Apr 28, 2017
Executives
William Pitts - Director, IR Patrick Dempsey - President and CEO Chris Stephens - SVP and CFO
Analysts
Pete Skibitski - Drexel Hamilton Michael Ciarmoli - SunTrust Robinson Humphrey Christopher Glynn - Oppenheimer & Co. Myles Walton - Deutsche Bank Edward Marshall - Sidoti & Company Bhupender Bohra - Jefferies Matt Summerville - Alembic Global Advisors Josh Chan - Robert W.
Baird & Company, Inc.
Operator
Good morning. My name is Krista and I will be your conference operator today.
At this time, I'd like to welcome everyone to the Barnes Group, Inc. First Quarter 2017 Earnings Conference Call and Webcast.
[Operator Instructions]. Thank you.
William Pitts, Director of Investor Relations, you may begin your conference.
William Pitts
Good morning and thank you for joining us for our first quarter 2017 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 Web site at BGINC.com. During our call, we will be referring to the earnings release supplement slides, which are also posted on our Web site.
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 Web site 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 our periodic filings with the Securities and Exchange Commission.
These filings are available through the Investor Relations section of our corporate Web site at BGINC.com. We will now open today's call in our usual fashion with remarks from Patrick, followed by a review of our first quarter results and our updated 2017 outlook from Chris.
After that, we will open-up the call for question. Patrick?
Patrick Dempsey
Thanks, Bill, and good morning, everyone. Barnes Group had an excellent first quarter to open 2017.
One that builds upon the momentum that began in mid-2016. We generated 15% organic sales growth with double-digit increases in each segment.
Adjusted operating income grew 33% compared to a year-ago and adjusted operating margin increased 180 basis points to 16.5%. Adjusted diluted earnings per share were $0.71 in the quarter, up 31%.
This business performance isn't simply the result of one quarter's efforts. Moreover, it is the out outcome of the profitable growth strategy we’ve been executing over the last several years, transforming our portfolio, expanding into new end markets, and leveraging intellectual property as a core differentiator.
The combination of these initiatives have led us to where we are today. And we will continue to serve us well as we move forward.
Supplementing these efforts are our three strategic enablers: the Barnes enterprise system, innovation, and talent management, which in combination drive a culture of high performance that translates into operational and commercial excellence to meet the needs of our customers. And while we're happy with the progress today, we're just getting started.
Notwithstanding the exceptional performance this quarter, keep in mind that last year's first quarter wasn't particularly robust, and that the comparables throughout the remainder of 2017 are more challenging. Nonetheless, we feel very good about our competitive positioning and the ability to execute our plan, and accordingly our expectations for the full-year have improved.
Now let's talk about our business segments in the quarter. The Industrial segment continues its track record of consecutive quarterly sales growth, now reaching six quarters as sales increased 16% versus a year-ago.
Certainly last year's FOBOHA's acquisition contributes to this performance, but more impressive is organic sales growth of 11% this quarter. As is the case for several quarters now, strength in many of the end markets served by our molding solutions and nitrogen gas products continues, while end markets for our engineered components business have generally improved.
At molding solutions, sales increased 24% over last year's first quarter and organic sales grew 11%. Strength in our automotive hot runner business endures with orders and sales growth well into the double digits.
Other hot runner markets such as medical and personal care are likewise favorable. The sales challenge and that's a relative comment relates to our molds business, which fell short of plan in the quarter due to timing of projects.
Our expectation, however, remains favorable as orders for this business line were pretty solid in the quarter, as improving customer sentiment converted into projects been released. Much of the operational focus of molding solutions is directed towards the integration of our acquired businesses, including systems alignment, optimizing and leveraging the global sales organization, and developing a higher level of aftermarket services.
This is a great business for us and we see significant opportunities for global growth. We continue to forecast sales growth in the double digits with organic sales in the mid to high single digits.
An uptick from a prior expectation. One final item with respect to molding solutions, in early April we closed on the acquisition of Gammaflux, a leading supplier of hot runner temperature and sequential valve gate control systems to the plastics industry.
Gammaflux provides temperature controlled solutions for injection molding, extrusion, blow molding, thermoforming and other applications. While the acquisition is modest in terms of size and financial impact this year, it is an outstanding addition in terms of controlled technology.
This capability further enhances Barnes Group's unsurpassed technical offerings of high quality [indiscernible] products, complex molds and value-added services to our injection molding customers around the world. At nitrogen gas products, our business remains very strong.
Tool and die end markets continue to be robust generating organic orders and sales growth in the high double digits. Part of the order book for the quarter includes a large order into an adjacent market, heavy-duty suspensions.
Please keep in mind that NGP commenced their business recovery in mid-2016, and as such the first half of 2017 has easier comparables. Regardless, NGP delivered a record quarter for orders, sales, and operating profit.
Accordingly, we now anticipate growth in the mid single digits, up from our prior outlook of low single digit growth. Our engineered components business also saw positive organic growth and orders, both up low single digits in the first quarter.
In fact, engineered components booked its highest level of quarterly orders and sales relative to the last six quarters. End markets such as heavy truck, construction and general industrial, showed good growth.
Global automotive production remains positive and the expectation for 2017 is for low single digit growth. While we expect to see somewhat of a plateauing of U.S production, we still anticipate auto related volumes to remain at a high-level.
