NN Inc (NNBR) 2017 Q4 法說會逐字稿

Good day, and welcome to the NN, Inc. Fourth Quarter and Full Year 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Matt Heiter, Senior Vice President and General Counsel. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. I'm Matt Heiter, Senior Vice President and General Counsel. On behalf of our team, I'd like to welcome you to NN's Fourth Quarter and Full Year 2017 Earnings Conference Call.

Our presenters this morning are President and Chief Executive Officer, Rich Holder; and Senior Vice President and Chief Financial Officer, Tom Burwell.

If anyone needs a copy of the press release or the supplemental presentation, please contact Abernathy MacGregor at (212) 371-5999, and they'll be happy to send you a copy.

Before we begin, I'd ask that you take note of the cautionary language regarding forward-looking statements contained in today's press release, supplemental presentation and in the Risk Factors section in the company's 10-K for the year ended December 31, 2016. The same language applies to comments made on today's conference call, including the Q&A session as well as the live webcast.

Our presentation today will contain forward-looking statements regarding sales, margins, foreign exchange rates, cash flow, tax rate, acquisitions, synergies, future operating results, performance of our worldwide market and other topics. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside of the company's control. The presentation also includes certain non-GAAP measures as defined by SEC rules. A reconciliation of such non-GAAP measures is contained in the tables in the final section of the press release and the supplemental presentation.

First, we'll give an update and overview of the full year and fourth quarter. Then afterwards, we'll open up the line for questions.

With that said, Rich, I'll turn the call over to you.

Thanks, Matt. Good morning, everyone, and welcome to our year-end and fourth quarter earnings call.

As usual, we'll walk you through the deck as Matt said, and then we'll open the line for questions. Before I jump into the presentation, I just thought I'd maybe take a minute to frame our discussion this morning.

It's been an eventful year, specifically year-end. And I think it's worth talking about a couple of things. Number one, we have been fortunate to be much more successful in contract wins than -- candidly than we had in our plan and had expected. So that's a good thing. We are winning at a far better hit rate than we thought we would. So that's a wonderful thing. The consequence of those wins, however, is upfront investments in advance of production shipments, anywhere between 6 months to 12 months.

And so, as we walk through the presentation today, you will see where that spending in advance of these production shipments has put some pressure on margins. And what we'll try to do as we walk through today is point that out to you where those pressure points are, to give you a great understanding of how these things are flowing through the enterprise. But we are extremely excited around our success and our hit rate on some of these new programs that it is -- it's truly wonderful. I can't -- I can probably wax on for the entire call about that.

The other thing I wanted to point out is that with the advent of the new tax act in concert with our selling of the bearing business, divestiture of the bearing business, brings with it an enormous amount of complexity around our tax structure. So we are in the mode of working through diligently our tax structure as we speak in advance of the K. The K is scheduled to be filed, I think, sometime next week. And so I'm sure there's a ton of tax questions out there and I will just preempt that by saying we're working through [it] and we're trying to make sure that we understand it all.

So with that, let me jump into the results and the highlights, rather of 2017.

So 2017, we finished the year at $620 million, which was 6% growth or $35 million. Our adjusted income from continuing operations increased 27% to $42.8 million. Adjusted diluted earnings per share of $1.55, up from $1.24.

Our cash flow generated for debt repayment was $43 million, and we continue to advance our diversification strategy with the divestiture of PBC. I think we've told you many times that post the divestiture that we have maintained a portion of the infrastructure in anticipation of redeployment of that infrastructure, as we redeploy the proceeds from the sale and acquire new businesses.

And you saw us begin to do that in October, when we closed the DRT Medical. And just a few weeks ago, when we close the Bridgemedica, which obviously is a 2018 event, so it's not appearing within this deck. But we feel pretty confident, and as you look at this infrastructure that we're holding onto that it will abate by the end of third quarter of this year. Either we will be a large enough enterprise to spread that across the enterprise appropriately or we will shed the SG&A accordingly. So for those of you who were paying attention the third quarter.

As we move over to Page 4, continuing the highlights. This is why I wanted to take a minute to give you the scope of the wins and what's going on in the enterprise, and why the investments, particularly, in the fourth quarter were so heavy.

We have a -- we will launch this year within the enterprise approximately $140 million of new program. $90 million -- to be specific, $94 million of those programs will be in the group formerly known as APC, for this purposes of this, because it's a little different in the new construct.

But $94 million of that is in the group formerly known as APC, and that is heavily weighted on new CAFE and international wins in Europe; in South America; and to a lesser extent, a much lesser extent in North America; and certainly to a big extent in Asia.

$40 million of new programs in the group formerly known as PEP. And that is entirely in the life sciences space. Check that. It's mostly in the life sciences space. There is a significant amount in aerospace and a significant amount in the electrical sector. So we have one program. When you think about our new construct with the 3 groups, we have literally one program across-the-board in the new group.

