Curtiss-Wright Corp (CW) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Curtiss-Wright Corp. year-end 2007 earnings conference call. Just as a reminder today's call is being recorded and will be hosted by Martin Benante, Chairman and CEO of Curtiss-Wright; and Glenn Tynan Vice President and CFO.

This call will be in a listen-only mode as the Company presents its recent financial results and then the Company will take questions. At this time, I would like to turn the conference over to Mr. Martin Benante. Please go ahead, sir.

Thank you, Christina. 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?

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

Before we begin please note 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 our 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 in 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 beheading 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 teaming partners further solidifying our opposition as one of the premiere global distributors of advanced nuclear products.

The strong commercial markets were partially offset by lower production work for the US 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 the [e-miles] program.

In our Motion Control segment, sales of $178 million increased 17% to due to 13% organic growth and $6 million of incremental sales from our 2007 acquisition 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 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 shot (inaudible) revenues in both the commercial and defense aerospace markets 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 counting 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 consolidated 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 non-segment expense was offset by increased amortization from the 2007 acquisitions, increased levels of development work and unfavorable foreign currency translations 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 margin 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 the segment's operating margin in the fourth quarter. In addition, this segment continued to have a high level of investment in development programs such as the AP 1000, the DDG 1000, the CVN 78, [Skimal] and the Advanced Arresting 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 margins 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 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 have substantially higher interest expense in the fourth quarter 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 acquisitions.

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. Marty?

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 effectively executing our strategic growth plans. Chief among the success factors is our strategic diversifications 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 continued to hold the spotlight with 45% organic growth and our commercial aerospace and general industrial markets both provided healthy 13% organic growth. Power generation generated solid organic growth due to the addition of new team 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 made substantial investments to our ongoing operations to prepare for the rollout of new programs such as the AP 1000, sub-sea pumping system, high-speed motors, CVN 78, [g-miles], Boeing 787 and 747-8 and a number of future combat systems programs.

Since 2000, the beginning of the last economic downturn, we've demonstrated our ability to generate superior organic growth while successfully reinvesting in both our advanced technologies and select acquisitions in order to enhance our portfolio and market diversification. In 2007, we successfully executed our strategy producing strong profitable growth and long-term shareholder value which is evidenced by Curtiss-Wright's five-year compound annual growth rate of shareholder value of 27%. Our dedicated and success is evidence that our track record 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 US 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 benefits to our customers in our 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 and 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 Noglaes, Mexico for lower 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 to $1.85 billion which equates to 15 to 16% topline growth; operating income in the range of 215 to $221 million(Sic - See Press Release) or 20 to 24% growth and fully diluted earnings per share in the range of $2.55 to $2.65, which equates to 15 to 20% growth excluding the non-recurring tax benefit we recorded in 2007.

On a consolidated basis, we're targeting a margin improvement of between 25 to 75% basis points. We are projecting free cash flow for 2008 between 70 and $80 million which is essentially the same as 2007 despite a 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.

(OPERATOR INSTRUCTIONS) 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?

I'm not sure of the exact number off the top of my head.

I guess we don't need to answer that. And then there's another $60 million from the nuclear side that is coming online. The bottom line and the question though is if you take those two things into account, it looks like your implied sales guidance is only 5% organic and the rest of your business which seems pretty conservative given the bookings you've had year to date and just wondered if there's any puts and takes there that I am missing.

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

Okay but the incremental from the commercial nuclear is going to be about $60 million in '08?

$50 million, yes.

50 or 60, okay. So there is a healthy amount of conservativism there. And then the next question on tension expense I guess the $8 million looks like it was running a little high. Was there a discount rate adjustment there or -- is this a sustainable level? Will it come down from this level? If you could just comment on that maybe.

It's actually not discount rate. That discount rate set in the fourth quarter last year, it pretty much was steady. It's actually -- about a $1 million of increase this year is from adding new people, acquisitions into our cash balance sheet and plan. Also we did make a couple assumption changes.

One is on the compensation increase and a bunch of demographic changes that all equated to another 1.2, $1.3 million. That gets you up to the $8 million for this year. But those are the only two changes that really impacted the -- you know, obviously discount (inaudible) differently in the future it could affect us in '09 but that's the way '08 was built.

