Oct 27, 2017
Executives
William Pitts - Director of Investor Relations Patrick Dempsey - President and Chief Executive Officer Christopher Stephens - Senior Vice President of Finance and Chief Financial Officer
Analysts
Michael Ciarmoli - SunTrust Myles Walton - Deutsche Bank Matt Summerville - Alembic Global Pete Skibitski - Drexel Hamilton Tim Wojs - Baird Christopher Glynn - Oppenheimer Edward Marshall - Sidoti & Company Myles Walton - Deutsche Bank
Operator
Good morning. My name is Kelly and I will be your conference operator today.
At this time, I'd like to welcome everyone to the Barnes Group's Third Quarter 2017 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you.
William Pitts, you may begin your conference.
William Pitts
Thank you, Kelly. Good morning, everyone and thank you for joining us for our third 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 website at bginc.com.
During our call, we will be referring to the earnings release supplement slides, which are also posted on our website. Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations. You will find a reconciliation table on our website as part of our press release and in the Form 8-K submitted to the SEC.
Certain statements we make on today's call, both during the opening remarks and during the question-and-answer session, may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the Securities and Exchange Commission. These filings are available through the Investor Relations section of our corporate website at bginc.com.
We will now open today's call in our usual fashion with remarks from Patrick, followed by a review of the third quarter financial results and our updated 2017 outlook from Chris. After that, we will open up the call for questions.
Patrick?
Patrick Dempsey
Thanks, Bill, and good morning, everyone. Continuing the momentum from the first half of the year, Barnes Group posted 15% total sales growth and 8% organic sales growth in the quarter, with solid contributions from both segments.
Our businesses continued to work diligently to build a portfolio of differentiated Industrial technologies with an emphasis intellectual property to generate sustainable profitable growth. That strategy has proven to be very effective over the last several years and while we believe we have more work to do with the transformation of our company, we firmly believe we're well positioned to achieve continuing growth in both segments.
To further illustrate that point, total organic sales for Barnes Group, excluding the impact of acquisitions and FX, were up 32%, with aerospace up over 80% and Industrial up12%. Total backlog rose to 1.05 billion, up 17% versus a year ago and up 5% sequentially from the second quarter.
To achieve such growth, we continued to push the limits of certain process technologies and our own capabilities to continuously improve. And on occasions, that created some short-term operational challenges.
Overall, we have stepped up and performed abruptly within both segments. That's been demonstrated with the meaningful operating margin improvements delivered over many years reflective of the value we bring to our customers.
However, a couple of items that we discussed last quarter continued to weigh on Industrial margins. For the quarter, adjusted operating income declined 10% compared to a year ago, with adjusted operating margin coming in at 13.6%.
While that performance is below our expectations, I believe that the lingering impacts are temporary. Let me now talk about our business performance in the third quarter beginning with Industrial.
Both the sales growth for Industrial was 15%, with solid organic growth of 6%. Our end markets, especially those served by our Molding Solutions and Nitrogen Gas Products businesses have been very strong and Industrial end markets or Engineered Components continued to improve.
Adjusted operating margins were down 510 basis points from last year. However, please keep in mind that last year's third quarter saw an exceptionally strong operating margin.
Relative to a mid-teens margin expectation there were two primary two factors that caused the shortfall. First, continuing challenges at our Associated Spring business caused a negative 2 point margin impact and a low margin contribution from our recent FOBOHA acquisition caused a 1 point impact.
I'll discuss each of these in a minute. At Molding Solutions, sales increased 23% over last year's third quarter, while organic sales grew mid single digit.
Orders remain robust, up mid-teens organically. Model changes which drive our automotive hot runner business remained strong and accordingly Synventive is on track for another outstanding year.
Similar to last quarter, our Molding Solutions medical, personal care and packaging end markets remained healthier and we saw [indiscernible] playing well into this double digit, propelled by mold orders. Our FOBOHA business, which is a great technology based business delivered decent top line in the quarter.
Our basic sales came with margins still below our expectations. We continue to work detailed synergy plans to improve its profitability.
Inclusive of the facility consolidation we announced last quarter, which will be completed by year end. Our current projections expect FOBOHA performance to improve meaningfully by mid 2018, as we advance commercial best practices, fine tune operational processes and expand aftermarket service offerings.
Wrapping our Molding Solutions discussion, with sustained end market strength, we now anticipate full year organic growth in the low double digit, up from our prior outlook of high single digit growth. Our Nitrogen Gas Product business continues to benefit from worldwide tool and die market strength.