We expect to see the benefit of some of these programs, starting to hit the P&L second half of 2018 and certainly beyond.

So the way to think about it is, we are in a space right now with these programs that are on average, we're pre-spending, roughly 6 to 8 months in advance when you sort of average it all together. Some are longer, some are shorter. So we'll start to see the effects of these wins in the second half of the year. Our anticipation is that we'll be abating some spending on wins as we go into the second half of the year. But that presupposes that we don't have any more big wins, all right?

And so, if we win a couple of more big moves, it is entirely possible that we continue to spend and invest for the sustainable -- long-term sustainability of the enterprise.

To give you an even better sense from a physical perspective, the amount of work that's being done around these wins, we are expanding our Chinese facility. We're expanding our Polish facility. We need capacity in all those areas. As you well know, we moved into a new facility in Wuxi, China, and we captured a certain amount of square footage in there. Now we have to expand that square footage. Again, a good problem to have. But nonetheless, requires investment.

We spun up -- we're spinning up our West Coast facility. We're having to spin that up a little bit faster than we had originally anticipated, because a good portion of the program wins in the aerospace group are all West Coast related shipments and customers.

Our East Coast facility, we have grown out of our East Coast facility. We -- the walls are bursting at the scenes and we -- in the fourth quarter, we had to make a move to come and bear a new building. And so, we will be moving from 1 facility to the next in order to accommodate the needed capacity for our East Coast aerospace and defense facility.

Our Brazilian manufacturing capacity is increasing, mostly on the back of wins on [TR] programs and TRW programs. This is not a roofline move. This is all around new machines and putting in 3 or 4 new lines in there. We are doing our best not to have to expand rooflines there. So we're moving a lot of machines around to make sure we can get these lines to fit.

We're enlarging life sciences clean room and machining capacities and part of the Bridgemedica acquisition helps with that.

And last but not least, and maybe the single most exciting thing on the list is, we are now in the process of building our second prototype facility that is located inside of our customer's engineering entity. So to put it another way, we have a facility, and now a second one in -- that is literally located in the middle of the customer's engineering building. And we are a prototype facility.

So an engineer walks in the door, with a drawing on the back of the napkin, we sit down with our engineers, we help codesign the product, we build a prototype. And hopefully, that engineer walks out with a prototype that -- and they can go down to the clean room or the cadaver lab or whatever, and test that instrument. And keep going back and forth till we get a finalized design.

Once that happens and you look into production, if this particular product goes into production, then we -- if the OEM decide they want to build it themselves internally, then we get paid for our prototyping and our co-engineering and our services work, which is at a very attractive margin.

But hopefully, and ideally, what happens is that they decide they don't want to make it, and they immediately turn over the production portion of it to us. And we move it to one of our factories. And we spin up production well in advance of their needs. And so, we are building our second facility. We have one in Cincinnati and our second one is located in Houston. So we're pretty excited about that.

So with that, let me turn it over to Tom to go through some of the numbers and I'll come back and we'll summarize the year and move in the fourth quarter. Tom?

Thanks, Rich. So as you'll see, starting on Page 5 with adjusted diluted earnings per share, we were -- adjusted earnings improved by $0.31 of EPS, and that was driven by profits on the 6% organic growth that we experience in sales throughout the year.

To a lesser extent, EPS was also benefited from the lower interest cost. We've been lowering our interest cost with debt refinancing that we've done opportunistically over the last 12 to 18 months.

So that has impacted our EPS in addition to the sales growth.

Sales growth for the year was 6%. It was almost all organic growth and we'd wish there for robust sales growth in each one of our vertical end markets. I mean as Rich mentioned, we've won many multiyear sales programs during 2017 that we'll continue to see this trend -- this growth trend through -- into '18 and beyond.

Turning to Page 6 on the gross margin. The flex productivity, which is our main metric that we use to judge profitability on our sales growth, was as expected. The gross margin was slightly impacted by some of the growth of the -- growth in the investments that we made that Rich mentioned on the -- for the new sales programs.

We undertook these starting in Q3 to a lesser extent, but really Q4 is where the big impact started on these investments, in order to get ready for -- start a production on programs in 2018, the second half of the year.

Adjusted operating margin was down 1.2%, and this was primarily driven by the -- maintaining the infrastructure investment that we had from the PBC divestiture. As we mentioned, we invested a lot professionalizing the enterprise and then increasing talent of the organization, and we're holding onto that. So we can continue to grow and enable us to hit our strategic goals in 2018 and beyond.

Turning over to Page 7. Adjusted EBITDA margin was impacted by the additional infrastructure cost and also the investments in growth-oriented programs that we mentioned.

With SG&A, we see that there is a growth, but almost half of that is -- $5.2 million of M&A integration cost that we've undertaken. Some of it related to the PBC divestiture and through the ongoing integration of the company and professionalizing of it. Additionally, we continue to invest in SG&A to facilitate -- getting ready -- reaching our strategic goals and professionalizing the organization.

