Question-and-Answer Session
Operator
The question-and-answer session will be conducted electronically. If you’d like to ask a question, please do so by pressing the * key followed by the digit 1 on your touchtone telephone. If you’re using a speaker phone, please make sure your mute function is turned off till allow your signal to reach our equipment. We’ll proceed in the order that you signal us and we’ll take as many questions as time permits. Once again, please press *1 on your touchtone telephone to ask a question. We’ll move to our first question from Holden Lewis - BB&T Capital Markets.
Holden Lewis - BB&T Capital Markets
Thank you. Good morning.
James O'Leary
Hey Holden, how are you?
Holden Lewis - BB&T Capital Markets
I’m fine, thanks. I wanted to ask you about the margins, I guess, in a broad sense – I think, you go back to 2006 and you were sort of running your gross margins, 41% to 42%, lately off it has been depressed – there just seems like there is a lot of moving pieces here – the Avon accounting, the depression from the constructions, the mix of Cooper bearings, the margin from wind – that comes on, I guess that’s somewhat lower than your past corporate average, but of course the impact of sealing – when all of this smoke kind of clears from all of these things, sort of at the end of 2008, I mean where would you expect in general terms for the gross margin to settle in at once all those moving pieces are resolved? Do you have any sort of guidance for that?
James O'Leary
In total, in aggregate, I’d say low 20s to mid 20s, and I’m glad you used the fourth quarter of 2006 because that is probably the high water mark as we’ve discussed both on prior calls and in one-on-ones and in group presentations – that’s the high water mark in the quarter that probably is not repeatable, certainly not in this cycle – the mix of business was very orientated towards – as we talked about these military orders – very orientated towards legacy military programs, extremely high margin that ran through some of our more profitable facilities; we had not yet begun any of the capacity expansion that we’re talking about now, so if you looked at our capital spending over the preceding 5, 10, or 20 years, expect for a few major projects we’re spending 2% to 4% of sales – was barely maintenance – the real expansion efforts now which we’re seeing in wind energy didn’t start until the first quarter of 2007; so you have the two things, mix that is heavily weighted towards legacy programs, particularly in military, is before the explosion in growth at Cooper split roller bearings which you know now in terms of operating margin are getting close to 20%, but that’s still lower than the overall average of the company, so you’ve got extremely high margins but lower than the highest margins in the industry – I think that’s still something we take all day long if it continues to grow at the rate it has been, and capacity utilization met – if you’re growing beyond the 400 million sales base that we’d averaged over the preceding 10 years, it will be pretty tough to repeat that type of performance, so when all this settles in a steady state with the capacity we’ve got coming online and the existing mix, particularly you’ve mentioned Cooper, but that’s a good one to point to, it’s probably in the low to mid 20s operating margin.
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