Jul 24, 2015
Executives
William Pitts - Director, IR Patrick Dempsey - President and CEO Chris Stephens - SVP, Finance and CFO
Analysts
Pete Skibitski - Drexel Hamilton Joe Radigan - KeyBanc Tim Wojs - Robert W. Baird Scott Graham - Jefferies & Co.
Christopher Glynn - Oppenheimer Edward Marshall - Sidoti & Company
Operator
Good morning. My name is John and I will be your conference operator today.
At this time, I would like to welcome everyone to the Barnes Group Incorporated Second Quarter 2015 Earnings Conference Call. [Operator Instructions].
Thank you. William Pitts, Director of Investor Relations, you may begin your conference.
William Pitts
Thank you, John. Good morning and thank you for joining us for our second quarter 2015 earnings call.
With me are Barnes Group‘s, President and CEO, Patrick Dempsey; and Senior Vice President of Finance and Chief Financial Officer, Chris Stephens. If you have not received 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 provides 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‘ll find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the SEC.
Certain statements we make on today‘s call, both during the opening remarks and during the question-and-answer session maybe forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today‘s call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.
We will now open today‘s call with commentary from Patrick, followed by a review of our second quarter results and our updated 2015 outlook from Chris. After that, we‘ll open up the call for questions.
Patrick?
Patrick Dempsey
Thanks Bill and good morning everyone. Barnes Group performed well in the second quarter.
While sales were down 2% year-over-year, organic sales were up 4% after adjusted for FX in our industrial segment. Adjusted earnings per share grew 5% to $0.62 and adjusted operating margin grew 90 basis points to 16.3%.
Driving performance with continued strength in our plastics and tool and die end markets within industrial and our revenue sharing programs within aerospace; however we are seeing softness developing within some of our end markets and a portion of my remarks today will focus on what we are seeing. But before we address that, I want to comment on a couple of meaningful highlights related to the continued execution of our profitable growth strategy.
This strategy entails to transformation of Barnes Group in to a global provider of highly engineered products and differentiated industrial technologies, bringing innovative solutions to the markets and customers we serve. With that goal in mind I am very pleased to highlight that we just signed an agreement to acquire Thermoplay Hot Runner Systems.
This acquisition represents an excellent opportunity for Barnes Group to add another high quality business to our plastic injection molding services portfolio and to expand our presence in an attractive end market. Thermoplay will further complement our strategy to become a provider of the innovative industrial technologies and allow us to globalize our systems capabilities serving the plastic injection molding industry.
Thermoplay specializes in the design, development and manufacturing of hot runner solutions primarily serving the packaging, automotive and medical end markets. The business which is based in Italy has annual revenues of about 35 million euros and 200 employees serving customers worldwide.
The transactions headline price is 50 million euros. We will not be proving any additional details until after the closing of the transaction, which is anticipated to occur in August.
We are very excited about this acquisition and we look forward to welcoming all Thermoplay employees to Barns Group. We believe that supplementing our portfolio with strategic acquisitions like Thermoplay while simultaneously leveraging the Barnes Enterprise System across our organization provides the fuel required to sustain profitable growth.
We demonstrated that successful acquisitions and performance initiatives create a formidable combination, and both are key elements of our growth strategy. To that end, during the quarter, we combined four of our businesses within the industrial segment in to a new strategic business unit called engineered components.
The new SPU is comprised of Associated Spring, Seeger-Orbis, Heinz Hänggi and Associated Spring Raymond. These four businesses have similar automotive and industrial end markets with complementary precision engineered prosthesis, product portfolios, global footprint, quality and supply chain needs.
This alignment is expected to enable better coordination of regional capabilities and expertise, leverage global customer relationships, and increase overall sales force effectiveness; so good progress on strategy execution with more to come. Let’s now take a look at our business segments and the markets in which they operate: at industrial, organic growth continues to be solid, achieving 5% for the quarter.
If we exclude the impact of the Saline closure, organic sales growth would have been 7%. So, very good results given the current economic environment.
As a reminder, Saline comparable will not be an item to highlight after this quarter. By contrast FX remains an ongoing challenge, impacting sales by approximately 9%.
Much of that impact relates to the strengthening of the US dollar relative to the euro. Yet other currency fluctuations also have an impact.
Within in our plastic technologies businesses, we achieved low double-digit organic sales growth, as demand for hot runners in automotive, medical and personal care end markets remained strong. Organic orders in the quarter softened though they remain positive over the first half of the year.
Demand for medical and personal care hot runner and molds remained robust in Europe which is Manner‘s primary geographic region. For automotive half runner systems North American markets are doing well, while not much has changed in Europe.
Performance in Asia has been solid, but the market there remains uncertain. Recent news out of China related to softening automotive demand bears [monitoring], and we do see some western OEMs delaying new model introductions.
That said, the (inaudible) continues to be a strong contributor and a record year for all three geographic regions is expected. Global tool and die markets continue to provide solid organic sales growth as well as nitrogen gas product was up high-single digits in the quarter.
