Oct 28, 2016
Executives
William Pitts - Director, IR Patrick Dempsey - President and CEO Chris Stephens - SVP, Finance and CFO
Analysts
Christopher Glynn - Oppenheimer Pete Skibitski - Drexel Hamilton Edward Marshall - Sidoti & Company Bhupender Bohra - Jefferies Myles Walton - Deutsche Bank Matt Summerville - Alembic Global Advisors Josh Chan - Baird
Operator
Good morning. My name is Scott and I will be your conference operator today.
At this time, I’d like to welcome everyone to the Barnes Group Inc. Q3 2016 Earnings Conference Call.
[Operator Instructions] Thank you. William Pitts, Director, Investor Relations, you may begin your conference.
William Pitts
Thank you, Scott. Good morning everyone and thank you for joining us for our third quarter 2016 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 provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in 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, 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 the periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.
We’ll now open today’s call in our usual fashion, with remarks from Patrick, followed by a review of our third quarter results and our updated 2016 guidance from Chris. After that, we’ll open up the calls for questions.
Patrick?
Patrick Dempsey
Thanks, Bill, and good morning, everyone. Barnes Group’s performance in the third quarter was solid as we delivered sequential and year-over-year improvement in sales, adjusted operating margin, and adjusted earnings per share.
In particular, our industrial business produced outstanding results, boosting Barnes Group to realize positive organic sales growth for the first time since the second quarter of last year. At aerospace, new engine program ramps such as the GE’s this is the GE’s LEAP and Rolls Royce XWB are underway with these programs reflecting higher sales, both year-over-year and sequentially from the second quarter.
As previously discussed at aerospace, we remain in the midst of a transition as legacy engine program sales were lower in the quarter compared to the prior year. During the quarter, we completed our acquisition of Adval Tech’s molds business known as FOBOHA.
This adds another market-leading business of highly-complex molds systems to our molding solutions portfolio. FOBOHA’s industry-leading cube technology positions Barnes Group as a premier total solutions provider for global OEM customers and molders in packaging, medical pharma, consumer, and electronics.
Chris will provide some financial highlights of this acquisition momentarily. Let’s now move to the quarter’s performance and our end-market’s outlook.
For Barnes Group, sales were up 7% compared to a year ago, 4% organically and adjusted operating margin improved to 17.4%, adjusted diluted earnings per share were $0.71, a 16% improvement from last year. The industrial segment’s performance was once again excellent, which was impressive given some market pressures in engineered components.
Our molding solutions and nitrogen gas product sales were considerably robust. Notably, the industrial team has leveraged the Barnes Enterprise System to achieve solid year-over-year productivity improvements.
Adjusted operating margin in the quarter grew to 17.6% on 6% organic sales growth. Within our end-markets and SBUs, at our molding solutions business, sales were up 22% over last year’s third quarter and organic sales grew 12%.
Our automotive hot runner business was particularly strong with record sales in the quarter as model changes and light vehicle end markets especially in Europe and Asia drove orders and sales growth into the mid-teens. At Männer, medical and personal care end-markets drove orders growth greater than 20%, while sales growth was in the high single-digits for the quarter.
I’d like to take a moment to complement the team at molding solutions. First, for the tremendous results and second for the incredible acquisition integration mark on last year’s Thermoplay and Priamus and this quarter’s FOBOHA.
The team continues to deliver remarkable performance. I’m very excited about the opportunities of molding solutions.
The product and technologies offered to our customers are world-class, and that was clearly on display at last week’s K Show Dusseldorf, Germany. This event, which takes place once every three years, is the largest international trade show for the plastics industry.
It’s where technology providers and system manufacturers display the latest, advanced capabilities as well as future trends. And now, molding solutions team was well represented.
While at the show, I had the chance to meet with a number of customers and could have been more pleased about the many exciting opportunities we discussed to grow our businesses together through a range of tailored solutions. At NGP, following several quarters of sequentially improving orders, organic sales realized a nice lift, up mid teens versus a year ago.
Tool and die end-markets, particularly in Europe and China, led the way. At our engineered components business, third quarter sales were down slightly on an organic basis.
Certain industrial end-markets such as whitegoods and construction remain a challenge, especially in North America. Forecasted global production for light vehicles remains positive, up low single digits for 2016 and 2017.
So clearly, the larger North American and Chinese markets are expected to see decelerating growth. Our outlook at industrial for the full year 2016 is now updated to include the contribution of our FOBOHA acquisition.
We expect total sales growth in the mid to high single-digits range with our organic sales in the low single-digits. Molding solutions forecast total sales growth in the high teens, benefiting from a full year contribution of Thermoplay and Priamus and four months of sales from FOBOHA.