We now have a slightly more positive view for engineered components with organic sales growth in the low single digits for 2017. At the segment level, our full-year outlook is for total sales growth in the high single digits in part due to the full-year contribution of FOBOHA, while organic sales are anticipated to be in the mid-single digits, up slightly from our previous year.
Forecasted operating margin at industrial remains in the mid-teens. Moving to aerospace.
First quarter total sales were up 23% compared to a year-ago. The aerospace team has worked extremely hard over the past two years to position Barnes Group to support the growth expected in our OEM business.
OEM orders were very strong leading to a further increase in backlog and OEM sales increased by over 20%. Ramping new engine program such as GE's LEAP A and Rolls-Royce's XWB are driving the sales growth as we continue to power through a transition from legacy to new engine programs.
For aerospace aftermarket, MRO sales increased 27%. While spare parts were up 20% over the prior year quarter.
In the aftermarket, the CFM56 engine is driving much of the growth and our expectation is that shop visits for this engine family will continue to grow over the next several years. Adjusted operating margin improved 590 basis points to 19.5% as larger production volumes benefit our manufacturing operations, and higher aftermarket margins flow through to operating profit.
For 2017, our aerospace outlook is for total sales to be up mid to high single digits for the year with OEM, MRO, and spare parts, each exhibiting that level of growth. Our operating margin outlook is for mid-teens, although as shown this quarter that can range to the high teens with a high-level of aftermarket demand.
In closing, I'm very happy with our performance that begin in 2017. Our growth strategy is providing the performance improvements we anticipate and the competitive positioning of our businesses is enhanced by our three strategic enablers: the Barnes enterprise system, innovation, and talent management.
While there is still much to do we're more confident in our outlook for the full-year and we see the opportunities before us to drive further improvement. Let me now turn the call over to Chris.
Chris Stephens
Thank you, Patrick, and good morning, everyone. I will begin with highlights of our first quarter results on Slide 3 of our supplement and end with our updated 2017 outlook.
First quarter sales of $342 million were up 19% from the prior-year period, driven by strong 15% organic sales growth and $15 million or 5% from our FOBOHA acquisition. FX unfavorably impacted sales by $4 million or 1%.
Net income in the quarter was $38.3 million or $0.70 per diluted share compared to $28.8 million or $0.53 a year-ago. On an adjusted basis, EPS of $0.71 was up 31% from $0.54 last year.
First quarter 2017 adjusted income excludes $0.01of FOBOHA short-term purchase accounting adjustments in our industrial segment, and while last year's first quarter adjusted income excludes a penny of contract termination dispute charges in our aerospace segment. Now on to segment performance.
Industrial's first quarter sales were $227.3 million, up 16% from year-ago. Organic sales grew 11% driven by continued strength in nitrogen gas products and molding solutions businesses.
Unfavorable FX reduced sales by $4 million, while the FOBOHA acquisition contributed $15 million as previously noted by Patrick. Operating profit was $33.5 million, up 13% from the prior year period, driven by the profit impact of increased organic sales offset by lower productivity.
Excluding $600,000 of FOBOHA short-term purchase accounting adjustments in the first quarter of 2017, adjusted operating margin, adjusted operating profit increased 15% to $34.1 million and adjusted operating margin was 15%, down 20 basis points. Two contributing factors to this decline.
First, FOBOHA margins have a dampening effect on industrial's operating margin. You may recall, at the time of acquisition we said this would occur over the short-term.
We’ve plans in place to improve margins at FOBOHA and they are being executed. Also initial sales for this business are a bit behind plan as we now expect sales to be between $65 million and $70 million for the year.
However, as Patrick mentioned, orders in the quarter were solid. And we see this push to the right.
Second, within engineered components, our associated spring business experienced some production delays, which resulted in increased costs and expedited freight charges. The team continues to work through this and have made steady progress in order to meet customer's requirements.
At aerospace, first quarter sales were $114.5 million, up 23% from last year, as OEM sales increased with higher volumes from new engine programs and aftermarket MRO and spare parts experienced considerable year-over-year sales growth. Operating profit in the quarter was $22.3 million, up 76% from an adjusted $12.7 million in the prior year period, reflecting the profit impact from higher sales volumes across all businesses and favorable productivity.
Operating margins improved 590 basis points to 19.5% from last year's adjusted operating margin of 13.6%. Aerospace backlog remain strong at $687 million, up 16% year-over-year and up 8% sequentially as compared to the December 2016 period end.
Please note that a good portion of this increase relates to our customers providing a longer time horizon on their orders. Of the current backlog, we expect to ship just under 50% over the next 12 months.
Other items to note, interest expense increased $400,000 to $3.3 million, primarily as a result of a higher effective average interest rate versus a year-ago. Our effective tax rate for the quarter of 2017 was 26.9% compared to 24.7% in the comparable quarter last year and 25.7% to the full-year of 2016.
With respect to share count, our first quarter average diluted shares outstanding were 54.7 million shares. During the quarter, we repurchased 107,000 shares at an average cost of approximately $50 per share and at quarter end we had approximately 4.3 million shares available for repurchase under existing Board authorizations.
Cash generation continues to be strong as first quarter cash provided by operating activities was $51.8 million versus $30.5 million last year. As a reminder, in 2016 we made a discretionary $15 million pension plan contribution that impacts the cash provided by operating activities for the prior year period.
