Woodward Inc (WWD) 2006 Q4 法說會逐字稿

Welcome to the Woodward Governor Company fourth quarter and fiscal year 2006 earnings conference call. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are in a listen-only mode. Following the presentations, you will be invited to participate in a question-and-answer session.

Joining us today from the Company are Mr. Tom Gendron, President and Chief Executive Officer, and Mr. Bob Weber, Chief Financial Officer and Treasurer. I would now like to turn the conference over to Mr. Weber.

Thank you, Operator. We would like to welcome all of you to Woodward's fourth quarter and fiscal year 2006 earnings conference call. Today, Tom will update on you our 2006 highlights and our strategic and operational direction. I will talk about the November 13 earnings release. At the end of the presentation, we will open it up for questions.

For those who have not seen the release, you can find one on our website at www.woodward.com. I would also like to point out that we have included some visual presentation materials to go along with today's call that are accessible on our website. Hopefully, you will find it fairly obvious as to the flow of the slides with the audio presentation. To access the presentation for today's webcast, go to our website, www.woodward.com, select the investor information tab at the top of the page, select presentations/conference calls from the left menu, select the webcast link for today's call, and you can view the slides on screen or download the materials.

An audio replay of this call will be available through Thursday, November 16, 2006. The phone number on the audio replay was on the press release announcing this call, and will be repeated by the operator at the end of the call. In addition, a replay of this call will be accessible on our website for 30 days.

Before we would begin, I would like to provide our cautionary statement, as shown on slide three. In the course of this call, when we present information and answer questions, any statements we make, other than factual, actual results or business facts, may contain forward-looking statements. Such statements involve risks and uncertainties and actual results may differ materially from those we currently anticipate. Factors that might cause a material difference include, but are not limited to; future sales, earnings, business performance, and economic conditions that would impact demand in the industrial and aircraft markets.

We caution investors not to place undue reliance on these forward-looking statements as predictive of future results. In addition, the Company disclaims any obligation to update the forward-looking statements made herein. For more information about the risks and uncertainties facing Woodward, we encourage you to consult the press release and our public filings with the Securities and Exchange Commission, including our 10-K for 2006, which we expect to file by mid December.

Now I will turn the call over to Tom to discuss our progress toward achieving our strategic goals in the fourth quarter and throughout 2006.

Thank you, Bob. Welcome to all of you who have joined us today. I would like to spend a few minutes providing a perspective on highlights for fiscal year 2006, our overall performance and our strategic direction. With respect to our highlights, and I'll elaborate on some of these items later in our presentation, it was a record year for both sales and earnings. In our Industrial Control segment, we executed our plan to deliver 10% segment earnings, almost double the level of earnings of a year ago. We attribute this exceptional improvement to initiatives we have previously discussed, which are primarily; cost savings from restructuring of our European and Asian operations, a favorable product mix, and continuous productivity improvements.

Additionally, our Aircraft Engine Systems segment continues its strong performance, delivering 20% segment earnings and 8% growth, while we absorbed higher levels of research and development investment related to upcoming program launches and new technology. We completed the acquisition of SEG, which fits extremely well with our growth strategy, as outlined with you last quarter. Our balance sheet and cash flow remains strong and ready to support our overall growth plans.

Our strategic focus remained consistent in 2006, as we continued to concentrate on Energy Control and Optimization solutions. These solutions include providing systems components and services for fluid energy, combustion control, electrical energy and motion control. We have put disciplined, internally aligned processes in place to drive focused growth, financial excellence, commercial and technology excellence, process excellence and the attraction and retention of outstanding people.

Turning to our Industrial Controls business. We successfully executed our profitability improvement strategies through a number of actions. First, we consolidated six regional mechanical manufacturing facilities, three in Europe and three in Asia, to one main facility serving Europe and two sites in China serving Asia. These sites are in lower cost locations, with good infrastructure and experienced workforces. Additionally, the margins on our product portfolio have also improved through active management of low margin offerings and an emphasis on those product offerings, offering greater value to our customers and reflecting that value in higher margins to Woodward. Lastly, our attention to continuous improvement and productivity, removal of redundant and low value efforts and redesigning products to improve quality and lower costs has been effective.

