anticipating improvements going forward.
Amit Mehrotra - Deutsche Bank AG, Research Division
Right. But if we look at next year, any underlying improvement should -- there should be some multiplier effect because you don't have this incremental headwind from the management fees.
Is that an accurate statement?
Christopher J. Stephens
It is an accurate statement. So you have this -- it's a onetime step-down.
It's not incrementally changed over multiple years. And as you may know is that these revenue-sharing programs are over the life of those engines.
And so we're going to benefit from this from years to come, and we'll see lumpiness quarter-to-quarter. Clearly, management fee is an item this quarter and we talked about the mix.
We'll see the lumpiness on those 2 specific engines, CFM56 and CF6. But over time, the fact that this is going to benefit Barnes Group for 20-plus years is the good news.
We just have -- we're dealing right now with just a step down in management fees, but we'll get through that in '13 and not have that, I'll call, headwind going into '14 or later years.
Amit Mehrotra - Deutsche Bank AG, Research Division
Okay, that's helpful. Just another, if I may.
My question -- my next question is sort of around consolidated industrial margins. These businesses appear to be quite a bit less profitable than the Aerospace businesses, but yet, the company continues to allocate a lot of capital there.
Is there an opportunity to narrow or close that gap between the 2 segments? Or are these structurally lower return businesses?
And I guess just to follow-up to that, if it's the latter, how should we think about the long-term earnings growth of the company, given this part of the business has sort of exclusively been the focus for some big acquisitions over the last few years?
Patrick J. Dempsey
Yes, Amit, what I would highlight there is that on the industrial side, the business that we have been targeting, in particular Synventive last year and Männer, the most recently announced acquisition targets that we hope to close on next week, these businesses, in general, are much more differentiated in terms of their product offerings, much more highly-engineered products where we would own both the design and applications engineering, as well as each of these businesses hosts a portfolio of patents, all of which tend towards higher margin. And as we look at our industrial portfolio, we've indicated that we're looking to move them towards mid-teens in terms of operating margins, where with Aerospace, we've cited mid to high teens.
So the intent, clearly, is to close that gap. And I think our overall strategy is in line to do so.
Amit Mehrotra - Deutsche Bank AG, Research Division
Okay. Do you think that gap can be closed relatively quickly?
Or is this sort of more of a long-term 5-year type target? Or do you think we could see some good progress there starting even in '14?
Patrick J. Dempsey
I think as we add the Männer acquisition to the portfolio, it will have a very positive impact. At the same time, this is a longer term strategy, where we are looking at it over multiple years, but looking for incremental improvement in 2014 and each year beyond that.
Operator
The next question is from Edward Marshall from Sidoti.
Edward Marshall - Sidoti & Company, LLC
So if you can just confirm that the $0.10 inventory charge in Aerospace, that's not in your guidance. So if I'm looking on a pro forma basis, that's 185 to 190, so technically, I guess, you're narrowing.
Christopher J. Stephens
Yes, we are. So -- yes, so the 175 to 180 recognizes the -- that charge.
Edward Marshall - Sidoti & Company, LLC
Okay. So when I think about the RSP agreements, and we just covered, I guess, the management fees and how they drop off next year, but I kind of wanted to also look at maybe the -- were that will be a tailwind for you.
I kind of wanted to frame it also as to the -- what happens with the pioneer tax rates. So you've got a tailwind on revenue, you got a tailwind on operating profit, but as we kind of move down if the core tax rate's going up as a whole, I assume that maybe the -- from an EPS perspective, it's actually going to be somewhat of a headwind.
Is that the right way to kind of look at this business?
Patrick J. Dempsey
I think that's a fair assessment in that as we look at the longer term for the RSPs, 2013 represents the incremental management fees effectively leveling out. And then, we'll only move with volume on a go-forward basis.
In terms of the positives, as we look at the longer term, is the shop visit rates and the overall rates that go against both the CFM56 and the CF6, in particular the ADC 2, and the newer generation the CFM56, the -5 and -7, already we're seeing very nice upticks in terms of the volumes against that. On a year-over-year basis too, we're also -- we also received the benefit of pricing increases in the -- aligned with the catalog of the OE.
As you mentioned, the pioneer tax agreements were also negotiated during the time of the RSPs in the 2003-2007 time frame. And in the future years, they will begin to expire, and that will represent some headwind on the EPS.