Free cash flow, which we define as operating cash flow less capital expenditures was $40 million compared to $17 million last year. With respect to our balance sheet, our debt to EBITDA ratio as defined by our credit agreement was 1.6x at quarter end.
Under our existing debt covenants additional borrowings of approximately 510 million of senior debt would be allowed, while 460 million remained available on our credit facility at quarter end. Turning now to our updated 2017 outlook on Slide 4 of our supplement.
Given the strong first quarter and the end market dynamics discussed by Patrick, we now expect 2017 revenue growth of 8% to 9% with organic growth of 5% to 6% after consideration of negative FX of 1% and acquisition growth of about 4%. Our operating margin outlook remains in the range of 16% to 17%.
GAAP net income is expected to be in the range of $2.65 to $2.75 per diluted share. Excluding $0.03 in FOBOHA short-term purchase accounting adjustments for the year, our adjusted 2017 EPS outlook is expected to be $2.68 to $2.78, up 6% to 10% from 2016 adjusted EPS of $2.53.
At this point, given the strength of Q1, we now expect or anticipate adjusted EPS to be roughly a 50-50 split between first half and second half of the year. Our CapEx expectation remains at $55 million.
Our 2017 effective tax rate is now approximately 27%. Average diluted shares outstanding for 2017 are anticipated to be approximately $54.5 million.
And lastly, we now expect cash conversion to remain strong and exceed 100% of net income. So in summary, an excellent start to the year.
Our solid financial results and good cash flow provided a supported balance sheet for further growth investments in organic projects and accretive M&A deals. Productivity initiatives which drive margin expansion and anticipated global growth should likewise provide financial benefits.
Operator, let's turn it over for some questions.
Operator
Certainly. [Operator Instructions] Your first question comes from the line of Pete Skibitski with Drexel Hamilton.
Your line is now open.
Pete Skibitski
Hey, good morning guys.
Patrick Dempsey
Good morning, Pete.
Chris Stephens
Good morning, Pete.
Pete Skibitski
Thanks for helping me and [indiscernible] on a very positive note to excellent quarter guys.
Patrick Dempsey
[Multiple speakers] we will do that and thank you.
Pete Skibitski
So organic growth in the quarter was 15%. It didn’t seem like the year-over-year comp was particularly easy, so I'm wondering considering you only raised the top line guidance by about 2%.
If you’re thinking that maybe sales got pulled forward from the rest of the year for some reason? Whether it's in one segment are the other or if you’re -- this [indiscernible] just being a bit conservative on the guidance.
Patrick Dempsey
I think it's a combination of both, Pete. We’re obviously extremely pleased with the quarter to both aerospace and industrial teams had a tremendous quarter in terms of performance in total.
We're looking -- we’ve clearly shaved $0.05 off the bottom and increased the midpoint by $0.04. The reason, we took that approach was as we look out over the course of the year.
It's not like the first quarter was linear. We did see some lumpiness in the quarter and as we look out over the full-year was we remain positive in terms of each one of the businesses, each with their own set of challenges and not with 100% certainty, I think the guidance is prudent at this juncture.
Pete Skibitski
Okay. Okay.
And then, obviously backlog was up nicely in both segments. You mentioned customers kind of getting better visibility I think longer-term type of backlog.
Is that something radically new there or does that helped to give you some comfort level that there is, like you said some challenges with some opportunities as well?
Patrick Dempsey
Yes. Well, let me speak to both sides of the equation, because you’ve the industrial side and have the aerospace.
A lot of the backlog, a big piece of aerospace's backlog was an extending of the window. So as you -- its not uncommon as you move into these ramping programs that depending on what the lead times are on materials as the demand increases, the OEs will open up the window.
It's not new work, so to speak, it's just a reflection of the fact that they’ve given you visibility through a greater outlook. And so of course that in turn reflects into our backlog.
I will highlight that there is the opposite of that can occur too. Once you come up to steady-state and the supply chain normalizes, the OE can close that window and you could see a fall off in backlog.
So, it works for ways, but clearly the driver of our backlog in Q1 was the new programs primarily the lead on the OE side of aerospace as you know the aftermarket a short cycle, so orders converted into sales in the same quarter many times. And on the industrial side, backlog was extremely healthy driven by just the demand that we’re seeing in a number of the businesses and for the most part all of the industrial is short cycle.
Pete Skibitski
Okay. That’s great.
That’s great. Very helpful.
My last one, then I will get back in the queue. You kept the margin rate guidance intact.
Are there any changes by segment? In other words, are you taking aerospace maybe could be a little bit higher than initially thought and maybe industrial a little bit lower on some FOBOHA comments you made?
Patrick Dempsey
No, we still see the year outlook in terms of both segments in the mid-teens and -- as I do every quarter, I think I introduced the caveat on the aerospace side that if we have a strong aftermarket then aerospace with flex up to the high teens.
Pete Skibitski
Okay. Okay, fair enough.
Thanks, guys.
Patrick Dempsey
Thanks, Pete.
Chris Stephens
Thank you.
Operator
And your next question comes from the line of Michael Ciarmoli with SunTrust. Your line is now open.
Michael Ciarmoli
Hey, good morning guys. Thanks for taking my question.
A real nice quarter here.
Patrick Dempsey
Hi, Michael.