We are monitoring its end market however as North America tool and die is beginning to show signs of slowing and China‘s export of automotive tooling has weakened. In our engineered components business, organic sales in orders were down low-single digits, as we are seeing some weakness in global industrial end markets.
However, for automotive, North American and European production is forecast to be up low-single digits in 2015, and China‘s automotive build is expected to be 6%; though that expectation is down from previous forecast. Overall, we should have a good year at industrial, with organic sales growth in the mid-single digits and operating margins in the mid-teens.
Moving to Aerospace, sales grew 3% year-over-year, with sequential strengthening from the first quarter. Our original equipment manufacturing sales were essentially flat compared to the prior period.
This was lower than our internal expectation due to various schedule changes and the timing of anticipated sales, which moved to the third quarter. For the full year, we have tempered our OEMs sales expectations to be approximately flat as a result of not being successful in generating short term orders early enough in the year to impact 2015 sales.
We are also been impacted by a customer insourcing decision of certain components we manufacture for the Boeing 787 program. The loss of these components will lower our 787 content from 300,000 per aircraft to roughly 250,000 per aircraft, and we expect that the sales impact will start to be felt in the fourth quarter of this year.
Aerospace aftermarket revenues grew 17% in total. In our aerospace aftermarket MRO business revenues were flat, primarily from sustained lower volumes from a specific OEM customer of one of our repair facilities.
We expect this particular softness to linger for the remainder of 2015 though longer term we do expect that volume to improve. Excluding this customer, we forecast increased MRO sales as we progress through the second half of the year.
Our component repair program provided a positive to our traditional MRO sales and contributed nicely to an increase in MRO profitability. We continue to be very pleased with the level of interest and success in signing up new customers for these preferred OE authorized repair services.
As expected, this will take time to ramp as each customer has their own approval process to make Barnes Aerospace a qualified repair source within their quality systems. Our CRPs gained momentum and traditional MRO activity increases; we expect a solid second half for 2015 with full year MRO revenues up mid to high single digits for 2014, over 2014.
For the second quarter in a row, the highlight of our aerospace aftermarket business was our revenue sharing programs. RSPs sales were up 50% plus in the second quarter, with volume increases for the CFM56 family of engines driving roughly half of the increase and the restocking on the CF6 program making up much of the remainder.
So, an excellent first half of the year for a business [fab] as you know has limited short term visibility. Given the year-to-date performance, we now expect RSPs to be up 20% plus for the full year.
As a whole, we see full year aerospace growth in the mid-single digits, with operating margins in the mid to high teens. In addition, we expect aerospace third quarter sales to be up only modestly on a sequential basis, with the fourth quarter being very strong.
So overall, let me say that we are happy with our achieved results and positioning relative to the end markets we serve. Though we remain cautious given a few market trends which developed during the quarter, we are fully committed to executing our profitable growth strategy and expanding our global reach, and we anticipate 2015 to be another year of solid organic sales growth, expanded operating margins and increased [GAAP] cash generation.
Chris will now take you through the financial details for the quarter and provide you with the current view of our full year outlook. Chris.
Chris Stephens
Thank you Patrick and good morning everyone. Let’s begin with highlights of our second quarter results starting on slide 2 of our supplement.
Sales in the quarter were 315 million down 2%, as organic sales growth of 4% was more than offset by FX headwind of 6%. Net income was 34.2 million or $0.61 per diluted share, compared to 30.2 million or $0.54 per diluted share a year ago.
On an adjusted basis, net income was $0.62 per diluted share, up 5%. This quarters adjusted earnings exclude the last remaining Manner short-term purchase accounting adjustments of a penny per diluted share.
As a reminder, last year‘s second quarter adjusted net income excludes the impact of Manner short-term purchase accounting adjustments of $0.02 per diluted share and Saline closure cost of $0.03 per diluted share. Now let me comment on our segment performance beginning with industrial.
Industrial second quarter sales were 203 million down 5%. As Patrick mentioned, our industrial‘s organic growth remained solid up 5%, however, FX negatively impacted sales by approximately 20 million or 9%.
Based on a euro rate of 1/10 we expect FX to negatively impact sales over the second half by approximately 25 million, with about two-thirds of that in the third quarter. Second quarter operating profit was 30 million up from 28.8 million from the prior year, benefiting from 1.3 million in lower Manner short term purchase accounting adjustments and the absence of last years 2.3 million Saline restructuring charge.
Ex these items, adjusted operating profit of 30.6 million was down 7% from 32.9 million a year ago, and the operating profit benefit from organic sales growth was more than offset by lower productivity including incremental costs related to new product introductions to support future growth programs, and the unfavorable impact of FX. Adjusted operating margin was 15.1% down 40 basis points from last year.
At Aerospace, second quarter sales were up 3% to a 12 million. Our RSP programs were up significantly as Patrick noted, while both MRO and OEM were essentially flat.
