Apr 24, 2020
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Barnes Group Inc. First Quarter 2020 Earnings Conference Call and Webcast.
At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session.
[Operator Instructions]. I would now like to hand the conference over to your speaker today Bill Pitts.
Please go ahead.
Bill Pitts
Thank you, Marcella. Good morning and thank you for joining us for our first quarter 2020 earnings call.
With me are Barnes Group's President and Chief Executive Officer, 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 and as part of our press release and in the Form 8-K submitted to the Securities and Exchange Commission.
Be advised that certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC. These filings are available through the Investor Relations section of our corporate website at bginc.com.
Let me now turn the call over to Patrick for opening remarks. Then Chris will provide a review of our financial results.
After that, we will open-up the call for questions. Patrick?
Patrick J. Dempsey
Thank you Bill and good morning everyone. For the first quarter Barnes Group's performance exceeded expectations shared with you on our February call driven by record performance in our aerospace aftermarket business.
While total sales ended a little lighter than our forecast, adjusted operating profit and margin were better. We achieved results in the face of significant uncertainty and the global COVID-19 challenge demonstrates the benefits of our transformed business portfolio and our strong leadership team.
We took and continued to take proactive, often difficult actions to manage through the ongoing crisis. To start 2020 first quarter sales decreased 12% with organic sales down 8%.
Adjusted operating income decreased 5% compared to last year, while adjusted operating margin improved 110 basis points to 15.6%. Positioning the businesses for the lower first quarter sales expectation allowed us to proactively manage costs and deliver the improved margin.
Adjusted earnings per share were $0.71 unchanged from a year ago. As a company, given the magnitude of the disruption from the Corona virus, we delivered solid first quarter performance.
However, as you would expect, the subject of most interest is not necessarily what happened in the quarter, but rather where the current business environment stands. As such, my discussion today will focus primarily on where we are versus what we accomplished in the quarter.
I believe it is important to let you know how we see our businesses and end markets progressing from here and the actions we are taking to adapt. Likewise, by providing the customary color on the quarter's financial performance later in the call, Chris will discuss in much greater detail than usual our liquidity position and capital priorities.
Relative to the current environment let me begin by saying that the majority of Barnes Group's manufacturing facilities around the globe are currently operating albeit at reduced levels. Our plants manufacture essential components and systems for several end markets, some of which are directly engaged in the fight against COVID-19.
In keeping our facilities open to provide these essential services, our primary concern is the safety and well-being of our employees and our families, our customers and our suppliers. To that end, we've instituted many additional precautions to protect them, including enhanced deep cleaning, staggered shifts, temperature checking, use of facemasks, practicing social distancing, and limiting non-employees at our locations, amongst other steps.
Most of our office workers in our manufacturing facilities, as well as the corporate and segment headquarters, are also working remotely where possible. Additionally, we've undertaken many aggressive steps to better manage costs in concert with the current environment.
While incredibly difficult, these actions are necessary to position the company to manage through the crisis and to best position us for recovery. These actions include, but are not limited to temporary reductions in compensation for all salaried employees, including Company Officers and Board of Directors, employee furloughs, short workweeks, and reduction of discretionary expenses.
With respect to our global supply chain, our procurement team continues to monitor and manage our ability to operate effectively. Today we have not experienced any significant disruptions, so we are constantly maintaining ongoing discussions with our suppliers to identify and mitigate risks.
Let's now move to a discussion of what's happening within our segments beginning with industrial. Challenging end markets fueled mostly by the COVID-19 pandemic have significantly impacted first quarter order intake and subsequently have reduced our expectations for 2020.
Manufacturing PMIs have faded into contraction territory for North America and Europe, with China just clawing back to a neutral 50. Many automotive manufacturing plants in most geographies have been or remain closed, with China just beginning to restart production.
And given customer's self-imposed capital investment restrictions and lower production levels, general industrial markets remain soft. One bright spot remains our medical end markets, which have remained strong throughout this time period.
With that backdrop, industrial's book to build was just under one times in the first quarter. At Molding Solutions the team delivered performance which was better than our previous expectations.
As we noted in our February call, we forecasted first quarter shipments would be lower than last year and organic sales did decline 6%, slightly better than what we had anticipated. For our automotive hot runner business, we saw a weak first quarter in Asia due to COVID-19, but expect to see a pickup there beginning in the second quarter.
In North America 2020 was off to a respectable start and quoting activity was good. However, given the suspension of auto manufacturing mid-quarter, we saw the corresponding disruption impact orders.
European markets remain very slow due to the closure of OEM and Tier 1 suppliers, though the onset of a restart has already begun. With respect to our multi cavity molds business quoting activity has been high.
However, due to existing uncertainties, many customers have put their capital spending on hold, leading to the deferral of new projects. This behavior has served to further extend weakness we had already been seeing in personal care and packaging demand.
As mentioned, our medical molds systems continue to see heightened interest. At Force & Motion Control organic sales declined approximately 20%.
A sheet metal forming end markets, primarily auto and industrial related, were impacted by the customer suspended or reduced operations and deferred or cancelled new programs. In the quarter sales in China and Europe were particularly hard hit.
Moving to engineered components, organic sales declined 16%, driven by lingering weakness in auto production and the onset of the COVID-19 pandemic. The engineered components management team has been very proactive in managing costs and addressing the fallout from the pandemic.