You can see from the staggered chart in our presentation, that while our Industrial Control segment sales were essentially flat, it reflects growth of roughly 6 to 7% in power, marine and process markets, as well as after-market services. We're benefiting in these areas from demand for more distributive power, globalization, and a fairly robust global economic environment. The growth in these areas was offset by reductions in turbine combustion system sales and volatility in China vehicle system ordering patterns. It also reflects some active deemphasis of certain low margin legacy products.

As shown on the next slide, building on our existing hydraulic electric actuation and valve technologies, our Industrial Controls team introduced innovative turbine auxiliary valve systems for flow control of advanced steam-cooled power plants. This expands our presence beyond the turbine and into the process side of the power plant.

Our acquisition of SEG, which will be part of our Industrial Controls segment, was completed at the end of October. SEG will contribute to portfolio growth and power generation and power distribution control offerings, bringing complimentary new products and new customers. Additionally, SEG brings inverter technology to Woodward, which is used predominantly in the fast-growing area of wind power. Wind is proving to be a desirable alternative to high oil prices for both developing and developed countries, in their drive to match power supply with rapidly expanding demand. As we discussed on the earnings call last quarter, and depicted on the next slide, this acquisition reflects a new focus on the power distribution market, which we estimate at over a $2 billion opportunity to Woodward. And it compliments our position in distributed generation.

Lastly, we are encouraged by recent results of our after-treatment burner system in relation to helping our customers offer effective after-treatment emission solutions in diesel engine applications. These solutions will assist end users in meeting increasingly stringent emission regulations. This burner system utilizes Woodward's broad range of competencies in fluid and combustion control, as well as advanced combustion technologies.

Now I would like to turn to our Aircraft Engine Systems segment. The Aircraft Engine Systems segment continues to win and develop new programs, moving up the value stream to provide complete fuel and control systems to our customers. The Aircraft segment grew by almost 8% for the full year, with the fourth quarter being 14% higher than the prior year. Segment profitability remained in our targeted range of 20 to 22%, even though we absorbed higher levels of research and development on critical customer programs and new technology advances.

More specifically, we are the fuel systems integrator for the new GE -- GEnx turbine engine for wide body aircraft such as the Boeing 787 and 747-8 and the recently announced Airbus A350 extra wide body. We are providing fuel system and combustion components for the F 135 and F 136 engines that will power Lockheed's joint strike fighter aircraft. We are now producing the control system for the Pratt & Whitney 600 engine family for the Eclipse 500 and the Cessna Citation Mustang very light business jets. And we continue to invest in technologies for next generation platforms to expand our system offerings.

Turning to the future, our priorities for 2007 are; to accelerate our existing portfolio growth rate, to continue improving our Industrial Controls segment margins, to continue winning in the Aircraft Engines Systems segment through superior system offerings, to improve our return on invested capital through more effective asset management, and to develop new market opportunities based on our strategic plan of applying our core competencies to increase market share in existing applications and expand it to adjacent market spaces.

2006 was a challenging and yet, rewarding year for us. We believe we are well-positioned to take advantage of our past restructuring efforts and to capitalize on our strong financial position and investments in the future.

Now I will turn it over to Bob to discuss the financial results and our outlook.

Thank you, Tom. Good morning, everyone. I will comment on the fourth quarter and full year for Woodward as a whole and each of its business segments. I'll then cover some specific financial measures of interest and finish by commenting briefly on our outlook for the future.

At the Woodward consolidated level, net sales for the quarter were $233 million, a 7% increase over last year's fourth quarter sales of $218 million. Consolidated earnings before income taxes for the quarter were $26.6 million, compared with $14.3 million in the same period a year ago. Net earnings for the quarter were $17.1 million, or $0.49 per share, compared with $11.3 million, or $0.32 per share, for the same quarter a year ago. Woodward began accounting for stock compensation in this year's first quarter, using the fair value method as required by recently released accounting standards. As a result of adopting the new standard, net earnings decreased by $400,000, or $0.01 per share.