Michael Ciarmoli
Maybe just to stay on that last question, Pete, was asking on the margins. I can't remember the last time you guys put up a aerospace segment margin this high to start off the year.
I understand aftermarket is more short cycle, but maybe if you can comment what sort of visibility you might have in the aftermarket right now? If you think those trends can be sustained, I mean, you still have I think some pretty easy comps on aftermarket in the next quarter, but we’re hearing a lot more airlines retiring plane or keeping their older planes in service, retirement slowing.
So maybe any additional color there?
Patrick Dempsey
Absolutely. Well, Michael, we saw in the quarter very strong performance with our aftermarket.
And it was driven as you know, our aftermarket is comprised of two elements and it's a big contributor to the overall aerospace margins. The two aspects of our aftermarket are the repair side and the spare parts.
And in both the common thread between both of those elements is there a long-term life of program deals that we’ve entered into, primarily on the CFM56. We're also on the CF6 and the CF34.
In CF34 on the repair side, the CF6 and the CFM common to both the repair and the spare parts. But to your observation of aircraft staying in service longer, that is translate and I believe into performance we’re seeing on the CF6.
So the CF6, which is ultimately a declining program, in that -- it's at the sunset side of its product lifecycle still continues to contribute nicely to both repairs and spare parts, as it pertains to our business. Our team both leadership and sales are currently down in MRO Americas.
I spoke -- communicated with them yesterday and they -- their feedback has been very positive in terms of the spirits at that particular show. And again, its translating into what we're seeing.
Our aftermarket business now this quarter represents five quarters of sequential growth, albeit that sequential growth has been modest with nonetheless is being growth for five quarters.
Michael Ciarmoli
And what about any kind of visibility? I mean, I know it's sort of book shift, but do you get the sense that you’ve better sort of maybe the line of sight into maybe beyond what's normal or anything you could share on the visibility of the business there?
Patrick Dempsey
Visibility wise, I think we look to overall trends. We are obviously looking at all the fundamentals of the industry with regards to traffic, passenger traffic, load rates and so forth.
But then it's more important for us is we married that with what our sales team on the ground is telling us in terms of what they’re seeing from their visits to the overhaul shops. How the overhaul shops doing, what's their outlook in terms of future visibility.
The airlines of course have the ability to flex both in terms of differing maintenance and pulling it in. So the visibility within the industry is somewhat challenged over the long-term -- in the short -- over the long-term I would say.
But in the short-term, again, all the feedback we’re getting in terms of this year there seems to be a high degree of optimism around aftermarket. Again, you temper that against the fact that we had a couple of All-Star to an aftermarket over the last few years where we thought it was going to become more robust over time and it actually disappointed.
So that said, I think the engines have to come in for overhaul eventually, life limited parts are driving the engines in at the moment. And so, again maintenance is a necessity that has become [indiscernible].
Michael Ciarmoli
Got it. That’s helpful.
And then maybe just one last one on the aero OE side. I think we’ve heard one supplier this quarter talk about some destocking, maybe cut them off [indiscernible] on the 787.
I mean are you seeing anything with regards to the 787 that might indicate too much inventory in the channel or Boeing perhaps revisiting its rates from 14 to 12 to 10 or what are you guys seeing there?
Patrick Dempsey
We’ve not seen anything significant reflected into our backlog. The 787 was -- its an important program for us, it isn't one of our bigger ones.
Clearly for us, we've been tracking the 777 much more closely, because of its corresponding impact to the Barnes Group. But in general, the 787 we’ve not seen anything that stands out that is concerning to us.
Michael Ciarmoli
Got it. All right, guys.
Great. I will jump back in the queue here.
Patrick Dempsey
Thank you.
Chris Stephens
Thanks, Mike.
Operator
And your next question comes from the line of Christopher Glynn with Oppenheimer. Your line is now open.
Christopher Glynn
Thanks. Good morning, guys.
Patrick Dempsey
Good morning, Christopher.
Christopher Glynn
Good morning. Just wondering how are you dealing with China and North America auto production in the outlook, just given the back half comps are toughened especially with China can be a little whimsical, I think around this inventive timing and obviously you’re seeing some pretty good straight there.
Patrick Dempsey
Yes. As I mentioned in the prepared remarks, Chris, we believe that North America will plateau.
But recognize its plateauing at high levels and that in terms of the full-year we just -- coupling transport -- the auto side with our general industrial into our engineered components business as an example, we're feeling more optimistic up in our outlook into the low single digits from flat. As it pertains to China, last year of course there's some -- there were some reservations and the fact that tax incentives were driving, volume are pulling forward, volume out of 2017.
With our businesses in China for the most part is the model changes and [indiscernible] and we’re seeing that at an elevated level in China. And so, China has been a nice part of this growth story for us as it pertains to our automotive hard runners.
Christopher Glynn
Yes, do you see signs that the model changes it kind of continues at a good clip for the horizon?
Patrick Dempsey
We see it in the medium short-term and in the context of what we see for the full-year, we’ve reflected it into the guidance. But in general, we think that the model change activity right now is at elevated levels and it was robust in Q1 and we’re seeing that continue into April.
Christopher Glynn
Okay, thanks. And shifting gears, just wondering about your capital deployment pipeline and how you’re looking at your current operational bandwidth to take on something material?