Organic growth for molding solutions is anticipated to be low to mid single-digits. NGP is expecting a slight decline in total sales to approximately flat organically, a slightly better view than our prior expectation.
Engineered components anticipates being down low single digits on an organic basis, a bit softer than our previous forecast. Adjusted operating margin at industrial is anticipated to be sustainable in the mid-teens.
At aerospace, total sales were flat compared to a year-ago at both OEM and aftermarket sales approximated last year’s levels. 2016 continues as a transition year for our aerospace business.
In recent quarters, we’ve seen strong order intake, driving backlog up to record levels. In the current quarter, orders as expected were down from a year-ago and OEM backlog decreased slightly from last quarter-end.
Nevertheless, backlog remains at a very healthy and high level and positions as well for the longer term. In aerospace aftermarket, the MRO business sales increased 12%, while spare parts were down approximately 14% over the prior year.
You may recall that the third quarter of 2015 saw higher than usual or RSP sales. What we’ve seen since then is a steadier run rate of quarterly spare part sales.
Our updated aerospace outlook is for total sales to be down low single-digits with OEM down the same; MRO up mid to high single-digits; and spare parts to be down mid to high single digits given last year’s strong performance and this year’s run rate. Our outlook is for mid-teens adjusted operating margin this year, although this could range to the high teens if we were to experience higher demand for RSPs.
In closing, I am pleased with the progress that we continue to make in the execution of our profitable growth strategy. We’re demonstrating that we are better positioned to perform well in a slow growth macroeconomic environment.
As we continue our transformation, the portfolio changes have created a more focused company, with differentiated industrial technologies and manufacturing expertise coupled with productivity enhancements driven by our Barnes Enterprise System are propelling our operating performance. The Barnes Group team overall has made tremendous progress.
But there is still more to do as we remain relentless in our commitment to create long-term value. Let me now turn the call over to Chris.
Chris Stephens
Thank you, Patrick, and good morning, everyone. Let me begin with highlights of our second quarter results and then I’ll end with an updated 2016 outlook.
Third quarter sales of $312 million were up 7% from the prior year period. Organic sales increased 4% and our recent acquisitions of Thermoplay, Priamus and FOBOHA collectively contributed approximately $10 million or 3%.
Net income in the quarter was $36.8 million or $0.67 per diluted share, compared to $33.7 million or $0.61 per diluted share a year ago. On an adjusted basis, EPS was $0.71, up 16% from $0.61 last year.
Third quarter 2016 adjusted income excludes $0.03 of FOBOHA’s short-term purchase accounting adjustments and transaction costs in our industrial segment and $0.01 per diluted share charge related to a contract termination dispute in our aerospace segment. Last year’s third quarter adjusted income excludes $0.03 per diluted share related to that contract termination dispute in our aerospace segment, $0.02 per diluted share of Thermoplay short-term purchase accounting adjustments and transaction costs in our industrial segment and $3 million benefit or $0.05 per diluted share benefit from a tax refund in the quarter.
Now, onto our segment performance, starting with industrial. For the quarter, sales were $209 million, up 10% from $189 million in the same period last year.
Organic sales increased 6%, while acquisition sales contributed 5%. FX reduced sales by 1%.
[Ph] Operating profit in the third quarter was $35 million up 28% from $27.3 million last year, benefitting from the profit impact of higher organic sales and strong productivity improvements. Excluding FOBOHA’s short-term purchase accounting adjustments and acquisition costs this year and similar charges for Thermoplay last year, adjusted operating profit of $36.7 million was up 26% from an adjusted $29.2 million a year ago.
Adjusted operating margin of 17.6% remains strong, up 220 basis points over last year’s adjusted operating margin of 15.4%. At aerospace, sales were $103 million, up slightly from a $102 million in last year’s third quarter, primarily as a result of higher aftermarket MRO sales, which were offset for the most part by lower aftermarket spare part sales.
Sales for aerospace OEM were fairly similar to a year ago. Operating profit in the quarter was $16.9 million, up 3% from $16.4 million in the prior year period, primarily due to lower charges on a contract termination dispute this year versus a year ago offset by lower pricing and an unfavorable profit mix from reduced spare part sales.
Excluding the contract termination dispute charges for both 2016 and 2015, adjusted operating profit was $17.5 million, down 9% from year ago, while adjusted operating margin was 17%, down a 180 basis points. Total backlog at aerospace was $638 million at the end of the third quarter, up 14% year-over-year and down 3% sequentially from the second quarter.
All-in, this remains a strong backlog level reflective of recent OEM orders for new engine programs. The Company’s effective tax rate for the third quarter of 2016 was 23.6% compared with 19.2% in the third quarter of 2015 and 23.2% for the full year 2015.
With respect to share count, our third quarter average diluted shares outstanding were $54.6 million shares. During the quarter, we were an active buyer of our stock as we repurchased approximately 194,000 shares at a cost of 7.7 million.