The other one that was in the other income obviously the 4X seems to be bugging you a little bit. Is there anything you can do in terms of hedging or structure transactions to kind of avoid that or are these Canadian operations that continue to just feel that pain or I guess where are the operations that you're feeling the most pressure?

Well, you know it's mostly in our Motion Control segment and they have several operations in Canada that have US dollar revenues and Canadian expenses and that has really been the (inaudible). We do have a hedging program which we do offset (inaudible). We were doing fine nine months of the year then the fourth quarter went a little haywire on us much more than we expected and that 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.

What flows through the other corporate in terms of Forex?

Corporate and other?

Yes.

Well, on an ongoing basis most of the time it's pension and there's usually about $2 million of various corporate expenses that flows 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 have a little bit higher medical expenses we don't have this year. But generally speaking it should -- it's around $10 million on average. We had a couple of aberrations.

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 airline budget. And would that be revenue for you in '09 or would it be revenue in 2010?

No, in '09. This year is probably the lowest (inaudible) as far as sales to the nuclear Navy. It actually decreases from last year to this year and that's one of the reasons why we have lower organic growth in the military side is that maybe cycle.

We are going to be getting the multi-year procurement. It looks like it will be seven subs in February. We will start at two submarines a year but that will start in '09. What we did have very nice growth in the military has been in our embedded computing. Again, we saw very nice increase this year in our embedded computing sales on ground vehicles.

Okay thanks. And again, good quarter.

Eric Hugel, Stephens Inc.

You talked about that investment in the embedded computer systems. It's kind of large I mean, I guess my -- sort of your margins X'ed out would've been around 14%, much more in-line where I think they -- comparably in the past. Can you sort of scope out one --how long you're going to be investing money? Is this sort of a onetime sort of quarter or is this ongoing that we're going to see sort of margin rates being impacted? Can you scope out sort of the size and opportunity of what you are going after? And are you on it now or are you sort of investing money now because you're hoping to be selected so there is some risk there?

We have not been selected yet. So we have invested with the hope of being selected. The bulk of it's in '07 but it will -- there will be some little bit in '08 as well. It's actually -- have 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 are investing in they're very strategic. And when we have the information obviously we will make it public to you but the combined revenue from these four programs is about $180 million.

Over --?

Over the life -- it's various. Over the next let's just say on average five to 10 years. I mean they're long cycle programs and big revenue potentials and it's very strategic for us. It will be about another million dollar impact in '08 we expect and that should be it.

I would assume in the first quarter?

I don't know the timing. It's probably in the first half. It could be throughout the year (multiple speakers).

Mostly in the first quarter.

I don't know that for sure.

Can you talk about this Canadian tax? Was that all the reason why you had to fill a tax rate in the quarter? That was sort of a cumulative catch-up?

That was the big thing. December -- I don't know -- 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 revalued on deferred taxes for our Canadian operations to the new rates. That was the big onetime impact.

The only other thing -- the bigger thing is we did have the UK R&D tax credits because 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 that the two big pieces.

How are you treating in terms of your -- I guess you're looking for 36%. What is that sort of implying in terms of US R&D tax credit being passed or not?

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

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

Sure, Flow Control -- sales of between 920 and 925; Motion Control, 640 to 650 and Metal Treatment around 275 million. That's the sales line. For margins we have Flow Control at 10.7 to 11 and I'm going to go back to 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's a couple of different things going on there. The magnitude of the acquisition they made in 2007 cost probably caused about 100 basis point drag on their operating margin and as well the other big thing is it's the first full year of AP 1000. And because we had indicated back in our investor conference it's about $50 million or so in sales at about 9% margins is what we told you and that obviously causes a drag in the margins as well. So those are the two big things, big ticket items reflected in the margin projection.

My last question and then I'll get back into the queue is can you talk about where things stand right now in terms of your progress on sort of ramping up for the AP 1000 for the awards that you've gotten in China. And can you also address sort of 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 US power producers have submitted their applications with the Nuclear Regulatory Commission.

I know Marty you had said that you expected -- I guess this was back in I guess maybe third quarter that you had expected orders to come through within the next 12 months. Do you still expect that? And can you sort of give us sort of 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?

