Oct 26, 2018
Executives
Patrick Dempsey - President and Chief Executive Officer Chris Stephens - SVP, Finance and Chief Financial Officer
Analysts
Michael Ciarmoli - SunTrust Robinson Humphrey, Inc. Edward Marshall - Sidoti & Company Christopher Glynn - Oppenheimer & Co.
Inc. Matt Summerville - D.A.
Davidson & Co. Josh Chan - Robert W.
Baird & Co. Myles Walton - UBS Investment Bank
Operator
Good morning. My name is Sharon, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Barnes Group Inc. Third Quarter 2018 Earnings Conference Call.
[Operator Instructions] Thank you. Chris Stephens, Senior Vice President of Finance and Chief Financial Officer, you may begin your conference.
Chris Stephens
All right. Great.
Good. Good morning, everybody.
So I’m joined by Barnes Group's President and Chief Executive Officer, Patrick Dempsey. And thank you for joining us for our third quarter 2018 earnings call.
If you have not received a copy of our earnings press release, you can find it on the Investor Relations section of our corporate Web site at bginc.com. During our call, we will be referring to the earnings release supplement slides, which are also on our Web site.
For our discussion today, includes certain non-GAAP financial measures, which provide additional information, we believe, is helpful to investors. These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
You will find a reconciliation table on our Web site as part of our press release and in the Form 8-K submitted to the 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 section of our corporate Web site. Let me now turn the call over to Patrick, for opening remarks.
Then, I will provide a review of our third quarter results and our updated 2018 outlook. After that, we will open-up the call to questions.
Patrick?
Patrick Dempsey
Thanks, Chris, and good morning, everyone. In the third quarter, Barnes Group delivered solid performance as adjusted earnings per share grew from $0.66 last year to $0.78 this year, up 18%.
Again, we experienced another strong quarter with sustained strength in our Aerospace segment and year-over-year margin expansion in both our segments. For the company, adjusted operating margins expanded 250 basis points from prior year period to 16.4%.
And we ended the quarter with a total backlog of $1.2 billion. In line with the ongoing transformation of our portfolio, we made a meaningful strategic announcement in the quarter when we entered into a definitive agreement to acquire Gimatic, a leading supplier of mission-critical solutions for industrial automation and robotics applications.
Gimatic designs and develops robotic grippers, advanced end of arm tooling systems, sensors and other automation components for various end markets, including automotive, packaging, healthcare, and food and beverage. We expect to close the deal in the near-term and as we’ve done in the past, we plan to hold a separate conference call to discuss Gimatic and the strategic and financial benefits we expect to gain from the acquisition as we look to 2019.
Now a few comments about this quarter's performance, starting with aerospace. Aerospace's impressive results have been sustained as sales were up 8% as compared to a year-ago with OEM up 3% and aftermarket up 19%.
Our OEM business continues to deliver growth in support of the ramp of new engine programs, primarily driven by the growing backlog of the lead family of engines for the Airbus A320neo and Boeing 737 MAX. These new programs are coming down the learning curve and contributing nicely to overall performance.
Our aftermarket business is experiencing robust sales growth, both in MRO and spare parts, fueled by the CFM and CF6 family of engines as industry fundamentals remain strong. For 2018, we expect OEM sales growth to be up mid single digits.
OEM backlog remains close to the record level reached in Q2, up 14% versus prior year and orders year-to-date are up 6%, positioning us for our future growth. For our aftermarket business, our 2018 outlook has improved from our view last quarter.
We see MRO revenues to be up low teens consistent with last quarter's full-year outlook and we now expect spare parts to be up high teens, which is an increase from our prior view. Our operating margin outlook for our Aerospace segment is now expected to be approximately 20%, up from our previous outlook of high teens, primarily driven by the strong growth experienced in our aerospace aftermarket business throughout 2018.
Overall, in our aerospace business we're excited not only about our results in 2018, but also about our progress in solidifying content on a number of long-term strategic aircraft and engine programs, including the GE9X and Trent 7000. Within our Industrial segment, total sales and organic sales were up 2% over the prior year period.