Second quarter operating profit was up 24% to 20.7 million as compared to 16.6 million a year ago. The operating profit increase was primarily driven by higher contributions from RSPs in addition the component repair programs in our MRO business and favorable product mix in our OEM business likewise benefited operating profit.
Operating margin for Aerospace was 18.4% in the quarter, up 320 basis points from 15.2% a year ago. Aerospace backlog ended the quarter at 536 million up 2% year-over-year and down 1% sequentially from the first quarter of ‘15.
Our effective tax rate for the second quarter was 28.4% compared to 27.7% in the prior year period and 27.6% for the full year 2014. The effective tax rate increase in 2015 over the full year 2014 rate is primarily due to the exploration of certain tax holiday.
For 2015, our tax rate is expected to be between 28.5% to 29%, slightly lower than our previous expectation. Regarding share count, our second quarter average diluted shares outstanding was 55.7 million shares, while quarter end basic shares outstanding were 54.7.
During the quarter we were an active buyer of our stock, we repurchased approximately 287,000 shares, for 11.5 million for an average price just below $40 per share. Presently, 2.1 million remains available for repurchase under existing Board authorization.
Cash generation continued to be strong, as second quarter cash provided by operating activities was 86 million versus 65 million a year ago. Free cash flow which we define as operating cash less capital expenditures was 64 million versus 39 million last year.
Our balance sheet is in very good shape with senior debt-to-EBITDA ratio of 1.8 times at quarter end. Under our existing debt covenant that means additional borrowings of approximately 415 million would be allowed and 377 million remained available with respect to our credit facility.
Turning now to our updated 2015 outlook on slide 3, we now expect 2015 organic revenue growth of 4% to 6%, with essentially flat total revenue after consideration of about approximately 5% FX headwind. As mentioned, our outlook assumed a euro rate of 1/10 which anticipated to negatively impact full year revenue of approximately 65 million.
Our operating profit margin outlook is approximately 16.5%, GAAP earnings from continuing operations are forecasted to be in the range of $2.43 to $2.53 per diluted share. Excluding the final $0.02 of Manner short term purchase accounting adjustments, adjusted diluted EPS is anticipated in the range of $2.45 to $2.55 up 5% to 9% from 2014 adjusted diluted EPS of $2.34.
We are forecasting third quarter EPS to be approximately the same as last year with a stronger fourth quarter driven by Aerospace. Our CapEx outlook is now approximately 55 million and cash conversion is forecasted to be approximately a 100% to net income.
So in summary with a good first half of 2015 behind us, we foresee another year of solid financial performance and cash generation. Upon on the closing of the Thermoplay acquisition our balance will remain well positioned to support additional acquisitions, as well as to fund organic investments to fuel further profitable growth.
Operator, we will now open the call to questions.
Operator
[Operator Instructions]. And our first question comes from the line of Pete Skibitski from Drexel Hamilton.
Pete Skibitski - Drexel Hamilton
Good morning guys, I apologize I actually missed the first five or ten minutes, so if you mentioned something Patrick I apologize. A little disappointed in the first half Aerospace OE volumes, have you been surprised.
You mentioned the schedule changes, I don‘t if that is directly related to 787 insourcing, but may be you can talk about which engines had their schedule changes and may be what led to the insourcing if there was a quality issues or some other issue. It seems kind of unusual to have that happen so early in the product life cycle.
Patrick Dempsey
No problem Pete. So basically relative to the full year on OE side of the house, we had seen a sequential ramp throughout the year, and that was basically something we had seen from the fourth quarter of last year that was going to be a step up.
In Q2 I would say that the step up was a little lighter than we hadn't expected, primarily because of parts that were ready, fully manufactured to ship but we didn’t receive the necessary customer approvals to ship them off the dock. So they will ship in Q3.
With that said, Q3 and Q4 also are sequentially up as the year progresses. In terms of the 787, affectively what has occurred is that the business which were doing for one of our large customers that customer sold the business and in turn the new owner of the business had the capabilities and is bringing that work inside.
Pete Skibitski - Drexel Hamilton
Okay, that makes sense. How should we think about - I know you haven ‘t 2016 guidance, but kind of looking in to 2016 does your OE business take on less of a focus with less 787 volumes or may be do you think that can kind of return the growth with the pick up on narrow body.
Patrick Dempsey
The 787 for 2016, we are looking at about 136 aircrafts for the year. You are looking at about 50,000 of a reduction in our content for [platform] so you are talking about 7 million approximately in annual revenue.
So as we look out to 2016, we believe that the other programs we have in place will more than offset.
Operator
Our next question comes from the line of Joe Radigan from KeyBanc.
Joe Radigan - KeyBanc
Aerospace aftermarket side, it sounds like you ‘ve taken your MRO expectations down, and I just want to - in the first quarter Patrick you talked about lower scope of work, and then certainly the folks that have reported in the aftermarket space the results have been all over the map really choppy here. So are you still seeing a continuing trend of that lower scope of work or is it more related to the customer issues that you mentioned in your prepared comments.