Cash generation continues to be solid as year-to-date cash provided by operating activities with $160 million versus $161 million for the same period last year. Keep in mind, the Company made a discretionary $15 million contribution to its pension funds earlier this year and that contribution is reflected in operating cash flow.
Free cash flow which we define as operating cash flow less capital expenditures was $127 million versus $129 million last year. With respect to our balance sheet, debt to EBITDA ratio was 1.8 times at quarter-end.
Under our existing debt covenants, additional borrowings of approximately $400 million would be allowed and $344 million remained available in our credit facility at quarter-end. Turning to our updated outlook for 2016 on slide four of our supplement.
We now forecast organic revenue growth to be approximately flat with total revenue growth of 3.5% to 4.5% after consideration of negative FX of 1% and acquisition growth of positive 5%. We anticipate adjusted operating margins to be approximately 16%.
GAAP net income is forecasted to be in the range of $2.39 to $2.44 per diluted share. Excluding $0.03 per share of cost associated with the contract termination dispute and $0.06 for FOBOHA short term purchase accounting adjustments and acquisition costs, our adjusted EPS in now expected to be in the range of $2.48 to $2.53, up 4% to 6% from 2015’s adjusted EPS of $2.38.
A few additional outlook items, our full year tax rate forecast is between 25% and 26%. This reflects 1 point benefit from our prior view and is a result of our adoption of an accounting standard change related to the treatment of tax benefits on share-based compensation.
CapEx outlook is in the range of $45 million to $50 million, and we expect cash conversion to remain strong and exceed a 100% of net income this year. Lastly, as we look to 2017, there are couple items we wanted to highlight.
The first relates to an anticipated increase in pension expense, primarily as a result of a lower discount rate. For planning purposes, we are estimating an increase in pension expense of approximately $6.5 million or about $0.08 reduction in EPS.
Second, we wanted to addition of financial highlights of our FOBOHA acquisition. And as you can see on slide five of our earnings supplement, we finished the transaction using approximately $60 million of foreign cash with the balance using available capacity on our credit facility.
For 2016, we do not expect FOBOHA to be a meaningful EPS contributor but we are projecting EPS accretion of $0.05 to $0.08 in 2017. So, in summary, Barnes Group continues to perform well.
Our investments in differentiated industrial businesses are helping to strengthen core of our portfolio and despite being into transition at aerospace, we’re winning business and have a healthy backlog that supports future growth. Our cash generation at conversion remained strong and our balance sheet is in a good position to support further investments.
Operator, we will now open the call for questions.
Operator
[Operator Instructions] Your first question comes from the line of Christopher Glynn from Oppenheimer. Your line is open.
Christopher Glynn
Thanks. Good morning.
Patrick Dempsey
Good morning, Chris.
Christopher Glynn
Hey. So, the industrial portfolio really continues to perform and Männer in particular, I think I heard 20% orders; so, humming along there.
What’s kind of a smooth view of Männer’s orders growth? I suspect there was a particularly strong quarter.
How are you looking at the overall complexion of that business?
Patrick Dempsey
So, Chris, on the Männer business, as you know the end markets that it serves are primarily medical and personal care with some smaller amounts of packaging. As we look at the business, it’s primarily driven by medical devices and the need for more complex medical device components, which are produced from plastic.
Männer’s business, as you said, in the quarter was up -- orders were up 20-plus percent and sales were up high single digits. The outlook, as we move forward, is we continue to receive robust quotations for new programs.
As I mentioned earlier, even at the K Show, I spoke to a number of customers, again with a view to potential projects in the future. And so, as we sit here today, I think the outlook remains positive for Männer, albeit that we have with that business, I will say that there is an aspect as there is with FOBOHA of projects moving from one quarter to another.
And that’s not uncommon for these businesses, so that may create a little bit of lumpiness quarter-to-quarter, but on the longer term, a robust outlook.
Christopher Glynn
Okay. And then, I had a question about aerospace.
You have -- it’s very dynamic on OE side, you’ve got nice backlog build but the transition aspect. And I think backlog conversion is a little longer versus historical trends.
But if you could kind of blend those factors -- where has it got tailing [ph] yet for aero next year relative to kind of a neutral plus or minus kind of dilemma.
Patrick Dempsey
As you know, Chris, we don’t give guidance for next year until February 1st. In context of the transition that we’ve going through, we look to next year in the plus category.
And this year has presented some challenges against the new programs and the ramp associated with them. We thought that they would be running a little bit more seamlessly at this juncture.
That as you can see over the course of this year has taken a little longer than we anticipated. The good news is that the programs, the backlog against the programs continues to be strong and those orders need to be delivered in the coming months.