On Page 8, turning to the Autocam Precision Components Group. We've seen 3% organic sales growth year-over-year, and this is generally consistent with our expectations and we're going to CAFE and the industrial end markets globally.

We've seen sales, as Rich mentioned, in each one of our geographic end markets: North America, Europe, South America and Asia. Very robust global growth there.

Flex productivity on the additional sales of (inaudible) impacted the adjusted operating margins favorably, but it was slightly impacted by the growth in the -- the growth-oriented investments within the quarter -- within the year.

Turning to Precision Engineering Products Group. During the year, the PEP was the segment that had the most sales growth that we had the rapid growth in our start-up aerospaces, as Rich has mentioned earlier, and we've been talking about throughout the course of the year. We've grown that business very rapidly throughout the course of 2017. And we've also had share gains in the life sciences business and the electrical end markets, which is likely this robust 2017 top line growth.

Relative to the adjusted operating margin, the new sales programs that we won in '17 were at margins consistent with our -- are better than our existing business. And was -- and flex as expected, but the growth-oriented investment had a near term impact on the margins within this segment for 2017.

So with that, just to kind of summarize 2017 if we haven't said it enough, we have driven growth. We feel really positive and really energized and excited about the amount of growth we've driven and where the growth lays in for the long-term sustainability of the organization.

The PBC divestiture was a big move in properly diversifying and being able to balance the company across market -- end markets that -- and how they perform in the -- on the economic cycle. So it was a big move for us. And starting that redeployment of proceeds with the acquisition of DRT Medical, and of course, couple of weeks ago, with Bridgemedica, continues to take us on the strategic path that we've always laid out to you.

Cash flow are in line with expectations, given the divestiture of PBC. And I'll leave you with this for '17, we continue to ready the enterprise for growth. The way I have been describing '17 is that, we think we are at the end of the beginning. And so, we're very excited going forward.

Jumping into Q4, we'll just hit that really quickly. Highlights of Q4. Again, program wins required additional investments. I can't point that out enough. It was significant. It was somewhere around point of margin that we've decided to strategically invest in the business.

But nonetheless, I think you'll see that $130 million in growth over the course of the next 18 months to 2 years. I think it's a great investment.

Sales were at $156.1 million, and that's 10%, which I'm pretty sure that is what we said -- what -- that's what we called quarter-to-quarter 10% growth, in spite of the fact that we had the fewest production days of any quarter. Adjusted diluted earnings per share of $0.30, EBITDA -- adjusted EBITDA of $27 million. Again, we acquired DRT in October. We're really excited to have them as part of the family. It brings with it a drug delivery capability that we -- that we're really excited about. And we repaid $8 million in debt in the fourth quarter.

Let me let Tom go through the numbers, and then I'll come back and summarize again.

Yes. So turning to the adjusted diluted earnings per share on Page 13. The $0.09 increase in EPS was driven primarily by the 10% sales growth, that we experienced within the quarter. And the sales -- the 10% sales growth was led by the PEP segment and we really had seen the aerospace growth that we talked about and also the medical and electrical increased sales due to the share gains that we've had within that segment.

Turning to the gross margin. The growth points in investments that we made really had the biggest impact in Q4. They started late in Q3, but really impacted Q4 in order to get ready for start of production in the -- full run start of production in the second half of '18. That's really why you're seeing more of an impact on the gross margin in Q4.

The adjusted operating margin as we mentioned for the full year, it's impacted by the infrastructure cost that we have held opposed to PBC divestiture in order as we've said to get us ready for the sustained growth and to achieve our strategic plans.

Adjusted EBITDA margin was fairly in line with expectations. The flex productivity on the additional sales was as expected. And again, slightly offset by the growth-oriented investments.

The biggest driver within the SG&A on Page 15 is we had $3 million of M&A costs related to the DRT acquisition plus some other ongoing integration activities that we've had within the business.

On Page 16, turning to Autocam Precision Components Group. 4.3% increase in sales was as expected. And again, common theme similar what we had for the full year, we've seen global growth within both the CAFE and the industrial end markets in each one of the geographies in which we operate. And the adjusted operating margin was impacted. The APC group, really -- the investments they made, the short-term impact. They were really gearing up for these large multiyear programs that are going to start up in the second half of 2018.

PEP group on Page 17. 7% organic growth as we mentioned was led by the life sciences group and the electrical, life sciences end market and the electrical end market share gains.

And then the profits on the additional sales for the -- drove the operating margin, but they were impacted by the growth-oriented investments that we made for 2018 and beyond.

Thanks, Tom. So again, the fourth quarter story goes much like the year. Strong organic sales growth, a ton of share gains. Really excited about that. Extremely excited about these multiyear contractual wins that we've had and it's across all segments of the business.

The acquisition of DRT, again, really excited about that. Again, it brings us a drug delivery capability that really helps to round out the portfolio. And so our life sciences business is really starting to come together from a portfolio perspective and we're very excited about it.