Edward Marshall - Sidoti & Company, LLC
Okay. And they don't all unwind last year.
I think there were multiple agreements signed. I think the bulk of which, though, were signed initially.
There was, I think, 8 or so they were signed. And secondly, do you produce everything in Singapore?
Or is there some domestic production as well for the RSPs?
Patrick J. Dempsey
The RSPs were signed over -- there were 13 agreements signed over a period of time from 2003 to 2007, and the arrangements in both the incremental management fees and the pioneer status are sequential as the -- so they're over a period of time as the agreements were signed.
Edward Marshall - Sidoti & Company, LLC
But 8 of the 13 were signed, I think, initially in '03. Is that right?
So...
Patrick J. Dempsey
No, no. They were pretty much signed on a quarterly basis between 2003 and 2007.
Christopher J. Stephens
Yes. Think of it as 2, 3 a year starting in 2003 through 2007.
Edward Marshall - Sidoti & Company, LLC
Okay. And is it -- is the tax rate -- is the tax jurisdiction -- we can follow up on this later, but is it per contract or is it like base on the facility and the amount of hires and when you've hired, et cetera?
Patrick J. Dempsey
It's based on each of the agreements. And again, I would highlight that even as we look at tax rates in Singapore, and obviously, they're significantly below the corporate tax rates here domestically.
Edward Marshall - Sidoti & Company, LLC
You mentioned the buyback and what you bought back in this -- in the quarter. I was wondering if you -- you gave us the blended rate for the quarter.
But can you give us the actual share count was for the end of the quarter, if you have it handy?
Christopher J. Stephens
Sure. On the press release...
Edward Marshall - Sidoti & Company, LLC
Sorry to make you work.
Christopher J. Stephens
Yes, yes. At the end of the third quarter -- so basically, it was 53 million shares, average 54.3 million for diluted.
Edward Marshall - Sidoti & Company, LLC
But is that the blended rate for the entire quarter? It's not an average throughout the quarter?
So, what was the...
Christopher J. Stephens
Fourth quarter. Yes, fourth quarter...
Edward Marshall - Sidoti & Company, LLC
What was the actual count on -- at September 30? Do you have that number?
Christopher J. Stephens
Yes. It'd be about 60.2 million shares, last about 7.4 million treasury.
Edward Marshall - Sidoti & Company, LLC
Okay. So the shares were bought back closer to the end of the quarter, I guess.
Or is it throughout?
Patrick J. Dempsey
Throughout.
Edward Marshall - Sidoti & Company, LLC
So you reconcile the cash flow saying that, that was less the distribution business. Taxes, is that how you go to the $74 million, rather than the loss of $21 million?
Is that right?
Christopher J. Stephens
Yes. Right, right.
So in our press release, we're just identifying the reconciliation.
Edward Marshall - Sidoti & Company, LLC
Okay. And then finally, I think if you could just confirm the OEMs split with aftermarket.
I think you said 6% year-over-year on OEM. Did you give the rate on the year-over-year in the aftermarket and sequential move?
Patrick J. Dempsey
Aftermarkets, we said was down 4%.
Christopher J. Stephens
And down 8% sequentially. Roughly, actually, let me blend that, I'm sorry.
It's around 5% sequentially.
Edward Marshall - Sidoti & Company, LLC
Okay. And did you -- you don't break out the RSPs versus the MRO, do you?
Christopher J. Stephens
We don't have any issues with that. So the 3% down for MRO, and I'm going to give you a quarter-over-quarter, we were down 3% for MRO; we were down 4% for RSPs.
Sequentially, MRO was actually up 1% and RSPs were down 8%. And again, just like I would say, a lot small numbers here, right, in terms of the size of these businesses?
So recognizing a $0.5 million sales mix, might represent a couple of percentage points there.
Operator
The next question is from Matt Summerville from KeyBanc.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
First, I want to talk about the inventory hit here. So can you just give a little more background history on that, when you bought this?
Did you buy this stuff from a third-party? And what was sort of behind the decision to do that?
And just walk through that in more detail. And then what's the remaining carrying value of that on the balance sheet?
Patrick J. Dempsey
Yes, Matt. We said the material was purchased for the purposes of an exchange pool.
