Curtiss-Wright Corporation Q4 2007 Earnings Call Transcript

Curtiss-Wright Corporation (NYSE:CW)

Q4 2007 Earnings Call

February 12, 2008 10:00 am ET

Executives

Martin R. Benante - Chairman and Chief Executive Officer

Glenn E. Tynan - Vice President, Chief Financial Officer

Analysts

Myles Walton - Oppenheimer

Eric Hugel - Stephens Inc.

Chris Donaghey - SunTrust

Karl Oehlschlaeger - Banc of America

Operator

Welcome to the Curtiss-Wright Corporation’s year end 2007 earnings conference call. As a reminder, today’s call is being recorded and will be hosted by Martin R. Benante, Chairman and CEO of Curtiss-Wright; and Glenn E. Tynan, Vice President and CFO. This call will be in a listen-only mode while the company presents its recent financial results and then the company will take questions. At this time, I’d like to turn the conference over to Mr. Martin Benante. Please go ahead, sir.

Martin R. Benante

Thank you and good morning, everyone. Welcome to our 2007 year end earnings conference call. Joining me today is Mr. Glenn Tynan, our CFO, who will begin our forum today.

Glenn E. Tynan

Thank you, Marty. If you do not have a copy of the earnings release which was issued yesterday, please call Ms. Debra [Torrey] at 973-597-4712 and she will be happy to email or fax a copy to you and add you to the Curtiss-Wright distribution list for all future press releases.

Before we begin, please note that we will make certain forward-looking statements on today’s call, such as statements about the company’s confidence and strategies or expectations about the results of operations, future contracts or market opportunities. While we believe that our operating plans are based on reasonable assumptions, we cannot guarantee that we will meet any expectations that might arise from these forward-looking statements or their underlying assumptions.

Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Security Reform Act of 1995 and involve risks and uncertainties that may produce results or achievements that are materially different from those expressed or implied during this discussion. Such risks and uncertainties include those factors that generally affect the business of aerospace, defense, electronics, marine and industrial companies.

Please refer to our SEC filings under the Securities and Exchange Act of 1934 as amended for a more thorough discussion of risks and uncertainties as well as further information relating to our business. For our agenda today, I will provide an overview of Curtiss-Wright’s fourth quarter 2007 operating performance and then Marty will discuss our strategic markets and 2008 outlook. After the formal remarks, Marty will open the call for questions.

Curtiss-Wright had consolidated sales of $498 million during the fourth quarter of 2007, an increase of 32% over the fourth quarter of 2006, including strong organic growth of 14%. Our organic sales growth was driven by double-digit growth in each of our three segments led by our flow control segment at 15% followed by motion control and metal treatment segments at 13% each.

In our flow control segment, sales of $255 million resulted from strong organic growth of 15% and $61 million of incremental revenue from our 2007 acquisitions of Scientech, Valve Systems and Benshaw. We experienced strong demand for our oil and gas products; in particular, robust demand for our coke de-heading systems, which fueled 45% organic growth in this market during the quarter.

We also had solid growth in the power generation market, primarily for the maintenance of operating reactors which was boosted by the addition of new partners, further solidifying our position as one of the premier global distributors of advanced nuclear products.

The strong commercial markets were partially offset by lower production work for the U.S. Navy’s traditional submarine and aircraft carrier programs due to the timing of their procurement cycles, partially offset by higher development work on the DDG 1000 and the next generation aircraft carrier CVN-78 program and the ramp up of the EMALS program.

In our motion control segment, sales of $178 million increased 17% due to 13% organic growth and $6 million of incremental sales from our 2007 acquisitions of IMC Magnetics. Organic sales growth was driven by demand from the defense markets for our embedded computing products and marine landing systems; higher sales of products for helicopters specifically Sikorsky and the Black Hawk; as well as the increased sales of our sensors and controller products for the general industrial markets. Motion control sales were positively impacted by $2.3 million of foreign currency translation in the fourth quarter.