At third quarter organic sales and orders reached the high teens. While we don't envision this end market to strengthen much further, we nonetheless foresee a very favorable environment in which sales remain at high levels into the first half of 2018.
As such for 2017, we now anticipate organic growth in the high teens, up from our prior outlook of low double digit. At Engineered Components, organic sales improved low single digits, while organic orders increased mid-single digits.
Recent end market trends have been sustained as the growth is coming from general Industrial and non-order transportation market. Whereas, our characterized automotive is relatively stable at a high level.
Forecast for global automotive production remains modestly positive for 2017, though North American automotive production, which impacts a portion of our Associated Spring business anticipates a modest decline. Along those lines a number of auto OEs have indicated they're planning Q4 shut downs.
Within our Engineered Components business and in particular Associated Spring, our operating profit performance did not meet our expectations. As we discussed last quarter, increased cost on certain program launches have negatively impacted our financial performance and we anticipated this to linger for several months.
Presently, we continue to protect customer deliver schedules as the priority, but are incurring higher incremental cost to meet those commitments. The Associated Spring team is working diligently with our customers to resolve the situation.
Part of the resolution of this challenge involves the closure of one plant with the transfer of work to other existing facilities. The transfer, which is paced by the necessary approval is taking longer than expected.
Looking forward, we see the heavy lifting continuing in the fourth quarter with improvement in early 2018. With respect to our 2017 revenue outlook at Engineered Components, we anticipate organic sales growth to remain in the low single digit.
With the quarter's solid organic sales growth and strong orders, our segment outlook has increased. Our full year revenue outlook has risen to the mid-teens from the low teens previously, while our organic sales are anticipated to be in the high single digit.
Forecast of adjusted operating margin in Industrial remains on the lower end of mid-teens, unchanged from our prior view. Moving to Aerospace, total sales were up 14% as compared to a year ago.
Ramping, Leap and XWB engine programs drove 14% growth in OEM, while aftermarket strength lifted MRO sales by 5% and spare parts were up 29% over the prior quarter. Quarterly OEM orders more than doubled from last year driven by Leap, Trent XWB and GE90 programs, which lifted OEM backlog to 709 million, 5% sequential improvement from the second quarter.
Adjusted operating margin was down 120 basis points from last year, primarily from planned price deflation on certain programs and an unfavorable OEM mix at some better margin deliveries originally anticipated to ship in the third quarter has shifted to the rise. Overall, we're feeling pretty good about our Aerospace end market, as strong commercial aircraft deliveries are forecasted over the next several years, benefiting our OEM business and demand for aftermarket services and spare parts remains especially on programs lime the CFM56.
For 2017, our total Aerospace outlook remains unchanged as we forecast total segment sales to be up mid-teens, with OEM growth in the mid-teens, MRO up low double digit and spare parts up approximately 20%. For spares that's a slightly higher outlook.
Our operating margin outlook for Aerospace remains the same at high teens. To summarize, sales growth and continued orders momentum sets us up well to finish 2017 as one the best years in our long history, it also positions us favorably heading into 2018.
I am confident in our team's ability to work through the temporary challenges noted at Associated Spring and to bring FOBOHA's longer term performance up to our expectations. I also anticipate further improvements in our operating margins as we execute our growth strategy, which has delivered substantial value for our many stakeholders.
Let me now turn the call over to Chris.
Christopher Stephens
Thank you, Patrick and good morning everyone. Let me begin with highlights of our third quarter results of Slide 4 of our supplement and then with our updated 2017 outlook.
Third quarter sales of 357 million were up 15% from the prior year period, driven by continuing strong organic sales growth of 8%. The acquisitions of FOBOHA and Gammaflux added 15 million or 5% and with the weakening US dollar and other currencies, FX positively impacted sales by 5 million or 2%.
Net income in the quarter was 35.3 million or $0.65 per diluted share, compared to 36.8 million or $0.67 a year ago. On an adjusted basis EPS is $0.66, was down 7% by from $0.71 last year.
Third quarter 2017 adjusted income, excludes $0.01 for FOBOHA short term purchase accounting and restructuring costs collectively, in our industrial segment. And last year's third quarter adjusted income excluded $0.3 of FOBOHA short term purchase accounting adjustments in transaction costs in our industrial segment and a $0.01 charge related to our contract termination dispute in our Aerospace segment.
Now let me talk about segment performance. Industrial's third quarter sales was 240.4 million, up 15% from a year ago.