Patrick Dempsey
Well, the team is doing a wonderful job on the industrial side, which is where the heavy integration is occurring. On the molding solutions business as you know, we just announced the acquisition of Gammaflux I referenced earlier, that I think is just another great technology player.
It's a smaller acquisition in the context of capital deployment, but very key in terms of the strategic aspects of where we want to build out a complete full-service offering to our injection molding customers. We are continuing to look at potential targets.
What’s important for us is that we hold true and disciplined to the strategy we view today, which is being our strategic criteria. And we have always with the M&A side of the equation, we have a lot of dry powder to see with regards to the balance sheet.
But action ability and timing and making sure that it needs our strategic screens is what’s key.
Christopher Glynn
Okay, got it. Thanks.
Patrick Dempsey
Thank you, Chris.
Chris Stephens
Thanks, Chris.
Operator
And your next question comes from the line of Myles Walton with Deutsche Bank. Your line is now open.
Myles Walton
Thanks. Good morning.
Patrick Dempsey
Good morning, Myles.
Myles Walton
To start on the EPS, on the top end, it looks like you’ve lower tax rate which would account for most of the top end rates of the EPS guidance and then you had another 1 or 2 points of growth added in. So, I’m just curious why that didn't add on to the top end even if it is earlier in the quarter just mathematically it would seem like there would be some drop through from the higher sales growth?
Chris Stephens
Yes, just as we looked at and Patrick's kind of commented, most -- some of the movement on the shaving of the top line meaning the 8% to 9% growth is in our molds business, within molding solutions. So we're tempering that down somewhat in terms of our overall guidance.
Feel good about dropping the $0.05 from the bottom end then adding $0.02 to each bottom and top. So, the molds business, some of that’s shifting to the right.
It is impacting some of the bottom line profitability and as a result we are in a little bit cautious as we look towards the second half of the year in our overall guidance, but obviously coming off of a terrific first quarter.
Myles Walton
Okay. And then the 777 in terms of what's flowing through on your OEM business and the rate there?
I know -- I think the backlog you’ve already got it step down to the right level within the backlog. Is the sales run rate now getting towards the right level or do you have further step down there as well?
Chris Stephens
Well, interesting in that for us on the backlog side is the things I think we’ve seen it almost half over the last two years. So that's not to be unexpected …
Myles Walton
Yes.
Chris Stephens
… as it pertains to that program. The announced next production cut in August is down to five from seven.
We believe that that's reflected into the backlog. What we’ve seen in this example set on light the lead where with the 777 you see a more closely controlled window, because of course the outlook is a little less predictable, so subsequently and the supply chain is fully up to speed as it pertains to this program.
So the window can close a little. So, whether it's fully reflected into our backlog and then into our outlook, we think we've covered it for 2017.
But how it's going to play out into 2018, I think still is a little unclear.
Myles Walton
Okay. And then on the margin performance, obviously really strong in aero.
I’m just curious, obviously helped by the aftermarket piece, but I wonder it can be also significantly improved the performance on some of the newer programs and their drop through, which I think if you look to last year was more of a challenge for you. It seems like it must be going pretty well at this point?
Chris Stephens
I would say that we're improving, but the challenge still remains quite considerable. So, I would attribute most of the benefit in the quarter to the aftermarket side of the equation.
We continue to absorb a lot of costs as it pertains to the newer programs, because they're not running steady-state, they’re ramping, they’re still being learned out. So, in general, a lot of costs still being absorbed on the OE side of the equation.
Myles Walton
Okay. All right.
Thanks.
Chris Stephens
Thank you.
Operator
And our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is now open.
Edward Marshall
Hey, guys. How is it going?
Good morning.
Patrick Dempsey
Good morning, Ed.
Chris Stephens
Good morning, Ed.
Edward Marshall
So I wanted to go back to China, if I could, and you -- in your comments you refer to model changes and how it reflects. I guess, you’re speaking some inventive.
But I wanted to kind of further extrapolate that conversation, talk more about NGP. And I think that's where you’ve seen a lot of the tool and die growth coming out of China, in particular for auto and the stamping businesses.
Can you -- and you talked about pretty good backlog there. Can you kind of help me think that through a little bit and kind of talk about the remainder of the year and how you see that business shaping up?
Patrick Dempsey
Yes. So, within China, Ed, our business is driven by both the tool and die industry and the automotive hot runner business as being the two primary drivers.
The tool and die industry continues at elevated levels. I mentioned that our NGP business achieved record order sales and profits in the quarter.
And that was driven across all three regions with China being the primary driver within the Asian region. The business has now -- as I mentioned earlier, since mid 2016 we've seen consistent improvement within our nitrogen gas products business and in parallel that improvement has occurred in China.
Though the tool and die industry out of China serves not only the local region, but at the world's demand and that a lot of tool and die products end up ultimately moving overseas. So it's a combination of all three regions.
Of course, China continues to exhibit strength from our NGP, our nitrogen gas springs business.
Edward Marshall
Great .And you talked about or whether when you look at the model in the industrial business, obviously you had some pretty good organic growth. You talked about some of the impacts of the operating margin is coming a little bit.
When I think about mix and pricing, obviously it wasn’t volume and I think you’ve already mentioned FOBOHA, but much were significant losses there, I don’t think that’s big enough to drive the margin that much. What are some of the pressures to the margin on the industrial side that weighed on it in the quarter?