Fourth quarter sales in our metal treatment segment of $65 million increased 13% from the prior year, all of which was organic. Sales growth was driven by higher global [inaudible] revenues in both the commercial and defense aerospace market as well as stronger demand in the general industrial markets, in particular the European automotive market where we continue to gain market share through the addition of new programs. Sales of this segment were favorably impacted by foreign currency translation of $2.5 million in the fourth quarter.

Our consolidated operating income of $61 million in the fourth quarter of 2007 increased 34% over the prior period, including strong organic growth of 22%. The organic growth was driven primarily by the flow control segment at 23% and metal treatment segment at 15%. Both segments benefited from stronger volumes and the flow control segment also achieved significant operating efficiency improvements in 2007.

Organic operating income for our motion control segment was down slightly from the prior year, mainly due to the impact of unfavorable foreign currency translation, higher purchase accounting adjustments and strategic investments on competitive embedded computing development contracts which we anticipate will provide us entry into new defense programs and markets in the future.

Our consolidate operating margin of 12.3% increased 20 basis points in the fourth quarter as compared to the prior year. A $3.4 million decrease in the non-segment expense was offset by increased amortization from the 2007 acquisitions, increased levels of development work and unfavorable foreign currency translation, all of which had an unfavorable impact on segment margins.

Flow control’s operating income increased 47% over the prior year, approximately half of which was organic. Operating margins for the fourth quarter was 13.6%, 50 basis points lower than the prior year. Flow control made three acquisitions in 2007, which will be a drag on margins in the first 12 months of ownership. The acquisitions resulted in an increase in purchase accounting amortization of $3.5 million, which was higher than anticipated and negatively impacted this segment’s operating margin in the fourth quarter.

In addition, this segment continues to have a high level of investments in development programs such as the AP-1000, the DDG-1000, the CVN-78, EMALS and the advanced [resting] gear which will negatively impact margins in the short term, but should lead to healthy growth and increased profitability in the future.

In our motion control segment, fourth quarter operating income of $21 million was 3% lower than the prior year period, resulting in an overall margin of 11.9% versus 14.3% in the prior year. For the full year, motion control’s margin is 20 basis points higher than the prior year. But in the fourth quarter this segment made strategic investments on certain new development contracts within our embedded computing business of approximately $3.4 million, which we anticipate will enable us to gain entry into new defense programs which are expected to have long life cycles. In addition, this segment continues to be impacted by unfavorable foreign currency translation which totaled 2.7 in the fourth quarter alone.

Our metal treatment segment increased operating income by 15% in the fourth quarter, all of which was organic, primarily as a result of the higher volumes as well as a small boost from favorable foreign currency translation of $700,000.

Consolidated net earnings of $38 million or $0.85 per diluted share in the fourth quarter equate to a healthy 43% growth over the prior year. We had substantially higher interest expense in the fourth quarter of 2007 due to the four acquisitions we completed this year. Net earnings benefited from a lower effective tax rate in the fourth quarter due primarily to a change in the Canadian tax law that was enacted in late December.

New orders received in 2007 were $1.9 billion, up 40% year over year in total of which 30% was organic. We ended the year with a backlog of $1.3 billion, up 49% from 2006 of which 35% was organic. Our new orders yielded a strong book-to-bill ratio of 1.17 with all three segments above one.

Now I will review our liquidity and financial position. In 2007, our free cash flow, defined as cash flow from operations less capital expenditures, was $85 million for the year. Our cash flow from operations was slightly below the prior year but we had higher capital expenditures of approximately $16 million related primarily to the new manufacturing facility in Cheswick and our 2007 acquisition.

Depreciation and amortization was approximately $62 million in 2007 and capital expenditures were approximately $56 million. Our balance sheet remains strong with $67 million in cash, working capital of $359 million and total debt outstanding of $512 million for a net debt-to-book capitalization of 33%.

I will now turn the call over to Marty to discuss our strategic market performance and our full-year 2008 guidance.