And again, we repaid $8 million in debt in the fourth quarter and cash was as expected. This -- sort of no surprises there.

Let's move over to guidance. So when you get the first quarter guidances, just jump straight into the guidance. It's $164 million to $169 million on the top line. So good solid middle -- mid-single-digit growth, as we move into the first quarter of the year.

You see margin start to return to the kind of normal range, so 11% to 11.5% as the investments that we're making start to taper off. We're still making investments, right? So in the first quarter, we still have margin pressure that is directly related to the investments, but we'll continue to prudently manage that as we go through the year.

Adjusted EBITDA, $28 million to $30 million. Again, we're maintaining the incremental -- the appropriate incremental on our growth. As expected, we focus a lot on flex productivity and making sure we drop through the appropriate incrementals. And so, that holds. Adjusted diluted EPS, $0.32 to $0.36, again, and flex is holding.

As we move over to full year. On the top line, we're looking at somewhere between $40 million and $70 million worth of growth. And so, we're saying $660 million to $690 million at this point. And we have -- and we're experiencing sales growth across the entire portfolio.

Operating margins of 11.5% to 12%, in part, because the spending tapers off second half of the year and some of these programs start to launch into production quantities the second half of the year. And additionally, the infrastructure issue will be abated, no later than the end of third quarter. So put all that together, I think margins start to come back even stronger than they were previously.

Adjusted EBITDA, $116 million to $123 million; adjusted EPS, $1.30 to $1.50. CapEx is $40 million to $47 million. We -- again, we continue to invest in the enterprise and for the long-term sustainability and strong long-term growth programs. So CapEx between $40 million and $47 million. Free cash between $25 million and $33 million, which is in line with the strategic plan. So there's the guidance.

With that, I'll just go ahead and have the operator open the line for questioning, and we can talk through anything you like.

(Operator Instructions) And we'll take our first question from Charley Brady with SunTrust Robinson Humphrey.

Can you -- you touched on a little bit about the margin impact from the investments that are happening. I wonder if you could maybe quantify that a little bit more on a margin impact, particularly in Q1. And then I guess for the full year as well. And then also, as these programs ramp up, can you give us some sense of -- from a modeling perspective, kind of the ramp of the top line growth rate as we move through the year, particularly in 2H?

Yes. Okay. So I'm just trying to think of -- so let me give you a sense of on when these things hit -- they hit the top and bottom. We will start on roughly 30% of those programs. We'll be shipping in production quantities in the second half of the year, right? So the -- when you think about the margin expectations and how you model that, all these programs have been -- have come into the enterprise at a margin rate that is better than the average margin rate of the enterprise. So I won't tell you how much more, but certainly better than our average margin rate. And for the most part, $45 million to $50 million of it has come in with a much lower capital intensity rate than the average of the enterprise, right? So that will manifest itself as well, okay?

With respect to the continued investment, I would tell you that I think we will have -- and again, this is assuming we have a steady state. We will have an overhang on margins for the better part of the first half. I think we abate the spending somewhere around the middle of the year under the assumption that we don't win yet another big program that will require us to spend, right? So we have a -- we certainly have a margin target that we are going after and we want to manage the business to maintain the margin appropriately. But at the end of the day, the long-term growth and sustainability of the business is always top of mind. So I think it's fair to say, kind of that 11% to 12% range is going to be where we are. And if we get the opportunity to invest even more and hold on to that 11% to 12% range, we're probably going to do it.

And you're speaking for 2018 when you say the 11% to 12% range. Correct?

I am. Yes. Correct.

Okay. So I know you don't want to give '19 guidance, clearly. But I'm just trying to frame this. It would be helpful, I think, for folks to frame it. Because we're spending a good amount of money to get these programs up. We're spending for the growth that's going to come. Can you quantify in any sort of way -- let's assume you don't win any more program wins. Unlikely, but for the assumption purposes, let's do that. And so the spending abates, we go into '19. We don't have the level of spending, but we have all these programs ramping at a higher margin level than the company average today. I guess, I'm trying to get a sense of what the potential margin lift would be in that kind of scenario, with the understanding that you're probably going to get program wins and still have to invest. But just to isolate it a little bit to give people a sense of where's the upside from here relative from today, because we're paying for it kind of early and getting it late?

Okay. So round numbers, and again, using your scenario, right, the world is sort of stagnant, stable and predictable. It would be roughly between 2 and 3 points, the way to think about it. If nothing else happened, everything stays the same, we didn't do any more investing and we rolled into '19 with these mature programs, it would be between 2 and 3 points. A point -- a little over a point would be associated with the abatement of the SG&A issue and the other 2 would be associated with the investment. So we would be having a -- somewhere around -- let's call it 14% to 16% operating margin kind of discussion for the corporation.