Patrick Dempsey
For Barns Aerospace aftermarket it is primarily driven by the specific OEM that I mentioned. And what‘s happened there is that they have changed their schedule to where they are moving out engines in to the future from the current quarters.
That said, as we look at our aftermarket its primarily driven off the CFM56 and CF6 engine models, which make up our RSPs as well as our CRPs, and as you saws with the RSPs very strong in the quarter, however that is lumpy and we ‘ve always said that. But overall trends for both programs for the CFM in particular which makes up the majority of our revenues in the aftermarket continues to be strong with that engine ramping up to a peak shop visit by 2024.
So it’s a long cycle business, we entered in to these programs for life of program which was a 20 plus year horizon and so what you are seeing is some of the lumpiness quarter-to-quarter.
Joe Radigan - KeyBanc
Okay then in the industrial businesses, I mean typically you have to deal with shut downs in Europe in the third quarter. Last year I think you were able to manage through some of that, and still drive pretty strong growth particularly in Manner.
Are you taking a similar approach this year or how should we think about the seasonality in industrial?
Patrick Dempsey
Well industrial we have through the rest of the year a relatively flat projection over the two quarters with maybe a little higher - seasonality wise a little higher projections against the fourth quarter than the third. But we have seen continued strength in terms of our plastics business in the hot runner space in particular as it pertains to Manner as well as Synventive.
So what we will do is continue to adjust a holiday schedule, certification vacation schedules to ensure that we meet customers demand throughout the third quarter.
Joe Radigan - KeyBanc
Okay. And then did you say that organic orders for the plastics business has softened in the second quarter.
Did I hear that right? And if that’s true then how should we think about the growth rates in those businesses in the back half.
Should we see a decelerating growth rate for the balance of the year?
Patrick Dempsey
You heard me correctly; I did say the order softened in the second quarter, but still up for the first half. What we saw were double-digit sales growth in the second quarter for both of our plastics businesses, and so we continued to remain bullish on both of those businesses for the remainder of the year.
And so it’s all relative I would say Joe in terms of where we have been, which is at all-time highs. We continue to see nice demand in both of those businesses.
Operator
Our next question comes from the line of Tim Wojs from Baird.
Tim Wojs - Robert W. Baird
Just going back to industrial, margins there were down year-over-year, and I think this is the first time industrial margins have been down in several years. And so can we just talk about what - I think you noted some investments there, maybe how big those were, and then was there an impact from mix or anything in the quarter that kind of normalizes in the back half of the year?
Patrick Dempsey
Not so much mix, as the fact that we continue to make investments in some of the key programs. One of the programs that we made large investments and took a little bit of the hit to productivity on in terms of the total flow through in the second quarter was our GDI program, as it continues to develop and ramp out of our Heinz Hanggi business.
So productivity was a factor in industrial. Also, what we saw in industrial in the second quarter was FX hitting the bottom line for the first time, where prior we‘d indicated that it was incorporated into our guidance, and we believe that it was negligible.
This quarter we saw it impacting the bottom line a little bit more.
Tim Wojs - Robert W. Baird
Okay. So can margins in industrial I guess return to expansion mode in the back half of the year?
Patrick Dempsey
Well we are forecasting full year guidance at mid-teens for industrial, and so I think we are confident with that target.
Tim Wojs - Robert W. Baird
Okay. And then just I guess a housekeeping question on Aerospace, I just wanted to make sure I get my numbers right.
So if we are assuming kind of mid-single digit growth for the full year and Q3 to be pretty similar to Q2, that implies a pretty aggressive ramp in the fourth quarter, and I guess is it really just all driven by the OE backlog coming through or is there a pretty big spares number also built into that forecast.
Chris Stephens
Not a big spared numbers, but what I would say it’s a combination of OEM and MRO. We have a couple of key programs that we‘ve been doing development work over some time, and that development work is scheduled to ship in the fourth quarter.
If possible, we would like to ship it earlier, but unfortunately sometimes the lead time against castings and forgings pushes to where they are the pacing item. So the way it’s currently lined up is for a large fourth quarter, and that is something we are working aggressively to try and pull forward as best we‘re able to, but right now it’s looking at a big fourth quarter.
Tim Wojs - Robert W. Baird
And then on the acquisition that you announced, I know you didn’t ‘t want to give a lot more detail, but is it unreasonable for us to assume that the margin profile of that business is much different than your current hot runner business?
Patrick Dempsey
I would suggest that it’s in line and meets the hurdle rates that we‘ve set in terms of our overall strategic criteria. So as we said we had put strong discipline around all other criteria pertaining to acquisitions.
Thermoplay we are extremely excited about will be very complementary to the two existing businesses we acquired in that space being Synventive and Manner and we recognize. I will point out that there is no impact of Thermoplay in our guidance for the full year and so we will address that after closing.
