Woodward Inc (WWD) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Governor Company fiscal year 2009 first quarter earnings 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 presentation, you will be invited to participate in a question-and-answer session. Joining us today from the Company are Mr. Tom Gendron, Chairman 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 fiscal year 2009 first quarter conference call. In a minute, Tom will talk about our highlights and our markets. I will then comment on today's earnings release and at the end of our presentation we will open it up for questions.

For those who have not seen the release you can find it on our website at www.woodward.com. As noted in the press release, we have included some visual presentation materials to go along with today's call, that are accessible on our website under our investor information tab at www.woodward.com. An audio replay of this call will be available through Friday, January 23, 2009. The phone number for the audio replay was on the press release announcing this call and will with be repeated by the operator at the end of the call. In addition a replay of this webcast will be accessible on our website for 30 days.

Before we 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 actual results or historical 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 aerospace, power and process industries, and transportation 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 earnings release and our public filings with the Securities and Exchange Commission including our 10-K for the year ended September 30, 2008, and our 10-Q for the quarter ended December 31, 2008, which we expect to file later today. Now, I will turn the call over to Tom to discuss our progress toward achieving our strategic goals in the first quarter.

Thank you, Bob. And welcome to all of you who have joined us today. I'll begin by highlighting our financial results for the first quarter. Total sales for the quarter were up 27% over the prior year. Organic sales were up 7%. Earnings per share for the quarter were $0.39, compared with last year's $0.36. Operating earnings excluding Airframe Systems were up 9% to $42.2 million.

Sales growth this quarter was delivered in each of our core markets of aerospace, power generation and process industries and transportation. Given the underlying economic climate, we believe this is an accomplishment. However, this growth rate is below our recent sales growth trend. Our sales growth for the quarter reflected an easing of growth rates in some markets, together with declines in some areas. Exchange rate volatility also made sales comparisons more challenging.

Looking specifically to our aerospace business, industry orders in 2008 continued at a pace that exceeded deliveries, leaving the industry with an even larger backlog at the end of the year. Boeing and Airbus orders exceeded deliveries by almost 2 to 1 during calendar year 2008. In 2009 deliveries and orders may be more aligned. However, the backlog likely will remain quite large. Stated production rates remained stable overall and provide a solid basis for future OEM shipments. Financing for deliveries remains an uncertainty in the market. We will monitor this closely for any potential impact.

The resolution of production and engineering labor issues at Boeing was a positive development. The announced delay in the 787, and the 747-8 schedules will have an insignificant impact on our 2009 results. But we expect these programs to yield future sales opportunities.

Although regional jet orders for 2008 were weak, and industry observers expect 2009 production to be flat from 2008, Woodward's expanded market share in this area with our acquisition of MPC has somewhat countered this softness. Small business jet order activity also continues to slow, leading to reduced production outlook for 2009 versus 2008.

In the aftermarket revenue pass through miles and cargo service are expected to decline during 2009 and airlines are withdrawing aircraft from service, although at a slower rate than previously announced. There is aftermarket exposure associated with the potential for aircraft to be removed from service, predominantly related to 737 Classics and MD-80s. The outlook for the military market is stable as we believe that governments will be reluctant to contribute to the economic decline with reduced military spending. Government budgets are generally expected to remain flat to slightly higher. Our Airframe Systems segment is fairly balanced between commercial and military business and our overall outlook should support the business through the year.

In recent months Woodward has been awarded a large number and variety of moderately sized aerospace programs including combustion and throttle controls to be used on the Bombardier C series, and actuation and motor systems for use on a wide variety of aircraft. Our breadth of applications and customers has expanded along with our potential to offset sales declines in some areas. We are very active in pursuing new aerospace opportunities and we are finding many new potential applications for the advanced technology obtained in the MPC acquisition.

We are also pursuing aerospace aftermarket activities that will mitigate the aftermarket exposure mentioned earlier. We estimate our exposure to be less than $10 million, which is already reflected in our outlook.