Martin R. Benante

Thank you, Glenn. 2007 was another terrific year for Curtiss-Wright measured by many achievements. We posted another record-breaking year of growth and higher profitability while successfully executing our strategic growth plans. Chief among the success factors is our strategic diversification and technically advanced products, which produce strong results in each of our core markets.

Our defense business provided solid organic growth of 6% and our commercial markets achieved nearly 20% organic growth. The success of our oil and gas technologies continue to hold the spotlight with 45% organic growth and our commercial aerospace and general and industrial markets both provided a healthy 13% organic growth. Power generation generated solid organic growth due to the addition of new partners and new construction projects that are still in the early stages.

Complementing our organic growth, our disciplined acquisition program contributed heavily this year with the addition of four new businesses. In addition, we’ve made substantial investments to our ongoing operations to prepare for the roll-out of new programs such as the AP-1000, subsea pumping system, high speed motors, CVN-78 EMALS, Boeing-787 and 747-8 and a number of future combat systems program.

Since 2000, the beginning of the last economic downturn, we have demonstrated our ability to generate superior organic growth while successfully reinvesting in both our advanced technologies and select acquisition in order to enhance our portfolio and market diversification.

In 2007 we successfully executed on our strategy, producing strong profitable growth and long-term shareholder value, which is evidenced by Curtiss-Wright’s five-year compounded annual growth rate of shareholder value of 27%. Our dedication and success is evidenced in our track record, and combined with our robust backlog provides us the opportunity for solid growth in each of our segments in 2008 and beyond.

Despite signals of softness in the U.S. economy and challenging foreign exchange markets, we anticipate another year of double-digit growth in sales, operating income and earnings in 2008 due to the continued strong demand for our superior technologies in the commercial market, which delivers profound lifecycle benefit to our customers and are key positions of long-term defense programs.

We believe our markets are robust and global demand for our advanced technology is solid. To that end, we are expanding our global presence considerably. With the opening of three new metal treatment facilities in Europe in 2007 in Spain, Sweden and the UK; and three more expansions in 2008 in Austria, France and Germany.

In motion control, we look forward to fully utilizing our newly-acquired facility in the Egalase, Mexico for low-cost manufacturing. In addition, we are expanding our presence in Asia with two facilities for our flow control segment. and a state-of-the-art metal treatment facility in 2008 in China.

To conclude our remarks today, I would like to review our guidance for full year 2008. We expect revenues in the range of $1.83 billion to $1.85 billion, which equates to 15% to 16% top line growth. Operating income in the range of $215 million to $221 million or 20% to 24% growth and fully diluted earnings per share in a range of $2.55 and $2.65, which equates to 15% to 20% growth excluding the non-recurring tax benefit we recorded in 2007.

On a consolidated basis, we are targeting a margin improvement of between 25 to 75 basis points. We are projecting free cash flow for 2008 between $70 million and $80 million, which is essentially the same as 2007 despite the sharp rise in capital expenditures, including $40 million for our facility expansion in Cheswick, Pennsylvania and $8 million for our new facility in China for our metal treatment segment.

At this time I’d like to open up the conference call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Myles Walton - Oppenheimer.

Myles Walton - Oppenheimer

I was wondering if I could probe the outlook a little bit first and just make sure I have some numbers right. The acquired businesses that you picked up in ‘07, it looks like they would add maybe $120 million of incremental revenue in ’08; is that about right?

Glenn E. Tynan

I’m not sure of the exact number, Myles, off the top of my head.

Myles Walton - Oppenheimer

And then there is another $60 million from the nuclear side that is coming online? The bottom line of the question though is that if you take those two things into account, it looks like your implied sales guidance is only 5% organic in the rest of your business, which seems pretty conservative given the bookings you had year-to-date and I just wondered if there are any puts and takes there that I’m missing?

Glenn E. Tynan

No, Myles, as a matter of fact the contribution from our acquisitions is about $130 million. We expect 10% organic growth across the businesses. I think if you add up the numbers you would be mathematically astute in indicating that there is some upside potential.