Operator
Your next question comes from the Scott Graham with Jefferies.
Scott Graham - Jefferies & Co.
So it’s funny that I know you have some of these pressures that have popped up around the company, but I guess I would probably argue that two years ago that these would have been much more disruptive in the old portfolio than the new. But with that I guess I do share the [fire] concern that was asked that the plastic technologies orders softer, they are still up.
Obviously that would indicate a negative trend, could you tell us which end market that relates to or end markets.
Patrick Dempsey
Two different businesses; one serving automotive, one serving the medical and personal care. On the automotive is where we ‘ve seen softening more in the China market than whilst North America continues to be strong, and Europe continues to be steady eddy so to speak, but not growing considerably.
On the personal care and on the medical side of the business, while orders are somewhat sporadic it’s what we are seeing in that business and that they are lumpy by from quarter-to-quarter. So the demand for the medical and the personal care side of the business remains - we remain very bullish on it, and so we ‘re seeing a little bit of softness in our Asian auto side of the equation, but overall we are very optimistic as it pertains to the plastic side of the business.
Scott Graham - Jefferies & Co.
Okay, understood. Maybe you can take this a bit further; the automotive I believe is something like 20%-25%, 20% of your sales.
Is that about right?
Patrick Dempsey
Sounds about right.
Scott Graham - Jefferies & Co.
Would you be able to kind of break that down by region and then I have another question about that as well.
Patrick Dempsey
So without getting into exact numbers I would say that clearly automotive is larger for us in North America, secondarily into Europe, and third on that scale would be Asia.
Scott Graham - Jefferies & Co.
And if you were to look at automotive as an end market, like maybe cut this a different way, what percentage of or what amount of that 20% is just typical production versus the new model changeovers. Is the new model changeover just the plastic technologies business?
Patrick Dempsey
So just think about it this way Scott, the legacy businesses were more connected to auto production volumes. The newer businesses are connected more to model changes or name plate changes.
So as we look at automotive as an overall end market, we‘ve become very deliberate in terms of how we want to play in the automotive market. Less so on production driven volumes and more so in terms of industrial technologies where we are truly creating value and that value is driven by different factors than the actual production rates.
So we expect that on the auto side, as it pertains to our industrial technologies businesses in particular Synventive that we would outpace production by virtue of the adoption of plastics into the auto industry, as well as the number of model changes that occur independent of volume.
Scott Graham - Jefferies & Co.
Fair enough, got you. On the organic sales guidance maybe this is something for both you and Chris, we‘re still presupposing a pretty good second half you know call it in the five plus range.
Let‘s just say we call it five to get to [4, 6]. Yet you‘ve talked about a number of different areas where we are a little concerned here or aerospace OE, there or what have you.
What are the primary drivers of second half organic growth in your view?
Chris Stephens
Scott this is Chris. So as Patrick mentioned the OEM and MRO business, primarily fourth quarter driven is where we see that being the most substantial quarter for the year for us.
So aerospace is driving that confidence in the second half. Industrial from a quarter-to-quarter point of view has been nice improvement year-over-year.
Sequentially we are seeing about that flat from the industrial point of view after you kind of negate out the FX. So it’s good growth overall, industrial throughout the year, quarter-to-quarter not much swings.
Scott Graham - Jefferies & Co.
Okay, I guess the follow-up comment I would make Chris would be that obviously we ‘ve had some issues with push-outs in both OE and MRO, and to have sort of a, may be a fourth quarter loaded organic, how much risk do you see presented there?
Chris Stephens
Well it gets back to Patrick‘s comment around a certain delivery or development program the team has been working on. We‘ve been working on that program and there have been multiple deliveries through the past few years.
We have been successful to date, and no reason to believe why we won‘t be able to achieve that in the fourth quarter.
Patrick Dempsey
I would also highlight that our customers are extremely focused on their shipments as well, because of the key strategic programs firm. So all of our resources are aligned against making those parts meet schedule as we‘ve outlined.
Scott Graham - Jefferies & Co.
Understood. Thank you.
Last question on Thermoplay, would it be fair to assume that the incoming margin structure of that business because it’s in Italy is lower margin than your prior two hot runner acquisitions?
Patrick Dempsey
That would be an incorrect assumption.
Scott Graham - Jefferies & Co.
Really. Very good, that’s all I had.
Operator
Your next question comes from Myles Walton with Deutsche Bank. Your line is open.
Unidentified Analyst
Good morning everyone, this is actually Lou on for Myles. So just the spares business, I know it’s been, we‘ll say a [bottle] in the past, just two quarters in a row of positive growth.
Do we think this is the turn now based on whatever you guys can see?
Patrick Dempsey
So as it pertains to spare parts Lou, the aftermarket in general content is normally low visibility and high variation. So quarter-to-quarter it’s tough to suggest there is a robustness or there is a linear aspect to this business.