For the full fiscal year 2006, consolidated net sales were $855 million, a 3% increase from $828 million for the previous year, a new record. Consolidated earnings before income taxes for the year were $85 million compared with $79 million in the same period a year ago. This year's pretax results included $8.5 million in accruals for legal matters. Last year's pretax results included the $7.8 million curtailment gain mentioned earlier and a $3.8 million gain on the sale of certain product rights.

Consolidated net earnings were $70 million, or $1.99 per diluted share, compared to $56 million, or $1.59 per share last year. Net earnings in 2006 included earnings of $8.4 million, or $0.24 per share, from two items -- first, a change in valuation allowances for deferred income taxes, reducing income tax expense; and second, expense accruals for certain legal matters. In 2005, net earnings included earnings of $7.3 million, or $0.21 per share, for gains in retirement healthcare benefits and on the sale of product rights. The stock compensation accounting change reduced our 2006 net earnings by $1.8 million, or $0.05 per share.

Moving to our Industrial Controls segment. Industrial Controls net sales for the quarter were $147 million, an increase of 3% over fourth quarter sales of $142 million a year ago. Industrial Control segment earnings in the fourth quarter of fiscal 2006 were $14.6 million compared with $4.2 million for the same quarter a year ago. Segment earnings as a percent of sales were 10% in the fourth fiscal quarter of 2006 and 3% in the prior year. Our operating margins this quarter benefited from previous investments in our product portfolio and restructuring actions.

Industrial Controls net sales for the full fiscal year were $541 million, a slight increase over last year's sales of $537 million. Industrial Controls segment earnings were $56 million, an increase of 93% over the previous year's segment earnings of $29 million. This increase can be attributed to the consolidation of manufacturing operations in 2005 and early 2006, as well as other productivity initiatives.

Now turning to Aircraft Engine Systems. Aircraft Engine Systems net sales for the quarter were $86 million compared with $76 million a year ago, an increase of 14.3%. Segment earnings for the quarter were $18 million compared to $15 million for the same quarter last year.

Aircraft Engine Systems full-year sales were $314 million, an increase of almost 8% over the prior year sales of $291 million. Segment earnings were $64 million, which is virtually unchanged from the prior year. Last year's earnings included a $3.8 million gain on the sale of certain product rights. Aircraft Engine Systems earnings reflect this year's higher R&D expenses, due to investment in systems development programs.

Now I would like to focus on certain specific elements of our consolidated financial statements. Cost of goods sold as a percent of sales improved from 75% in 2005 to 72% in 2006. This improvement is largely due to our previous investments in our product portfolio, productivity improvements, product mix, and the actions we took to consolidate European operations in our Industrial Controls segment.

Selling, general and administrative expenses increased slightly, from 9.6% of sales in 2005 to 10.8% in 2006. This reflects increased accruals for legal matters and other professional services and the effect of new accounting standards with respect to stock compensation.

Research and development costs increased by almost 20%, to $60 million in 2006 or 7% of sales, from $50 million or 6% of sales in the prior year. This is a continuing result of our increased investment in systems development programs in both segments.

Total depreciation and amortization expense decreased to $29 million in 2006 from $32 million in the prior year. The decrease in expense is primarily due to the effects of our European restructuring activities on capital investments in the region.

Our capital expenditures were $32 million this past year compared to $27 million in the prior year. We expect capital expenditures in fiscal 2007 to again be about $32 million.

Our tax expense in the current year included the valuation allowance change mentioned previously, which significantly benefited our fourth quarter and year-to-date effective tax rate. We expect the rate to be in the range of 35 to 37% for 2007.

To turn briefly to our balance sheet; working capital increased to approximately $260 million at September 30, 2006, compared to $241 million at September 30, 2005. This reflects our continued strong operating earnings and resulting cash flow.