That's really helpful. One more for me. I'll get back in the queue. We've got a lot of discussion about material cost inflation with potential tariffs. Can you just comment maybe what the impact would be and how that looks as COGS, and I guess still fluid? But to give us a sense of potential impact and an opportunity to offset that.

Okay. So let me start by saying that we -- we're probably not smart enough to come up with what the appropriate impact, if any there will be, simply because I don't think we have enough information to do the analysis to look at that. Because keep in mind, we don't know, if this is going to be a tariff that's going to affect (inaudible) and steel. Is it going -- we buy steel from 8 countries in the world. And so today, we don't know how that is going to affect us. But with that said, I've told you over and over, we have material pass-through contracts. So the majority of it for sure will be passed through to our customers. So immediate impact for us will be a timing function of how long does it take because we have some material pass-through contracts that we can pass through in 30 days, we have some that we have to wait till the quarter. So let's assume worst-case scenario, we will pass this through in 90 days. And we'll begin to abate this in 90 days. That is invariable -- invariably what's going to happen if this takes place. And in fact, it is as blanket -- as blanket as it said -- so far being discussed. Now here's what you got to keep in mind. When you start talking about abatement for us, one of the reasons that we continue to have smaller plants located around the world is to have -- to be local for local. And so, this is going to hit our customers. And invariably, what's going to happen is, are customers going to say, "I don't want to take the hit in North America if you could make the product somewhere else in the world." And so we're going to say, "Absolutely. If you could" -- we're not going to lose the product. So if need be, we'll make -- we'll move the product from one factory that's getting inordinately hit as a result of the tariff to the Polish facility, which -- and we'll buy European steel. We'll make it in Poland, we'll make it in France, and we'll ship it -- in Poland, we'll ship it in France. And so we'll move to a more localized strategy to help our customers abate the issue, or maybe most notably, make sure our customers don't look somewhere else to try and abate the problem. So we have that in hand that we would do. I mean, if need be, we would pick up a line and move it to a factory somewhere else in order to help our customers do this. Because these can be for our customers' really big numbers.

And we'll take our next question from Brian Colley with Stephens.

So just wanted to clarify one thing on the new program wins. So that's -- that $130 million, that's an annual run rate. Correct?

Yes.

Okay. So could you just talk about your revenue and operating margin expectations by segment for this year? And kind of what the major drivers are for each?

When you say by segment, you're talking about in the 2018 construct?

Yes.

Or -- okay. All right. Yes. So -- yes. I can certainly give you [prospect]. Oh, okay. Okay. So recognize that in January, we announced that we have gone away from that type of segment reporting and we've moved to power solutions, mobile solutions, life sciences. So when you think about '18, our life sciences business will be kind of a 16% to 18% operating margin type of business. Let's call it round numbers, $160 million to $180 million (inaudible) business, right, round numbers.

Our mobile solutions business all in, including the JVs and everything else, is somewhere around $400 million. Net of the JV, it will be 3-and-change, I can't give you an exact number right now, but it'll be 3-and-change. And it would be operating somewhere in the, let's call it, 11% to 12.5% operating margin base. Our power solutions business, which has our aerospace and our -- and our electrical business in it will be -- let's call it, $120 million, $130 million kind of top line space. The electrical side is -- well, blended margins will be, let's call it, 13%, simply because of continued investments that will certainly happen on the aerospace side of that. We'll keep the aerospace margin down between 10% and 11%. And -- but the electrical margins will be somewhere between, probably between 14%, 15%. That's how the enterprise high level stacks up, in those ranges going forward. I don't have it for '18 in a PEP/APC format because we've changed to the different reporting segments. I can -- if you want to take it off-line, we may be able to sort of backtrack that for you.

No. No. That was perfect. And those numbers you're referring to were for '18, correct?

Yes.

Okay. And secondly, just wondering if you could give an update on how the acquisition search is progressing? And how the pipeline has evolved over the past, call it, 4 months? And has there been any change to your expectation on the timeline, getting something done?

Yes. I will tell you, I think the -- we're just as bullish as we were 4 months ago. We are continuing to do our work. We are extremely confident that we will execute on our strategic plan as we've been saying. There isn't anything that has caused us -- or given us any pause in the execution of our strategic plan relative to acquisition. And -- I mean, I've been really candid about it. Our focus is on the life science space, right? Not that we won't acquire anywhere else, but we're going heavy organic in mobile solutions and in power solutions, and we're going both heavy organic and heavy acquisition in life sciences. That's why you saw DRT. That's why you saw Bridgemedica. And the pipeline is heavily weighted and heavily prioritized towards life sciences.

Got it. That's helpful. And then lastly, just wanted to move back to the program wins you discussed. So in the last conference call, you talked about some program wins. And I just wanted to clarify, the ones you're talking about today, are those incremental to what you spoke about last quarter? And requiring incremental investment from that -- from what you were expecting last quarter, any discussion around that would be helpful.