And so as we were ramping up a number of years ago with the expanded capabilities within our MRO business, the turnaround times against these particular components were such that we required an exchange pool to meet the demanding turnaround times. As a result, the material was bought from a range of different sources that we accessed at the time.
And as we've continued to improve our processes in terms of the capabilities around these components, subsequently, the demand or the necessity of the inventory has decreased. So with that, we look to market the material out to the open market.
And based on our assessment in the third quarter, decided to take a valuation charge against what were readily available market channels.
Christopher J. Stephens
And then, Matt, that -- to answer your second question, so the adjustment represents less than 10% of the Aero inventory. And the value that's left, is -- the net realizable value that's left is also less than 10% of Aerospace inventory.
Patrick J. Dempsey
I would also highlight, Matt, that this material is in fact still very much part of production engines that are used -- actively used in the fleet today. And so as we look to the future, we believe that these materials absolutely continues to have -- hold future value, and it's just this became a timing issue.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
So basically then -- I just want to make sure I understand this, so basically, did you overbuy and then get caught with the aftermarket kind of in this protracted downturn with engine cannibalization playing a part of that, and then you tried to shop the parts, couldn't get what you wanted, so you had to take the hit?
Patrick J. Dempsey
I think all -- a number of different factors. We purchased the material.
No, we didn't overpurchase the material at the time because it was -- based on what the demand was and what the processed capability was within the shops -- our overhaul shops, the demand was procured or the amount of inventory we procured was to meet the demand. What has occurred is that we've continued to improve our processes and improve yields to where the amount of inventory required is no longer needed at the levels at which we originally required.
To your point, over the last number of years, the market's been slow to recover in terms of the aftermarket, did play a role to where its -- the value of the material today compared to where we bought it required this valuation charge.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
Got it. And then Chris, I believe you mentioned in your remarks that there were some acquisition costs in the quarter.
Could you please quantify that?
Christopher J. Stephens
Sure. We spent the -- I'd view it as -- think about it as almost like a $0.02 incremental spend to last year.
If you recall, we have Synventive activity last year as well, but Männer, a lot of activity in the third quarter related to the transition -- the transaction.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
And then I just -- I want to make sure I understand the whole debooking thing. Can you -- so what was your OEM backlog at the end of the third quarter here versus a year ago?
And how much of that change was this debooking? And then how much of that do you expect to be recaptured?
Christopher J. Stephens
Right. So we ended the OEM backlog at 5 01 [ph] versus the end of the second quarter, we were at 5 29 [ph].
So think of it at $28 million of debooking.
Patrick J. Dempsey
And just highlight what's driving that, Matt, is the fact that it's not uncommon from a quarter-to-quarter for there to be volatility in orders, especially at this time period, where we're in heavy NPI. And so as we continue to develop new capabilities and design changes occur or something as simple as a material change occurs, what happens is, invariably, a component that had been issued as an order on the one part number is then debooked in 1 quarter and potentially then rebooked in the next quarter at a different part number.
It also could be at a different unit value. So $1 million debooking may not come back as $1 million.
It may come back as $800,000 as an example, if there's material benefit to be had by the design change.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
Okay. Just a couple on the Industrial segment.
So organic growth was 6%. Can you talk about, kind of going forward, where Synventive is shaking out around kind of that segment average, and then what you saw in nitrogen gas and how the backlog looks there?
Patrick J. Dempsey
Yes. In terms of Synventive, I would highlight that we continue to be very pleased with its overall performance.
Similar to a number of our businesses we do see some lumpiness quarter-to-quarter, region-to-region. So whereas one region may be up in a particular quarter, another might be up the following quarter.
In terms of Synventive, overall, as we look to that business, we're looking at high single-digits growth compared to the average. And as -- answering your question on NGP, we saw 3% growth in the quarter, and that was impacted somewhat by FX.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
How's the backlog in that business? I believe, at this time last year, you were looking at an all-time record.
Is that still sort of the case that you're seeing?
Patrick J. Dempsey
I think all-time records continued to be made in terms of sales for that business. But I would also highlight that it's a short-cycle business by comparison, if you make a contrast to Aerospace.
So the backlog within NGP may be just a couple of months.
Christopher J. Stephens
Exactly. And I would say the orders activity probably was the better correlation to sales, and we're seeing that book-to-bill be consistent with top line.
Operator
The next question is from Peter Lisnic from R. W.