Our total debt decreased during the fiscal year by approximately $22 million to $74 million at the end of the year. The ratio of debt to debt plus equity was 13% at the end of the year compared to 18% at the end of the prior year.

We repurchased approximately 673,000 shares of Woodward stock, at a total cost of $22.3 million this year, primarily in the third quarter. There is a total of slightly over $43 million remaining under the current authorization.

In closing, I would like to comment on our outlook for fiscal 2007. We expect our Industrial Controls segment sales for fiscal year 2007 to grow 13 to 16%, primarily resulting from the acquisition of SEG, and generate segment earnings of approximately 10 to 12% of sales. In our Aircraft Engine Systems segment, we expect sales growth of 10 to 12% and segment earnings of 20 to 22%. For the Company as a whole, we anticipate sales growth of 12 to 15% for the full fiscal year. We expect net earnings to be in the range of $2.05 to $2.15, including the effects of the acquisition just completed.

That concludes our comments on the business and results for the fourth quarter and fiscal year 2006. Operator, we are now ready to open the call to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from J.B. Groh from D.A. Davidson. Go ahead, sir. Your line is open.

Hi, guys.

How are you doing?

Good morning.

Good. Thanks for taking my call. I had a question on your guidance and R&D spend in fiscal '07. Looks like this year ran about 7% of sales. I know that next year, it's probably still going to be pretty heavy spending on GEnx, et cetera. What is sort of implied in your guidance number, in terms of R&D spend, in either absolute dollars or as a percentage of sales?

What we expect in 2007 is the absolute dollars to remain about consistent with 2006. So as a percent of sales it will go down slightly.

Okay, so basically flat on a dollar basis?

Correct.

And does that go down? I mean, I know fiscal '08 we're not talking about. But I mean, conceptually, does that go down as those programs start to get into higher levels of production?

I would say the R&D spending would drop, unless we backfill it with new programs and new wins. And my expectation is that we would probably be adding to the programs we have. So, that's an open question at the moment.

Okay, and then what sort of tax rate does that guidance assume? It nudged up a little bit this quarter. Is there any specific reason for that? Or -- and how should we think about the tax rate in fiscal '07?

No specific reason. That's probably more of our base rate, if you will, going forward. Each time you've seen a lower rate, there's usually been a specific adjustment. But at this point in time, that's roughly our ongoing tax rate. As we see changes in our overall global structure, hopefully we'll also see improvements in that overall tax rate.

So use something like a 35% rate?

Right.

Okay. Great. Thanks a lot.

Thanks.

Sure.

Our next question comes from Mr. Ned Armstrong from Friedman, Billings and Ramsey. Go ahead, sir. Your line is open.

Good morning.

Good morning.

My question regards -- the first one regards your SEG acquisition. Are you at liberty to say approximately what you paid for that acquisition? Or provide us a multiple range so we can determine the potential returns there?

Yes, we're -- we've recently closed, as you probably have seen, and we're still in the finalizing stages, but approximate acquisition price was about $45 million in cash and assumed debt.

Great. And then earlier in the call, when talking about your power generation markets, you spoke about moving into the process portion of power generation as opposed to the -- or to compliment your presence in the turbine area of power generation. Can you describe that a little bit more, as to what exactly it was that got you into that area? And what part of the process area it's in?

What we're looking at in the process area is -- the best way to describe it is, we're responding to really demand from our customer base. What you see is the large turbine manufacturers from Mitsubishi, GE, Siemens, that they are now providing a greater portion of the power plant. In the past, you would have had A&E firms designing a power plant and then working with the owner to source the process equipment. Today, what we're seeing is the big turbine OEMs are doing a lot of that themselves and they are also guaranteeing the performance of these plants. As such, they started looking at the process equipment. In particular, we're talking about process valves and actuation products.

Okay.

And they are realizing that some of the equipment that's out there wasn't the most reliable, didn't have the highest performance. And they were looking for a supplier to do more systems synching -- systems work. So we stepped in and we have been very successful with selling some of these products. It's really in an area that we did not participate in before, but we're using key competencies that we had to bring better actuation technology, better valve technology and then also, systems integration capability.