Organic sales were solid, growing 6% with each FBU contributing. Acquisitions contributed 15 million and FX added 5 million.
Operating profits was 29.3 million down 16% from the prior year period, with lower productivity given higher costs of certain programs within our Engineered Components business continuing to weigh our performance. The third quarter of 2017, includes cost of 0.3 million from previously announced restructuring actions and 0.5 million of FOBOHA short term purchase accounting adjustments.
Excluding these items, adjusted operating profit of 3.01 million was down 18% from 36.7 million a year ago. Adjusted operating margin was 12.5%, down 510 basis points driven by the factors that Patrick addressed earlier.
You may be recall that during the second quarter, we undertook a couple of restructuring actions within our Industrial segment, as such we anticipate another penny charge in the fourth quarter related to these actions. For 2018 we continue to expect these actions, restructuring actions will result in annual cost savings of $5 million.
Lastly, the short term purchase accounting adjustments from the FOBOHA acquisitions are now behind us. At Aerospace third quarter sales of a 116.8 million was up 14% from last year, as OEM sales increased with higher volumes from new engine programs and aftermarket MRO, in spare parts experienced year-over-year sales growth as well.
Operating profit in the quarter was 18.5 million, up 6% from an adjusted 17.5 million in the prior year period, reflecting the profit impact from higher sales volume and solid productivity improvements partially offset by planned price deflation and higher employee related costs. Operating margin was 15.8%, down 120 basis points from last year's adjusted operating margin of 17%.
Total Aerospace backlog, grew to 718 million, up 13% year-over-year and up 5% compared to the second quarter of 2017. On the current backlog, we expect to shift just under 50% over the next 12 months.
Other items to note, interest expense increased $700, 000 to 3.7 million, primarily as a result of a higher effective average interest rate versus a year ago. The company's effective tax rate for the third quarter was 19.1% compared with 23.6% in the third quarter 2016, and 25.7% for the full year 2016.
The primary drivers of the lower rate in the quarter are the favorable settlements of tax audits along with the closure of tax years for various jurisdictions. With respect to share count, our third quarter average diluted shares outstanding were 54.6 million.
During the quarter we were active in repurchasing 300 shares at an average cost of $59.70 per share and we have 4 million shares remaining available for repurchase under existing board authorizations. Year-to-date cash provided by operating activities was 168 million versus 160 million last year.
Included in those results are discretionary pension plan contributions of 5 million in 2017 and 15 million in 2016. Year-to-date free cash flow, which we defined as operating cash flow, less capital expenditures was 126 million, compared to 127 million last year.
With respect to our balance sheet, our debt to EBITDA ratio was 1.6 times at quarter end similar to last quarter. Under our existing debt covenants, additional borrowings of approximately 513 million of senior debt would be allowed, about 457 million remained available on our credit facility at quarter end.
Turning to our updated 2017 outlook on Slide 5 of our supplement, with sales in orders remaining strong, we now expect 2017 revenue growth of 15.5% to 16.5%, with organic growth of 10.5 to 11.5 and acquisition growth of about 5%. FX was a minimal impact on full year revenues; our operating margin outlook is approximately 15% a bit lower than our previous view.
GAAP net income is expected to be in the range of $2.83 for $2.88 per diluted share. Excluding $0.03 in FOBOHA short term purchasing accounting adjustments for the year, offset in part by a net $0.02 favorable adjustment for restructuring, our adjusted 2017 EPS is expected to be $2.84 to $2.89, up 12% to 14% from the 2016 adjusted EPS of $2.53.
A few additional guidance items, our CapEx expectation is slightly higher at a range of 55 million to 60 million. Our 2017 effective tax rate is now approximately 22% and average diluted shares outstanding are anticipated to be 54.6 million shares.
Lastly, our full year cash conversion expectation has improved to approximately a 100%, up from our previous expectation of greater than 90%. So in summary, with orders sustained at very healthy level the high and growing backlog, good cash generation and the supported balance sheet, we're well positioned to deliver a very good 2017, despite challenges we are addressing in our industrial segment.
And as we communicated at our inaugural investor day last month, organic growth investments and accretive acquisitions remain a critical aspect of our strategy to drive long term superior performance. Operator, we'll now open the call for questions.
Operator
I would first like to turn the call over to Will Pitts.
William Pitts
Just one clarification, total organic orders for Barnes group were up 32%, with Aerospace orders up 82% and Industrial up 12%. Now we can go into Q&A.
Operator
[Operator Instructions] And our first question comes from Michael Ciarmoli from SunTrust. Please go ahead.