Our Turbine Systems segment has recently secured key customers and long-term agreements that aid in offsetting exposure to reduced flight hours and the associated aftermarket sales declines. Both Turbine and Airframe Systems segment have obtained new multi-year repair and upgrade agreements and are pursuing several other new opportunities. Increase in our overall aftermarket business within our air frames systems segment is a key priority for us. This quarter we celebrated receiving a United Technologies Corporation supplier gold award, at our turbine combustion facility in Zeeland, Michigan. This designation is important to us not only as a sign of customer satisfaction, but as an opportunity to demonstrate our broader systems capability to this key customer and others.

Industrial turbine demand was strong in the quarter, driven by international power generation projects. Turbine power remains the preferred choice for quick set-up and backup for renewable projects. The credit crisis has dampened demand for some types of power generation and distribution equipment. Our customers are shipping fewer reciprocating engines into the power generation market. However, peak power reserve margins remain tight, suggesting long-term infrastructure needs remain intact. In fact, we remain optimistic that the increasing number of power sources supplying the grid will require more electrical control products to efficiently manage and protect the grid like those supplied by our Electrical Power Systems segment.

As shown on slide 11, industry experts are mixed with respect to 2009 deliveries of wind turbines. However, there is agreement that the long-term trend remains intact for wind power. Given these expectations, our strong first quarter growth is encouraging and Woodward expects to do better than the overall market in 2009 due to market share gains achieved over the last year. Our Electrical Power Systems segment signed a variety of inverter agreements for future turbine installations in Europe, Asia and North America and continues to pursue further opportunities.

In transportation markets, the depressed economy is more evident. Depressed natural gas equipment demand in Asia has slowed somewhat due to economic, currency and inventory control reasons. The small industrial engine market has weakened, reflecting reduced demand for material handling and construction equipment. Engine production for the large marine market remains stable, due largely to the significant backlogs at ship builders. However, we are starting to see declines in shipbuilding that will likely lead to some pressure on our engine system sales in future quarters. Steam turbine projects have been a bright spot as financing of key projects has remained in place.

In the face of this tougher environment for our engine system products, we are increasing our efforts to introduce new and upgraded products, improve our performance in the areas of responsiveness and quality and develop opportunities in regions of the world where Woodward has traditionally had less representation. Regarding the global economic situation, while we expect to see the broad slowdown continuing to affect our business later in our fiscal year, each of our businesses has taken steps to gain share and improve profitability through the slowdown.

The diversity of our markets, customers and product offerings provides us with a measure of stability as well as select opportunities in these times. This diversity is something that Woodward has actively pursued in recent years, in anticipation of the current economic cycle. Although the current economic downturn is challenging in the near term, and changes to priorities and business models will be required, Woodward remains focused on providing energy control solutions for our customers' efficiency and emission needs. We expect to drive through the current cycle and emerge stronger as a result of the actions we have taken and will continue to take in coming months. Now I'll turn the call over to Bob to review our financial results and update our outlook.

Thank you, Tom and good afternoon, everyone. I will comment on the first quarter of fiscal year 2009 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 $345 million, a 27% increase over last year's first quarter sales of $272 million. $52 million of this growth was attributable to the acquisition of MPC. Organic growth was approximately 7%. This growth came from the market strengths and Woodward positioning that Tom referred to earlier.

Foreign exchange rates negatively impacted quarterly sales comparisons by approximately $9 million. Operating earnings for the quarter, defined as earnings before income taxes and interest, grew 13%, and were $44 million or 12.8% of sales, compared with $38.9 million or 14.3% of sales in the same period a year ago. Net earnings for the quarter were $27.1 million, or $0.39 per diluted share, compared with $25.3 million or $0.36 per share for the same quarter a year ago. Foreign exchange rate volatility negatively impacted net earnings by approximately $0.03 per diluted share year-over-year.