Sales growth was driven by continued strength in medical, personal care, packaging and general industrial, partially offset by declines in transportation and tool and die end markets. Overall orders were down 11% due in part to the dampening effect of lower global automotive production outlooks and the disruptive impact tariffs are having on the timing of new projects.
At the same time, industrial backlog remains at a healthy level of $340 million approximately, slightly higher than this time last year. With a number of key customer mold projects scheduled to ship in the fourth quarter.
At molding solutions, total sales increased 6% with organic sales up 8%. Overall, medical, personal care and packaging end markets served remain robust providing a positive counterbalance to moderating automotive hot runners.
As we noted last quarter, our second half sales outlook for our molds businesses is forecast to be substantially higher than the first half of 2018, due to the timing of certain program launches. During the third quarter, the FOBOHA team successfully gained customer acceptance approvals and delivered several critical systems.
Both of our mold businesses continue to work closely with our customers to meet their requirements for the balance of the year. Our forecasted molding solution sales growth for the full-year remains in the mid single digits.
At nitrogen gas products, third quarter total sales were down 5% and down 11% organically as it started to feel the effects of a softer tool and die market. This business is coming off of historic highs with softness been experienced primarily in Europe and China.
We now expect full-year sales to be relatively flat including sales from our acquisition of Industrial Gas Springs. As we noted last quarter, we are pleased to have the IGS team join Barnes Group.
As a reminder, IGS is a designer, manufacturer and supplier of customized gas springs. Our combined teams have been making great progress on integration activities as well as targeting growth opportunities across a number of diversified end markets.
For engineered components, third quarter total sales were down 2% and flat organically. Sales for -- sales from automotive production were down slightly offset by year-over-year increases in heavy truck and general industrial sales.
In Europe, auto production sales and orders were affected by new EU emission standards that took effect on September 1. However, we expect that to be a temporary issue.
In the quarter, we saw continued progress on cost productivity improvements within our associated spring business, contributing meaningfully to industrials margin improvement versus a year-ago. Overall, for engineered components, our projections for 2018 remain in line as we expect full-year revenue to be flat relative to 2017.
At the Industrial segment level, we now expect 2018 full-year total sales growth to be in the low single-digit range with organic growth relatively flat. Forecasted adjusted operating margin is projected to be in the mid-teens.
So to wrap up my remarks, we had a strong third quarter and remain bullish on our aerospace end market outlook. For industrial, we remain cautiously optimistic that global automotive markets will continue to show resilience, the current tariff related trade disputes will moderate and while the China market has taken a pause, it will continue to be a key area of growth.
Despite end market dynamics, we remain committed to driving our long-term profitable growth strategy to generate increased shareholder value. And the recently announced dramatic acquisition, it's just another step in that direction as we continue to transform the Barnes Group portfolio.
With that, let me turn the call back to Chris for a discussion on the financial details of the quarter and an update on our full-year outlook.
Chris Stephens
Okay. Let's begin with highlights for our third quarter results.
For the quarter, sales were $370 million, up 4% from the prior year period with organic sales growth of 4%, negative FX impact of 1%, while acquisition revenues contributed 1%.Net income was $39.1 million or $0.75 per diluted share, up 15% versus last year's third quarter. On an adjusted basis, EPS was $0.78, up 18% or $0.66 last year -- from $0.66 last year.
And then third quarter 2018 adjusted EPS excludes $0.02 of Industrial Gas Springs short-term purchase accounting adjustments and $0.01 of acquisition transaction costs, while last year's adjusted EPS excludes $0.01 FOBOHA short-term purchase accounting. Each of these adjustments are within our Industrial segment.
I also want to highlight that our quarterly GAAP results of $0.78 includes pre-acquisition costs of approximately $2 million or $0.03 per share related to the Gimatic deal. Now moving on to our segment performance beginning with Industrial.
Third quarter sales were $244 million, up 2% from $240 million with organic sales of 2% -- up 2% and unfavorable FX impact was essentially flat -- essentially offset by acquisition sales of 1%. Operating profit was $33.3 million, up 10% from $30.3 million in the prior year period, as the profit impact of higher organic sales and improving cost productivity, primarily in our engineering components business, provided lift.