Well in the beginning of the cycle, the AP 1000 obviously we received an order from China last year and you will see revenues this year. As the AP 1000 continues on in its sales, you will see a lot quicker from order to revenue because it will be an ongoing program.

You know as far as (inaudible) 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 (inaudible) oil. Right now, we're looking at receiving orders for startup for (inaudible). We anticipate about $30 million in that area coming into our EPD for the (inaudible) seals and other items and that will be ongoing. The rest of our businesses will probably see almost equal an amount of money for that startup.

In this year?

Yes, getting orders this year.

And is that built into your revenue projections that you are going to be getting another US plant?

Yes, somewhat. Now, that's a restart of the Watts Bar-2 plant. That's not a brand new one --

That's not an AP 1000?

No that's not an AP 1000. And as a matter of fact China is also interested in four Westinghouse plants which is generation two 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 and I still when you look at the AP 1000, we expect sales this year -- or not sales but an order this year from outside of China.

That will be US or South Africa?

That's correct.

You are expecting one? Or are you expecting multiple?

Right now we're going with one.

Set the bar low. Thanks a lot, Marty, and good quarter.

(OPERATOR INSTRUCTIONS) Myles Walton.

It's a short line here. I was actually a little surprised by the Flow Control margins that you cited for '08 and I guess 10.7 to 11 seemed -- is certainly higher than I was looking for. I guess that is a good indicator (inaudible) Tapco has run its course and you guys feel pretty comfortable there?

Yes, (multiple speakers) that. 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.

Yes, that's why I asked the question. The other question that came out of Eric's question, Motion Control. It looks like you are implying there about 5% organic growth in that segment? I'm just curious kind of the puts and takes that are going on there and what in particular may be going a little slower than maybe the embedded computers are?

Myles, you're starting to uncover all the little chestnuts.

You are on a roll today.

We don't really have a good answer that question. We are seeing increased growth from Boeing and as you now our sensors are going up and we also have good backlog in expected sales and embedded computing. So 5% might be a little conservative.

okay and given you are a supplier on the 87, can you comment on kind of what you are seeing on that program with respect to deliveries? Obviously, 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. Also if you can remind us of your ship content there?

Our ship content has gone up a little bit. We are about 240 -- there's 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 flip.

If you look at airbus's problems with a large body, Boeing hasn't made one for a while. Our anticipation that sales will actually -- sale of that first aircraft will not be at the end this year or probably into next year. So we conservatized our estimate associated with the 787.

Okay, I think that's a wise move. The last one I had for you I guess, Glenn, on the cash flow side of things, it looks like working capital would be about a use of $30 million in '09 -- excuse me -- in '08. Is that about right?

Working capital -- yes, that's a good estimate, yes.

And so how long do you think you'll be in this kind of working capital pretty heavy usage? Is it until kind of '09, 2010 when the deliveries actually start to occur on the China nuclear side or is it further out than that, you know?

A lot of it is the buildup of inventory on long-term programs so it does coincide with the rollout of that. Fortunately I should say we end up layering our new long-term programs on top of it. So it seems to be fairly steady and receivables (inaudible) not really collections for customers. A lot of time it is [unbilled] on long-term programs (multiple speakers) kind of coincide. We've seen ourselves in this kind of mode but for a good reason.

And then on the other side of the free cash flow in the CapEx I guess $90 million about in '08. Does that come down precipitously in '09?

No, actually our guidance is 70 to $80 million and what we're trying to say is -- I would include cash flow from operations about 185 to 190, a significant increase from last year. The CapEx (multiple speakers)

I'm sorry, I was just referring to CapEx.

Okay the 115 -- that includes a big $40 million nonrecurring I would say. There'll be some of it -- the tail off in '08 for the buildout of the Cheswick facility in Pennsylvania.

If we look at the remainder of the CapEx, $2.5 million is for our new program with Boeing where they will be using our laser to shape their 747-8 wing. We're also opening up a brand new plant in China and that's going to be about $8 million. It is going to be the fifth largest facility we have. The combination of coatings, shot-peening -- while 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.