At the segment level, let me first discuss our Turbine Systems segment. Turbine Systems net sales for the quarter including intersegment sales were $145 million, an increase of 11% over first quarter sales of $131 million a year ago. Turbine Systems segment earnings in the first quarter of fiscal 2009 were $29.1 million, compared with $27.2 million for the same quarter a year ago. Segment earnings as a percent of sales were 20.1% in the first fiscal quarter of 2009, compared to 20.8% in the prior year. Our sales performance reflects sustained growth across our portfolio of both aircraft and industrial offerings with particular strength in industrial turbines. Earnings increased year-over-year largely due to our ability to successfully leverage our fixed cost base on the increased volume.

Engine systems net sales for the quarter including intersegment sales were essentially flat at $114 million. Growth in Marine applications this quarter was offset by softness in other areas, notably small engines for material handling. Foreign exchange impacts on net sales were a negative $3 million, approximately.

Segment earnings for the quarter decreased slightly to $11.7 million, compared to $12.1 million for the same quarter last year. Segment earnings as a percent of sales were 10.2% in the first fiscal quarter of 2009, compared to 10.6% in the same quarter of the prior year. The decline in segment earnings was attributable to approximately $2 million in negative foreign exchange rate impacts, which was partially offset by infrastructure efficiencies and cost control initiatives.

Electrical Power Systems' net sales for the quarter including intersegment sales were $62 million, compared to $58 million a year ago, an increase of 8%. Again, this quarter, wind inverter sales were very strong. We experienced declines in other portions of this segment including intersegment sales.

Without the effects of exchange rates growth was approximately 17%. Segment earnings increased 27% for the quarter, to $9.2 million, compared to $7.2 million for the same quarter last year, despite approximately $1 million in negative foreign currency effects. Segment earnings improved as a percent of sales to 14.8% in the first fiscal quarter of 2009 from 12.5% in the prior year.

Our newly acquired Airframe Systems segment contributed $52 million in net sales for the quarter. Segment earnings for the quarter were $1.8 million, or 3.4% of net sales, after $3.2 million in amortization on acquisition intangibles.

Now I would like to focus on certain specific elements of our consolidated financial statements. Gross margin defined as net sales less cost of good sold as a percent of sales was 29.1% in the first quarter of 2009 as compared to 29.9% in the first quarter of 2008. Selling, general, and administrative expenses as a percent of sales decreased slightly, to 9.4% of sales, or $32.5 million in the first quarter of 2009 compared to 9.5% or $26 million in 2008.

Research and development costs were $19.1 million in the first quarter of 2009, or 5.5% of sales, compared to $15.6 million or 5.7% of sales in the first quarter of 2008. Most of the increase was attributable to the MPC acquisition. This level of spending is consistent with our expectations and longer term requirements although some quarterly variability will continue.

Total depreciation and amortization expense for the first quarter of 2009 increased to $14 million from $9.3 million in the prior year, largely due to the acquisition of MPC. Our effective tax rate for the quarter was 29%, compared to 34.2% last year, reflecting the impact of the retroactive reinstatement of the research and experimentation credit. We would expect that our effective rate for full 2009 would be fairly consistent with the prior year's rate.

Our capital expenditures were $8.8 million in the first quarter of 2009, compared to $6.6 million in 2008, reflecting near completion of a sizable project at our turbine facility in Illinois. We previously announced that we expected annual CapEx to be close to or slightly below our total 2008 annual level of $41 million. Given the current level of economic uncertainty, we continue to review our planned 2009 capital expenditures and may defer some planned expenditures where timing is not critical. In 2009, we will remain focused on our low cost strategy, continuing our expansion in Poland and supporting our wind growth through expansions in Colorado and China.

Turning to our balance sheet, working capital, defined as current assets less current liabilities, increased to $463 million at December 31, 2008, compared to $297 million at December 31, 2007, largely reflecting the MPC acquisition. Following our usual quarterly pattern, Woodward generated $5 million of cash flow from operations in the first quarter. Free cash flow was a negative of $3 million.

As credit and the economy tighten, we believe adequate liquidity and cash generation will be critical to the execution of our strategic initiatives. We believe our planned levels of cash generation, coupled with our strong balance sheet, adequately support our operations going forward and the strategic initiatives we have identified. Currency impacts, while impacting our reported earnings, generally do not significantly impact our economic results as we have operations and strategic investment opportunities outside the US.