On an adjusted basis, excluding IGS short-term purchase accounting adjustments and acquisition transaction costs this year, and FOBOHA short-term purchase accounting adjustments and restructuring expenses last year, adjusted operating profit of $34.9 million was up 12% from an adjusted $31.1 million a year-ago. Adjusted operating margins was 14.3%, up a 140 basis points and would have been approximately 15% if you excluded the pre-acquisition costs noted earlier related to the Gimatic deal.
For Aerospace, the third quarter's performance continued to be very strong. Sales were $126 million, up 8% from $117 million last year.
Operating profit was $25.7 million, up 39% reflecting the profit impact from higher sales volumes in both OEM and aftermarket and productivity improvements, partially offset by scheduled OEM price deflation. Operating margins expanded to 20.5%, up 460 basis points.
Aerospace total backlog ended September at $819 million, up 14% compared to a year-ago and flat sequentially. For OEM specifically, backlog was $807 million, remaining near last year -- last quarter's record level and 45% -- approximately 45% of OEM backlog is expected to ship over the next 12 months.
Other items to note for the quarter, interest expense increased 300K to $4.1 million as a result of higher average borrowings, partially offset by lower average interest rate. Other expense for the quarter was $2.4 million versus $1.5 million a year-ago.
With respect to taxes, the company's effective tax rate was 25.6% in the third quarter of 2018 compared to 19.1% in the prior year period. The primary driver of last year's lower tax rate was the settlement of tax audits along with the closure of tax years for various tax jurisdictions.
2017's full-year effective tax rate was 69.6%. Excluding the impact of discrete tax expense related to U.S tax reform, the effective tax rate for 2017 would have been 20.2%.
With respect to share count, our third quarter average shares outstanding were 52.1 million shares. During the quarter, we repurchased 337,000 shares at an average cost of $59.82 per share and now have 1.5 million shares available for repurchase under existing board authorizations.
Through September cash provided by operating activities were $158 million versus $168 million last year. Year-to-date free cash flow which we define as operating cash flow less capital expenditures was $118 million compared to $126 million last year.
Year-to-date capital expenditures were $40 million, down slightly from last year. With respect to the balance sheet, our debt to EBITDA ratio decreased slightly to 1.7x at quarter end.
Under our existing debt covenants, additional borrowings of approximately $533 million of senior debt would be allowed, while approximately $394 million remained available on our credit facility at quarter end. Note that as a result of the anticipated deal close and funding of the Gimatic acquisition, we access the $150 million of the $350 million available through the accordion feature of our revolver.
Turning now to our updated 2018 outlook. Please note that as it relates to the Gimatic acquisition, our outlook includes the pre-acquisition spending as occurred through Q3 '18, but excludes any projected results of Gimatic's operation and acquisition related costs.
We will provide more color of the -- on the financials for 2018 and 2019 during the separate conference call to be held after we close the deal. On Slide 5 of our supplement, you will see that we forecast 2018 total revenue growth of 4% to 5% with organic sales growth of 2% to 3%, impact of FX is expected to benefit revenues by approximately 1%, and acquisition revenues at approximately 1%.
Our adjusted operating margin forecasted to be -- is to be approximately 16.4%. Adjusted earnings per share are now anticipated to be in the range of $3.21 to $3.26, up 11% to 13% from 2017's adjusted $2.88.
A few other update outlook items. Interest expense is anticipated to be approximately $16 million.
Our effective tax rate for 2018 excluding tax adjustments related to IGS short-term purchase accounting, acquisition transaction costs and the second quarter U.S tax reform adjustment, is expected to be approximately 23.5%. Average diluted shares are forecasted be approximately 53 million, our CapEx expectation remains at approximately $60 million to $65 million and cash conversion is expected to be approximately 100%.
So in summary, we had a strong third quarter. We continue to benefit from robust performance from our aerospace business and expanding margins in both of our business segments.
So with that, operator, we’d like to now turn the call over to open the questions for analysts that may have them.
Operator
[Operator Instructions] Your first question comes from Michael Ciarmoli with SunTrust. Your line is open.
Michael Ciarmoli
Hey, good morning, guys. Thanks for taking the questions.