We ‘ve had two great quarter as it pertains to spare parts, half of that has been driven by the CFM56 engine and the other half by restocking on the CF6 engine program which has an intermediary distributor that stocks, depletes stocks and then destocks. So what that does of course is it drives some volatility into our CF6 portion of it.
That said the RSPs are pre dominantly CFM56 and the engine itself is the largest and most successful engine program in aviation history, continues to be the largest installed base, and the CFM56-5 and -7 are now starting to come up on time for shop visits, so we are very bullish in terms of the outlook against CFM in general.
Unidentified Analyst
Just to stick with aerospace, so you had the slip on the OE side, although it sounds like from Q2 into Q3. And I know you are expecting to ramp into Q4, but it also sounds like Q4 you are going to see some impact from the787 customer shift there.
So is it fair to think that Q3 and Q4 as a result of the slip will fromQ2 will be more even I guess or you might think it might be wrong?
Chris Stephens
No it will be ramping. So we expect that Q3 will be modestly up to Q2, and that Q4 will be significantly up to Q3.
Unidentified Analyst
Alright, and then just overall China exposure I guess.
Patrick Dempsey
Overall?
Unidentified Analyst
China exposure?
Patrick Dempsey
In terms of our businesses in general?
Unidentified Analyst
Yes.
Patrick Dempsey
You know China is a primary market for our Synventive business as well as our tool and die and nitrogen gas products business; and those two businesses are the primary products and services that we sell into China.
Unidentified Analyst
Alright. And then just remind me of leverage targets?
I know obviously with the share repurchase the upcoming acquisition obviously you are going to use cash in the revolver?
Chris Stephens
In terms of the covenants?
Unidentified Analyst
Yes.
Chris Stephens
Yeah, so we ended the quarter at 1.8. We don‘t foresee that changing significantly over time.
Even the Thermoplay acquisition once closed in terms of how we finance that. We expect to be able to use a combination of cash and debt.
But the strong cash generation of our business especially outside the US and Europe we‘ll be able to - we are not concerned from a covenant point of view. As a matter of fact, I‘d emphasize that the capacity that we have available to do an additional acquisition is quite sizable.
So we feel the balance sheet‘s in great shape.
Operator
Our next question comes from the line of Christopher Glynn from Oppenheimer.
Christopher Glynn - Oppenheimer
Congratulations on the deal, sounds very interesting. So I just want to revisit the fourth quarter comments for industrial, I think the comment was 3Q and 4Q kind of similar linearity from a seasonal perspective 4Q may be a little bit stronger.
I believe that would be potentially unprecedented and looking back over the years at the industrial segments linearity. So I just wanted to dive back into that again.
Patrick Dempsey
Yeah, so overall the businesses as we roll up Q3 and Q4, we have anticipated a little lighter at Q3 and a little stronger Q4, as it pertains to industrial. The businesses that are driving that overall tool and die, as well as the plastics remain relatively strong coming off of highs from 2014.
And in terms of our engineered components, we‘ve seen a little bit more clouds gathering, if you like, pertaining to the general industrial markets and subsequently there is where some of the hedges.
Christopher Glynn - Oppenheimer
Okay. And then what caused sort of the elasticity into 4Q?
Patrick Dempsey
The fourth quarter is just really feedback from certain customers around planned programs and model changes in some instances as it pertains to plastics. Scheduled shipment against our Manner business as it pertains to major programs that they are working, as we speak.
So it’s a combination, Chris.
Christopher Glynn - Oppenheimer
Okay, thanks. That’s helpful color.
And then the industrial margin in the quarter talked about lower productivity including incremental costs related to new products, I suspect that’s sort of a lead lag, part of the answer to the fourth quarter tick up. But in terms of the lower productivity, wondering if we could dive a little into that, does that include deal costs related to the new acquisition?
Patrick Dempsey
No it doesn’t ‘t include deal costs, its really pertaining to some of the major programs, new product development programs that we were working during the quarter. And there was a combination of a couple of challenges there that some related to our operations, some related to the customers ‘ supply of material, and so as we worked through those it impacted the quarter.
The margins for industrial continued to be healthy at mid-teens, and we expect - we‘ve indicated that for the full year.
Christopher Glynn - Oppenheimer
Okay. So that was sort won and done with some of those supply chain type inefficiencies?
Patrick Dempsey
We‘ve worked through the bulk of the issues, and we believe we are at the other side of it. Yet what we are seeing is, as that you enter in to some of these programs, don ‘t underestimate that as we are pushing the envelope in terms of what I consider disruptive technologies that they don ‘t come easy, and subsequently we ‘ve seen some challenges that the team has done a wonderful job in terms of working through.
But I would be remiss I think to say that we are plain sailing at this point, because the nature of new product development brings with it challenges all the time. But in this particular instance, I believe we are at the other side of it.