Michael Ciarmoli
Hey good morning guys, thanks for taking the question here. So, maybe just on the on-going headwinds that are Associated Spring, I mean you had the analyst day, the guidance was re-affirmed, I guess, three weeks left in the quarter.
When did you guys realize that there were going to be cost overruns , I mean obviously it was impactful enough to lower the operating margin forecast and I think you called about two points of headwind, can you maybe elaborate. I know at one point they were expedited free charges in there, but, maybe just a little bit more on the kind of challenges and kind of when they are identified?
Patrick Dempsey
Yeah. So Mike, the challenges as I highlighted are contained within our Associated Spring business primarily has been the primary drivers, again see operational challenges the, what we announced in the second quarter was intend to consolidate one of the smallest facilities and to move that business into the larger facilities within Associated Spring.
To that end, the moves that we anticipated have taken a little longer because of pace by the necessary approvals that are required. And necessarily, all this is within our control, so, we had been optimistic I think in the sense of we anticipated moving quicker than what has actually happened, and so as we continue through that consolidation as well as the challenges of the program lines that are associated with that, there relies the source of the increased that we've been incurring.
It's a cost along the same lines as what we've been previously noted, which is its transfer blur. The coverage of the customer schedule, really at this point is a little bit, is that the highest priority so that's coming with costs that we would normally, normally incur, such as fray, expediting additional costs in the manufacturing process.
And so again it has taken longer than we initially anticipated and in research we expected to continue into the fourth quarter with a view to improving into the first quarter 2018.
Michael Ciarmoli
Okay, perfect, that's all for. And just maybe the last one for me, on the Aerospace margined, you got out of the gate real strong in the first quarter of the year with 19.5%.
It trended lower, I think you called about the price deflation, some increased employee expenses, is there, the price deflation, is that coming from some of the rate increases or you're seeing additional pressure from some of your OEM customers, is it more mix with some of your legacy right down, if you could just maybe elaborate on the Aerospace margins?
Patrick Dempsey
It's a combination of everything you said Mike as there is deflation that's built in on legacy programs overtime and also on the newer programs that you ramp up the volumes. So, in the quarter we did see, on the margins from deflation, but also, it was driven by mix within the OE, besides the business because as you saw, MRO, and Spare parts continue at a healthy clip.
And so, the other one contributing factor was that we did have a number of parts that were previously scheduled to go in the quarter that moved to the right and they were higher margin components.
Michael Ciarmoli
Got it, okay that's helpful, thanks Patrick, I'll stand back in the queue.
Operator
Your next question comes from Myles Walton from Deutsche Bank, your line is open.
Myles Walton
Thanks good morning. That was a hoping follow-up on next question is related to the Associate Springs and it sounded like you are expecting more of a volume pressure, kind of going or can you give us some answer what you're seeing and sensing from the volume pressure built that you're facing, the conclusion of this year as well as in to next year, from the events schedules.
Patrick Dempsey
In terms of Associated Springs its business is heavily concentrated into North America and in particular light vehicle has an influence on it. So, when we think about light vehicle production, going forward North America is a market related declining or decelerating and so there is a little, a slight head wind to the Associated Spring business volume wise from the transportation side.
But the offset, which is really you know, is reassuring is the fact that we're seeing in general investment side of the business, as improving over the last few quarters with more improvement in Q3. Not that it will be a complete one-for-one offset, but as we look to foresee for the full year, we are talking to spell to low single digits in terms of organic growth.
Myles Walton
Okay, okay and then the 2020, 18%, 19% targets you put out there, obviously they wouldn't have changed in the last month, but in terms of the glide spot to get there, it sounds like 18 will still be reached the front and the 18 has to be contracting some of these challenges in industrial, and then there is three up in the second half of 18 into and beyond. Is that the way to think about the recovery margins that are industrial?
Patrick Dempsey
Yes, that's the way to think about it, we see in the first quarter some bleed over from, the item reference code in Associated Springs and some of the lower margin contribution from FOBOHA. But, in each and sense what is, what I say in great confidence in, is the amount of effort that the teams have placed in on board issues, with the figures of plans being executed to resolve them as quickly as possible.
So, as indicated we think that, FOBOHA will get back to our expectations in mid 2018. And in the case of Associated Spring, we are looking at that, you know, bleeding over into the first quarter but clearing up by the second quarter of the New Year.
Myles Walton
Okay, that's a quick one for you Chris on the master bedded tax fall conversion forecast, is there anything in particular regarding?