Figured, just to start on aero, what specifically drove down the outlook for the OEM side? I mean, can you just elaborate maybe what -- what's changing there or even comment on what you're seeing in the supply chain, any constraints or challenges that might be impacting that outlook?
Patrick Dempsey
Absolutely, Mike. For us what has changed over the last few months in terms of our outlook for the full-year has been just some shifting to the right on certain programs.
The backlog as you see remains at almost at historic high. So not concerned overall, but have seen some shift to the right.
And to that end, I would suggest that we are seeing some constraints in the supply chain as it pertains primarily to raw materials. And so there is a little bit of shortages that occur and then it comes in, somewhat lumpy.
So there's been a bit of disruption I would suggest relative to that and I think it's been widely noted I think for the industry overall. But other than that, I think in general, still remain very positive on the OE side of things for the strategic programs that we're now well positioned on.
Michael Ciarmoli
Got it .Can you elaborate on the programs that are sliding to the right? Is that a result of the raw material challenges?
I mean, it seems like from a program perspective, there's been some headline challenges with engines and fuselages which seem to be normalizing now, but can you give any more color on the programs that are sliding or shifting?
Patrick Dempsey
Well, what I note is the fact that anything we produce, we’re shipping. So there's no such thing as the supply chain is hesitating on receiving product.
Moreover, it's a case of the system or the supply chain I think in general from a raw materials standpoint, which is forgings and castings, is where a lot of the constraint is. For us, we see that translate and I think across a number of the programs whether narrow-body our wide-body we’re seeing it on both sides.
Michael Ciarmoli
Got it. And just one more for me on OE.
I think you called out some OEM price deflation. Is that hitting you guys on the revenue side there?
Is it hitting more margins and how should we think about that deflation going forward as rates might be climbing here on several of the programs?
Patrick Dempsey
It's hitting sales and the OE. And it is scheduled deflation as we ramp up in volumes over these program.
So it's a pretty standard protocol. Any guidance we give has that deflation already baked in, because we know ahead of time clearly what it's going to be from a overall program perspective.
Michael Ciarmoli
Got it. So does that become more of a headwind in '19 as the rates climb higher or are you already kind of feeling that deflation, just assuming your kind of producing ahead maybe of the -- to get to those anticipated build rates?
Patrick Dempsey
It will continue into 2019. The one area that I mentioned that I think the teams are doing a really nice job on is coming down the learning curve on those programs to keep out in front of it.
So what our -- how we think about it is ensuring that we have the necessary operational activities occurring internally through the enterprise system to be one step ahead of any deflation that we've already signed up to.
Michael Ciarmoli
Got it. Perfect.
I will jump out of the way here and get back in the queue. Thank you for taking the questions.
Patrick Dempsey
Thank you.
Operator
Your next question comes from Edward Marshall with Sidoti & Company. Your line is open.
Edward Marshall
Good morning.
Patrick Dempsey
Hi, Ed.
Edward Marshall
I wanted to talk about Gimatic, if I could. Looking back to the Molding Solutions Business and the acquisition that you acquired -- when you first acquired Synventive and then how you build that business out, I'm curious if you're willing to share with us what your plans are for automation, what your go-to-market strategy is, and what type of businesses you might be looking for?
I’m assuming that this is not a one-shot deal.
Patrick Dempsey
You’re correct. It's not a one-shot deal and it is very much based on the same thought processes as the playbook that we executed against with Molding Solutions.
So as we’ve entered into this phase, Ed, it's been with a view to having done a significant amount of upfront analysis to ensure: number one, that the space met our strategic criteria; and two, that we thought there was a pipeline of potential future opportunities from an acquisition standpoint to continue to build out a portfolio of industrial technologies within that space that complemented each other. As I mentioned in prepared remarks, we expect to close on the deal in the near-term and will set up a separate call specifically to all aspects of both the strategy and the financials on that call as soon as we close the deal.
Edward Marshall
Got it. Would you be willing to share maybe your timeline to kind of build that out?
And potentially the leverage that you're willing to increase over time to kind of build that out? I’m impatient, can't wait for that call.
Patrick Dempsey
That’s fair. That’s fair.
We are excited as well. We are excited as well.