So, we are very bullish on 2017 against our aerospace business compared to 2016.
Operator
Your next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is open.
Pete Skibitski
Good morning, guys. Another nice cash quarter.
Patrick Dempsey
Good morning, Pete.
Chris Stephens
Good morning, Pete.
Pete Skibitski
Couple of questions; just a follow-up on the OEM. Is it fair, I don’t want to mischaracterize it, but is it fair to say you’re not surprised by the fall-off -- the pace of fall-off in legacy programs, but you are a little surprised in how slow the ramp of the new ones are going, is that accurate characterization?
Patrick Dempsey
I think it’s a fair categorization fees. The legacy program of course that we continued to watch very closely is the Boeing 777.
And in the case of that program, Boeing has indicated that they will reduce the output from 8.3 this year to 7 per month, starting in January. And then more recently, there’s been some indication that it would drop to five per month in 2018.
So, as you know with our business, any anticipated reduction in aircraft production hits us 6 to 9 months earlier. So, we would feel that into, our backlog as we dissect backlog today, what we’re seeing is the GE90 backlog shrinking whilst the XWB and the LEAP continued to grow.
On both programs was they haven’t ramped as quickly as we might have liked. What we have referenced in the prepared remarks is the fact that both programs the XWB and the LEAP are up both sequentially and year-over-year, as you would expect.
Pete Skibitski
Absolutely, okay. And just a follow-up.
I guess given its importance, I am wondering how you are thinking, how you’re sort of satisfied with the performance on the early stages of the LEAP program. I guess it’s the one area in the A320neo performing to your expectations and then any update on the potential for the 1B or is that you feel?
Patrick Dempsey
Yes. So, on the 1A, the teams are doing what I think is a wonderful job in terms of managing the complexity of the new product introduction that’s occurring on the LEAP A.
In parallel, we are continuing to work on developing the opportunities for the LEAP B. I would note however that the approach that our customer has taken on the LEAP B program is very different to past programs and that they’ve made the decision to dual and in some cases triple source the components to protect the program due to the significant ramp up in production in a very compressed timeframe.
So, as such, for us on the LEAP B, we’re developing products for that engine program. The final number of parts and the split of the work will ultimately determine our sales per aircraft.
As we look forward into 2017, our primary focus remains in terms of our capacity and our engineering resources is dedicated to the successful ramp of the LEAP AC program. And as such, we do not expect any meaningful contribution from LEAP B revenues in 2017.
Pete Skibitski
Okay. Is it fair to say you’re not sure of your content yet; you won’t know until we get closer to first delivery; is that still the view?
Patrick Dempsey
Well, actually, I would think that it’s going to be different this time, Pete, because one caution that I’ve mentioned in the past, I’m going to repeat, is that you should not assume content to be the same between board aircraft. Because in addition to the multiple sources that I’ve referenced that are being introduced under B program to protect it, in a number of instances, we are now working on the same parts for the LEAP B as we are the LEAP A and in a number of instances, they are of lesser value.
Operator
Your next question comes from the line of Edward Marshall from Sidoti & Company. Your line is open.
Edward Marshall
So, I was looking at the aero margins and noting the volume changes as well. But, it started to see some recovery but still well off of last year.
I’m just kind of curious, is there tooling that you have to pay for in aerospace that could be affecting that margin this year or is it something else that is going on?
Patrick Dempsey
Tooling is a factor, but it’s not significant, Ed, in terms of the overall results. What’s driving results this year compared to last year, if you recall in Q2 of last year, our RSP sales were up 50%.
We also had tough comps this quarter, because in Q3 of last year, we were up 35%. And so RSP clearly has a more leverage on the operating margin than the rest of the business.
So, as we move -- what we are pleased with is the sequential improvement that you referenced from Q2 to Q3. And clearly, we are absorbing extra costs through the NPI or the new product development side of the LEAP as well as the XWB.
And as we move -- move forward into 2017, we expect that those costs will start to reduce as we move into higher volumes against the product lines.
Edward Marshall
Got it. When you talk about spares in Q3, I know you noted year-over-year they’re down 14%.
Did you give that number? And if so, I missed it on the sequential change in spare parts from 2Q to 3Q.
Chris Stephens
Basically flat here. Ed, it was basically flat quarter-to-quarter, second quarter into third.
Edward Marshall
Okay. So, are we seeing more even patterns now from the customer there with much more [multiple speakers] okay, good much more...
Patrick Dempsey
I think that’s a fair comment in that. What are seeing is a steadier pattern of revenues coming out of the RSPs over the last four quarters basically.
And if you recall, what drives spikes into the RSP, our restocking events that occur with an interim distributor. And reason we love -- as we entered into the year, we were -- it’s not always clear as to when those restocking events might take place.