And while there's still more work to be done, the team has been making solid progress adjusting to the lower demand. In our automation business, it was a relatively good story in the first quarter, posting positive organic sales growth of 4%.
This business has seen favorable trends in medical and pharmaceutical end markets and signs of stabilization in food packaging both of which are targeted growth markets. Not unlike our other industrial businesses challenges in automotive end markets persist.
All in a mixed story for our industrial end markets with our larger end markets under considerable pressure heading into the second quarter. As we think about how things may progress through the year, it's important to keep in mind that in the current environment it's extremely difficult to make definitive calls on the pace of recovery.
Across industrial, we anticipate a poor second quarter, followed by gradual recovery as many of our customers come back online. For general industrial markets we expect manufacturing PMIs for Asia and North America to improve and help less sales in our engineered components and Force & Motion Control businesses.
With auto manufacturers restarting production, we expect to see a turn towards sequential improvement across our auto component and end markets. Medical end markets have been good and we don't envision a change there.
We expect automation to benefit from global economic stabilization and the release of delayed projects by its customers. Across the segment, we forecast sequential improvement from Q2 to Q3 and then again from Q3 to Q4.
However, we do anticipate year-over-year organic sales declines in each quarter. Moving now to our aerospace business, all things considered, aerospace delivered a very good first quarter with improved operating profit and margin on slightly reduced sales.
Total aerospace sales were down 2%, with OEM down 7% versus a year ago, driven by lower shipments related to the Boeing 737 Max. Aftermarket sales were up 8%, with both MRO and spare parts seeing similar growth.
Due to the strong aftermarket contribution, aerospace operating margin of 23.9% was a record performance. Aerospace OEM backlog ended the quarter at 703 million, down 12% from the end of 2019.
We expect backlog to be impacted by the industry's evolving production schedules with net orders highly variable until the uncertainty settles. As a result, backlog may ultimately settle below the quarter end level.
Aerospace performance has been very strong over the last few years, benefiting from a favorable OEM and aftermarket, an excellent performance from our aerospace team. However, with the global COVID-19 pandemic, aerospace markets have come under immediate intense pressure.
We anticipate our OEM business to see the impact of lower aircraft demand and production cuts of Boeing and Airbus. In the aftermarket some substantial reductions in aircraft utilization, growing levels of parked aircraft, and reduced airline profitability are expected to impact our business for some time to come.
There is no doubt the aerospace industry is in unchartered territory with the duration and depth of the disruption not totally clear at the present time. That said, I have full confidence that our aerospace team will adapt as necessary to deal with whatever challenges the industry faces as we move forward.
Before wrapping up, I would like to take a moment to highlight several of the many ways that Barnes Group's employees are actively engaged in the COVID-19 fight through the many products we manufacture. Across industrial our manufacturing capabilities in plastic injection molding, metal forming, specialty springs, and other component parts are being used in a variety of medical applications.
Examples include blood testing devices, medical dispensing equipment, ventilators, oxygen masks, and test kits to name just a few. Aboard industrial and aerospace our additive manufacturing capabilities have been employed to produce critical PPE parts such as the frames used to make facemasks.
On behalf of all Barnes Group's employees, I want to express our sincere thanks to all the medical staff on the frontlines of the pandemic. So to conclude, we are unquestionably in a different place and situation than what we all had envisioned 2020 would look like.
As we address the realities of today, our primary concern remains the well-being of our employees, suppliers and customers. We appreciate all their collective efforts during this time.
From a business standpoint, we've taken aggressive and necessary actions to adjust our costs and through the disciplined application of the Barnes' enterprise system, we continue to adapt to the structural changes taken place in some of our end markets. Our focus on driving commercial, financial and operational excellence is as important as ever.
At the same time, we will continue to make the necessary investments in our future by moving forward on our innovation and research and development efforts. Despite current challenges I have every confidence that the Barnes team will overcome this crisis, as we've done so many times before over our long 163 year history.
When we get to the other side of this pandemic, I anticipate Barnes Group will be in an even stronger position to compete in its markets and profitably grow once again. Now, let me turn the call over to Chris for a discussion on the financial details.
Christopher J. Stephens
Thank you, Patrick and good morning everyone. Let me begin with highlights of our 2020 first quarter results.
For the first quarter sales were 331 million, down 12% from the prior year period, with organic sales declining 8%. The divestiture of the Seeger business had a negative impact on sales of 3%, while FX had a negative impact of 1%.
Operating income was 49.3 million as compared to 50.6 million in last year's first quarter. On an adjusted basis, which for 2020 excludes 2.4 million of Seeger divestiture adjustments and for 2019 excludes 4 million of Gimatic short-term purchase accounting adjustments, operating income was 51.7 million, a decrease of 5% from 54.6 million in the prior year period.
Adjusted operating margin was 15.6%, up 110 basis points. Interest expense decreased 800,000 to 4.3 million, primarily from a decrease in average borrowings outstanding and a lower average interest rate.
The company's effective tax rate for the first quarter of 2020 was 31.5%, compared with 23.4% for the full year 2019. The increase in the first quarter effective tax rate from 2019s rate is primarily due to the recognition of tax expense related to the Seeger divestiture partially offset by a benefit related to a refund of withholding taxes and a reduction of a statutory tax rate at one of our international operations.
Net income for the first quarter was $0.58 per diluted share compared to $0.65 a year ago. On adjusted basis net income per share was $0.71, unchanged from last year.