So you're -- essentially what's happened is your customers have expanded their presence and they are bringing along their better suppliers, so to speak, to help them out and you happen to be one of them within the valve and actuation and systems area, is that a fair characterization?

That is fair, yes.

Great. Thank you very much.

Sure.

Our next question comes from Mr. Tyler Hojo from Sidoti & Company. Please state your question, sir.

Good morning, guys.

Good morning, Tyler.

Bob, I missed it. I know you gave the CapEx number for '07. What was it again?

Roughly the same as this year, about $32 million.

Okay, great. Then I was hoping we could talk a little bit about Industrial Control. First, the margin in the quarter came in a little bit. I was wondering if you could speak to that first?

When you say came in a little bit -- I think for the quarter we were right on the 10.

Yes.

And there was some fluctuation throughout the quarters of 2006, but the fourth quarter was 10. That is kind of as we said, we made some manufacturing facility consolidations in both Europe and Asia and those -- I think, we're finally starting to see the impacts of that. We expect to see some continuing impacts of those consolidations. In addition, another big area has been kind of active management of the product portfolio, and kind of moving upstream in the value chain, providing a little more value on some of our products, focusing on those with our customers. And usually that means there's a little more margin in those as well. As well as defocusing certain lower margin product we've had in the past.

Okay. And I know we talked about this on past calls. Obviously, a number of years ago you were running about 14, 15% margin in Industrial Controls. Obviously, the guidance for fiscal '07 assumes some pretty good margin expansion there. But do you expect, looking past fiscal '07, to still be able to attain those levels?

Yes, I think, Tyler, we have stated this in the past, that we do believe we will get back to our historical range, 12 to 15% segment margins. And we believe we're on the path to do that and we think we can attain that. So we're -- I feel good about our progress.

Okay, good.

We're going to continue to make that progress as we move forward.

Okay, good. And just -- I know you talked about the recent acquisition. And you guys made mention that, I believe, the '05 sales were $60 million. What would the guidance be if you just stripped out -- as far as top line growth, if you just stripped SEG out entirely? Can you answer that?

So in Industrial without SEG in it, of that total, approximately 12% of the 15% is actually SEG. And so that leaves 3%, roughly, for the Industrial business as a whole without SEG. And that really reflects kind of the confluence of two factors. One is, we're encouraged by some of our customers' recent announcements and directions, in terms of areas that they believe we will see growth in. And we happened to play in some of those areas. So customer direction at this point looks good. It's offset by a fair degree of conservatism in kind of overall economic levels. And I think we all would agree that there's a fair amount of uncertainty out there at the moment. So the combination of those two elements, along with, as you saw in that staggered chart that Tom described and walked through, there's a fair amount of portfolio movement inside as well.

Okay. That's fair. Does that -- does your guidance include -- I believe in '05 you saw about $15, $20 million from alternative fuel buses in sales to China. Does that guidance include that coming back at all? Or -- ?

No, Tyler, it's basically -- assuming approximately flat.

What is your expectation, Tom? Do you have any visibility into that, just as far as China goes, on the bus side?

Yes, on the alternative fuel buses, the expectation is for growing orders. But we're being cautious about that because we have not seen them yet.

So it's more -- I know they order in batches, so it's just more of a timing issue than anything else?

Right. And so I guess as we look at our planning process and the like, when you have something, if I could call it a switch, either got it or you don't -- we tend to be a little conservative.

That's fine by me. Thanks a lot, guys.

Sure.

Our next question comes from Mr. Peter Lisnic from RW Baird. Just a second.

Hello?

Yes. My computer hung up for just a second.

Okay.

Mr. Baird, your line is open. I mean Mr. Lisnic.

Thank you. Can you hear me?

Yes. Hello, Peter.