Christopher Stephens
Yes actually on the Molding Solutions , one thing that we do benefit from on the mold side with MRO and FOBOHA our cash advancers, given the strength of orders out of those two businesses, within Molding Solutions higher than our internal expectations that we thought about three quarters ago. So, given those increased cash advances that we've experienced and plans starting from the fourth quarter, we are impressed with that.
Myles Walton
Got it, thank you.
Operator
Thanks, the next question comes from Matt Summerville from Alembic Global, your line is open.
Matt Summerville
Thanks good morning, first question I want to ask is on Molding Solutions, you mentioned, I believe in your prepared remarks, you anticipate organic growth from the full year being up low double digits. Is there a way to pause that in terms of how much of that is being driven by market growth, how much of that if any is maybe a price component and then third how much of that is market share?
And if you guys, you could speak to both the hot runner side and the mold side, as you sort of walk through the commentary there? Thank you.
Patrick Dempsey
As so much the business, the Molding Solutions business as you said, we think of it in three categories. We think of it as hot runners, molds and controls, these two primary drivers because the both of the revenues go to the hot runners and to the molds.
The hot runners business right now has continued strong for the entire year and as we look at towards the end of the year, we see that strength continuing. And it's been primarily driven by the auto model changes within Synventive and as I said Synventive is having an outstanding year.
But, simultaneously the hot runner business has a potent as the medical, personal care and packaging continues also to have a very strong year. And, we see that continuing in particular, and recognize that the mold side of the business compliments the hot runners for every mold.
When we see mold strong, there's a hot runner that's also accompanying in this. And, so we are doing attracting both sides of the equation with the strength that we are seeing.
In the case of market share I would say, serve end continues as the market leader and its business has seen strength and particularly this year in North America and in Asia. And to cut that end, we think that they will continuing to keep that leading position, the potent to the new products and services, that they continue to continuously bring to market in terms of new innovations.
On the mold side of the business, we saw a little slower start to the year, but seen significant strength in Q3 as it pertains to manner in particular. So, we have orders around the molds, had been may be, they are a little less predictable in that notice so to speak.
Because entire programs get released at one time, and so, today our manner business is at a record backlog and of course we've only owned FOBOHA for a short time, but their backlog is at a record level too, as far as we know from the historical standpoint. So, both businesses are well positioned for the reminder of the year and into the 2018.
Matt Summerville
And then just is a follow up with respect to the issues at Spring, is this an issue with the production process, it shows that you are trying to figure out and what exactly are the products in the end markets that is products are sold into? What is the component you are having the challenge with?
Patrick Dempsey
Primarily, transmission components into the auto industry and the challenges are along the line that the components themselves have presented a much higher degree of complexity than what I might argue has been previous applications of the same types of products and so the team is working through the odds as well as now we clearly saw in the second quarter - the end of the first quarter into the second quarter that the resources at the smaller locations was not up to the challenge so to speak in of the complexities and so subsequently the decision to consolidate has been to [ph] somewhere we have critical math in the larger facility.
Matt Summerville
And then just lastly with respect to Nitrogen Gas Products, do you have a book to bill number to that business in Q3, please?
Patrick Dempsey
We can take a look first as we are talking but as you know Nitrogen Gas Products had a very strong quarter and a very strong year. In fact Nitrogen Gas products had record sales in the quarter.
So the team there just have done an outstanding job in terms of stepping up to the increase the volumes that we have seen this year.
Christopher Stephens
The most related was the Nitrogen Gas Products of the book to bill in the quarter? That's the question -
Patrick Dempsey
Yes. Yeah, just under exactly.
We are going to say we are partially 95%.
Matt Summerville
Got it, thank you guys.
Patrick Dempsey
Yeah, thank you.
Operator
Your next question comes from Pete Skibitski from Drexel Hamilton. Your line is open.
Pete Skibitski
Good morning guys.
Patrick Dempsey
Good morning Pete.
Unidentified Company Representative
Good morning guys. [ph]
Pete Skibitski
Hey, Patrick, just talk about aerospace margin, I guess number was it below your expectations this quarter and then I guess because I would have thought about aerospace being up 29% I would have thought you know overall margin was then even nothing on 20% maybe even just to show you if they had a price deflations kind of a concept thing who are you. So can you talk just a little bit in terms of maybe why the deflation was maybe a nearly high this quarter and maybe why it won't be still there going forward?
Patrick Dempsey
Well, the fact with our original comment at these I would say yes the margins were below our expectations for the quarter. But not necessarily because of the pricing and if you look at the aftermarket shows the business was its up 29% on a year-over-year basis.