But just as impatient to get the deal closed, but what I will point out is that our two sets of teams, both the Gimatic leadership team as well as the team on the Barnes side have been working closely not only through the due diligence, but also since the announcement of the signing. And so our intent is to hit the ground running the day after the deal is closed.
We are obviously as we look forward, we've identified a number of what we think are key technologies that will complement Gimatic and associated potential acquisition targets. In terms of timing, first and foremost as we did with Synventive, we will look to integrate Gimatic, we see already opportunities for it to leverage the business across to some of the same customer base as Molding Solutions.
And so as we integrate it, we will ensure that that is fully secured before we then take on the next vise. But again, if you look at Molding Solutions, we executed it over a range of five years.
And as we move into the automation space that time frame is not unreasonable in terms of how we’re thinking about it as well.
Edward Marshall
Got it. And I guess, I wanted to ask that question in the context too of kind of looking at your industrial margins.
I mean, as they start to slide to the right here, I wanted to see if you could kind of bifurcate the difference between maybe inflation and the impact it might be having whether it's engineered components or NGP and then of course the slide in NGP business organically. I know that's a relatively high margin for your business for you.
So coming off what was the second -- strong second quarter and looking at the third quarter print on margin year-over-year growth, but I’m wondering if you can kind of talk about what you anticipate for that margin on a go forward.
Patrick Dempsey
Yes. So what we’ve communicated and continue to communicate is we’re targeting mid teens for the Industrial business.
You saw us bounce back to that in Q2 and GAAP numbers reported this morning was they look like they’ve pulled back a little from Q2s performance. As Chris noted, there was $2 million worth of pre-Gimatic acquisition costs that were all basically absorbed by the industrial business.
So if you exclude that operating margin for Industrial in the second quarter were also approximately 15%. So that’s the in the target zone of what we're looking at as we continue forward with the industrial business.
On the nitrogen gas products side, we did see some slowing of order -- sales on a year-over-year basis with total sales down 5%, organic down 11%. But on an orders basis, we saw one-for-one -- one times book-to-bill.
So orders continue to be -- continue -- I would say, they continue to be robust. At the same time, at the historic high levels that we have been operating, it's not unexpected that with some of the headwinds we're seeing into the automotive industry that there's some pull back on that.
Edward Marshall
Got it. And just a point of clarification, you said the $2 million expense, is that the same expense that was removed from the adjusted operating earnings in the press release?
Chris Stephens
No. That would be separate.
So that $2 million of pre-acquisition type of spending would be a part of our GAAP results. It's not a part of our Reg G, that’s separate.
That’s related to the IGS acquisition, which we’ve done in terms of the adjustments. So that was just -- that’s a part of our GAAP result, that $0.02 [multiple speakers].
Edward Marshall
So there was nothing from Gimatic in the quarter?
Chris Stephens
Not in the Reg -- on the Reg G, but there's -- just in terms of our period expensing related to the pre-acquisition due diligence cost, that’s the $2 million. So it's in our GAAP results.
We didn’t break Reg G out. We wouldn’t break Reg G out.
Edward Marshall
Got it. Thank you very much.
Chris Stephens
Thank you, Ed.
Patrick Dempsey
Thank you.
Operator
Your next question comes from Christopher Glynn with Oppenheimer. Your line is open.
Christopher Glynn
Yes, thanks. Good morning.
Patrick Dempsey
Good morning, Chris.
Patrick Dempsey
Good morning.
Christopher Glynn
Congrats on Gimatic -- yes, congrats on Gimatic. Look forward to hear more about that.
Question on the OE. We could do some pretty simple math, 45% of $807 million and look at the guidance for OE backlog, it sort of backs in about 10% OEM growth for next year.
Is that ballpark reasonable on the kind of 45% note?
Chris Stephens
Yes, Chris, I would look at -- we look at the next 12 months, so that would include the fourth quarter as well. OEM as we look to the backlog and the projections into 2019, we're in the mid single digits consistent what we've been saying at of our OEM business.
So 10% would be too high. It look more at the mid single-digit level.
Christopher Glynn
Okay. And then on the aftermarket side, you’re obviously having a very killer-ish year this year.