Yes. That's correct. This is the -- the $130 million is an incremental discussion than what we would have in last quarter. The only part of the discussion that I will tell you, when I talked about increasing the capacity in the factory, last quarter we talked about the work we had to do in France, which we've started. And if you recall earlier, today, I said our Polish facility. So our entire European footprint now is getting larger. So the short answer is yes, these are incremental.

And we'll take our next question from Daniel Moore with CJS Securities.

Wanted to just give you a second or two maybe -- I know it's smaller, but talk a little bit about Bridgemedica product line, where that fits in. And your expectations for margins and growth as we look forward.

Sure. That would be great. So Bridgemedica is based in Mansfield, Massachusetts. And candidly, this -- the biggest strategic value that Bridgemedica brought to us is engineering. They are an engineering services organization. So a lot of design, a lot of codesign work and what falls out of that is production work. So the way to think about the organization was they were selling mostly services, and oh, by the way, making med devices, sort of by accident, because the customers were asking them to do it because they provided such good services. So Bridgemedica bolts onto the front-end of our life sciences business and becomes our heavy OEM design piece of the equation, right? We've talked about building more and more of our own intellectual property that we sell directly into the customers and having the engineering capability to do that. So there's 2 ways to do that. We went and hired 35 engineers and figure this out or we could have bought an engineering services company. So we bought an engineering services company that was already profitable in services and in making products, right? We'll take the making products part and put them in the appropriate factories within the enterprise and allow them to be the heavy services organization.

And again, because we sell the engineering services as well as making the products. So that's really the exciting part of Bridgemedica. It brings the engineering capability that both we and our customers need to continue to penetrate the space. So candidly, there's a space that if -- when we get to this sort of $300 million plus mark in life sciences, the game moves to a -- to an organic gain. And we have to have the regulatory capacity and the engineering capacity to keep driving double-digit organic growth. And so, that's part of the construct that Bridgemedica brings to it. The organization itself on a margin expectation, I mean, it's a 19-ish percent EBITDA kind of business. And I think for the foreseeable future, if you carve that out, it's going to continue to be kind of 19% to 21%, but it's going to get deconstructed. The manufacturing part's going to go -- go back into the enterprise as part of synergy and the engineering part is going to go into the engineering construct. So it'll probably get lost a little bit, but it's always going to be, let's call it -- it's going to be a low 20s kind of EBITDA business.

Helpful. Appreciate it. Now switching gears a little. Obviously, making the appropriate investments for growth right now. Just in terms of the trade-off between financial leverage and delevering and growth, how long are you -- how comfortable are you operating at 4x plus? And as we think about '19 and beyond, when do you think about letting a little bit more drop to the bottom line and delevering a little bit quicker?

Yes. So there's a lot of moving pieces in that question. I will tell you that, that I think if we -- and we're very confident in our plans around growth and replacing that EBITDA that we carved out as a result of the PBC divestiture on a much higher profitability kind of business or businesses. You know the math tells us that if we are remotely successful in doing that, we will immediately bring leverage down, right? If we bring another $40 million of EBITDA back into the business on a lower top line, right, and a higher margin, we grow our way into handling the leverage issue. I don't think we will be at this leverage point much beyond the middle of the year, because if we're unable to execute candidly, then we'll pay down the debt. So it's going to come down one way or the other, right? We're still holding a couple hundred -- almost $300 million on the balance sheet for redeployment. We will certainly know by the middle of the year. We will either be a bigger organization and more profitable organization, which will handle the leverage; or we'll be the same size and we'll pay down the debt, which will handle the leverage. So I think by the end of the second half, it's -- the leverage issue goes away.

Got it. And then lastly, just a couple of housekeepings. I know your -- the tax rate is still in flux. What's the range that's embedded in your Q1 and fiscal '18 guide? And if you have it, Tom, what does your guidance translate to on a GAAP basis for EPS?

Yes. There's a table in the back where we do the -- where you can find the GAAP number. I don't (inaudible) top of my head but the...

Okay. I'll get to that. No problem.

The tax rate's kind of in the mid-20s for the year 2018. Because we are getting some benefit from the lower tax rate, but then we have tax -- taxes around the globe that are higher rates.

And we'll take our next question from Rob Brown with Lake Street Capital Markets.

On the incremental revenue, just wanted to get a sense of you said your win rate was higher than you expected. Maybe a sense on sort of why you're winning? What dynamics are going on to allow you to win and does this sort of change your organic growth thinking going forward?

So -- yes. It's a little bit different by geography. Certainly, our wins in Europe has probably more to do with our competitors stumbling than anything else. So we've been the benefactor of those stumbles, if you will. It's kind of an interesting scenario, we had a competitor that was moving into North America. I think they were -- to kind of scratch at our market. I think they were so laser focused on doing that, that they forgot to pay attention to their own back door. They stumbled on product, created an issue, and we won 2 programs as a result of that stumbling.