Myles Walton - Oppenheimer

But, the incremental from the commercial nuclear is going to be about $60 million in ‘08?

Glenn E. Tynan

$50 million, yes.

Myles Walton - Oppenheimer

The next question on pension expense, the $8 million looks like it was running a little high. Was there a discount rate adjustment there? Is this a sustainable level? Will it come down from this level? If you can just comment on that Glenn?

Glenn E. Tynan

Sure, Myles. It’s actually not discount rates, the discount rate set in the fourth quarter last year pretty much was steady. It’s actually about $1 million of increase this year from adding new people, acquisitions, into our cash balance sheet and plan. Also we did make a couple assumptions changes, one is on the compensation increase and a bunch of demographic changes that all equated to another $1.2 million, $1.3 million that gets you up to the $8 million for this year. But those are the only two changes that really impacted it. Obviously, if the discount is different in the future it could affect us in ‘09, but that’s the way ‘08 was built.

Myles Walton - Oppenheimer

The other one was in the other income, obviously the forex seems to be [inaudible] a little bit. Is there anything that you can do in terms of hedging your structured transactions to avoid that or are these Canadian operations that continue to feel that pain? Where are the operations that you are feeling the most pressure?

Glenn E. Tynan

It’s mostly in our motion control segment and they have several operations in Canada that have U.S. dollar revenues and Canadian expenses. That has really been the big part. We do have a hedging program which we do offset. We were doing fine nine months of the year and then the fourth quarter went a little haywire and it was much more than we expected. It obviously impacted their margins in the fourth quarter as well as it exceeded what we were hedging.

So I mean generally speaking we were fine through the nine months.

Myles Walton - Oppenheimer

What flows through the other corporate in terms of forex?

Glenn E. Tynan

Corporate and other?

Myles Walton - Oppenheimer

Yes.

Glenn E. Tynan

Well on an ongoing basis most of the time it is pension and it’s usually about $2 million of various corporate expenses that flow through there; that’s on average what it is. If you look at the year to-date this year the big difference between last year and this year is last year we recorded a $6.5 million reserve that obviously we don’t have this year. Last year we had a little bit higher medical expenses that we don’t have this year. But generally speaking it’s around $10 million on average. We had a couple of aberrations.

Myles Walton - Oppenheimer

Marty, you commented on the navy timing being something that’s holding back a little bit. Can you comment on how those bookings are flowing and also it looks like the second sub will get some advanced procurement money in the budget and would that be revenue for you in ‘09 or would it be revenue in 2010?

Martin R. Benante

No, in ‘09. This year is probably the lowest as far as sales with the Navy. It actually decreases from last year to this year, and that’s one of the reasons why we have a lower organic growth in the military side, that Navy cycle. We are going to be getting the multi-year procurement, it looks like it will be seven subs in February; they will start two submarines a year, but they will start in ‘09.

Where we did have very nice growth in the military has been in our embedded computing. Again we saw a very nice increase this year in our embedded computing sales on ground vehicles.

Operator

Your next question comes from Eric Hugel - Stephens Inc.

Eric Hugel - Stephens Inc.

You talked about that investment in the embedded computer systems – it was kind of large, I mean by your margins ex that would have been around 14%, much more in line with where I think they were comparably in the past.

Can you scope out how long you’re going to be investing money? Is this a one-time quarter, is this ongoing that we’re going to see margin rates being impacted? Can you scope out the size and opportunity of what you’re going after? Are you on it now? Are you sort of investing money now because you’re hoping to be selected so there is some risk there?

Martin R. Benante

Well, we have not been selected yet. We’ve invested with the hope of being selected. The bulk of it is in ‘07 but there will be a little bit in ‘08 as well. That is in four major programs, none of which I can really talk about in detail because it’s in that stage.

But I will tell you, the combined potential for these four programs that we’re investing in they are very strategic. When we have the information, obviously we’ll make it public to you, but the combined revenue from these four programs is about $180 million.

Eric Hugel - Stephens Inc.

Over?