Patrick Dempsey
We mentioned two items. One was the incremental sales of FOBOHA as what our lower margins and at the lower volumes in the quarter that had a corresponding impact on utilization within the shops.
The second item we mentioned, which if I talk to the good news relative to the experience which was how well the team learned in the quarter, how they should be ready to respond to adding changes in demand within our engineered components business as we had one business within that particular segment or business SPU, that experienced some operational issues in the quarter. And as such, we ended up having to react with additional resources, additional expediting over time, and all that goes with meeting the needs of the customer as the ultimate goal.
But with that we -- it did have an impact on our margins. So, if I look at -- if I take that out, I would've expected it to be at least a point higher to where we finished the quarter.
Edward Marshall
And I'm sorry, the point higher was that related to FOBOHA and the engineered components? Or you’re referring to just the engineered components?
Patrick Dempsey
Just the engineered components.
Edward Marshall
You'd be a point higher?
Patrick Dempsey
Yes.
Edward Marshall
Okay. And then, anything to report on, LEAP-B or this 777 X?
Patrick Dempsey
Well, we continue to work both programs and remain positive on them. But as I’ve mentioned a few times, most of our energy as you can imagine is on the ramp that’s been driven against the LEAP-A at the moment and that’s where we have the larger piece of content and as such the team is collectively focused on it.
We are also developing the 777 X product line, but in both instances again as I think I've indicated previously, neither the B or the 777 X will be at the levels that we've enjoyed with the GE90 on the base 777 or on the LEAP-A.
Edward Marshall
Your -- the GE90 obviously steps down in August to five from seven. And I'm curious, are you in that sweet spot where you’re benefiting still from a higher rate at the GE90 as well as the incoming order from -- or the incoming demand from the LEAP-A or did you already start to see the declines for the August shipments?
Patrick Dempsey
I believe we've seen the declines for the GE90. And I'm not sure that they're all in there in the sense of that we've not got to a point where the GE90 is neutral.
I think we're still absorbing some of this decline at the GE90 was we're ramping on the LEAP, but net net as we give guidance to the OEM side of our business of mid to high single digits, it includes our assessment of both all the moving parts within aerospace.
Edward Marshall
Great. Thanks, guys.
I appreciate it. Nice quarter.
Patrick Dempsey
Thanks, Ed.
Chris Stephens
Thanks, Ed.
Operator
Your next question comes from the line of Bhupender Bohra with Jefferies. Your line is now open.
Bhupender Bohra
Hey, good morning guys.
Patrick Dempsey
Good morning, Bhupender.
Chris Stephens
Good morning, Bhupender.
Bhupender Bohra
Hey, question just some housekeeping question on -- I don’t know if you’ve already mentioned about the aerospace OE and aftermarket, especially with the MRO and sales growth in the quarter? If you can give …?
Patrick Dempsey
Yes. The sales growth on the OEM side of aerospace was 20% and the aftermarket side was 24% which split 27% in MRO and 20% in spare parts.
Bhupender Bohra
Okay, got it. And let's talk about on the industrial side.
I think we focused too much on the sentiment side of the business. Give us some color on the Manor side, some of the other end markets you’ve talked about was kind of solid in the quarter.
And how should we think about for FOBOHA and how that integration is going on and what kind of opportunities do you have for FOBOHA and especially with the Manor business as you integrate? Thanks.
Patrick Dempsey
Right. So the Manor and FOBOHA teams continue to work extremely well together, and that both of those businesses as you just mentioned, have a lot of similarities.
Clearly the primary business is molds as opposed to hot runners, which are the primary of a [indiscernible] as an example. But also within that clearly Manor is also a industry-leading provider of the hot runner systems that it embeds into its own molds.
And now going forward, will also look to do so into the FOBOHA molds. The two businesses, the primary end markets that they serve are personal care, medical devices, and packaging.
And those end markets have been very deliberate in terms of our strategic targeting as we got into this industry, because we believe if you think about those three end markets they're not necessarily going to be really high growth. But what they do offer is resilience in both the good and the bad times from an economic standpoint.
So as we look at those businesses, in particular, not only were to complementary to the molding solutions overall strategy, but also they provide some nice and dampening effect and I think have an ultimate impact on our performance as we go forward, as you know economy -- the economy turns at some point, they will provide a nice resilience to the -- any particular down turn given the end markets that they’re serving. What we did see in the fourth quarter was a movement to the right of projects been released and subsequently what that means is that into the first quarter it impact shipments, first and second quarter.
So that was something that we were looking closely and monitoring closely. The good news been that in the first quarter we’ve seen customer sentiment improving and projects been released.
So we’ve seen a nice uptick in our mold business in the quarter in terms of orders and in turn because of the lead time that goes with a mold is why we subsequently tempered our outlook on the Manor and FOBOHA business for the full-year. But that again is reflected in our guidance.
Bhupender Bohra
Okay, got it. On the Gammaflux now, can you -- I know it's a pretty small acquisition here.
Where does it fit in, especially on the auto side or would that be even on the Manor side of the business?
Patrick Dempsey
Well, when we look at our molding solutions business, we think of it in three ways. We think of the molds, the hard runner systems, and the controls and what Gammaflux brings which is complimentary to the other two elements.