There have been none through the third quarter, and we don’t anticipate and our forecast does not anticipate any in the fourth quarter.
Edward Marshall
Okay. In that regard, when I look at the margin again and we talk about spare parts being significant driver to that.
On a sequential basis, the 300 basis points or so that you’ve gotten in your operating profit on a sequential basis and not to get too granular, but I guess it’s not spare parts if you are flat sequentially. So, what else -- I mean is there a learning curve adjustment that you’re making here on some of the newer products or what might be driving them?
Patrick Dempsey
Well, there is also some military programs that are included in our performance. And when the military programs ship, which a number of parts or components did in Q3, they also have a targeted impact on margins.
But I also would bring you over to the aftermarket side of things. And MRO was up 12%, which was primarily driven by CRPs and those again are a nice contribution to margin from an aftermarket perspective.
Edward Marshall
Okay. So, let’s maybe talk about the aftermarket in general, what’s the outlook for the remainder of the year.
I know you noted the up single-digit. But, I mean is there a lot of momentum behind that, the aftermarket?
And I’m speaking to both MRO and spare parts on a go forward basis, and then maybe as you’re I guess foreshadowing 2017 as well?
Patrick Dempsey
Yes. Well, as it pretends to aftermarket, I would say that I don’t see anything in terms of a major uptick but I do see us being pretty consistent to the performance that we’ve seen throughout 2016.
As you’ll recall, we are a major player on the CFM56 as it pertains to the aftermarket in context of both spare parts and repairs. So, the CFM56 is in a wonderful position in terms of the installed base to drive shop visits.
So, we continue to be very bullish on aftermarket over the longer term. Yet, I would say that right now the CFM56, which is primarily what’s driving shop visits, are the dash 5 and the dash 7 models and they continue to perform well in service.
And so again pushing to the rise, I think the CFM will be a driver, a nice driver into 2017 as it pretends to the aftermarket in general for us.
Edward Marshall
Just for a clarification. Did you lap the change in the MRO customer change that occurred last year?
Patrick Dempsey
We did and we announced that in Q3 of last year. And that was the closure of a major engine overhaul facility.
As we’ve lapped that, I will point out that the team has done a nice job in also winning new work to compensate for the loss that came with that.
Edward Marshall
Did you mention the industrial order book, the number there?
Chris Stephens
In terms of what, total orders?
Edward Marshall
Yes, total orders or growth -- I mean growth or however you want to present it from a backlog perspective?
Chris Stephens
Right. So, we had 10% -- with the addition of the acquisitions, we had in excess of 10% growth in orders year-over-year.
If you exclude those acquisitions that we made, it’s up low single-digits.
Edward Marshall
And then, finally, when I look at, you’ve historically bought a lot of stock back in several different instances, I mean for instance in last year $52 million of stock repurchases. Will that continue, especially as you generating much more cash now?
I understand thirst for acquisitions but I was kind of curious about the capital deployment?
Chris Stephens
Yes, when we look at the share repurchase, we typically look at it from an opportunistic point of view. So, the Board has authorized us the $5 million replenishment.
We’re down about roughly 4.5 million shares, and we will continue to look our stock. We were an active buyer of the stock during the quarter to roughly 200,000 shares.
So, we’ll continue to look at that in opportunistic point of view. Depending on the deployment of capital, we will balance the pipeline of acquisitions that we look at and the opportunities and that timing with the stock price.
And we make those judgment calls quarter-to-quarter.
Edward Marshall
Yes. By the way, I wanted to ask you GE9X, are you doing developmental work for that as well?
Patrick Dempsey
We are doing developmental work on it, Ed. I would note that we as it pretends to the GE90 which powered the base 777, we were extremely successful and do not expect the same level of content on the GE9X.
Operator
Your next question comes from the line of Bhupender Bohra from Jefferies. Your line is open.
Bhupender Bohra
A question on FOBOHA, you gave the guidance of I think you want to be accretive in 2017 $0.05 to $0.08. Maybe if you can just give us some assumptions, what kind of assumptions do you have in terms of growth, or as you said, this is a 15% EBITDA margin business on the slide?
Can you just kind of give some color on the $0.05 to $0.08?
Patrick Dempsey
Yes. As we acquired FOBOHA, we acquired it on the basis of its tremendous technology and its complement to the existing molding solutions business.
We also acquired it with a view to realizing, several synergies are expected to be realized over time. So, as we look at 2017, we have minimum synergies baked into the outlook that we provided.
As we move forward, we see opportunities for Männer’s hot runner systems to complement FOBOHA’s highly complex cube molds. Also we see the opportunity for the sharing of those technologies across all of the molding solutions businesses.