Martin R. Benante

Over the life, over the next say on average five to ten years. I mean they are long cycle programs and big revenue potential and it’s very strategic for us. There will be about another $1 million impact in ‘08, we expect, and that should be it.

Eric Hugel - Stephens Inc.

I would assume in the first quarter?

Martin R. Benante

I don’t know the timing, probably in the first half; it could be throughout the year.

Glenn E. Tynan

Mostly in the first quarter.

Martin R. Benante

I don’t know that for sure.

Eric Hugel - Stephens Inc.

Can you talk about this Canadian tax, was that all of the reason why you had this double tax rate in the quarter, that was a catch up?

Glenn E. Tynan

That was the big thing. On December 20th, somewhere right before the holidays the Canadians dropped their tax rate and actually the biggest chunk of the thing was about $2.7 million was revaluing our deferred taxes for our Canadian operations to the new rate. So, that was the big one-time impact.

The only other thing was we did have UK R&D tax credits. As you know, we had Canadian R&D tax credits in ‘06, but we embarked upon a study in ‘07 and that was about $1 million, those were the two big pieces.

Eric Hugel - Stephens Inc.

How are you treating in terms of your -- I guess you’re looking for 36%. What does that imply in terms of a U.S. R&D tax credits being passed or not?

Glenn E. Tynan

I think we’ve built into the rate probably status quo at this point. I don’t think we’ve built in that they’re going to eliminate the R&D credit at this point in our 36% rate.

Eric Hugel - Stephens Inc.

Can you go through the segments in terms of what you’re looking for in terms of sales and margins give us some visibility there?

Glenn E. Tynan

Sure. Flow control, sales of between $920 million and $925 million; motion control, $640 million to $650 million; and metal treatment around $275 million at the sales line.

For margins we have flow control at 10.7% to 11%, and I’m going to go back and talk to that for a moment. Motion control between 11% and 11.5% and Metal Treatment around 21%.

I do want to point out as we look at flow control again there are a couple of different things going on there. The magnitude of the acquisition they made in 2007 is probably about 100 basis points drag on their operating margin and as well the other big thing is it is the first full year of AP-1000, and I think as we had indicated back in our investor conference it’s about $50 million or so in sales below that 9% margin is what we told you. That obviously caused a drag on the margin as well.

So those are the two big things, big ticket items reflected in the margin projection.

Eric Hugel - Stephens Inc.

Can you talk about where things stand right now in terms of your progress on ramping up for the AP-1000 for the awards that you’ve gotten in China? Can you also address how we should think about it, I know Westinghouse has submitted a bid for three AP-1000 reactors in South Africa; I know a number of U.S. power producers have submitted their applications with the Nuclear Regulatory Commission.

I know Marty you had said that you expected -- this was back in maybe third quarter -- that you had expected orders to come through within the next 12 months. Do you still expect that? Can you give us a, how should we think about when somebody places an order for an AP-1000, how quickly does that translate into revenue for you guys?

Martin R. Benante

Well in the beginning of the cycle the AP-1000 obviously we received an order from China last year and you’ll see revenues this year. As the AP-1000 continues on in its sale, you will see a lot quicker from order to revenue because it will be an ongoing program. As far as all of the bids being submitted, when you look at the nuclear industry, obviously people talk a lot about energy as far as oil prices are concerned. But realistically the power requirements are a heck of a lot greater over the next so many years than the price of oil, the supply of oil. Right now, we are looking at receiving orders for the start up for a [inaudible]. We anticipate about $30 million in that area coming into our EPD for the pumps, fields and other items and that will be ongoing; the rest of our businesses will probably see almost an equal amount of money for that start-up.

Eric Hugel - Stephens Inc.

Into this year?

Martin R. Benante

Getting orders this year.

Eric Hugel - Stephens Inc.

Has that been built into your revenue projections that you are going to be getting another U.S. plant?

Martin R. Benante

Yes, somewhat.

Eric Hugel - Stephens Inc.

Okay.

Martin R. Benante

That’s a restart of the [inaudible] plant, that’s not a brand new one.