Sorry. Just wondering if we can talk about Industrial Controls profitability a bit more. If I look at your forecast and the incremental margin, if I just use mid points, its somewhere around 16%. I'm just wondering if; A, you're being relatively conservative? Or B, whether you can give us a sense as to profitability at SEG and whether or not that's weighing down results there a bit? Or I guess another way of talking about it would be just kind of what you need do to get to more of the 12% range versus 10%?

Yes, I -- you mentioned 16. I'm not sure--

If I just use the midpoint of your sales forecast and your operating margin forecast, that's the incremental margin.

Oh, okay, okay. I would have to say no, at this point. SEG is not necessarily weighing it down. There will be acquisition expenses, et cetera, that will have an impact. But the ongoing operating margin of SEG will be similar to the Industrial Controls margins. So we see kind of -- if you are using the midpoint again, we see continued improvement up by a minimum of a point. Hopefully, we can see a little bit more than that. But to the 11, and if things go well, the 12 range. But I think it's just the law of large averages, Pete, that -- you're not going to see that entire margin on that increment flow through.

Okay, but it sounds like you're also going to incur some step-up charges for inventory at SEG. Do you know what that number looks like right now?

No, we don't. We've just recently closed and we're still working on all of that.

Okay. Fair enough. If we could just continue on SEG and talk about wind as being an opportunity, can you give us a sense as to, I guess, how big that business is? And what it might look like -- well, not necessarily next year, but a couple years out, especially with consideration that the production tax credit may, at some point, just not be renewed?

Right. It's -- at this point in time -- first off, it's the fastest growing piece of that business. And at this point in time, it's in the neighborhood of approximately 40% of the total. And if I were to look a number of years out, I think all of us right now have very high -- everything you read is very bullish on wind. And at this point, we see no reason to believe that that will decline. It's very big in Europe, as many of us have seen who have traveled there and seen the very large farms. And it's very -- it's growing very rapidly in Asia, as well. And I think we'll also see it growing more here in the United States.

Okay. And is your business within that piece of SEG, is there an after-market piece to it? Or is this just kind of original equipment demand?

It's going to be both. With the inverter technology, that's the power electronics that convert the variable frequency power to a constant frequency to put under the grid. And due to the high power, power electronics do wear out. So there is an after-market potential here. If I can supplement what Bob said on the market, one of the things we do -- are encouraged by SEG is -- has just released a new product for the five megawatt wind power applications. And those are a lot of the offshore. And we expect some nice growth in there. And we're also working -- they were also working in China, and I think Woodward's presence in China will help that. We expect substantial increases in China in wind power. So we're encouraged by the outlook for the business. The portfolio is very new. And we think the Woodward global footprint will help accelerate the sales of that business.

Okay. That's very helpful. Thank you.

Our next question comes from Mr. Jim Foung from Gabelli and Company. Go ahead, sir. Your line is open.

Hi, good morning, everyone.

Good morning.

I was just wondering, what do you think is the growth rate for SEG when I look out two or three years? And I guess what's the growth rate of the wind power markets in particular?

Hi, Jim.

Hi.

As the wind power has been obviously a very fairly recent phenomenon, if you will. But right now we're targeting somewhere in the 8 to 10% sort of growth range, very similar to our internal existing Electronics business.

Okay. And then for the SEG as a whole, that would come -- be slightly under 8 to 10, since wind power is like 40% of that business, right?

Exactly.

Okay. Is the -- what's the potential upside in the margin from SEG? It looks like from your guidance that -- you indicated that they are pretty much doing the same margins as the entire Industrial Controls segment. Is the potential much larger as you go out a couple years from now?

We believe, with the electronic systems that they have, that they will help increase our margins into our targeted range. So what we see is our electronics business carries very nice margins. And our due diligence on SEG, we believe that over time, we will be able to have them provide the same high margins on Electronics and should be additive to our Industrial earnings potential.

How much of that -- how much of SEG's business is in electronics? Is that -- ?

All of it.

All of it? Okay.

Yes. They do some systems work, but the primary product out of SEG is electronics and electronics systems.

Right. Okay. So it's a nice fit for you guys, then.