Adjusted net income per diluted share in the first quarter excludes $0.13 of Seeger divestiture adjustments, while last year excludes $0.06 of Gimatic short-term purchase accounting adjustments. Let's now move to our segment performance, beginning with industrial.
First quarter sales were 199 million, down 18% from a year ago. Organic sales decreased 12%, primarily related to volume declines in certain of our end markets, the impact of COVID-19 pandemic, and the absence of a favorable 2.6 million commercial settlement of a patent related matter in last year's first quarter.
Seeger divested revenues had a negative impact of 4%, while unfavorable FX decreased sales by 2%. Operating profit in the first quarter declined 17% to 70.9 million with the decrease driven by lower sales volumes, the absence of last year's commercial settlement, and Seeger divestiture adjustments.
As a partial offset cost productivity and the non-recurrence of Gimatic short-term purchase accounting adjustments recorded last year were favorable factors. Excluding the just referenced Seeger adjustments this year and Gimatic adjustments last year, adjusted operating margin -- adjusted operating profit was 20.3 million versus 25.5 million a year ago.
Adjusted operating margin was 10.2%, down 30 basis points. At aerospace sales were at 132 million, down 2% from last year.
OEM sales decreased 7%, primarily due to the lower shipments related to the Boeing 737 Max while aftermarket sales increased 8%. Operating profit was 31.4 million, up 8%, primarily reflecting the profit impact of higher aftermarket volumes.
With the favorable aftermarket mix, operating margins improved 220 basis points to 23.9%. Operating margin was a quarterly record.
However, as Patrick mentioned we anticipate challenges going forward in aerospace as a result of the COVID-19 disruption. Cash provided by operating activities was 47 million down approximately 6 million from last year's first quarter.
While free cash flow is 35 million versus 39 million last year. CAPEX of 12 million was down about 2 million from a year ago.
With respect to the balance sheet, our debt to EBITDA ratio was 2.4 times at quarter end, unchanged from December 2019 level. Barnes Group has liquidity of approximately 430 million consisting of 110 million in cash and 320 million of undrawn revolving credit facility.
We have not drawn further on our credit lines to secure cash, nor do we have current plans to do so as the availability of these funds are not believed to be at risk. The company is in full compliance with all covenants under the revolving credit facility which matures in February 2022.
We maintain open lines of communication with our banks and we will continue to monitor the credit landscape and the company's cash needs. Our first quarter average diluted shares outstanding was 51.5 million shares.
During the quarter under a preexisting 10b5-1 plan we repurchased 396,000 shares at a cost of 15.5 million. With the full execution of our 10b5-1 plan, we have now suspended share repurchase activity.
While there remain 3.7 million shares available for repurchase under the board's 2019 stock repurchase authorization, we do not have an expectation for when share repurchases will recommence. With respect to our customer annual outlook highlighted, heightened levels of uncertainty in the current environment make it difficult to forecast performance with any reasonable precision.
Accordingly, we can continue to spend our full year 2020 outlook when the depth of destruction and the pace of recovery in our critical end markets become clearer we will reiterate our full year outlook. Related to that uncertainty, the company has decided to postpone its planned Fall 2020 Investor Day until next year.
We look to provide further details of the rescheduled event at a later time. However, even with limited visibility, we do anticipate a challenging second quarter significantly impacted by the COVID-19 pandemic.
Our best view at the current time is that organic sales will be lower than last year's second quarter by approximately 30%. Operating margin is forecast to be between 8.5% and 10%, adjusted earnings per share for the second quarter are anticipated to be in the range of $0.20 to $0.30.
With respect to capital priorities in the current environment, the company has a well positioned balance sheet with reasonable leverage. Nonetheless, proactive management of our cost structure will continue.
We'll continue to invest in our business, though anticipate 2020 capital expenditures of approximately 45 million lower than the 55 million average annual spending of the past few years. While an acquisition or divestiture in the near-term is unlikely given the current business environment, we continue to analyze potential acquisition targets and end markets that meet our strategic criteria with an emphasis on proprietary, highly engineered industrial technologies.
At present, our quarterly dividend remains unchanged however, if the economic disruption intensifies or last deep into the year, the Board would consider a dividend change. To close, I'd echo Patrick's comments, while the first quarter results were generally better than our expectation, the challenge now is to continue to effectively weather the global disruption caused by COVID-19.
The Barnes Group while our balance sheet and liquidity profile are in good standing, we'll focus on the judicial use of our cash. As highlighted, several actions have been taken and others will be taken as conditions dictate.
We'll look to effectively manage working capital especially inventory where the tradeoff between building inventory and potential future supply chain interruptions will be closely managed. CAPEX will be focused on maintaining our operations and ensuring we're positioned to take advantage of an eventual recovery.
Operator, we will now open the call to questions.
Operator
[Operator Instructions]. Your first question comes from the line of Christopher Glynn from Oppenheimer.
Your line is open.
Christopher Glynn
Thank you. Good morning and good luck here.
The next few quarters it looks like you're doing a lot of work on the margins there. I was curious about the behavior of the aftermarket, that kind of like hit a wall two to four weeks ago or has it been kind of progressively creeping in?
Patrick J. Dempsey
As you mentioned, Chris, clearly aftermarket will definitely see the impact of what's occurring right now in the airline industry. Our experience and through the first quarter was a pleasant surprise in terms of it holding up as well as it did.