The aftermarket has been pretty consistent quarter-to-quarter sequentially and that performance continued into Q3. The real shift for that impact of margins for as a comparison for expectations was really against the mix within the OEM side of the business because the pricing deflation we had anticipated.
The mix was the shift of high margin work that was originally planned to ship in Q3 that has now moved to the rise and again that's a continual communication with the customer to ensure we are aligned and the timing of our shipments.
Pete Skibitski
I see okay. That's all.
Thank you for that. And then can you update us just on how you feel LEAP-1A [ph] execution is going and how you think about other LEAP opportunities?
Patrick Dempsey
Yeah, the LEAP-1A continues to progress from my perspective fabulously by the team in aerospace. They have just done a wonderful, a wonderful job of bringing that program up to the level that we have achieved even in the third quarter.
The plans going towards the end of the year and into the new year is the combination of not only continuing at the levels that were at in one facility for we are bringing on line a second facility to accommodate the increased levels of production in 2018. And so that transition or [ph] ramp even within our own business is moving ahead extremely well.
And again that's in anticipation of the increased volumes that are coming in 2018 on the LEAP-AC. On the LEAP-B we continue work a number of components, within us.
And the opportunity is still being worked as to potentially additional components and right now based on where the LEAP-B is in its production schedule we feel that by the end of the year and hopefully by the fourth quarter earnings call will be in a position to highlight what our content is on the LEAP-B.
Pete Skibitski
Okay, great. Thank you, guys.
Patrick Dempsey
Thank you.
Operator
Your next question comes from Tim Wojs from Baird. Please go ahead.
Tim Wojs
Hey, guys good morning. Nice job on the growth.
Patrick Dempsey
Yeah, thanks Tim.
Tim Wojs
Maybe just in industrial, is there a way to kind of sum up some of the EBIT impacts from Associated Spring in FOBOHA, I am just trying of as you go into '18 [indiscernible] the restructuring and some of these onetime impacts. What might kind follow up as you move into next year?
Christopher Stephens
The highlight what I mentioned in the prepared remarks and the impacts of Associated Spring in the quarter, we ring fence it around 2 points and 1 point in terms of FOBOHA. As we move into 2018 we expect that associated spring will come back to its normal operating margin levels by the second quarter of 2018 and then FOBOHA we are looking at it to meet expectations by mid-June as well.
So in board incentives we see the issue as temporary and getting them behind us quickly as we move into the New Year. On the consolidation that we announced in Q2 which was the consolidation of one facility out inside of FOBOHA and one inside of associated spring.
Our projections are $5 million as savings into 2018 against those two actions.
Tim Wojs
Okay, okay. When I think of how the tax rate Chris, it's kind of step down this year, what's the - just the kind of level set as what do you think normalized tax rate should be?
Christopher Stephens
Consistently low we talked about in investor day within the 27% would be a normalized rate.
Tim Wojs
Okay. And then -
Christopher Stephens
Over the previous 27% to 28% we expect fourth quarter of this year to be around 27%.
Tim Wojs
Right, okay. And then just on the buybacks you know it's actually a little bit of step up for more you have done historically you said juts opportunistic in your mind or is that any sort of change and how you think about buybacks.
Patrick Dempsey
Yeah, in opportunistic we typically go into the year trying to make sure we are set any -, any diluted effect on flowing stock based compensation to just kind of keep that share count neutral and that was that. We had roughly 400,000 shares repurchase in our plan and we executed on that this first quarter.
Tim Wojs
Okay, great. Good on the rest of the year.
Patrick Dempsey
Yeah, thank you.
Operator
Your next questions comes from Christopher Glynn from Oppenheimer. Please go ahead.
Christopher Glynn
Hi, thanks. Good morning.
Patrick Dempsey
Good morning.
Christopher Glynn
Just want to dig a little deeper in the industrial and Patrick I think you called out a couple of points, associated spring of the point FOBOHA. It was down 5 points year-over-year so just maybe we could speak to the other couple of points a pressure given that it was excellent growth in GP and molding.
Maybe was a mix within this.
Patrick Dempsey
I would say that in terms of nitrogen gas products we did see a little bit of margin pressure on a year-over-year basis not meaningful, but really I think it comes with the higher volumes and what's occurring at nitrogen gas products is that when we hit capacity levels or volumes that were hidden right now as that compares the compared capacity we make decision on how much we will outsource to our vendor base and how much we keep in house. And if those spikes will push more out the vendor base or the supply base but that has an ultimate decrement, slight decrement on margin those are little there but nothing significant.