Eric Hugel - Stephens Inc.

That’s not an AP-1000?

Martin R. Benante

No, that’s not an AP-1000. As a matter of fact, China is also interested in four Westinghouse plants, which is generation 2 which is the former configuration. The need for power is so great that obviously, actually some of the older, safer reactors are actually being taken into account. I still, when you look at the AP-1000, we expect orders this year from outside of China.

Eric Hugel - Stephens Inc.

That will be U.S. or South Africa?

Martin R. Benante

That’s right.

Eric Hugel - Stephens Inc.

You are expecting one, or you are expecting multiple?

Martin R. Benante

Right now, we’ll go with one.

Operator

Your next question comes from Myles Walton - Oppenheimer.

Myles Walton - Oppenheimer

I was a little bit surprised by the flow control margins that you cited for ‘08 Glenn. I guess 10.7% to 11% is certainly higher than I was looking for. I guess that’s a good indicator, that the [inaudible capco] has run its course and you guys feel pretty comfortable there?

Martin R. Benante

Yes. That has done well. And again it does include the drag from significant acquisitions in that particular segment as well as the first full year of the AP-1000. So, without those it would be really good.

Myles Walton - Oppenheimer

Motion control, it looks like you’re implying there about 5% organic growth in that segment. I’m just curious of the puts and takes that are going on there and what in particular may be going a little slower than maybe the embedded computing is?

Martin R. Benante

Myles you are starting to uncover all the little chestnuts, you are on a roll today. We don’t really have a good answer for that question. We are seeing increased growth from Boeing as you know, our sensors are going up, and we also have good backlog and expect sales in embedded computing, so 5% might be a little conservative.

Myles Walton - Oppenheimer

Can you comment on what you are seeing on that program with respect to deliveries? I know it’s not certainly nowhere near a make or break business for you, but more from a standpoint of what you are seeing within the supply chain in terms of their acceptance of your deliveries and also if you can remind us of your shipped content there?

Martin R. Benante

Well, our shipped content has gone up a little bit. We are about 240, there is another contract that we have shook hands on an agreement but not yet announced. I expect and we expect that Boeing may have yet another slip. I mean if you look at Airbus’ problems with the large body, Boeing hasn’t made one for a while, our anticipation is that sale of that first aircraft will not be at the end of this year, probably into next year. So, we’ve conservatized our estimate associated with the 787.

Myles Walton - Oppenheimer

I think that’s a wise move. Glenn on the cash flow side of things, it looks like working capital would be about a use of $30 million in ‘08, is that about right?

Glenn E. Tynan

Working capital, that’s a good estimate, yes.

Myles Walton - Oppenheimer

How long do you think you would be in this kind of working capital, pretty heavy usage? Is it until 2009-2010 when the deliveries actually start to occur on the China nuclear side or is it further out than that even?

Glenn E. Tynan

Well, a lot of it is the build-up of inventory on long-term programs so it does coincide with the roll out of that. But fortunately we end up layering on new long-term programs on top of it. So, it seems to be fairly steady. On receivables, it’s not really collections for our customers; a lot of time, it’s unbilled on long-term programs, both of them kind of coincide. So we’ve seen ourselves in this kind of mode but for a good reason.

Myles Walton - Oppenheimer

Then on the other side of the free cash flow and the CapEx, I guess $90 million in ‘08, does that come down precipitously in ‘09?

Glenn E. Tynan

No, actually our guidance is $70 million to $80 million and what we’re trying to say is that would include cash flow from operation at $185 million to $190 million, a significant increase from last year.

Myles Walton - Oppenheimer

I was just referring to CapEx?

Glenn E. Tynan

The 150, that includes a big $40 million non-recurring I would say, the big sum of it, the tail off in ‘08 for the build out of the Cheswick facility in Pennsylvania.