In South America, we have had a concerted effort. The whole time that the market was down, we were working to diversify our business because we were heavy Fiat house and we wanted to get TRW, Delphi and some of the others. And we wanted to also increase the range of the products we were making. We put a lot of work in when that market was bleeding and a lot of folks were leaving. And now we're reaping the benefits of that because all -- there's a huge amount of investment going on in Brazil. The economy is strong. And so, I would categorize it as the customers are remembering who their friends were during bad times. And so, we're winning in Latin America, predominantly for that. Asia, I will tell you that both our [Wuxi] and our JV are really doing well. Fundamentally in Asia, we're just winning more programs with this -- with our same customers, because our customer is winning. So I'd love to say, we did something special in Asia. We did. We took really good care of Bosch and those guys who are our big customers in Asia. And so, as they win and take share, we come along for the ride. When you're talking about aerospace, and let me be clear about this, on the aerospace side, we are winning much more space than aero, right? So it is probably 70/30 space versus aero. So we are -- we have focused heavily on space products. We have focused heavily on unmanned military products and some interesting technologies that are not typically top of mind for the average person walking around. It is incredibly difficult technology, incredibly high precision. And so the competitive space is very small. And the fact that we can bring engineering and complete control of the supply chain to the customer is unequivocally why we're winning. We walk in the door and we present effectively a better product. And we do the engineering and we manage the supply chain, and we do the Delta qual and we pay for it. And we say, here is everything locked up. All the regulatory is done. Everything is done and we present it to the customer. They don't have to do anything but start throwing purchase orders over the wall at us, and they love the model. And so, that's why we're winning in that space. In the electrical business, we are heavily into sensors, right? The more this whole IoT effort continues to build out more and more, our partner, our customer who is a major sensor manufacturer is coming back to us for more, and more and more sensor activity. And so that's much appreciated. On the clad metals side, as long as we are seeing strong movement in the residential sector and strong movement in the non-res construction, we're there, right? We're doing very well. A lot of the new programs we won has been on the smart meter side of the house. And as you well know, we have at least one customer that we make the entire back end of the smart meter. So we make basically everything but the computer part of it. And so, we've grown in that space. I think it's 13% or something, 13% to 15%. So we are at one of those times where you're careful not to celebrate too much, but everything is going in the right direction, right?

Okay. Great. That was a good overview. And then just maybe stepping back, what's the -- what's sort of the organic growth rate you can get to without sort of these excess investments? And then, what organic growth rate kind of are you at with these excess investments?

So on a steady-state, we think our organic growth rate -- if you normalize everything, and that's always a tough statement to make. But let's assume we can actually do that. We are mid-to-high single-digit. On a -- I'll use your terminology, excess investment. I'm not sure that's a fair terminology. It -- we have heavily capital intense businesses that just naturally require big chunks of upfront spending that gets amortized over 5 to 10 years worth of production cycles. But using your terminology, if we increase that by somewhere between 2 and 3 points with -- we increase spending. Now inevitably, what's going to happen is, if our financial projections hold as we think they will, because of the scale of the enterprise that we will achieve around -- in and around the end of 2018, the investment -- how the investment flows through the enterprise will have a much lower impact on margin than it does today, right? Because part of what this is, is scale, right? We're still fighting size. So every time we make an investment, we just -- we're hitting someplace pretty hard, right? Every time we get a little bit bigger, we get a little bit more profitable. This problem gets a little smaller. And so when we are, and we think we'll be of a scale towards the end of the year, that this will become less and less of an issue. And certainly, once we hit our strategic plan, one target of getting over the billion-dollar hump, this issue will probably completely abate itself just because of scale.

And we'll take our next question from Steve Barger with KeyBanc Capital Markets.

This is actually Ken Newman on for Steve. Thanks for taking my question. I wanted to go back to the program wins -- wanted to go back to the program wins when you were first ramping up the medical side of that -- your medical business, you had a little bit of issues with trying to get some FDA approvals. So curious if you could just talk about how much of these new medical wins have to go through FDA approval. Maybe just help us frame up how much risk is there to a push out in shipment?

Yes. So the short answer is, they all have to go through FDA approval. It's just the nature of where we're playing and how we're playing. One of the things that we've done, we've talked a lot about this carrying an infrastructure piece of the equation that we spread through the business. One of the things that we have done, and are doing, is building our regulatory capacity within the enterprise. And we're really close to a point where we have a very, very robust core of regulatory affairs people, right? The significance of that group is to appropriately shepherd -- and I say this from a marketing perspective, appropriately shepherd the parts through this -- the regulatory activities, most notably, FDA, UL, all of those pieces. The reality of it is, the more we could do, the more connected we are, the faster we can get these things moved through the process. So that really is the business benefit of having that group there. Secondly, one of the things we're doing with that group is we're taking it almost entirely out of the customers hands, so we have control of it, right? So what we think we've done with that is, we've put all the guardrails around it that we can to minimize the risk. With all that said, the FDA, we can normally get something through the FDA between 3 and 6 months. Does the opportunity exist for them to say, "Hey. Stop. It's going to be 8 months?" That absolutely happens. We don't anticipate any of that with any of these programs. Because again, we're taking a really aggressive partnering posture with the customer and the FDA to try and get in front of anything that could derail the timing in any significant way.