Our total short-term and long-term debt was $434 million at December 31, 2008, compared to $49 million at September 30, 2008, reflecting the MPC acquisition financing. Our timing was opportune and we believe the terms and rates of this financing were favorable, considering the current market situation. The ratio of debt to debt plus equity was 40.1% at the end of the first quarter, compared to 7.2% at September 30, 2008.

As previously announced, Woodward acquired MPC products on October 1 of this year. We remain confident that this acquisition, with annual sales of approximately $220 million, will be neutral to slightly accretive to Woodward's earnings per share in fiscal 2009. We continue to expect that synergies and cost savings will be realized as originally planned and these will be considerably greater in the second half of fiscal 2009 than in the first half, and with further benefits to be realized during fiscal 2010.

We also acquired MotoTron in early October. We expect this acquisition to be neutral to earnings per share in 2009. Integration is proceeding on schedule. MotoTron's results are included in but do not significantly impact our engine system segment's operating results.

Turning to our outlook on the future, as mentioned in our earnings release we remained concerned about the economy and the credit markets. Strength in the dollar will exert some downward pressure on our earnings relative to the prior year, although this may be somewhat offset by reductions in some commodity pricing. Overall, visibility to market conditions has not significantly improved since last quarter and considerable uncertainty remains.

We continue to take actions to broaden our geographic base, expand market share and increase the efficiency of our infrastructure. While we believe the economy continues to have down side potential, our guidance has not changed. We anticipate full year organic sales to be flat to slightly up with overall sales including our recent acquisitions to be approximately 1.4 billion to $1.5 billion and related earnings per share of $1.65 to $1.90.

That concludes our comments on the business and results for the first quarter fiscal year 2009 earnings conference call. Operator, we are now ready to open the call to questions.

(Operator Instructions) Our first is coming from Peter Lisnic from Robert W. Baird.

Good afternoon, gentlemen.

Good afternoon, Pete.

I was wondering, I guess my first questions, if I look at the Turbine Systems segment and you posted double-digit growth and I guess I understand with aero and the strong international or the strong industrial side of the business, what I'm wondering is how sustainable that sort of growth rate is, especially on the industrial side because I would imagine there's some backlog that you've built there that you're probably working off of. What's the outlook for the industrial piece of that business?

Right now we still believe we've got a good outlook. It's a combination of new builds but also aftermarket sales on the industrial turbine side. There's no doubt that financing of projects could impact future growth. It's something we're keeping a keen eye on.

But we also have some optimism that around the world, infrastructure projects are being looked at as some of the way to offset some of the economic decline. And to get something moving and done quickly as we were highlighting in our prepared comments, turbines is one of the few ways to put in quick infrastructure with a lot of output. So subject to the financing of these projects, we should continue to see some reasonable sales there. But if the financing doesn't come through, that's going to be a big wild card.

Okay. And can you maybe carve out what your comparisons were on industrial aftermarket versus industrial OEM and then maybe do the same for the aero business?

I don't have the industrial right off the top. But our aero business continues to be about half aftermarket, half OEM.

I'm just wondering what the sales comparisons actually were?

Oh, quarter-over-quarter?

Yes, yes, December '08 versus December '07 quarter.

We don't -- it's much more difficult -- on the industrial side, Pete, it's much more difficult for us to differentiate between aftermarket in some cases and OEM. So we have not disclosed that split. On the aero side, the percentage remains approximately the same and OEM I think if you kind of run the numbers here on where we're at is roughly flat with the prior year, the industrial being up. It's up slightly. So that would say that aftermarket, for aerospace, would be up very slightly during the quarter.

Okay.

From last year.

Okay. That makes sense. And then I guess last question, if I look at the Electrical Power segment, you threw up a 45% incremental margin there which was ahead of our expectations. And I know you outlined a couple things in the slides there about what you're doing to improve margins but I'm wondering if you could give us a little bit more color as to where you think the margin in that business could go and should we continue to expect strong incrementals like that as some of these restructuring initiatives kind of flow through the numbers?