Christopher Glynn - Oppenheimer
Well said. Last one is the tax rate has been going up, I think we‘ve had the bulk of the big increases.
But in terms of the rate of increase that could be incremental over the next year or two, how should we think of that? It’s a pretty key modeling item and you are more qualified to judge whatever the plug is than I am.
Chris Stephens
Appreciate the compliment, Chris. So guiding 28.5% to 29%, mainly driven by the expiration of certain tax holidays, there are certain expirations that are going to occur over the next two years.
So we will see the natural lift in our tax rate going forward. But I wouldn’t call it a dramatic change.
So we are in this high 20s, low 30s tax rate is kind of how we see it. One item that will impact our tax rate is clearly the mix of earnings.
You know we evaluate that as you know on an ongoing basis. But that high 20s, low 30s is what we foresee over the next, year or two.
Christopher Glynn - Oppenheimer
Okay and it’s only going in one direction right?
Chris Stephens
Yeah, we don‘t see a reduction in that, we see an increase, you know how‘s the pressure of an increased tax rate over the next few years. Again we constantly go after tax efficient strategies as well as holidays across the globe, and that would then potentially impact would impact it, but that’s where we see it right now.
Operator
Our next question comes from the line of Edward Marshall from Sidoti & Company.
Edward Marshall - Sidoti & Company
So the outsourcing that you saw, can you talk to the timing of maybe of when that occurred, was it during the quarter, was it post quarter? Have you known about it for some time?
Patrick Dempsey
Outsourcing, are you talking about the 787?
Edward Marshall - Sidoti & Company
The 737.
Patrick Dempsey
787 actually. The comment relates to the 787.
Our outsourcing kind of relates to the 787 insourcing [decision].
Edward Marshall - Sidoti & Company
Got you.
Patrick Dempsey
So it’s the Boeing 787, the Dreamliner.
Edward Marshall - Sidoti & Company
Okay.
Patrick Dempsey
The content is that we‘ve reduced it from 300,000 to 250,000
Edward Marshall - Sidoti & Company
Per aircraft.
Patrick Dempsey
Per aircraft.
Edward Marshall - Sidoti & Company
Right.
Patrick Dempsey
And that is something that will start to impact Q4 this year, and then going forward should be thinking about 250,000 as the content for platform on that aircraft into the future.
Chris Stephens
And I would just add that we were in anticipation as Patrick mentioned the selling of this business and the fact that they in this space, our new customers are in this space. This insourcing decision was not, I won ‘t call it a surprise, it was something strategically we were keeping an eye on, but it was something that we knew, like in any part of our business and to build [different] space, we recognizing those decisions can be made.
Just as we see in-sourcing decisions, we see a ton of opportunity on the outsourcing side as well. This just happened to hit us, it will hit us in the fourth quarter, it’s not all that substantial as Patrick mentioned, but it is changing our average content down to 250.
Edward Marshall - Sidoti & Company
It seems unusual; I mean this is a period of outsourcing and tight capacity as we move up the supply chain, so just timing is odd. But is the delta in the backlog, the [536], or is that yet to hit the backlog?
Chris Stephens
I would say that it’s already starting to hit the backlog.
Patrick Dempsey
Yeah, I agree.
Edward Marshall - Sidoti & Company
If we look at the RSPs you mentioned that you expect to have 20% for the year. I ‘m curious if you can kind of update me on the first half how much is that up so far year-to-date?
And then maybe kind of parse out the expectations for the second half of the year?
Patrick Dempsey
So to achieve the 20% for the full year, Ed it means that the second half needs to be down compared for what we‘ve just accomplished in the first six months. So overall I think we are obviously very pleased with regards to the performance in the first six months.
That said we know that this business tends to be lumpy, and so we are being also conservative in the back half.
Edward Marshall - Sidoti & Company
How much was it up in the first half and how much was the expectations?
Patrick Dempsey
It was up 10% year-over-year in the first quarter, and it was up 50% plus in the second quarter.
Edward Marshall - Sidoti & Company
Okay and the math would be what for the second half?
Chris Stephens
Roughly 30 some percent for the first half, recognizing we are guiding about better than 20% for the year. So still showing a lift in the second half, but not as substantial as Patrick mentioned for the first half.
Although Ed as you know this is lumpy business. I mean look at 50% plus growth in the quarter.
So it’s a combination of our CFM growth which is we are anticipating that, that’s going to continue to grow on the -5, -7s, but the distributor ordering that happen on the CF6. We saw a nice top.
But you don‘t see that every quarter as you know.
Edward Marshall - Sidoti & Company
Right. So that’s just changing and [AVR] and so forth, and the way Boeing kind of purchases through that, that supply chain, right.
Chris Stephens
That’s right. That’s right.
Edward Marshall - Sidoti & Company
So the cash outflow on the CRP is that just timing or was that a new product?
Chris Stephens
No that’s final. That’s the final --.
Edward Marshall - Sidoti & Company
The final contribution?