And as we speak, we’re rolling out the Barnes Enterprise System, which again will take time for it to take hold within the FOBOHA organization. I also mentioned previously that we see opportunities for top line expansion also between the businesses because FOBOHA has a footprint and an established operations in China, which Männer will leverage going forward and vice versa Männer has an established footprint in the U.S., which FOBOHA will leverage on a go forward basis.
So, in total, the guidance we’ve given is for the first year in that $0.05 to $0.08 range.
Bhupender Bohra
And lastly, on the industrial margins here, look pretty significantly higher like 17.6. Can you talk about the sustainability or how should we think about like I don’t want to give you -- don’t want you to give 2017 guidance here, but how should we think about the margins for the industrial business in 2017 from the 17 level over the last two quarters?
Patrick Dempsey
So, as you noted, Bhupender, Q3 was a very strong quarter at 17.6% operating margin. The drivers behind that were organic sales growth and the recovery of a number of the businesses, in particular as I mentioned nitrogen gas product and molding solutions.
And the drivers behind both of those businesses were primarily Europe and Asia, in particular China. So, what you are seeing is that even in a slow growth environment that the portfolio is starting to perform on a consistent basis.
Our expectations are mid-teens for this business. And we’ll continue to drive it from there.
Also noteworthy in Q3’s performance is the relentless focus that the team and the industrial team has put on productivity being driven by the Barnes Enterprise System. So, the leverage of that in the quarter also was a contributor which we expect to continue going forward, albeit that will be on an incremental basis from where we stand today.
Bhupender Bohra
Now, is there a way you can quantify the margin expansion from productivity in a quarter, I mean have you given that externally anytime or…?
Chris Stephens
Bhupender, if you recall, we went through several actions in terms of restructuring in the fourth quarter; we took a charge. And we anticipate that this year, not only for industrial but aerospace to get roughly 7 million to 8 million of benefit.
We are experiencing that. But to Patrick’s point, in terms of productivity, it goes into additional buckets of global sourcing, operational excellence, and the functional excellence, the pieces that we continue to drive for productivity.
So, I want to say, not specific number. I can tell you that industrials, when we walk their margins quarter-over-quarter, we contributed about $5 million or $6 million in the quarter just in productivity alone.
So, feeling very good about their ability to execute well.
Operator
Your next question comes from the line of Myles Walton from Deutsche Bank. Your line is open.
Myles Walton
I am going to pick up on aerospace if that’s okay. So, the implied fourth quarter growth rate for OEM, it looks like it needs to be somewhere in the 10% range.
Is that right? And just from a standpoint of level loading you’re outlook on OEM, do you feel like you’ve gotten with the new leadership in place, kind of the new structure of understanding the components of roll up to your aerospace OEM business, are you getting more comfortable with giving a good read on that market overall, not just quarter-to-quarter but over a few quarters in a year?
Patrick Dempsey
Yes. Short answer, Myles, is yes.
The team is really starting to come together. As you know, there is -- we brought in new leadership in the early mid-part of the year.
And as the team continues to reorganize itself collectively as a Barnes aerospace business, they are driving into details at a meticulous level. What I will say is that there is an aspect of these new programs that we control and there is an aspect that we don’t.
And what we’re looking to do of course is to overcome both because at the end of the day success comes from producing the parts and producing the parts at the highest quality on time to meet the ramp that’s required. On the LEAP program, as an example, a 100 aircraft this year is projected to go to 300 aircraft next year, rough numbers.
And so, the need for us to perform is a non-negotiable and the need for the entire supply chain to perform I believe is a non-negotiable. So, some of the issues that have been experienced over the course of this year, I’d put them in the categorization of feeding problems.
And as the year has progressed, we’ve consistent improvement quarter-over-quarter but not at the rate of which we had originally anticipated. And that said, we are -- Q4 with the 10% that you referenced is in the ballpark.
Why, because, we continue to need to ramp in terms of volumes to meet these new programs’ run rates.
Myles Walton
Okay. And then given the relatively easy comps in the first half of 2017 versus 2016 are you comfortable that we can get a full year of reasonable growth in aerospace into next year, any pushback to that?
Patrick Dempsey
I think we’ll growth into the next year. And what I won’t necessarily say that there won’t be issues from quarter-to-quarter.
But nonetheless, on a comp basis, 2017 should be up nicely. The other aspect of 2017, as I mentioned earlier on the 777, depending on the timing of when Boeing decides to cut, if they do decide to cut to five aircraft per month versus projected seven, then that will flow into the back half of 2017 putting pressure on the new programs to compensate against that.
Myles Walton
Okay. And then, Chris, on the cash flow, another really good quarter performance.
Is there a pathway to cash flow in 2016 actually overachieve 2015 despite the $15 million discretionary pension contribution?
Chris Stephens
Yes, we think so. I think as we look at the focus on working capital management in last year, as well as this year, it seems we’re starting to gain some momentum in terms of getting the reduction out of operating working capital to continue to put additional cash to the bottom line.