Baird.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
First question, I guess, just on the ramp-up to RSPs, I guess. Does the -- as you look to '14, does the absolute dollar level of those management fees step down at all in '14?
Christopher J. Stephens
We talk about the management fees as being incremental, recognizing that incremental kicks in once during the first 4-plus years of the program. And once they step down, that there's no additional step downs.
It is an ongoing business for the remaining life of the program.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
But it is tied to volume, correct?
Christopher J. Stephens
Yes, absolutely. Yes, yes.
Patrick J. Dempsey
The volume -- so over the life of the program, Pete, 2 big factors that will drive the model on a go-forward basis, will be unit volume and catalog price increases.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
Okay, okay, perfect. And then on the -- just continuing on Aero, or maybe this is more broadly, you talked a couple of different times about new product development costs.
I think that was largely early. And also, Chris, if I heard you right, the CapEx going up $10 million from $45 million to $55 million?
Christopher J. Stephens
Right. So on the CapEx side, it really just is to support the number of growth programs we anticipate in the -- on the Aerospace OEM side.
The XWB, we've been making investments in getting prepared for that as well as Leap-X [ph], so we've increased our CapEx. In the near term, CapEx spend to be ready for those volume increases.
Patrick J. Dempsey
I'll just also highlight to that, that what we've challenged the businesses to do is to focus a very -- deliberately on technologies that are going to carry us forward, not only for the current engine programs, but those future engine programs, with a view to create a competitive advantage. And so today, we continue to make investments in what we believe will be key technologies that will support not only the engines of today, but the engines of tomorrow.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
Okay, all right. So as you look at 2014 and beyond, can you maybe give us a little feel as to what sort of impacts some of these new product development cost might be having on the Aerospace segment today?
I mean, it's kind of a steady run rate as you look to '14? Does it step down at all or continuous?
But -- just trying to get a flavor there.
Christopher J. Stephens
Yes. I guess, we don't view it in a negative way at all, right?
I actually hope it increases, if you think about it, right? That's how we, in effect, go after winning new business on new engine platforms.
So if we have an elevated increase in new product introduction, that speaks to the favorable side of what we anticipate in terms of growth in our Aerospace OEM business.
Patrick J. Dempsey
So as we look to 2014, I would say that we will continue to make significant investments in the XWB, as well as also the Leap-X [ph] engine. And as we continue on into next year also, and as the GE90X starts to become more firm in terms of its design, we will actively look to participate there as well.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
And can you give us a little color on how you're viewing your positioning on some of these new programs, i.e., increasing share, constant, et cetera?
Patrick J. Dempsey
Yes. On the -- as I said, we're clearly -- in some instances, our position on the newer programs will continue to improve in terms of we're still bidding on certain types of products, certain types of work packages, as well as developing the ones that have already been won.
Why we haven't necessarily indicated what our content for platform will be on these newer engines is basically because the movement, and even as we reference bookings, debookings in terms of unit values, in these early development stages, it doesn't necessarily make the most sense until it's more solidified in terms of that final design. And so at that point, we'll communicate content per platform on each of these new engines.
Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division
Okay. Perfect.
And then just one last one on industrial, if I may. Can you give us just a little color or sense of what your customers might be telling you in regards to their inventory positions.
Are they relatively lean? Any spots where inventory liquidation has been somewhat of an issue impacting growth?
Just some feedback there would be great.
Patrick J. Dempsey
I think what I would say in general is that feedback from our customers continues to be that they remain cautious on their inventories. And as such, it's actually creating some lumpiness into our order patterns because they are monitoring closely still.
So I would suggest that they're somewhat lean. And I think across the board, we're seeing that increased discipline, if you like, in ensuring that they're not overordering, and at the same time, not being caught.
I think, in turn, they're turning to our companies, like Barnes Group, which we're able to provide rapid responses in terms of making sure that they have their material just in time. And so I think we're also looking to leverage that in terms of the service and value that we're providing.
Operator
The next question is from the line of Scott Graham from Jefferies and Co.
R. Scott Graham - Jefferies LLC, Research Division
So a couple of additional questions. Could you tell us on the Aftermarket and Industrial sides what the order progression was as the quarter moved forward?
Christopher J. Stephens
Sure. On the order side of Aerospace, you mentioned Aftermarket as an example.