And as you know from the call or from the script, we actually, achieved record operating margins in the quarter as a result of aftermarket. What we've seen in the last couple of weeks is a significant slowdown in terms of input of orders.
One of our major customers across the Board have basically turned off the spigot in terms of their cost controls. And definitely with parked aircrafts right now airlines are just looking to conserve cash in every way possible.
And so it's flowing through and we expect it to be significant in the second quarter.
Christopher Glynn
Okay, and how do you see the early side rolling in that slowdown, imagine that's a little more progressive just because it takes a little more cycle time to slow down, if you could kind of characterize what you're seeing there?
Patrick J. Dempsey
The which side?
Christopher Glynn
OEM.
Patrick J. Dempsey
Sorry. Yeah, definitely with OEM, it's a longer cycle business so adjustments there are more gradual, as you noted.
And to that end, what we're doing right now is communicating daily with all of our large OE customers. As you know from just the public arena, some of our aircraft manufacturers, Airbus have been pretty vocal in terms of what they're indicating as potential future rates.
Well on the other side Boeing has been a little bit more muted. All in what we're doing is, of course, is keeping very close contact with the engine OEs to understand how they are anticipating and adjusting their schedules relative to the coming year.
To that end, what I would say is that definitely a significant pullback, we're seeing tremendous volatility in terms of the order intake and the EDI runs that are occurring across the Board. And so again Q2 we anticipate a slowdown not as significant as aftermarket or as immediate as aftermarket, but nonetheless preparing for lower demand Q2 and through the rest of the year.
Christopher Glynn
Thank you.
Patrick J. Dempsey
Thanks, Chris.
Operator
Your next question comes from the line of Myles Walton from UBS. Your line is open.
Myles Walton
Thanks and good morning. Hello Chris, maybe you could start with any more color on the shape of the two end markets in that 30% decline in the second quarter and then conversely, with the comments about recovery in 3Q and 4Q, I think you're pretty explicit that there was going to be more in industrial recovery than in aerospace, so just want to clarify -- so just want to clarify these two points will be good?
Christopher J. Stephens
No problem. Relative to being down well, we're projecting for second quarter, which is basically the extent that the visibility that we are putting out there because of the uncertainty of Q3 and Q4 or the full year.
We've indicated down 30% for Q2 in total for Barnes Group. Industrial, we see in the low 20s and aerospace within that we see in the high 30s from an organic sales perspective.
In terms of the outlook for Q3 and Q4 what we are seeing right now on our industrial side is the fact that things are coming back online. Some of our customers are coming back online, albeit at reduced levels.
So you're seeing that China in particular, we saw starting to pick up after a very hard hit Q1. We're expecting that to continue into Q2.
In Europe, you're hearing already of different OEs beginning to come back on in terms of production back online this week. And so as things start to come back online and production starts to ramp back up, albeit great uncertainty to what levels we expect, that will be gradual improvement sequentially from quarter to quarter.
Myles Walton
Okay, okay. And then Chris on the leverage liquidity and covenants, are you comfortable that the rest of the year you'll be cash flow positive for the remaining three quarters?
And then secondly, as it relates to the senior debt or the total leverage ratios are you comfortable that you won't need to renegotiate those in 2020 or that they'll be relatively straightforward to do so?
Christopher J. Stephens
Yeah, no at this stage we are pretty confident in our ability to maintain compliance with covenant ratios. The actions we have taken so far comments we talked about for purposes of capital, capital deployment and the pullback of CAPEX.
We would expect to see just operationally the operating working capital improvements as you're shipping less inputs on the material side and you're collecting those receivables. So we expect to get additional improvements out of working capital.
But we literally are managing it weekly. I mean, we're in a very much a weekly mindset as it relates to cash, decisions that need to be made as a senior leadership team.
We're meeting daily, seven days a week to just manage through this crisis. And we are making decisions real time and making sure we plan accordingly to make sure we avoid any covenant issues.
But as we look out the next three quarters and even into the first quarter of 2021 which seems like a long time from now. Right now we are not too concerned, we will adjust accordingly as things progress.
But taking second quarter, a significant drop in the second quarter and somewhat of a recovery. Not an aggressive recovery in the third quarter or fourth quarter based on our current view, we still would remain in compliance and we stay in constant dialogue with our banks and make sure they know exactly where we are and we get a feel for where they are.
Myles Walton
Okay, thanks guys.
Christopher J. Stephens
Thank you.
Operator
Your next question comes from the line of Tim Wojs from Baird. Your line is open.
Timothy Wojs
Hey, gentlemen. Good morning.
Patrick J. Dempsey
Good morning Tim.
Timothy Wojs
Maybe just back on aftermarket, just maybe more of a bigger picture question. If there is a ramp in retired aircraft, is there any way to just kind of frame what longer-term impacts on both maybe spares and CSPs might be?
Patrick J. Dempsey
So if there is a an increase in retirements for that, ultimately, it tends to happen in the industry, is it would translate into tear downs at some juncture. And so the concern always that would be speculated upon is what the impact of that surplus material would mean as it come into the market.
For Barnes Group obviously it would -- it's something we'll watch very closely and something that has both a good side and a bad side to it. It's a good side because all that surplus material has to be overhauled before it can be reused for the most part.
And so that would be a positive to our MRO business albeit that that may not overcome the drop in overall airline demand or maintenance. On the spare parts side of the equation if that surplus material comes in there's always the concern that it's competing with new spare parts.