So, the operating cash flow, I do expect that to exceed last year.
Myles Walton
Okay. That’s great.
And then the only other one, it seems like the pensions contribution this year, I think it pre-funded for a period of time. When is the next contribution we have to think about?
Chris Stephens
Yes, it will be discretionary. We are not -- right now that was a discretionary contribution that we made at the beginning of the year.
We’ll go through the evaluation of that as we finalize our 2017 planning, but at this stage, we have not made a decision regarding a 2017 funding.
Operator
Your next question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is open.
Matt Summerville
I wanted to ask a follow-up on the 777. In terms of the revenue run rate you saw in Q3 coupled with your backlog, have you now seen the full impact of the production cut from the 8.3 to the 7 at this point?
Patrick Dempsey
I would suspect we have, Matt. That said, what the OE can choose to do at any given time is to close the window or narrow the window, because of the uncertainty of the outlook.
And if they were to close -- shorten the shortened window that has been released because of the uncertainty out 18 months from now, that could impact our backlog.
Matt Summerville
And remind me, have you guys -- I guess, what is the status, if you will, of that Bamar [ph] program that I believe there was some pretty heavy military aftermarket work; is that fully -- is that done at this point and what kind of pool does that leave for 2017?
Patrick Dempsey
So, the program you’re referring to, the Bamar [ph] program, we’ve been working it throughout 2015 and 2016 and some of the components against that program shift in the quarter. And I referenced them earlier as nice contributors to the margins within our OE business.
The program goes on for another couple of years, but at a lower volume than what we’ve experienced in 2016.
Matt Summerville
And then, I guess just sticking with the aerospace, is it suffice it to say, are you still experiencing -- I mean you mentioned kind of growing trends there, are you still seeing the same level of bottleneck issues kind of challenges associated with design changes on some of these new programs? I know you commented a little bit earlier on that.
But can you just be a little more granular in terms of where you are at from an efficiency standpoint. I guess, if you are not where you need to be, how much of a profit drag is that like?
Patrick Dempsey
Well, again, the short answer is we’re not where we need to be in terms of our efficiencies. And I would suggest that the teams right now in these early stages is about performance as opposed to profitability in the sense that the teams are pulling out all the stuff to meeting customers’ needs.
In these early stages also, as you highlighted, there is a degree of dynamic changes that occur in the process. And we are part contributor to that in the sense that we are continuously providing feedback on a concurrent engineering basis as to how to improve the parts.
And so, in that we’re working closely with the engineering groups of the OEs. The other aspect of it is material and the quality of the material as it comes in continues to be vetted very closely, some of which as the part progresses through its production at schedule, deviations appear as a result of removing material and so in turn causes process to stop or to be reworked.
And so, these are all the inherent aspects of a new program, not uncommon. And as I speak to my own team, I highlight it’s a wonderful problem to have because we’re on these new programs working through these issues.
And we’ll get through them as we always have. As I refer back to GE90, we have the same feeding problems and again it was a tremendously successful program first as will be the XWB and the LEAP going forward.
Matt Summerville
And then just one final one for Chris. As of year-end, what do you anticipate roughly?
I know we’re not at the end of the year yet. What would you anticipate the funded status of the pension plan looking like?
Chris Stephens
In the 90% range, Matt. That’s the way we’re looking at it.
Operator
Your next question comes from the line of Josh Chan from Baird. Your line is open.
Josh Chan
I just wanted to ask about the aerospace ramping and I was wondering if there is any operational metric that you can share with us, whether it’s like scrap rates, I don’t know if that’s an issue that shows that the operation is improving versus the earlier parts of the year like how you alluded to? And what’s your confidence that this transition level kind of maybe falls off in 2017?
Patrick Dempsey
I think the primary metric we’re looking at, Josh, is producing parts against the delivery schedules that the customer expects. And so, in that we are currently working internally on a number of key initiatives that are to ensure that the Barnes Enterprise System as a major driving tool is driving the whole aspect of material flow to the shop.
So, we’re talking about how to level out the shop, how to put in standardized production sales that are dedicated to these. We have recognized that we also have dual capabilities within Barnes Group between our U.S.
operations and our Asia operations and we are working meticulously to ramp the capacity with both facilities learning from each other. So, the metrics that are in place on operations revolve around on time delivery, quality, and quality being cost support quality as well as you highlight scrap.
At this junction, those metrics continue to improve, but they are nowhere near where a normalized running program would be or needs to be.
Josh Chan
Okay. And I appreciate that.
And then switching over to the industrial side, there have been some worries about automotive production flattening and I think you mentioned that in your slide as well. And so, any thoughts in terms of how that might impact Synventive business or even the engineered component business?