Chris Stephens
Yeah, final payment for the two programs that we signed up to over the past two years.
Edward Marshall - Sidoti & Company
Okay, so nothing to read through on that.
Chris Stephens
Right.
Edward Marshall - Sidoti & Company
When I look at the auto business and I'm curious if the comments surrounding some of the plastic orders, is that across-the-board, and is that flowing into the legacy spring business as well?
Patrick Dempsey
So when I talk about the plastics business we are seeing strength in North America, we are seeing relatively flat in Europe, and we are seeing a slowing in China. So that’s how we are seeing automotive as it pertains to the plastics side of the equation.
On the engineered components which is more the legacy automotive businesses, there we are seeing some mix around the globe. One of the areas that we‘ve seen significant decline is in Brazil, and that economy continues to, and as you know we have a business there.
So that economy continues to be bearish and subsequently that is impacting our legacy Associated Springs, but overall as I mentioned volumes production for automotive in both North American and Europe still forecast to be up low-single digits.
Edward Marshall - Sidoti & Company
So the Asian markets are still North American producers I understand. Are you shipping your plastic products to US producers in Asian markets or are you selling to the--?
Chris Stephens
We are doing both. So in Asia we are selling to both western OEs that are manufacturing and selling in China, as well as to local Chinese companies as well.
Edward Marshall - Sidoti & Company
There's been some growth in say polyester needle felt technology in certain low-end applications, and I ‘m wondering if maybe in (inaudible) and things like that, have you lost any content with hot runner technology as it moves to kind of that polyester needle felt? And is that the order outflow that you see as we move to new model orders and so forth?
Patrick Dempsey
Yeah, not that I am aware. As you use that example, if you think about a wheel well what it is, is it’s the lower - it’s what‘s hidden if you like compared to the naked eye of the consumer.
Synventive ‘s products are very much those that are highly visible to the naked eye of the consumer in particular the bumpers, the fairings around, the grills, the internal dashboards. So again very high end, high visibility, high aesthetics, and so for the most part I am not aware of any displacement of different materials as you cited that might impact half runner in that application.
Edward Marshall - Sidoti & Company
I actually have one more question, if I could. The Thermo acquisition I'm curious, if you could break down packaging, auto, medical as a percent of revenue.
I understand you want to take some time, but just from a modeling perspective it might be helpful if we kind of knew the mix in that business.
Patrick Dempsey
I would differ at this juncture Ed if you don‘t mind, only because it’s a privately held business and we want to close on it before we start sharing information around the business.
Chris Stephens
I agree.
Operator
And our next question is a follow-up question from Pete Skibitski from Drexel Hamilton.
Pete Skibitski - Drexel Hamilton
Yeah, just a couple of quick follow-up guys, Patrick, interesting you say you have a large amount of Aero OE development work shipping in 4Q, because I think that's around the time the A320neo enters service. So I would like to ask is there a connection there, and any good news you happen to share with us.
Patrick Dempsey
There is a connection Pete, but it’s something that we will not. Our past practice has been that until an aircraft is just about entering the service and we are convinced that the fluctuations that happen in development have somewhat settled than we would communicate a content for a platform.
I will say that there is a connection and we are doing development work, all of which is scheduled to ship in the fourth quarter.
Pete Skibitski - Drexel Hamilton
Okay, very helpful. Thank you.
And then just a last one, given we all kind of recognize the macro outlook globally is a little more tenuous right now, a little more unpredictable. Do you get the sense after Thermoplay that maybe you just think about shifting your capital returns more so back to share repurchases versus M&A?
Just because it’s not like your shares are that expensive and we've seen in the past some companies maybe buying into a downturn really get hit pretty hard. So does that enter your thought process about maybe it’s time to shift the capital deployment at all?
Patrick Dempsey
I think we remain consistent in terms of our communication around capital allocation, and first we‘re going to continue to invest in the existing businesses to drive organic growth. We still opportunities with in Manner, with in Synventive in terms of their continued, the opportunities that are presented to those businesses globally.
So as I‘ve communicated in the past, phase 2 of Manner is very much on the way, we continue to look at the investments required to expand in North America, and secondarily as we think about the M&A side of the equation, we are very much holding to the high discipline that I continue to reference around the criteria. So even as we see some of these markets slowing, if we believe that there’s an industrial technology that provides great value to the customer base and that the customer places a premium on that technology then it still is going to be something we are willing to pursue in terms of M&A.
And our last and third capital allocation criteria is share repurchase and dividends and so we continue to be in tune with our shareholders and continue to buy back as we see the opportunity presenting itself opportunistically.
Operator
And we have no further questions. I turn the call back over to Mr.
Pitts for closing remarks.
William Pitts
Thank you John. We‘d like to thank all of you for joining us this morning.
We look forward to speaking with you once again in October with our next quarterly earnings call. And at this point, we will conclude today‘s call.
Operator
This concludes today‘s conference call. You may now disconnect.