And the key component that is kind of the catch in transition and the fleet demographics with the CFM. So, as we think about the rapid growth this year and the comps next year, is it fair to think that the baseline stable and this sort of remains a flight hours plus type of business as a generic profile?
Patrick Dempsey
I think that’s fair. A couple of additional comments I would add to it, Chris, is that when we look at our performance this year, what has really driven it in terms of the split between CFM and CF6, it's an 80-20 split.
But the CF6 has performed I think beyond expectations in 2018. And so the bounce back of the CF6, I think it's something that may be surprise the industry overall because that aircraft and that engine, we're at the sunset side of the lifecycle and we're expected to retire out at a particular rate.
And that would -- those retirements haven't happened to previous forecast. So the CF6 has been a nice contributor to the strength that we've seen on a year-over-year basis.
As we move into 2019, the CFM, we expect will continue to grow in terms of shop visit rates right through to the early 2020s and maybe even into the mid 2020s. So the CFM continues to be a nice growth story.
A little bit of tempering I would put on our growth rates today would be the CF6.
Christopher Glynn
Okay. And then just back to the scheduled programmatic price dynamics on some of the OE program ramps.
Is it fair to consider from a margin rate perspective that learning curve holds that more in the neutral range?
Patrick Dempsey
That’s probably fair. I haven't said that that's not anything we accept on the inside.
So clearly, the aerospace team is challenged to continue to expand margins, but it is nonetheless with the schedule deflation. It does become a challenge, but margins we expect to continue and to improve slightly.
But overall, when we think about the OE side, we have on our guidance -- we have it built into the guidance that we project, which has been outstanding over the last three quarters.
Christopher Glynn
Indeed. Thank you.
Patrick Dempsey
All right. Thanks, Chris.
Chris Stephens
Thanks, Chris.
Operator
Your next question comes from Matt Summerville with D.A. Davidson.
Your line is open.
Matt Summerville
Thanks. Couple of questions.
First, just with respect to Synventive, can you comment a little more detail around what the outlook is for that business, specifically in the fourth quarter? And what your early read is on new model changes, launches, introductions, whatever you want to call it for 2019?
Patrick Dempsey
Absolutely, Matt. For Synventive came off of just to put a bit of the backdrops, Synventive came off of a record year in 2017.
And the primary drivers behind that was that all three regions, North America, Europe and Asia, all hit at the same time with the primary driver being North America. What we've seen coming into and that's relative to model changes.
As we can into 2018, we've seen the pull back in North America, which was to be expected because of the same rate couldn't continue, so to speak at that elevated level. But as we go into 2019, we're looking at that business to continue to be very successful in the context of it's the market leader in the automotive hot runner space.
In 2018, what we've seen here in the last half of 2018 or in the last quarter is some of those program launches move into the right, primarily I think because of the uncertainties associated with the tariffs. And so a lot of noise in the system, if you like, that has put some pressure on the Synventive end markets relative to program launches.
But we expect a good year in 2019, not necessarily back to the levels of 2017, but clearly consistent as we move forward from '18.
Matt Summerville
Then can you provide a little more color on NGP. You mentioned down 11% organically.
Can you give a little color with that business from a regional standpoint, North America, Europe, China? How that performed around that 11%, if you will?
Patrick Dempsey
So, down 11% in the quarter, and the region that fared best was North America. We saw pressure in Europe and most of the pressure in Asia during the quarter.
And Asia being primarily China.
Matt Summerville
Is that -- its a book-to-bill in your Asia, and I know a small piece, but this tends to be a pretty reasonable leading sort of macro indicator, if you will. I guess, I'm curious you said the book-to-bill was 1 for overall NGP.
Is the book-to-bill 1 in Asia in that business right now?
Patrick Dempsey
I don't have it in front of me, Matt. But I can get that to you after the call, no problem.
Matt Summerville
Sure. And then just one final one.
You mentioned that, I think, it was you in your prepared remarks, tariffs, sort of disruption. You mentioned a little bit of that may be impacting Synventive.
Just more broadly speaking, across Barnes Group, where do you see the tariff impact being to the company in 2018? And if the step up in tariffs takes place in January of next year up to 25%, what you sort of ballpark the P&L impact potentially being to you guys?