So if you think of it as a three-legged stool within that overall SPU, Gammaflux is the electronic controls that have a great bearing on the hard runner system itself and the overall performance of the mold in operation. So if you couple that with our acquisition of Priamus Sensor Technologies in 2015 we see the combination of these technologies being value enhancing to the overall portfolio and the total service offering that we aim bringing to market for the plastic injection molding customers.
Bhupender Bohra
Okay. And lastly I just want to -- I think you’ve mentioned the second half, the earnings for this year is going to be equally weighted 50-50 first half, second half.
So, does it seem like the second half, which was pretty nice last year, while the quarters would be kind of a down quarter in terms of EPS or how should we think about, especially the third and the fourth quarter I think kind of your earnings are pretty nice in the third quarter last year so.
Patrick Dempsey
Sure. Bhupender, let me just highlight the third quarter last year, if you recall, there was we had a $0.03 benefit from a tax accounting change.
And that that represented $0.71 actually on adjusted basis for our third quarter last year. So we don’t necessarily see that repeating again and it is possible, it would.
But that would be the one quarter that we're looking at where to your point little bit down as we think about our overall guidance on a year-over-year basis, quarter-over-quarter.
Bhupender Bohra
Okay, got it. Thank you so much.
Patrick Dempsey
Thank you.
Chris Stephens
Thank you.
Operator
And your next question comes from the line of Matt Summerville with Alembic Global Advisors. Your line is now open.
Matt Summerville
Thanks. Good morning.
Patrick Dempsey
Good morning, Matt.
Chris Stephens
Good morning, Matt.
Matt Summerville
With respect to the industrial business, the issue you encountered at associated spring, can you get a little more granular on it? It sounded like it cost you a couple of million dollars in OP during the quarter, which is not an inconsequential model?
Patrick Dempsey
Yes, I think a couple is a little hasty, but it did cost us and it cost us to the fact that I said it was the point that probably had an impact of a point on our margins. The good news is, I said again is that I think for the most part its substantially behind us, and there was a number of lessons to be learned.
But really it was a case of where one of our businesses got behind the curve in terms of performance and then have to react and react with what I -- what the direction given to the business was that they have to meet the customer's requirements and that the issue was there were many reasons, it was important that we address this and address that with a sense of urgency. So it's been as I said materially taking care of and once it might bleed over a little into Q2.
Again, I indicate that the full-year guidance reflects it.
Matt Summerville
And then where are you in terms of learning curve with some of the new programs you mentioned on the aerospace business? You have been encountering some operating challenges, how are quality metrics -- while how -- to what degree have your quality metrics improved and how far are you through, if you will, may be using a baseball analogy [indiscernible] are you in, in getting through these transitory challenges?
If you will, how far up on the learning curve are you at this point given the margin performance we're seeing to narrow?
Chris Stephens
Yes, I think we’re still in the early stages, Matt, as it pertains to some of these newer programs, because what you have is even as we enter as they ramp into production, there's a misconception sometimes that they have been locked in, in terms of their design. In some instances even as we are ramping on certain programs we're also implementing engineering design changes to make the part better as we go.
So there is still -- I would argue there is still a lot of efforts engineering design work, concurrent engineering, as well as far from optimum movement of the parts through the shop that's causing incremental costs. So we are in the early inning.
It's going to be a typical learning curve on these programs could be one year to two years. And it depends on the volume ramp, and it depends on -- the primary driver at the moment is meeting the production rates and ensuring that every part that ships is meets every requirement terms of quality and performance.
And unfortunately in the early stages that comes at a high cost.
Matt Summerville
And then, I think it was either in your response to question or in your prepared remarks, Patrick, I can't remember, but you mentioned that I think speaking about the industrial businesses that you have not seen a lot of linearity or maybe you had a seen a little bit more volatility than you would otherwise expect. And you provided some color on what you’re seeing in Asia.
Can you maybe talk about the industrial businesses in the context of what you're seeing in North America and Europe as well please?
Patrick Dempsey
Yes. North America for us, we've seen a lot of good -- goodness in the context of general industrial.
Albeit that it has been somewhat volatile or sporadic. The -- I mentioned that construction or heavy-duty trucks have seen some nice green shoots, if you like, and as we move forward we're optimistic that the general improving industrial side of our engineered components business as an example, can offset maybe some of the plateauing that's anticipated on the automotive side.
Within Europe, Europe has been very strong for us this quarter, primarily coming out of again the automotive hot runner business as well as the nitrogen gas products has been the two primary drivers.
Matt Summerville
Great. Thank you.
Patrick Dempsey
Thank you.
Operator
And your next question comes from the line of Josh Chan with Baird. Your line is now open.
Josh Chan
Hi, good morning, Patrick, Chris, and Bill.
Patrick Dempsey
Good morning.
Chris Stephens
Good morning, Josh.
Josh Chan
Good morning. Obviously it was a very strong quarter.
I was just wondering relative to your own expectation as you look across the business, where were the areas of the biggest surprise to you within the quarter? And then also kind of looking ahead, you talked about trying to be prudent with your outlook and you mentioned molds as an example.
I was just wondering if you're looking at any other areas where you’re trying to be a little bit more cautious as well?