That's helpful. And then I guess, switching gears. I'm going to ask the M&A pipeline question a little differently. Obviously, you're focusing more on the life sciences part of your business. Maybe can you kind of help frame in the general revenue range size of these deals, what are you seeing in terms of multiples? Trying to really figure out what's the upside from M&A to the guidance as we look at it today.

Yes. So I will tell you relative to the multiples, I probably sound like a broken record. But we continue to say that we'll run up to 10x or 11x for a big deal that solves a lot of issues in the enterprise. It'll be kind of a forward-looking -- it could be a 10x or 11x in the back. But it would be a backward looking probably 6x or 7x by the time we're done with synergies. Our normal -- that's for a big deal. Our normal operating range is somewhere between 7x and 8x, and kind of 4x and 5x backward looking. So that inevitably is what DRT is going to be. Inevitably, that's what Bridgemedica is going to be. And so, I don't necessarily see anything in the construct that's going to have us miraculously change our posture relative to any of those things. As far as sizes of deals in the enterprise -- in the backlog. Certainly, we have deals ranging from better than $100 million in revenue to as little as $7 million in revenue. It's all about strategic fit. What problems are we trying to solve? What markets are we trying to penetrate? It's always, and always will be about the construct of the strategic plan. And so, you know we want to play in drug delivery. We want to play in endo, we want to play in ortho. That's our -- that's where we've targeted. And so it's safe to assume that any, and everything for life sciences in the pipeline has something to do with those 3 areas. And we will execute them in the fashion of forward-looking 8x, 9x. Backward looking, sort of 4x, 5x. That is probably the best I can say.

And we'll take our next question from Stanley Elliott with Stifel.

Rich, you mentioned on some of the FDA work that you guys are taking on more risk in trying to help with the regulatory process. Are your competitors doing the same thing? Or do you see this as kind of a differentiator for you guys?

This is absolutely a differentiator for us. I will tell you sometimes -- when you look at some of the wins that we've had, I am absolutely convinced that what we actually sold was the regulatory affair more than the design and the -- or at least as much as the design and the production work. It is a major monster headache for our customers. And they have to do it for their lead products. And so, if they can find a competent partner to handle it for the sub-products like we're doing now, it -- the benefit to them is far beyond price, right? It's freeing up a ton of engineering and all those things. So for sure, it's a huge differentiator. Now I will tell you there are others out there that are certainly trying to do it. And some are fairly successful, right? And -- but it's not rampant. There's a handful of people that have sort of the scale and the engineering and regulatory wherewithal to be able to do it. But yes, there are others out there at least attempting it.

Perfect. And I hate to keep talking about kind of the market growth piece. But at the analyst days, you guys have always been talking about high single-digit growth. So what we are saying here is that with these recent contract wins, that it's in -- on top of high single-digit organic growth. So effectively, you're looking at something closer to kind of low teens sort of organic?

I don't know that we're getting the low teens. I would -- I think it would be fair to say, we're in the double -- we're in the low double-digits. I'm not sure that that's -- well, certainly not in '18. '19 might be a different story. But yes, I mean it's low -- yes. I would say low -- low double-digits is probably the way to think about it.

That's right. And then, kind of along the same lines, maybe you guys have talked a lot about kind of a 35% sort of an incremental on pos -- or on additional volume growth. And we have kind of the investments upfront. Is that implying that the incrementals on a go-forward basis are actually going to be higher than 35%? Or is that 35% blended and inclusive of this new level of investment on a go-forward basis?

No. I think it's fair to say that -- I'll call it post the organization sort of settling down, right? It takes a minute to get everything in and lines running properly. And on the other side of these investments, I think it's fair to say that the blended incremental of the organization will increase.

Perfect. And then last one for me in terms of kind of free cash flow. Perfect. And then lastly, kind of looking at kind of free cash flow, is there any reason to assume the working capital would not end up being kind of more of a use in the coming years, especially with some of these programs ramping?

I think that -- what we have is lumpy. So we will have usage early in the year towards the middle of the year. But I think net-net, it will not -- I don't think it will be -- the plan isn't usage for the year, even with the investments because we start to get the sales back second half.

Yes. And (inaudible) always improvement within inventory management and days inventory outstanding. So that's really where you'll get the offset for the temporary upfront investment (inaudible).

It appears we have no further question at this time.

Okay. Well, with that I want to thank everyone for joining us today and we will bring this conference call to a close. Have a -- for those of you in the Northeast, be safe and stay inside.

That concludes today's call. Thank you for your participation. You may now disconnect.