Thank you.
Patrick Dempsey
Yes. So before I talk to the specifics, what I mentioned is that as I think about the tariffs challenges in general, from a Barnes perspective, there isn't that much product we have that’s moving between the U.S and China and vice versa and that our model has predominantly been local for local.
That said, we're not immune to the tariffs because we do have supply chain which is moving across what we said for 2018 was that we saw the headwinds of approximately $2 million that we have built into our guidance. As we look out into 2019, I would suggest that it's in a range of $2 million to $7 million.
We are currently in the ballpark of $5 million that we’re anticipating. That said, the teams have been doing a wonderful job in terms of mitigating any potential headwinds that we're anticipating, and that they're doing through a number of different activities, including pass-through of pricing, looking at the supply chain with a view to what alternative supply we may be able to pursue.
And then the third area is that of exclusion because some of our products which we're shipping intercompany are getting caught in the tariffs net, which we feel should be excluded and so we are pursuing that as well.
Matt Summerville
Thank you, guys.
Patrick Dempsey
Thank you.
Chris Stephens
Thank you, Matt.
Operator
Your next question comes from Josh Chan with Baird. Your line is open.
Josh Chan
Patrick, Chris.
Patrick Dempsey
Good morning.
Chris Stephens
Good morning, Josh.
Q - Josh Chan
Good morning. I think you mentioned your orders within the industrial business, but I was wondering about the orders in the moldings business specifically, and also how are you thinking about the backlog as it relates to outlook into 2019 for moldings as a whole, I guess.
Patrick Dempsey
So, on the Molding Solutions business, one thing that we watch very carefully is the fact that the molds side of the business tends to be lumpy. So we see -- as I’ve mentioned before, we see major fluctuations from quarter-to-quarter on orders, because of the timing and the programmatic nature of how molds are released to us.
So as I think about molding solutions, I usually have a little bit of caution that I express as it pertains to the molds side of it because of the sizable nature and the variation quarter-to-quarter. It control the number, distort it somewhat.
But as we think about the molds side of the business right now, what I would highlight is that Manner, as an example stands at a record backlog in terms of the orders on the book. And FOBOHA also continues to see some nice order intake over the course of the year for its products and services.
So that aspect of the business we continue to be very bullish on. On the hot runner side of the Molding Solutions, we see continued strength in medical, personal care and packaging.
And as I mentioned previously, we saw some moderation on the automotive hot runner side of the business.
Josh Chan
Okay. Yes.
I appreciate the color. And then, if I can step back a little bit on the industrial, it sounds like some of the early cycle businesses that you have for are moderating or I think you even use softening.
And so just as you think about like 2019, how concerned or not concerned are you about just the global industrial backdrop overall?
Patrick Dempsey
Well from our perspective, I think about the end markets -- in the context of the end markets that we're serving, as I just mentioned, medical, personal care, and packaging continues to look favorable as we move into the fourth quarter and we expect that to roll into 2019. The area that we see some headwinds is on moderation of the automotive industry and the impact that might have on our -- on some of our businesses.
The aerospace side continues to be extremely strong and we expect that to continue into 2019. And so, in general, it's a cautious optimistic outlook that we have as we move into 2019, but we remain very positive overall.
Josh Chan
Okay, great. Thanks for the color.
Thanks for the time.
Patrick Dempsey
Thank you.
Chris Stephens
Okay. Thanks, Josh.
Operator
Next question comes from Myles Walton with UBS. Your line is open.
Myles Walton
Thanks. Good morning.
Patrick Dempsey
Good morning.
Chris Stephens
Good morning.
Myles Walton
Just wanted to make sure I would square it around your adjusted guidance now includes the $0.03 from Gimatic pre-acquisition costs.
Chris Stephens
Exactly. What we had in the third quarter, the third quarter spending roughly approximately that $2 million or $0.03 of EPS is reflected in our full-year guidance.
Myles Walton
And then the other expense, pretty steep growth, I know year-on-year, it actually looks less steep than it was sequentially. What is -- was there anything special in there, and kind of what the pace that you’re expecting for the rest …
Chris Stephens
Myles, sorry can you say that again. Can you repeat that?