Yes, we think it's an excellent fit. Not only have we wanted to expand in wind, which we have previously discussed, but the opportunity to take their power distribution controls and accelerate our strategy to go into the market -- what we're calling the market adjacency of power distribution. As well as they do some work with some of the big diesel OEMs that play right into our current portfolio. So it's a very nice fit with Woodward.

Now, when I look at your balance sheet, this ended September 30th and you closed in October for SEG. So the balance sheet doesn't reflect the price of the SEG acquisition?

That's right.

Okay. But notwithstanding that, still a very strong balance sheet. Could you just kind of discuss your plans for your cash flow going forward? I guess you have $43 million left in your stock authorization. Any other plans in terms of future acquisitions? Or any other things you want to use your cash for?

Sure. We've mentioned, I think a number of times this past year, that we are continually looking at various strategic fitting targets. So we mentioned we're not going to go off and do things that we are not currently in the market -- we like to kind of call it market adjacencies, areas, as Tom mentioned, where customers have asked us to get involved in certain expansive areas in their product portfolios. That's the type of thing that we will continue to look for and have been, continue to look for acquisition candidates. And increasing our organic growth as well.

So we could kind of see more acquisitions -- a lot more than you've done in the past?

Well, what I would say is, we're actively looking. And if we find ones that we think are a good strategic fit, and that we think are prudent, we're looking to do them. So part of what we like about our balance sheet is we have the ability to fund all our organic growth. And then we will be looking to expand through acquisitions, as we can find good ones.

Great. Thanks, Tom, Bob.

Take care.

Our next question comes from Mr. Matt McGeary from Sentinel Management. Go ahead, sir. Your line is open.

Good morning. Just lastly on the M&A front -- I had to step off for a minute, so I'm not sure if you covered this -- but just curious what you're seeing right now, any change in the environment, in terms of valuations or things coming available -- potentially coming available, in your opinion, as the year progresses?

Yes, I think what we would say is the valuations are still robust in the marketplace. We continue to look for the fits with the Company. So as we look at the targets, we're looking for ones that add to our portfolio, broaden our portfolio, but we're also looking for market share gains. But the environment today -- the prices are still robust, and as such, maybe there's more things -- more potential companies coming on the market. But we're all set to watch the valuations.

I think the key is kind of what we described as the fitting strategically with us. Because with the pricing today, unless you can really identify good strategic fit candidates with lots of synergistic elements, it's very difficult.

And just lastly, it sounds like all of your end markets seem to be in pretty good shape. You spoke fairly positively about a lot of things, SEG looks interesting; and yet your guidance may be a little bit on the conservative side. You mentioned earlier, just sort of general economic caution. Are you seeing some specific things out there that are leading you to be more cautious on the general economy? Or is that just sort of a -- kind of a general strategy, you don't want to get too bullish on the economy?

Well, I think Bob described it pretty well. We -- in a lot of our end markets, as you highlighted, we think they look pretty good. But with things like housing down and potentially some light construction equipment down, we're not in those markets very -- we have a little bit of presence in those markets. So we're just being -- we're cautious that -- to ensure that the outlook is appropriate for planning purposes. So we feel that we're on the mark with our estimates. And we'll watch as the year progresses if everything holds, or goes up a little bit, we have upside potential. But we want to ensure that we're on target.

Great. Thanks a lot.

Sure.

[OPERATOR INSTRUCTIONS] Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.

Okay. Well, I appreciate everyone joining us today. And Bob and I will look forward to speaking with all of you after our first quarter. Thank you.

Ladies and gentlemen, that does conclude our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available at 10:30 a.m. Central Time by dialing 1-888-266-2081 domestic, or 1-703-925-2533 international, and by entering the access code 387581. Again, those numbers are 1-888-266-2081 domestic, or 1-703-925-2533 international, and entering the access code 387581. A rebroadcast will also be available at the Company's website, www.woodward.com, for 30 days.

We thank you for your participation on today's conference call. And ask that you please disconnect your line.