So sequentially, we saw MRO up 1%, while RSPs was down somewhat, 8%, recognizing that we view the MRO business more of a backlog business. RSP is kind of -- it happens when it occurs.
So -- and then from an industrial point of view, we saw -- well, I've got to be careful because Synventive's in these numbers. So in general, we saw improvement quarter-over-quarter.
But I would say that each of our businesses saw a little bit of softness on orders, but not terribly to say we got a book-to-bill type of issue, right? We had a very strong second quarter, as we commented last time.
And this quarter, the order patterns were slightly down. We're talking low single-digit kind of on average.
R. Scott Graham - Jefferies LLC, Research Division
Chris, sorry, I actually meant within the quarter. As the quarter progressed, how did the sales or orders in those businesses did they -- on a year-over-year basis, did they modestly accelerate, were they kind of up the same throughout the quarter?
That's what I meant.
Christopher J. Stephens
Yes, no meaningful difference, Scott.
R. Scott Graham - Jefferies LLC, Research Division
Okay, could you also -- I think that there was an earlier question that was kind of after this. If Synventive is rising or expected to rise organically high singles, yet only kind of had 1 month, would you be able to maybe pro forma what that would have meant?
Would it have added another point or 2 to industrial organic?
Christopher J. Stephens
Good question. I guess I'd have to do the math.
I just -- I look at it as -- we've seen year-over-year growth in Synventive, recognizing that we've had them -- we've owned them since September -- end of August, early part of September 2012. But just thinking back, looking at their 2012 full year performance, and when we put out guidance this year and as we still kind of track to the fact that we're going to be high single-digits out of Synventive, it's good news.
I mean, we don't -- we see continued improvement, continued growth out of our Synventive business. That's helping compliment the fact that Industrial had another very strong quarter.
Patrick J. Dempsey
And I think I'd also just add to that, Scott, that Synventive is very much representative of a global footprint in that its business is generated out of North America, Europe and Asia, and almost equally, and with highest gross coming out of Asia.
R. Scott Graham - Jefferies LLC, Research Division
Got it. Next question is on this debooking.
And I have not heard that word used, though I'm an industrial analyst, so what do I know? Patrick, you are the Aerospace, more experienced on this call than anyone.
So has this occurred before with Barnes? You say that this is not unusual to see.
I guess, I haven't heard of that, and maybe it's just the semantics of the word. But why would someone debook something knowing that they're going to -- why wouldn't they do that at the time that the order close -- or ready for shipment, as opposed to during the quarter, beforehand?
Patrick J. Dempsey
Well, orders may be placed not with a view to being shipped in a given quarter. So you may have an order placed on you this month that is for $20 million that's going to ship over the next 18 to 24 months.
So it's not as if there has to be a rapid response to any change. So as you think about NPI and you think about a demand profile that is expected, an order is placed against that demand profile.
And it's at a unit value. So if there are design changes and the single unit was $100,000 and because of material changes, as an example, the unit value now was going to be $80,000 because of a change of material, then that delta of $20,000 into the demand profile that had been placed on you will -- one part number will be debooked.
The next -- the new part number will be reissued and you'll get a delta in the orders.
R. Scott Graham - Jefferies LLC, Research Division
Okay. So this has happened to you before then?
Patrick J. Dempsey
Oh, it happens all the time in the industry. As a build-to-print supplier for your building to the OE's actual engineering drawings, this is a very common occurrence.
R. Scott Graham - Jefferies LLC, Research Division
Understood. Last question.
I was under the impression that we were going to be talking about Männer today, with that deal potentially having closed. It didn't, so I can understand why.
I guess, that's why you're not talking about it. But is there anything that's happened there to have pushed this thing back a little bit?
And is there anything you can provide more than the press release when you issued it, I guess, a little over a month ago?
Patrick J. Dempsey
No. I think, we're at -- look, we're very excited about adding Männer to the portfolio.
Currently, we're targeting October 31 to close on the deal. And as I think Chris might have indicated either November 1 or November 4, we will hold...
Christopher J. Stephens
Shortly after the quarter.
Patrick J. Dempsey
Shortly after, we'll hold an analyst call, with a view to speaking specifically to Männer. But it's a -- it's just a tremendous business, and it's a great addition to our current capabilities.