Martin R. Benante

If we look at the remainder of the CapEx, Myles, $2.5 million is for our new program with Boeing where they will be using our laser to shape their 747-8 wing. We are also opening up a brand new plant in China that’s going to be about $8 million. It is going to be the fifth-largest facility we have. It is a combination of coatings, shot peening; we have a contract with Alcoa and we have a lot of our traditional shot peening and plating customers are now in China which gives us about the right time to start servicing the customers there.

We also have three new expansions for MIC, which is similar to what we did in 2007. We are expanding in Austria. We actually are seeing our auto sales which the automobile market is down but our market is actually going to be up this year at 6%. So we are seeing some very good European sales in the automotive area and also in coatings. We’re also going to be opening and expanding our plant in Munich, Germany and we’re also opening up a new facility in France for the A380 wing spars.

Myles Walton - Oppenheimer

On M&A, would you say 2008 is going to look more like ‘05 or ‘07?

Martin R. Benante

Myles, when you start to look at, people are seeing that the lending is starting to become tighter. Well, obviously that’s going to favor us. The financial buyers which have traditionally been highly deleveraged, if they are not going to be able to get the money to sustain their inventory of product of companies that they have, they are going to be looking to sell some. So, we think that 2008 should be a robust market for a company such as us.

Operator

Your next question comes from Chris Donaghey - SunTrust.

Chris Donaghey - SunTrust

Glenn, I just wanted to walk first of all through the seasonality for 2008. Should this be traditionally the very slowest quarter in the first quarter ramping through the year?

Glenn E. Tynan

It could be more like last year. From half to half it’s going to be about 40% in the first half, 60% in the second half. Our first quarter is going to be lower than our last year’s first quarter, somewhere near 15%, 16% and the second quarter will be better this year than last year; last year was 21%, we’re looking in the area of around 24%. That’s the 40% there.

Then in the third quarter, fourth quarter kind of line up the same way about 24% in the third quarter and about 36% in the fourth quarter, so it’s the same 40-60 split.

Chris Donaghey - SunTrust

Going back to Myles’ comments earlier, the margin guidance is a little bit better than what I was expecting, and I apologize if I missed this but can you walk me through what you expect corporate and other expense to be in 2008 and your plans on the capital structure side? Should we use this $8.5 million as the run rate for interest expense and any other items that you see coming in the year?

Glenn E. Tynan

On the corporate and other, we usually run around $10 million between pension and corporate; generally $10 million, $10.5 million. It could be a little bit higher, a little bit lower, we have other things close to that, but that’s generally what’s in our guidance. Our current interest expense is about $32 million estimated for next year. The tax rate is at 36%.

Operator

Our next question will come from Karl Oehlschlaeger - Banc of America.

Karl Oehlschlaeger - Banc of America

You talked a lot about the expansion plans that you are looking at doing here and in Europe. How are you thinking about the FX exposure there and the risk level and what sort of strategies do you have in place to deal with?

Glenn E. Tynan

Well, we do have a global foreign currency hedging program that’s already in place. I mean MIC already has about, I don’t know the exact number, but a pretty substantial European presence which is in our program as well as the rest of our foreign operations. Again as we are going into China and Asia which is a new territory for us, we are doing the same thing, we’re bringing them into our global hedging program. Of course obviously the objective of the program is to not have to talk about foreign currency, and we are getting there, but unfortunately sometimes it’s more than we expected.

But we do have one in place, and all of our new facilities will be included in that program as well.

Karl Oehlschlaeger - Banc of America

Is there anyway we could think about sensitivity to the euro?

Glenn E. Tynan

Not that I can provide you off the top of my head.

Operator

Your next question comes from Eric Hugel – Stephens.

Eric Hugel - Stephens Inc.

Glenn, can you talk about getting into the FX program this quarter with Canada? You talked about everything was going well up until the fourth quarter. What broke down? Did you have more sales than you expected or was there something structural with the program that sort of broke down, and what are you doing there?

Glenn E. Tynan

I think the rate we were going to hedge is obviously the forward contracts, so we enter in hedges based on what our best information is and it was more rate-driven than anything else. I don’t think it’s structurally wrong, but the rate dipped; obviously a lot worse than what we anticipated. That’s really the bulk of it in the fourth quarter.