For the most part there what I feel confident in, in terms of a positive for Barnes Group is that most of our spare parts are consumable in nature so that the opportunity to repair the components economically doesn't in many instances make sense because the spare parts, the cost to repair them may in turn not be feasible or economic. So, but nonetheless detrimental in the bigger scheme of things for spare parts in general.
Timothy Wojs
Okay, okay, that's helpful, thanks. And then just maybe on the cost side, could you just help us maybe frame into -- I don’t know if you can frame it in terms of dollars, maybe some of the actions that you've taken in response to the end market weakness and then specifically in industrial, how should we think of just the decrementals on volume?
Patrick J. Dempsey
So we've been very proactive and aggressive I would suggest in terms of our cost reduction efforts. As we came off of the end of last year fourth quarter, we saw a softness coming into the first quarter independent of the extent of which the Corona virus took hold.
And so to that end, I think we were being very proactive. Within the Barnes enterprise system one of the things that we have instituted as a discipline is scenario playing.
And so as we entered into the year, we scenario played the extent to which we saw softness in the first quarter and responded accordingly which allowed us I think to achieve the margins that we did in terms of our first quarter results. As we move forward what is currently our outlook for the second quarter which is what we're driving towards is a margin profile of between 8.5% and 10%.
And to that end we're clearly looking to manage costs just as aggressively. And depending on the extent of which this becomes protracted or doesn't recover as fast as any of us would like then, we will continue to look at what the other alternatives are.
Today, we've instituted salary reductions across the board. We were furloughing our direct and indirect employees.
We have taken all over time out of the system, all discretionary spending, all travel, all of those things some of which we had a choice in some you don't given the current pandemic. But all in I would say that the team has done a really outstanding job in terms of trying to stay in front of the situation with a view to keeping a keen focus on margins as we move forward.
Timothy Wojs
Okay, okay. Thanks for all the color here and good luck over the next couple of quarters.
Patrick J. Dempsey
Thank you so much.
Operator
Your next question comes from the line of Edward Marshall from Sidoti. Your line is open.
Edward Marshall
Hey, guys. How is it going?
[Multiple Speakers]. Hope you and your families are all doing well and safe.
Patrick J. Dempsey
Likewise and thank you.
Edward Marshall
Thank you. Just following up, knowing that you had some salary cuts, what does the Q2 SG&A number look like, what's embedded in that guidance from $0.20 to $0.30 for 2Q?
Just curious.
Patrick J. Dempsey
Sorry, you broke up a little bit there. Can you repeat that?
Edward Marshall
Yeah, I'm looking at the potential -- you've cut salaries. I'm wondering what the SG&A component looks like for Q2, what's embedded in your guidance there?
Christopher J. Stephens
SG&A is going to get somewhat of a benefit, not significantly. Recognize sales are coming down quite meaningfully.
As we walk our second -- more importantly walk our first quarter performance and then to second quarter, we felt it was important to provide investors and shareholders a look at what we know. And that's providing guidance for Q2.
Specifically to SG&A the actions we're taking are both in the cost of goods sold as well as in SG&A. I don't have a specific number for you, but I could tell you in the quarter we're driving $3 million to $5 million of actions on the headcount side, salary side, overtime side, etcetera to be able to post a margin profile of 8.5% to 10%.
Edward Marshall
That 3 to 5 is total across both COGS and spend…
Patrick J. Dempsey
Yeah, exactly for the company impacting all of cost of goods sold as well as SG&A, I don't have a specific SG&A number for you.
Edward Marshall
Got it, got it. So, airframe OEM manufacturer mentioned that they expect 20% to 25% declines in the OE production this year or their revenue for OE for this year.
Your backlog implies 12% on a year-to-year comp. I think that's -- I think you mentioned that the backlog continues to deteriorate through the end of the quarter.
I just wanted to kind of get a sense as to maybe what the comments of another OEM manufacturer might have mentioned for further kind of expectations this year versus what you think and what the backlog implies? Thanks.
Christopher J. Stephens
Thanks. Relative to Barnes' Group at the end of the quarter, what we saw was our OEM backlog was approximately 700 million and that was down I think about 12% on a -- since the end of the year.
So, as we look at the volatility in terms of the orders and EDI [ph] runs that we've been receiving, then the communications we expect that it will drop further than that in the coming weeks. Relative to how we're looking out towards for the full year, say the biggest piece of that drop in backlog came from the narrow body aircraft, particularly our backlog as it pertains to the LEAP program.
And so again, that gives you an indication of where the OEs have been very proactive in terms of seeing the immediate aircraft that were going to be impacted. At the same time, right now, we're seeing movement on the wide body aircraft as well in terms of the backlog.
But it wasn't that dramatic in the first quarter because I think, again, the airlines were holding the aircraft OEs, were holding to see how things were going to transpire. So ultimately right now we are -- it's a very fluid situation I would suggest.
We internally are managing it with our own judgment against the feedback we're receiving. And what we're looking to do is adjust our capacity to a given level for the rest of the year.
And that may involve some inventory build and it may have involved that we may need to increase slightly if we've understated what we think the full year is going to look like. But again, it's going to be a real time dynamic I think assessment on a week to week basis.
Edward Marshall
Got it and that 20% to 25% number does that -- is that kind of -- with what you're thinking, what's maybe your rationalization in your facilities have been?