Operator
The next question is from the line of Peter Skibitski from Drexel Hamilton
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
First question, maybe it's for Chris, maybe. Chris, pension in 2014.
I know it's been a bit of a headwind here for you in 2013. I'm just wondering what's your -- all your assumptions, if they held today, incrementally, what would pension be for you in 2014?
Christopher J. Stephens
Yes. Good question, Pete.
I think as most companies have defined benefit plans, right? That discount rate, go back 2 months and we're anticipating a higher discount rate in the benefit of which and lately, maybe it's come down a little bit.
So that really is a pretty volatile question in the sense of trying to give a number. What I can say is that the returns of our investments have been terrific this year, when we think about the funding profile being at a very good spot.
I would say that we would expect some improvement, not so much of a headwind on pension expense, but it's a little too early to tell. And we will provide color on that, Pete, in our February call when we give guidance, where I specifically kind of highlight pension expense or income depending on the situation into that year.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Okay. Okay.
You think incrementally would be better, though, even if it's less?
Christopher J. Stephens
At this stage , I would suggest that we are not going to have a headwind on pension expense -- incremental headwind on pension expense. That's right.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Yes. Got it, okay.
And then, it looks like you're expecting fourth quarter margins to be probably your high for the year. Is that just due to volume or is Aerospace Aftermarket mix going to improve?
Can you talk about what the drivers are there?
Patrick J. Dempsey
Yes. I think we're looking at a very strong fourth quarter in terms of our Aerospace OE side.
Plus, we've indicated that we're expecting continued softness in the Aftermarket, again, primarily as a result of the dampening effect that we're experiencing on the RSPs due to incremental management fees.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Right. So it's all OE volume primarily?
Patrick J. Dempsey
Yes.
Christopher J. Stephens
Yes.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Okay. And then the other thing I was wondering is the European auto, I think is still down kind of year-to-date.
It's probably given Industrial some headwinds this year. I'm just wondering if your sense is -- from talking to your units over there, if you think that Europe -- European auto has kind of bottomed this year, and if you think that, maybe, going to next year, it might actually accelerate for you?
Patrick J. Dempsey
Yes. We remain -- we are optimistic about Europe for next year in terms of seeing gradual improvement.
What I would highlight is that our European businesses, whilst they service the European market, they also -- the customer -- their customers are net exporters. So even this year, we've seen nice improvement in our European businesses as their customers and markets continue to improve.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Okay. So Europe's only been a modest headwind for you?
Patrick J. Dempsey
Yes, I would consider it modest.
Peter J. Skibitski - Drexel Hamilton, LLC, Research Division
Okay, okay. Last question.
I just wondered about -- again, on the management fees. My sense is you guys probably largely knew what the management fees would be entering 2013.
So is it fair to say that gross Aftermarket sales has been below your expectations? And what's your sense?
Is that due to -- maybe some of the older A320s and 737s being retired more quickly than expected? I'm just wanting to get your thoughts there.
Patrick J. Dempsey
Well, what I would highlight I think that expectations coming in to 2013 for the Aftermarket in general were high. And really, I think what's occurred is that once the earnings releases of this quarter, obviously, are much more positive from the OEs.
Still, I would argue that it's 3 quarters -- 2 quarters later than originally anticipated. So in general, we would have thought that 2013 was a higher gross sales overall in terms of the RSPs.
And, I think on a longer term, continues to look very positive but just a timing issue.
Operator
We have a further question from Amit Mehrotra from Deutsche Bank.
Amit Mehrotra - Deutsche Bank AG, Research Division
Just a follow-up on M&A. Can you just characterize the acquisition pipeline now?
Is it safe to say that now we're entering sort of the integration base, and we shouldn't expect more transactions for a while? How are you guys thinking about that?
Patrick J. Dempsey
Amit, great question. And what I would highlight is that clearly, our focus right now is on integration as a priority in terms of ensuring that it's flawless and seamless, both to the -- our customer -- our new customer base, as well as to making the integration a pleasant one for all of the new employees that will join Barnes Group.
That said, we're actively keeping the pipeline current, with a view that we are still very much looking as all opportunities in parallel. But priority-wise is integration and to make that flawless was, at the same time, keeping our finger on the pulse to launch our longer-term overall strategy is.
Operator
Ladies and Gentlemen, thank you for joining today's conference. This concludes the presentation.
You may now disconnect. Have a very good day.