Patrick Dempsey
Yes, we -- in the quarter, I think where there was strength above what we had anticipated within the short cycle businesses and the nature of those businesses and where I give a tremendous amount of credit to our team is that when you have a surge in a short cycle business, either you meet the demand or demand potentially go somewhere else to a competitor or otherwise. What our team flex on the industrial side within nitrogen gas products and within the molding solutions side of the business was that they flexed with great agility to absorb that incremental demand, and by far March was the strongest month of the quarter.
So we had even higher than I think we anticipated. The question is as somebody mentioned earlier is it -- those will represent a little bit of a pulling from Q2 or Q3.
I think that remains to be seen and subsequently why again we're a little bit more prudent on the outlook because that has yet to be determined. The aerospace side of the business, also the aftermarket side was stronger than we had anticipated and originally we thought aerospace was going to be in the mid single digits.
We are now providing an outlook of mid to high single digits based on the relative continued improvement in aftermarket that we saw in Q1. And as I mentioned, that’s five sequential quarters now of modest growth in aftermarket.
But there seems to be momentum there that we believe will continue throughout 2017.
Josh Chan
Okay. That’s good to hear.
And then, as your businesses continue to grow, how are you thinking about capacity across your portfolio? Any place where you’re going to be bumping up into the need to add more capacity?
Patrick Dempsey
It's a great question. And I think it's something that we continue to monitor very closely.
One of the key elements of our overall strategy for as we continue to execute against the new strategy for Barnes, as you know there's been a few elements of this and transforming the portfolio has been at the heart of it and that has primarily took place in terms of brick-and-mortar on the industrial side. And it took place on the aerospace side in the form of moving on to the next generation of new aircraft.
Each one with that strategy, intellectual property has been at the cornerstone of it and what an element that is also embedded in there in terms of the overall go forward strategy is global expansion. And that global expansion, it is twofold.
One to move into new markets, and second to increase our capacity. Over the last couple of years, some of the capacity we've -- increases that we've made, we have advertised or publicized, others we've done almost is -- just a part of normal business.
So there to give you some examples, a couple years ago we expanded almost by 50%, our nitrogen gas products business in anticipation of future growth. And that of course has bode out very well for us and as I mentioned even in the quarter nitrogen gas products stepped up to the increased volume.
On the aerospace side, as we expanded into these new programs we’ve also launched two Greenfields over the last couple of years. One in Mexico to support our customers there and another in Singapore, both were used to increasing capacity to support these new programs.
So it's something we are monitoring closely. We continue to invest in and that’s again where as we talk about our capital investment budget for the year at $55 million, this particular year that is where we’re making those investments on these growth programs.
Josh Chan
Sounds good. Thanks.
Thanks for the time and great quarter, guys.
Patrick Dempsey
Thank you.
Chris Stephens
Thank you.
Operator
And your final question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.
Pete Skibitski
Yes, guys. It's been explored a little bit already, but I wanted, see if I can get some more color on this thesis of peak auto production.
And Patrick I leave it to you whether it's best to talk about in terms of engineered components or associates spring more specifically. But I'm wondering if -- how you think about managing that?
You did with peak auto aligned, if your idea of [indiscernible] changes now in this environment? And I don’t know if you’ve already seen pressure is on auto production already or if you could see a flattening?
But does cost control take on a bigger focus in this environment there or [indiscernible] are you going to change the way you manage that business in this environment. And I also want to get a sense of the mix in terms of, if its 50% auto production, 50% construction there and I just want to get a better feel for that as well?
Thanks.
Patrick Dempsey
Absolutely. As it pertains to engineered components, that business in total is a split between industrial and automotive.
What’s happened over the last couple of years is the shift has moved, there were a greater percentage and balance of it was 50-50. Over the last couple of years it shifted more to automotive just given the strength in the auto industry.
As you think about the outlook for automotive, in particular North America plateauing, the businesses continue -- their area of focus continue to drive optimum -- capacity optimum efficiencies against the Barnes -- with utilizing the Barnes Enterprise System as the mechanism by which we do that. But I’d note is that the engineered components business also has done a really nice job over the last couple of years in terms of moving the mix of its components.
So we have been focused on the 8 to 10 speed for the next generation of autos moving off of the traditional 6 speed. And so, there's a conversion rate that’s happened within our engineered components business that's helping as well.
Also within engineered components we’ve made reference to our Swiss operations and the GDI program, which again is a new technology been adopted by the industry, and so there is a conversion from the old port fuel injection systems to the GDI systems. And again, what happens is it provides a dampening to the overall production volume.
Pete Skibitski
Okay. That’s helpful.
And on the construction exposure or the general industrial exposure, is there some capital exposure there? Because it seems like they’re starting to turn and I’m wondering if that’s a good read through for you guys or something else?
Patrick Dempsey
Yes, Caterpillar is a very strong customer of our engineered components business. Small in the scheme of things, but strong relationship with that customer.
And clearly their recent earnings announcement was all good news. And as I mentioned in my prepared remarks, we've seen some green shoots in terms of our experience coming in to the engineered components side of the business, on the general industrial side.
Pete Skibitski
Thanks, guys.
Patrick Dempsey
Thank you.
Chris Stephens
Thanks.
Operator
There are no further questions at this time. I will turn the call back over to Mr.
Pitts.
William Pitts
Great. Thank you.
We would like to thank all of you for joining us this morning, and we look forward to speaking with you once again in July with our second quarter 2017 earnings call. We will now conclude today's call.
Thank you.
Operator
This conclude today's conference call. You may now disconnect.