And then we also have three new expansions for MIC which is similar to what we did in 2007 -- we're expanding in Austria. We actually are seeing our auto sales which automobile market is down but our market is actually up going to be up this year 6%. So they're 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 Germany in Munich and we're also opening up a new facility in France for the 8380 Boeing wing (inaudible).

Okay, great. And then maybe last one for you, Marty, is on M&A. Would you say 2008 is going to look more like say in '05 or in '07?

I think 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 highly leveraged, they're not going to be able to get the money to sustain their inventory of product (inaudible) that they have. They're going to be looking to sell some. So we think that 2008 should be a robust market for companies such as us.

Chris Donaghey, SunTrust.

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

It could be more like last year. From half to half (technical difficulty) up 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 in the area of 15 or 16% and the second quarter will see better this year than last year.

Last year it was 21%. We're looking in the area of around 24%. That's the 40% there and then 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.

Okay and kind of going back to Myles's comment 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 runrate for interest expense and any other items that you see coming in the year?

On the corporate and other, we usually run around $10 million between pension and corporate, generally 10, 10.5. They could be a little bit higher, a little bit lower. It depends on you know we have other things closing there but that's generally what's in our guidance. Our current interest expense is about $32 million estimated for next year. Actually it's at 36%.

Okay great, thanks -- good quarter.

Karl Oehlschlaeger, Banc of America.

You talked about a lot of these expansion plans that you're 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 that?

We do have a global foreign currency hedging program. (inaudible) already in place. I mean MIC already has -- 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're going into China and Asia which is a new territory for us we're doing the same thing -- we're bringing them into our global hedging program.

And of course obviously the objective of the program is to not have to talk about foreign currency and we're 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.

Is there any way we can think about sensitivity to the euro?

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

Eric Hugel.

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

Well I think the rate we go into hedges -- obviously they're forward contracts so we enter in the hedges based on what our best information is. 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. And that's really the bulk of it then in the fourth quarter.

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. I mean how should we think about those in terms of just overall laser peening, in terms of where are we, in terms of your new product development cycle and can you talk about sort of what in your mind does that sort of opportunity to get into the Boeing facility mean for you over the long-term?

Laser peening you know obviously is taking a little bit longer than we had anticipated. But the nice thing about it 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's a benefit associated with laser peening. As far as going into Boeing, we first start out with the revenues for the (inaudible) for the year will be about $2.5 million. It's a minimum billing situation. I think what happens is as the laser is in Boeing, they will start using it for other applications.

And our revenues for the year will increase about $6 million in 2008 versus -- so it will be up about $17 million this year in laser peening which is the nice growth. I think we have some good momentum with some other people or other customers that we anticipate bringing on later this year.

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

Well the thing is that obviously they had a problem -- not problems with their service. 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 extend 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.

You did not include Rolls-Royce on that list. I am assuming you're still working with them?

I did, did I miss it? I'm sorry. We are in fact -- their new engines for -- that they're -- every new engine -- every derivative they make now we are on and they always have laser peening.

Is laser peening being more and more spec'd in as new engine upgrades and new models are coming off the line? The mean is that sort of -- is the technology sort of getting to the point where I mean it is being designed in?

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

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

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

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

We aren't really looking at building new lasers. We have I think 10 of them.

It's just a matter of filling them up.

It's just a matter of filling them. Obviously we have some mobile lasers are out doing some field work. So we feel good about where that process is heading.

And right now, I am assuming you have a couple of lasers doing development work that as that sort of comes down those can be put more into revenue production. Is that sort of where you're getting your capacity from?

Well, yes. But I think 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're still (inaudible) we have a healthy rotation of development work that we are doing.

Glenn, can you sort of box around for us where should we be looking for D&A given sort of the acquisitions and sort of the ramp up in CapEx or what should we be thinking for the year, for '08?

(inaudible) about $80 million.

(OPERATOR INSTRUCTIONS) At this time, Mr. Benante, there appears to be no further questions in the queue.

I would like to thank everyone for joining us today. We look forward to our conference in the -- first quarter conference in April. Thank you very much and take care.

Thank you.

That does conclude our teleconference for today. We would like to thank everyone for your participation and have a wonderful day.