Patrick Dempsey
On the engineered components business, I think it will have more of a direct impact for the fact that we’re producing some product that goes directly into the automobile itself. With Synventive and with our nitrogen gas product businesses, they both serve the automotive industry as well, but do so more on the model changes as well as production.
So, they have -- the two combinations allow them to be there little bit more resilient to any fluctuations in auto production itself. What we do see is that accelerating race of production in North America and China and yet as I said still up low single digits in terms of outlook for the upcoming year, 2017.
Operator
Your next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is open.
Pete Skibitski
A couple of follow-ups, one aerospace, one industrial. I want to dig a little bit more on aerospace just so I understand better kind of if there is any secular shift going on or any other shift just with regard to your comment.
You guys got great content on the LEAP 1A, but with regard to your comments on the GE9X, so LEAP 1B content chase we’ve seen on the 787. Is there any kind of technology shift going on that’s working away from you or business model shift at GE or some other kind of secular shift that’s working a bit against you that’s causing [technical difficult] occur or is just some other concern about kind of production rates or something?
Patrick Dempsey
Pete, what I would say is relative to technology, not necessarily so. And the types of products of that we produce are the larger structural components.
And there are absolutely new technologies that are being introduced into the next generation of engines. And those technologies are in fact very impressive.
They are definitely targeted though against certain applications. And the product families that the applications that are they’re being directed against are not necessarily in the sweet spot of Barnes.
And so, therefore, the larger structural -- those that provide the integrity to the overall structure of the engine or the parts, we’re focused on. And historically you know they’re not the ones being necessarily targeted by the newer technologies.
I’m not going to talk about newer technologies, I might talk about additive manufacturing or I might talk about ceramics matrix composites. Again both of those are key technologies that I think will be directed sold towards the airflow within the core of the engine.
The relevant to my comments around the LEAP B program, I do think that that is a change relevant to a philosophy at the OEs to dual and triple source for the purposes of protecting schedule. The primary driver behind that from my vantage point is that the LEAP B is expected to ramp at a rate that is so compressed compared to what the industry historically has done that one, the traditional one supplier per part, so to speak, does not bode well to protect that ramp.
Because if anyone supplier were to trip, you then put the overall program at risk. And so that compressed timeframe has definitely resulted in a different sourcing philosophy form the OE.
Pete Skibitski
Okay, got it. And then 9X, is something similar may be or just a competitive issue there?
Patrick Dempsey
The 9X, I think plus, the dynamic that played into the 9X that wasn’t as much a play with the base GE90 where risk and revenue sharing partners or programs. And the GE9X in order to ensure its success and to fund it, the OE in that instance had brought on a number of larger players in the form of risk and revenue sharing partnerships.
And in that that is a dynamic that has changed the outlook against that engine compared to how the base GE90 would have been sourced 10 to 15 years ago.
Pete Skibitski
Got it, okay, make sense. And then on industrial, I am curious post- FOBOHA, where you guys see yourself in the plastic injection molding market, if you’re kind of just getting number of deals you done?
Are you kind of the market leader at this point or the top two, top three and is there more consolidation opportunities? And I am also curious as to kind of the TAM, if you can update us on the size of market?
Patrick Dempsey
Yes. So, when we entered into the space we initially identified a segment of the overall classic injection molding industry, and that’s initial space was hot runner systems.
The overall classical injection molding industry as we have identified is within the range of about $30 billion market size. And then we initially had segmented that down to where the hot runner systems was in the range of 2 billion to 2.5 billion.
As you noted, we have definitely made our presence known in this space now. As I’ve referenced in my prepared remarks, I just came back from the K Show in Germany last week.
And there the enthusiasm and the energy in the space was infectious with a view to the fact whether it’s medical, whether it’s packaging, whether it’s personal care, the energy in terms of the business driving forward to look for innovators in the space. And what Barnes has built in our short period in this industry is a collection of businesses that distinguished themselves in terms of being on the tip of the pyramid of technology and creative solutions to meet the needs of the customer.
So there I think we are in a great position. And I don’t think we’re finished.
I think that there is continued -- we’re continuing to look hard at opportunities with complementary technologies that make the whole greater than the sum of the parts.
Operator
Your next question comes from the line of Bhupender Bohra from Jefferies. Your line is open.
Bhupender Bohra
Sorry. My question is answered.
Thank you.
Patrick Dempsey
Thank you.
Operator
There are no further questions at this time. Mr.
Pitts, I will turn the call back over to you.
William Pitts
Great. Thank you, Scott.
We’d like to thank all of you for joining us this morning, and look forward to speaking with you once again in February with our fourth quarter and full year 2016 earnings call. We will now conclude today’s call.
Operator
This concludes today’s conference call. You may now disconnect.