Eric Hugel - Stephens Inc.

Can you talk about laser peening, I saw that you won that nice award with Boeing. I know you guys have been wanting to get into Boeing for a long time. How should we think about this in terms of just overall laser peening, in terms where are we, in terms of your new product development cycle? Can you talk about what in your mind does that opportunity to get into the Boeing facility mean for you over the long term?

Martin R. Benante

Well, laser peening, obviously, takes a little bit longer than we had anticipated. But the nice thing about it, Eric, is that we now have Boeing, GE, Siemens, Rolls-Royce and Toyota. Obviously the benefits of laser peening is definitely being known by some of the premier contractors in the world. So I think the biggest thing is the fact that as we keep getting these premier customers, people start to realize that there is a benefit associated with laser peening.

As far as going into Boeing, we first start out with the revenues for the [re-ring] for the year will be about $2.5 million. It’s a minimum going situation. I think what happens is as the laser is in Boeing they will start using it for other applications. Our revenues for the year will increase about $6 million in 2008. So it will be up about $17 million this year in laser peening which is a nice growth. I think we have some good momentum with some other people or other customers that we anticipate bringing on later this year.

Eric Hugel - Stephens Inc.

One of the customers that you said, I was actually just shocked and my jaw almost hit my desk -- you said GE. GE has their own laser peening, not as good as yours I’m told. But GE is sort of known for the not built here type of thing. Can you talk about what happened there?

Martin R. Benante

Well, the thing is that obviously they had a problem -- not problems with their turbines, everybody is looking to extend the life of their turbines -- and the thing is that fan blades either because of usage or by foreign particles can break down. We can expand as we do with fan blades on engines; the same thing with turbines, extend the life of them and obviously they went with us in spite of their own in-house capability.

Eric Hugel - Stephens Inc.

You didn’t include Rolls on that list, I’m assuming you are still working with them?

Martin R. Benante

I did -- did I miss it? I’m sorry. In fact their new engines, every new engine, every derivative they make now we are on and they always have laser peening.

Eric Hugel - Stephens Inc.

Is laser peening being more and more specked in as new engine upgrades and new models are coming off the line? I mean, is the technology getting to the point where it’s being designed in?

Martin R. Benante

It is always being designed in. As far as Rolls-Royce is concerned every engine they build will have laser peening associated with it.

Eric Hugel - Stephens Inc.

Has GE pretty much just decided that they are going to go with you in the future or are they still debating whether to use their internal or?

Martin R. Benante

I think that’s going to be a program-by-program analysis; obviously there is a profound benefit for our technology on their turbines. Hopefully they find the same thing on their engines for jets and other products that they have in their portfolio.

Eric Hugel - Stephens Inc.

How many new lasers are you looking at building this year?

Martin R. Benante

We aren’t really looking at building new lasers, we have I think ten of them.

Eric Hugel - Stephens Inc.

It is just a matter of filling them all?

Martin R. Benante

Just a matter of filling them, obviously we have some mobile lasers that are out doing some field work. So we feel good about where that process is heading.

Eric Hugel - Stephens Inc.

Right now I’m assuming you have a couple of lasers doing development work and as that comes down, those can be put more into revenue production, is that where you are getting your capacity from?

Martin R. Benante

Well, yes. But, I think that even at the level we are at right now, we don’t have any problem taking development lasers and having to turn them into production lasers. So, we have a healthy rotation of development work that we’re doing.

Eric Hugel - Stephens Inc.

Glenn, can you box around for us where should we will be looking for D&A giving some of the acquisitions and the ramp-up in CapEx? What should we be thinking for the year for ‘08?

Glenn E. Tynan

About $80 million.

Operator

Mr. Benante, there appear to be no further questions in the queue.

Martin R. Benante

Thank you, Kristie. I would like to thank everyone for joining us today. I look forward to our first quarter conference in April. Thank you very much. Take care.

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