Christopher J. Stephens
It is for the second quarter and so far as that, and it also obviously entails what our current outlook is for the rest of the year in the sense of the adjustment down in volumes that we're anticipating on the OEM side.
Edward Marshall
Got it. When I look at the decrementals in the industrial business of just 12%, I understand some of that Seeger orders and the divestiture there.
Can we true up maybe what the comp looks like year-over-year so that to kind of get a sense as to what maybe the industrial decrementals there are doing?
Patrick J. Dempsey
Yeah, you can think about Seeger delivering about 15 million of revenue last year. It's a lower margin business that we divested.
So you got a few million dollars in OP if you're just trying to walk quarter-over-quarter, but it will be 15 million in sales call it 2 million or 3 million in OP. Does that answer your question.
Edward Marshall
Yeah, I think I can get close enough. And orders for cash, priority for cash, has anything changed, I don't know if you mentioned that?
Patrick J. Dempsey
Conserve it. In a nutshell, I mean, just conserve cash.
You know, actions we're taking across the board on the on the head count side, just the cost side will help us meaningfully in terms of how we look at the next several quarters as I answered the question earlier. But the cash priorities will continue to remain.
We're going to continue to invest in our business. I mean, although we're going to reduce CAPEX we are still operating.
Our businesses are operational. Now, it's going to be more focused on maintenance CAPEX versus growth but we're not going to not invest in our businesses that way.
You get to the other deployment actions, I do expect, we do expect working capital to continue to improve. As you know, we're incentivized to make sure we try to maximize that as much as possible.
Anytime you go through a downturn, you'll collect those receivables faster and you make sure you're managing inventory at a lower level kind of coming in you're going to get the benefit of cash on the operating cash side. So in my prepared remarks, we just wanted to highlight our three priorities of capital deployment.
And again, that's around CAPEX, it's around acquisitions, and it's around the dividend and share buyback. We did buy back shares.
It was a pre-existing 10b5-1 prior to things getting pretty ugly and that was executed and we're going to hold off on doing anything more at this stage. And then I did comment about the quarterly dividend.
We do talk about our -- do talk with our Board about that. We've got actions literally laid out in priority of what we would do, when we would do it, if certain conditions were met.
It goes back to the scenario planning and triggers we would pull. So at this stage, we're not -- I'm not too concerned about Barnes Group's ability to generate cash and remain in compliance with covenants.
I may say something different a quarter from now, but right now it's -- we're all over it.
Edward Marshall
Got it and I just want to get a sense of something here, just as I'm thinking, looking at your model, I just want to make sure I get this right. The drop off in March and April, I mean it was sudden and sharp and I think your business is still reacting.
You're adjusting your cost structure, as I -- you talked about some reinvigoration in some of the markets call it China, call it potentially Europe restarting and so forth. So as we step back, we think about 2Q, do you see that as kind of a trough scenario for you this year, is that the expectation, is that what you're building into your full year outlook, full year expectations?
Christopher J. Stephens
Yes, short answer is yes. And that we see -- we're looking at Q2 as being the trough or the most severe quarter at this juncture.
The bright spots you know are providing some outlook or upside in terms of even the second quarter as I mentioned. We're seeing activity pick up, order activity in China particularly where I would argue it's one quarter ahead of the rest of the world and that Europe and North America we're seeing clearly going to be impacted and slow to come online in Q2.
Plus we're seeing some nice order activity in terms of China in particular. Also, the other bright spot for us that has held steady throughout this entire crisis has been our medical side of the business.
And there we've seen increased quoting activity, some of which is on a fast track. In other words, the customer is asking us to expedite particular products in the fight against COVID-19.
And at the same time, we're seeing a lot of activity that potentially hasn't been released because of concerns over the uncertainty and restrictions that have been put on CAPEX. But at the same time, it's signaling I think, a little bit of pent up demand because those quotes are clearly indicative of projects that we knew were in the pipeline and are continuing to be proactive if you like in terms of doing the groundwork before ready for release once they get the right signals to do so.
Edward Marshall
Got it, I appreciate your comments guys, thanks very much and stay in and stay safe, be well. Thanks.
Patrick J. Dempsey
Thank you.
Operator
Your next question comes from the line of Michael Ciarmoli from SunTrust. Your line is open.
Michael Ciarmoli
Hey, good morning guys. Thanks for taking my questions.
Good to hear from you and I hope everyone's safe and well. Just Patrick maybe more on the aerospace, I'm just trying to reconcile are you confident that 45% of the backlog is going to be shippable over the next 12 months or is that kind of fluid and subject to change?
Patrick J. Dempsey
I think it's somewhat fluid, but at the same time it's the best estimate to where we see -- it obviously is down. We normally would suggest 50% but we're talking about 45%.
In that also recognize that I indicated that the 700 we expect that backlog potentially to come lower. So the 45% will be potentially 45% of a lower number.
So what we're projecting is the application of our best judgment to the many different signals and inputs that we're getting right now. And though it's not even that the inputs are consistent, I think they are variant significantly week to week sometimes day to day.
So there's an aspect, I think, of the industry as a whole is looking to try and get its arms around where demand ultimately is going to settle. I think, a big portion of this, of course, is going to clearly go to the flying public and how passenger traffic comes back on line and the rate at which that happens is going to be a big determinant.
Michael Ciarmoli
And then, I mean, yeah, the demand side of the equation is one thing. Obviously, we've gone from supply chain constraints here to turning the spigot off.