One of the things we mentioned, we have kind of an engineering solutions business inside of that business that had a very tough comparison last year to this year. Those margins -- I'm sorry.

The operating margins.

Right.

Okay.

Those operating margins are not as good as our margins in both the power generation side and the wind side. We do -- power generation margins are very strong. Our wind margins are slightly less strong than those. So this quarter with wind growing, but the solutions business declining, is why we flowed through a little higher earnings, operating earnings level.

Okay all right. Thank you very much. I will jump back in queue.

Our next question comes from Greg McKinley from Dougherty.

Yes, good evening. Wanted to ask you a couple questions about how your fiscal year view in your mind right now sort of flows through quarter by quarter. And I know you're not going to give specific quarterly guidance but you have highlighted maybe some cautionary outlook on the transportation market even though Marine has a real strong order book. You are anticipating some softening trends there as the year progresses. I'm wondering, with that as a contributor, as well as maybe some softening in your non-wind Electrical Power Systems business, how do you see the revenue concentration for the remaining three quarters shaking out relative to your fiscal year view?

And you may have to help me out with the two together. But the first part, in terms of how we see the quarters, I would say they are maybe a little bit flatter than we expected early on and by that I mean less extreme volatility through the course of the year. So we're somewhat encouraged that our longer term look doesn't have what we might have portrayed last time as kind of a spike up and a spike down. Now it looks like it may be a little more tempered throughout the year.

Okay. I'm sorry. With still some sequential growth implied as the year progresses, simply because that's what's required to get us into that 1.4 billion to $1.5 billion range?

That's true. As we said, the second half -- we still believe there's some down side potential, so if we're on the down side of that, it will be because the second half gets a little more challenging.

Okay. And I'm wondering if you could comment on within that Electrical Power Systems segment, wind continued to perform strongly. I think you indicated a pretty robust growth rate for inverter orders. What are you seeing in your other Electrical Power Systems products? I know you had said that wind offset some weakness there. What particularly weakened and was there anything that surprised you in the degree to which it weakened in the quarter?

Yes. I would just highlight that what we call our power generation and distribution controls, we say PG&D, that business we would classify more as short cycle. So that's controls that are used in protective relays, AC measurement, jet set controls and as such, they move a lot closer and react a lot closer to the economy.

Okay.

Short cycle business. That was anticipated and that business will move with, as I highlighted earlier, with infrastructure investments. So it's -- we're going to keep a real close eye on that because it's directly tied. So that was the ones we were anticipating that.

The other business in electrical power we call power solutions. That's what we would categorize as a project oriented business. So you get large projects, so you get a little bit of lumpiness in the order intake and also the deliveries. And we were -- you know, because they're also -- but there are long lead times, so we had a pretty good idea that that was coming so we have a pretty good outlook on that business because the lead times are generally half a year to a year. So we have pretty good but it's project business. So those were anticipated and then as we said on the wind side, continued to see good orders and the growth is continuing in wind.

I guess my last question is relative to what your mindset was when you initially provided guidance and compared to today, has any -- have any of these markets -- which of the markets have stood out as maybe creating either some positive or adverse surprises to you, relative to how you were looking at them 60, 90 days ago?

Yes. I think, to highlight that I don't know that we've seen any adverse surprises. I think we were anticipating some of the sales coming through as they have. We probably had a more pessimistic view of currencies.

Okay.

Than we do today, but we still are -- we're not currency traders, so.

Yes.

But we still believe that we're going to see more downward pressure on the euro and our wind business today is predominantly out of the euro zone. Over time, we'll have it in China and the US. So that's something that's in our plans. We've been factoring in for that. So we saw the big drop in the euro, then it kind of bounced back, kind of held a little bit, so that was kind of a little different than we were anticipating.

Thanks for your thoughts.

Yes. Sure.

Thank you. Our next question is coming from Tyler Hojo from Sidoti & Company.

Hey, guys, good evening.

Hi, Tyler.