In terms of internet organization, you guys also had the activity we've got in China. They grow up in China, and they'll be able to satisfy that demand, so that's a good idea framed in terms of getting the unit down over to, to satisfy the customer demand.
So, there's a good problem right, but it's costing us little bit incremental.
Christopher Glynn
Absolutely agree and on the Molding Solutions side really, some of us have mentioned continuous extremely strong year, and as similar they are continuing to a very strong year in China, so both hand-in-hand with business comments on NGP. But they are locally based, but none the less, I do think the China market is always a competitive market and so with that comes some fresh work from time-to-time.
So, all-in-all, the mold that I really take on addresses the delta Chris, is the fact that we are having this exceptional Q3 in 2016, where everything aligned to the positive and so even at that time we were indicating that 17% was not to do normally with more of a ,a great quarter. And so, as we think about our industrial businesses, the expectations that we set at this juncture is at the mid chains and so, that's where we're considering the base to build up.
Christopher Glynn
Okay that makes sense, and on Aerospace it sounds like the mix impacts within OEM, kind of peculiar to the third quarter. On the price schedules, is there a kind of a timing mis-match between learning curve against the price schedules that was may be little lot of whacked that comes back your way.
Patrick Dempsey
I think the learning curve is a real factor and it's one which we track meticulously in terms of insuring that will be coming down the curve and measure it with the volume increases, because tier point and as I mentioned earlier, with those volume increases do comes, step downs in pricing. So, we as I mentioned even to further get ahead of that, we are bringing online the second facility and that second facility is into process today, and will start around bumping to 2018.
And that location is in Singapore. So, we are looking to stay one step ahead of it, the one factor that I also mentioned in Q2 I think, that is the factor in Q3, is that one is the offset in aspects or margins as we move through these ramp ups.
If our fabrications business continues strong, at the same time as we are observing extra costs to the ramp up of new programs, it all sets. In the third quarter, when I talk about somewhat moving to the right, it was out of our fabrications business, which still has the impact of [indiscernible] based margins, if believing true to the total.
Christopher Glynn
Got it, thank you.
Operator
Hello, next question comes from Edward Marshall from Sidoti & Company, please go ahead.
Edward Marshall
Hey guys how are you? Good morning, good morning.
Popular times last night, I appreciate I apologize if any things were asked. The OEM price inflation that you're seeing, do you talk about what engine programs you were seeing those price compression?
Patrick Dempsey
It's step done pricing on legacy as well as the newer programs, the legacy being you know G90 at some degree, but the newer program is a volume based price deflation that is been pre-determined and so, Chris Glynn just asked previously, the timing factor is something that we'll love to keep ahead of, so that the learning curve stays ahead of the anticipated price deflation with, when the rigs starting levels or volumes.
Edward Marshall
Got it now, this doesn't change the content for engine program or is this already reflected in those kind of base level assumptions?.
Patrick Dempsey
We've initially anticipated it so, when we give OEM sales for aircraft, we are anticipating one, two year, three year house and anticipation of what has been agreed to contractually ahead of them.
Edward Marshall
Got it, got it, okay. And then you talked about increasing the capacity in Singapore, and I'm curious is that mandatory on that part of the OEM, for you to secure certain contracts, for you to meet certain ramp programs, or is this just strategically something that's either positioned you to for additional contact or, you know on existing programs or I guess new programs as well?
Patrick Dempsey
I would say, it's a combination of factors, because we have from the very onset of this program, we had planned to build capacity in our Singapore facility in addition to our US locations. And so, to that end, as we look at the total cost of the program and the associated margins, we anticipated that with deflation in volume, as the volume increase that we have a number of approaches to stay ahead of that.
And so the Singapore facility and this example with the strategic part of that original modeling, I guess is programmed. It's not mandatory, it's a bounced decision, but one which we believe allows us to take advantage of our global nature as a potential Aerospace business.
Edward Marshall
Many years ago when you went to Singapore initially, you had tax holidays, will this expansion provide you with ammunition or opportunity for additional tax holidays?
Patrick Dempsey
Absolutely an opportunity adding that, no matter when we look to bring business to any one of our locations, whether it's in the US or it's in another country, we enter into discussions around what opportunities on a tax basis, there may be available to us, and that is something that is actively in discussions up this week.
Edward Marshall
Could they have been as lucrative as they've been in the past for you?