You guys have good line of sight into inventory in the channel. Do you think there's a lot of buffer stock within the engine supply chain that has to be removed as the supply chain realigns itself that could be even additive to a weakened demand environment that might add further pressure?
Patrick J. Dempsey
I think there are adjustments that are going to take place for sure, and I do think that at a lower level there is going to be some amount of inventory in the channel so to speak that are in the supply chain that's going to need to adjust accordingly. One aspect that we look at from a Barnes perspective is always the fact that it's been in -- since in crisis like this or in downturns that we've always stood strong as a very formidable partner to the OEs.
And so if there is going to be some shakeout, we expect that we will be in a very good position as a strategic long-term partner to take maybe even in some cases to take share, if not all the competition, makes it through this turbulent times.
Michael Ciarmoli
Got it and then just on the aftermarket, I mean obviously, some of these engine inductions they spend some time in the shop, the repairs can go up to 90, 180 days. But I would imagine inductions clearly down right now.
I mean, could -- in your scenario I mean, should we think about aftermarket being down, 60%, 70%, 80% just in line with utilization here in the short-term, I mean, can you guys give any sort of color around what you're assuming for aftermarket revenues?
Patrick J. Dempsey
Well as a baseline we're utilizing a 50% reduction and then we're scenario playing off of that. And so we're looking at Q2 being at that level and as I said, then scenario playing if we were down 60, if we were down 70 or if we were down 40.
So accordingly, it obviously creates a lot of judgment calls in terms of walking a tightrope and monitoring of real time. The team is doing a great job or an excellent job of trying to adjust capacity in alignment with that demand and also managing the cost side of the equation.
At the same time I will also note that we're continuing our NPI efforts on some of the key projects that were in process and continuing to make those investments. So, it was in the short term and this holds true for both sides of our business aerospace and industrial where we're managing costs very aggressively and commensurate with current demand.
We're also keeping our eye on the long-term with a view to how to position and come out of this stronger by continuing to invest in those key innovations that we believe are going to be needed by our customers irrespective in the future.
Michael Ciarmoli
Got it, helpful. Thanks guys and stay safe.
Patrick J. Dempsey
Thank you.
Christopher J. Stephens
Thanks Mike.
Operator
Your next question comes from the line of Pete Skibitski from Alembic. Your line is open.
Pete Skibitski
Well, in terms of health, quick one on China. Patrick, just to expand on what you were talking about, are virtually all of your manufacturing workers in China back to work now, are you almost fully staffed essentially in China?
Patrick J. Dempsey
We are and it took a multiple of months because what happened was, as you know, what happened in Q1 was with the Chinese New Year most of the workforce is migratory, so it moved back to their own home provinces. And then as this onset of COVID-19 took place they got trapped there because the country froze and in particular the provinces of Wuhan.
In that what happened was mobility in the country froze for a period of time. And so ultimately we closed our operations initially because we didn't have the workforce, even if we wanted to stay open.
And the demand froze simultaneously. So over the last weeks and months, we're probably back to 90% to 95% in terms of our workforce right now with only a handful of outstanding items if you like.
And so again, very pleased that our workforce in China has been healthy and safe throughout this albeit that they were quarantined in their respective homes. As they've come back to work we've been very fortunate.
Pete Skibitski
Okay, okay, it sounds good. And then I had another question on medical, I think typically you guys kind of talked about combined medical and kind of personal care and packaging being almost a quarter of industrial revenue.
Just because medical is up I think the other personal care and packaging are down, is medical -- are you thinking that's roughly 10% to 15% of industrial revenue just to get a sense?
Patrick J. Dempsey
Yes, about 15%, I would put it out for industrial and again, had a very just relatively speaking our medical business had a strong first quarter year-over-year. And as we move into Q2, we're very optimistic that medical is going to continue with the heightened level of quoting activity that we're seeing.
The unknown will be the release of those orders and the timing of it. As I said, it's definitely taken a prioritized set of sequences in that anything that's touching a product or a service related to COVID-19 is on a fast track and anything, even though it's medical that isn't COVID-19 related is a little bit on the back burner is how we're seeing the customers prioritize their release of orders.
Pete Skibitski
Okay and just last one for me. You touched on this, Patrick, but coming into the year, you talked about 5 million incremental internal R&D investments.
It sounds like that's still the plan. You're sticking to that, you want to continue to invest through the downturn?
Patrick J. Dempsey
We will invest through the downturn. What I would indicate is that the 5 million may be modified slightly and so far we have anticipated brick and mortar in that 5 million and an investment of some CAPEX.
In turn what we're doing right now is we have continued full speed with the hiring of the necessary resources to continue with our R&D efforts. But rather than set up a separate location, we've housed them in one of our existing facilities and are utilizing our existing equipment.
And so there is a slight modification in light of the current environment, but full speed ahead, so to speak, in terms of the projects that we've identified. And there I would say that while we're looking to and something I'll give credit to, which I think is a unique strength of Barnes Group, is the involvement and the participation of our board in the current dialogues.
We've held two out of session, out of cycle board meetings in the last couple of months. And there the emphasis from our board has been very much a set of discussions around how to defend and protect, first and foremost; how to preserve liquid liquidity secondly; thirdly, the importance of looking to make the continued strategic investments that we've been making; and then fourth, challenging us to look out beyond the horizon and to anticipate those new strategic opportunities after this storm has passed.