Myles Walton
Yes, the other expense line …
Chris Stephens
Right.
Myles Walton
… I know it's up $900,000 year-on-year and up $1.5 million sequentially. What’s the -- is there anything special in there?
And then also the expectation for the fourth quarter and into '19 as a run rate?
Chris Stephens
Sure. Many moving parts in other expense, and you could see we had a larger expense item this year.
If I go back to the year-to-date results, remember, last year we had a pretty large curtailment gain on the pension side when we consolidated one of our facilities in Switzerland. So that was a positive to last year.
The negatives to this year, a couple of things primarily FX driven, FX losses that we've incurred not only in the quarter, but kind of on a year-to-date basis. We don't expect that to be as significant in the fourth quarter.
So hopefully that dwindles down, but that's reflected at our full-year guidance.
Myles Walton
Did you have to include -- I’m just trying to get to your full-year new adjusted EPS that absorbed that extra $0.03 from Gimatic, did it absorb higher FX losses as well?
Chris Stephens
It did. It did.
It does reflect that. It does reflect what we anticipate in the fourth quarter, but not -- we do not view that to be -- we view third quarter to be higher than what we'd expect in the fourth quarter.
Myles Walton
Okay. And Patrick, you alluded to the 1 book-to-bill at NGP.
I’m just curious, if you'd look back last quarter at the book-to-bill, would that have given you a heads up as to the kind of performance in NGP in the third quarter here? How relevant or predictive is that metric for the business?
Patrick Dempsey
It's -- if you look at book-to-bill for NGP in Q2, it was just shy of 1x as well. So, the -- it is a short cycle business and so what we saw in the back half of the quarter was a slowdown in China.
And I think that was commensurate with the GDP numbers that came out for that market. We saw it translate in to the back half of the quarter.
As we move forward into -- as we've already continued to dialogue with the business, we saw some recovery to that in the first part of this month. And so that looks a bit -- that gives us some degree of optimism as to -- hopefully it's a short-term item, but something we’re watching very closely.
Myles Walton
Okay. And then, Chris, the cash conversion side, I mean, it's spinning here a little bit, but it was greater than a 100% now at a 100%.
Chris Stephens
Right.
Myles Walton
Is there anything moving around in there, cash taxes or something. And then also as you go into next year, are you back above a 100%, or is 100% the planning around it?
Chris Stephens
Yes, good question. So specific to the quarter on the cash conversion side, we actually had a very strong cash generation quarter, almost with a 130% cash conversion.
As we look to the full-year, mainly on working capital needs to support the growth we see going into next year. So elevated inventory levels entering in the fourth quarter, obviously, remember that we expect to ship in the quarter, but even as you kind of continue that into 2019, we just see higher levels of working capital needs primarily in inventory to support that growth.
And that -- that's the area. So this is -- it could be greater than 100%.
This could be a 98 to 102, that's kind of our current outlook. So we just decided to be more around that 100% versus, say, it's going to be greater.
But going forward as a company, we expect cash conversion to be greater than 100% every year.
Myles Walton
And in the EV, the inventory build, is that primarily Aerospace OE or is it …?
Chris Stephens
Aerospace OEM as well as the Molding Solutions, the mold side of our Molding Solutions business. So we’ve got a pretty large quarter set up for molds to be shipped.
Building on Patrick's comments in terms of the second half of the year, we had a very strong third quarter out of mold shipments, and we expect to see the same in the fourth. But at the same time, there's additional backlog to be shipped in the first half of next year, that's built up an -- that's building up an inventory.
So it really is an inventory working capital need.
Myles Walton
Okay. All right.
Thanks, guys.
Chris Stephens
Thank you.
Patrick Dempsey
Thank you.
Operator
At this time, I will turn the call over to Mr. Chris Stephens.
Chris Stephens
All right. Thank you for joining us this morning.
As we mentioned, we -- as soon as we get a chance to get the Gimatic deal closed, we plan on having a call and we hope to get that done over in the next few weeks. So we thank you for joining us this morning.
We look forward to talking to you sometime soon.
Operator
This concludes today’s conference call. You may now disconnect.