First question, I don't know if you could quantify it but what do you think the impact from the Boeing strike was in the quarter?

We -- Tyler, I don't think we've quantified that. What you have to look at, and I think we've shared this on past calls. If you look at the end production, Boeing aircraft, the main one we have content on today is the 777 and on one of the engine choices on the current version of 747, so it wasn't a real major impact to us. Not enough that it comes out as one our business group highlights as rationale for any change in financial performance.

Going forward, Boeing's going to be a big -- the Boeing products are going to be big for us because the 777 is selling well, we're on the 787 and the 747-8 is going to be a single engine choice of the GNX so those are going to be very good programs for us. Going forward we're going to have very good exposure at Boeing. During the strike it had minor amount of impact during the quarter.

All right. Just a question on 787. If you could just update us on what your ship set content is currently? And kind of a follow-on to that would be, you know, what are the lead times in regards to when one of your products gets ordered relative to when the plane is delivered?

Yes, we haven't given a ship set content and I don't know that we're ready to do that today. You always have to look -- I always highlight this on any program. You have to look at the OEM, initial provisioning spares and then repair and overhaul is the total. That's why we always take that in total.

The second part of your question, it's usually about -- right now I'd say with the supply chain the way it would be operating, it would be about four months.

That's helpful. And then just on the acquisition, the most recent acquisition, there was some commentary in the press release, I think it said something to the nature of you still expect the acquisition to be neutral to accretive. If sales are not too negatively impacted by the downturn in biz jet. So I guess the question is, what is your outlook for business jet and I guess that would be a good starting point.

For clarity, the -- we expect the acquisition of MPC, acquisition to be neutral to slightly accretive. We still believe that with our outlook as of today. So we're pretty confident in that.

The outlook for business jets was more a general across both the aerospace businesses and there's no doubt that the business jet market has been hit with order intakes dropping and we expect production rates to drop. But that is already in our forecast. And it's already reflected in our belief with the ability to have that neutral to slightly accretive.

Okay. So it's kind of playing out how you thought when you actually made the purchase or is it a little bit better or a little bit worse?

What we would say is it's playing out pretty close to what our thoughts were and the other thing that I would want to highlight with MPC is there is a -- half the sales are defense and we believe the outlook for those are very, very secure.

Okay.

The programs have long lead times. We're comfortable with them. So the outlook is holding. There is no doubt some softening in certain segments of the market but we believe we've captured that in our forecasting and in our financial outlook.

Okay. Very good. Just moving on to one other thing here. Just in regards to the inverter business, I was hoping that you could maybe discuss just where exactly you are in the expansion efforts, especially in the United States and when you expect that to actually be able to ship product?

Yes. What we have is we've built our first units here, so that was key to building and in effect certifying the production line. We see really production more starting towards latter part of third quarter, early fourth quarter.

Okay and would there be--?

And then in China it's going to be probably another quarter behind that.

Okay. And would there be new customers with these new builds or same customers?

Right now, we are pursuing new customers, but right now the orders are in support of our existing customer base and their initiatives, both in the U.S. and in China. And as I was saying, we've positioned some global agreements with them to support their localization in both countries. So that's really more tied to our existing business than the growth in that existing business, that's where we highlighted we captured some share in the last year.

All right. And just lastly, if you could just maybe update us on your CapEx expectations and free cash flow for the year?

Right. On CapEx, right now we said in the first quarter we were finishing a large project, so we think the first quarter is a little bit high in relation to the remainder of the year. So we believe we'll be under -- consistent with or under last year's number, most likely under.

We have put in place new processes to review capital expenditures on a more stringent basis, obviously with -- as we mentioned cash is tight and we want to make sure we're doing all the right things. So we put new processes in place that will probably keep that number down below the prior year. Free cash flow, we do believe will continue to be a pretty strong element for us. In the first quarter if you kind of do some of the math with the foreign exchange impacts, we were fairly consistent with the prior year. And so we do not at this time anticipate free cash flow to see any significant drop over the prior year. It will be down, obviously, with the flatness and some of the currency impacts but if you pull those out, we anticipate that we'll be about in the same levels.