So, we're trying to balance what is a very difficult situation, but position ourselves for to come out of it even stronger.
Pete Skibitski
Thanks, guys. Appreciate the color.
Patrick J. Dempsey
Thank you Pete.
Operator
Your next question comes from the line of Matt Summerville from D.A. Davidson.
Your line is open.
Matt Summerville
Thanks. Good morning.
A couple of questions; first, with respect to incoming order rates in the quarter in industrial can you maybe give a little bit of a quantification around how that looked both on a year-over-year and sequential basis?
Christopher J. Stephens
So on a year-over-year basis, overall what I said was that we were just below, slightly below one times in terms of book to bill within industrial as a whole. The strength in there was just over one times with Force & Motion Control.
And engineered components was at about 0.85 times and our Molding Solutions business was just at around the same level. So overall what we saw was a definitely a falloff in orders significantly in terms of Asia in the first quarter impacting our Molding Solutions business.
And, to some degree I would suggest for some motion control held up reasonably well in the quarter. Going into Q2, we expect that to change across the board depending on which business we speak to.
Matt Summerville
With respect to the automotive hot runner business, can you maybe give a little bit of color in terms of how that business you performed in China in Q1 and if indeed you are seeing that piece of the business start to rebound at least out of subprime out year-over-year, but at least on a sequential -- on a sequential basis, have you indeed seen that?
Patrick J. Dempsey
Yeah, we've seen on this event of business which hover on our business. We've seen that improve in Q2.
It did clearly it was impacted in Q1 by everything I've mentioned earlier with respect to the freeze basically that took place within China in terms of quarantine. We've seen -- if you look at our three regions overall I would suggest that for the hot runner business, automotive hot runner business, North America has stayed pretty consistent throughout 2019 and into the first quarter of 2020.
As I mentioned a few times we've seen releases continuing to come out or trickle out if you like across North America which has been positive. Europe has pretty has been slow and I would suggest has been depressed.
In Asia a very tough first quarter for that business and as I said seeing lights at the end of the tunnel right now as we have entered into second quarter with activity picking up. But I still think it's going to be a tough environment even within China because right now most of the activity we're seeing is domestic rather than the international
Matt Summerville
Got it and just one more follow-up, as you think about I think Chris mentioned 3 million to 5 million of cost related savings anticipated in Q2, is there a full year number you're able to give around that Chris and then similarly guys what would you need to see to think about taking more structural related actions including in aerospace but also further in industrial? Thank you.
Christopher J. Stephens
Yeah Matt so specific to 2Q like you mentioned we're in an environment where we are managing I would call it daily if not weekly in terms of decision making and even going out with providing like I said investors a look at Q2. We felt about one month into the quarter we know what we know today, that's going to change next month.
It may change next week. So that's where we have literally no confidence in being able to put anything out beyond that including savings.
I mean actions we've taken related to furloughs relative to demand we need to increase that, we need to accelerate that versus pulling it back because demand comes in. It's very fluid so I'm going to err on the side of not providing any color around a full year savings number.
All we can do is look at what's here and now.
Matt Summerville
And then my follow-up to that was what you would have to see in the business to contemplate doing things that are more structural in nature including in aerospace if indeed we're looking at something that is maybe more U or L shaped as opposed to V shaped?
Patrick J. Dempsey
Yeah, good point. I mean I look at -- when we look at Aerospace business the backlog we know today, the order activity from the OEM's has been pretty volatile as you can see the backlog is going from 800 to 700.
We could see a 650, we could see a 600 but at the same time it can go back. What we're looking at is the next 12 months and trying to somewhat ignore the volatility that happens on the back half of that year two or year three.
From a global footprint point of view we don't feel we're in a situation to have a capacity concern for purposes of restructuring and consolidation. The way we're well positioned in the U.S.
as well as in Asia on the manufacturing side we're not having those conversations now on the Aerospace side. You know we do -- we're pretty confident that this will come back, it's going to be slow, it's going to be protracted in terms of a year or two but right now we want to make sure we maintain the continuity to satisfy customer demand.
Matt Summerville
Got it, thank you guys.
Patrick J. Dempsey
Thank you.
Operator
Your next question comes from the line of Michael Ciarmoli from Sun Trust. Your line is open.
Michael Ciarmoli
Hey guys, thanks for of taking the follow-up. Just on the Aerospace aftermarket, can you comment what you've seen in April.
I know I think you said you were kind of planning for that 50% baseline reduction but can you comment on since the airlines have obviously seen activity, dropped in here in April, can you give us a sense of what the aftermarket is looking like right now in terms of order flow or kind of daily activity?
Patrick J. Dempsey
We've seen that 50% that I said we were using as our baseline, we have seen that become a reality in April and so it is almost immediate in terms of the speak up being turned off as it pertains to the aftermarket side of the equation. So as I said we are scenario playing off of that and will adjust accordingly.
Michael Ciarmoli
Okay, perfect. Thanks guys.
Patrick J. Dempsey
Thank you.
Operator
There are no further questions at this time. I'll turn the call back over to your host.
Patrick J. Dempsey
Bill Pitts
Thank you Marcella. We would like to thank all of you for joining us this morning and we look forward to speaking with you next in July with our second quarter 2020 earnings call.
Operator we will now conclude today's call. Thank you.
Operator
This concludes today's conference call. You may now disconnect.