Patrick Dempsey
I would say that they were very lucrative in the past, and so that will be a high bar in terms of what we might get in the future. We are working it and we are going to push out for it.
That's all, previous ones were high bars.
Edward Marshall
And I'm curious too, because I know there were certain employee levels etcetera, that you needed to, I mean the OEM bill rates were a little bit more skeptical than the aftermarket demand, but our might be which why you had those holidays? What will give you some concerns of offering up so much on your side, to go into a, you know that with the skeptical type nature of that business.
Patrick Dempsey
Yeah, we are very conservative when it comes to protecting ourselves on the downside. I also would highlight that we have a very strong alpha market business in Singapore in this example.
So, we flexed our work force from one side to the other when we see any type of fluctuations. And so cross training is a big factor forth, in all our facilities, whether they are at the mass recover that are overseas, to where we have OEM and aftermarket in a number of instances, coal located and in the same constraint and so, we are in the same location and so search end will flex the work us.
So, we anticipate any particular events in the market to the best of our ability to be headed on.
Edward Marshall
I'm going to ease myself here a bit, looking at backlog 10 years ago, the quote was we typically, we are 58 % to 61%, 62% of our backlog in any given year. With the ramp that we are seeing now, do those same numbers hold true on a go forward basis, or are they slightly hard.
Patrick Dempsey
Yeah what we are sighting right now is 50% in the next 12 months and the reason that its moves from the 58 that you referenced down is that as the OEs are going into new programs and there is a ramp what they tend to do is open the window to give the supply chain visibility to what their ramps looks like. So they release orders further out then when it's a steady stayed program and so in that there lies the reason why we are coming down from the 58 to the 50 because once our back log is increasing its also we get in visibility further into the outer years.
Edward Marshall
Sure. They want to you to build capacities so that you can meet the potential demand I guess right.
Patrick Dempsey
That's correct.
Edward Marshall
The last question I am sorry I don't mean to go on so long but the transmission components that you discussed that were difficult to make I am wondering is that the next generation ten speed transmission and point is that are you so outsourced on those components?
Patrick Dempsey
We are not so outsourced and it is next generation and we are as we said we are working through those right now with a view to the operational issues and ensuring that we have - we look at any one of these products. If the offer up complexity beyond what we believe is going to meet the margins balance required to our internal harder rates.
We are going to negotiate against those thoughts as well. So it is the combination.
Edward Marshall
Got it, I appreciate your time guys. Thanks very much.
Patrick Dempsey
Thanks a lot.
Operator
Our last question comes from Myles Walton from Deutsche Bank. Please go ahead.
Myles Walton
Thanks just one more follow up. We got pretty good idea of where the industrial margin transfer into '18, but given the - a kind of a step down here in aero margins in 3Q and I guess implied in 4Q is somewhere around 15% to 16% as well if the math is right.
What is that implied by the '18 margin profile for aerospace? Is it a down from the 17 level given the tough comp in 1H?
Christopher Glynn
Well I think what we indicate for forward looking and we usually as you know give one year guidance, but the - as we think about the aerospace we are still targeting at the high teen as the bench mark that we are moving we look to move aerospace forwards consistently and that is a combination as you know of the aftermarket which is the big influencer. But the less we see that the high teens for in order to achieve it has to be a combination of molds, OE and aftermarket.
The aftermarket primarily driven of course by our life of program deals on the RSPs and GRPs which are primarily CFM 56 driven and the demographics of that continue to support a very strong outlook into 2018 and beyond and then as the OE side contributes to those high teens. It has to meet and come down the learning curves on these new programs as we discussed just a little while ago.
Myles Walton
But is the - I am just wondering is the second half here performance implied margins more reflective of what looks Springs in '18 are still early in this learning curves and we are still ramping up a set of story and I am just trying to level set if the kind of price deflation returns here are going to be seen more in '18 accounts like the second half of '17, that's all.
Christopher Glynn
Yeah notes spared I think that we are obviously at this point of that we saw a little bit of pressure over the course 2017 as we move into 2018 our intend will be to move back gradually back up as far as from the mid to the high teens.
Myles Walton
Okay. All right, thank you.
Christopher Glynn
Thank you.
Operator
And we have no further questions at this time. I will now turn the call back over to Bill Pitts for closing remarks.
William Pitts
Thank you, Kelly. We would like to thank all of you for joining us this morning.
And we look forward to speaking with you next in February with our fourth quarter 2017 earnings call. Kelly we will now conclude today's call.
Thank you.
Operator
This concludes today's conference call. You may now disconnect.