Thanks a lot, guys.

Sure.

Thank you. Our next question is coming from William Bremer from Maxim Group. Please go ahead with your question.

Good afternoon, gentlemen. Nice quarter.

Thank you.

The Electrical Power Systems, are we close to the 50/50 ratio between power gen as well as wind at this point?

We're getting closer, but we're not there yet. So we're about a little over a third now.

Okay. Just wanted to do a little housekeeping, since my colleagues hit a bunch of questions I had raised. SG&A for this quarter, how should we look at that going into the latter or the second quarter as well as the latter part of '09?

The SG&A towards the end of the year.

I'm sorry, I was focused on something else a minute there. How do we anticipate SG&A flowing through the year?

Right, especially with the integration of MPC and the synergies that we're expecting.

Right. We do believe that for a variety of reasons, one being synergies but probably more importantly overall cost reductions that we will be putting in place across all of our businesses, that we would see SG&A moderate as we go through the year. You're not going to see significant cuts in any given quarter or anything like that. So I think you'll see fairly decent moderation of SG&A through the year.

Okay. Excellent. Thank you.

Our next question comes from Peter Lisnic from Robert W. Baird. Please state your question.

Hi, guys, just some quick follow-ups.

Sure.

If I look at the first quarter tax rate, the R&D credit, was that a one-time item? Is that the right way to think about that? You said the tax rate should approximate last year.

Right. The prior year piece of that is a one-time item. We will see for the remainder of the year the ongoing piece of -- reflected in the tax rate but there was the catch-up, if you will, from the prior year.

Okay. But the net for the fiscal '09 is that your tax rate is going to be somewhere around 33, is that the right way to think about it?

That's the right way to think about it.

All right. If I look at the intangible that you booked in airframe, is that a one-time item or should we expect the same kind of amortization throughout the year?

Every quarter, it will -- there's different lives embedded in that over a number of years but it's a longer term item, yes.

Okay. And so that suggests that that business really is mid-to high single digit operating margin. Is that the right way to think about it?

Coming out of the blocks, yes, and we anticipate improving that as we go throughout the year.

That is my question is how much improvement are you targeting and relative to your legacy aerospace businesses, I mean, that's a pretty significant difference. So how much of that gap do you think you can close this year and how much of that gap can you close overall?

Pete, the best way to highlight is, we expect that business over time to operate at or above 15%.

Okay.

And we'll be working on a path to do that. It has all the fundamentals to get there. But what I'm not going to do right at the moment is give quarter-to-quarter but that's our expectation of the business.

I'm okay with the non-quarter-to-quarter, not giving that out. But the over time part is the part I'm wondering about. Is this a two, three year kind of time horizon or is it longer than that?

18 months.

Oh, okay. All righty then. That's all I had. Thanks a lot.

Sure.

Thank you. Our next question is coming from Greg McKinley from Dougherty. Please state your question.

Yes, my question's been answered, thank you.

Sure.

Thank you. We'll go with our next question from Renee Reynolds from Gilder, Gagnon.

Hi, good afternoon. Could you just tell me how much of the growth in inventory was due to the acquisition and how much from the core businesses?

The majority of the growth was due to the acquisition. I'd like to say that more than the growth was. But we did have some growth in organic inventories. Not significant this quarter but we did have some growth, but the majority was related to the acquisition.

Okay. Thank you.

Thank you. Our next question comes from Tyler Hojo from Sidoti & Company. Please state your question.

Hey, just wanted to ask you guys about acquisitions. I mean, what are your plans here with the balance sheet somewhat levered and what -- also, just what you're seeing generally speaking, just in terms of pricing.

Yes, what you'd have to say, I think we looked at this in previous discussions, is we think in a downturn there's opportunities, and so we're continuing to look at the opportunities that arise and especially for assets that may not have become available in the normal time. We've talked a little bit about looking at if you want to say ratios or pricing on acquisitions and if you're in the healthy areas, we think the ratios are somewhat sticky. If you want an automotive asset you can get it cheap. In the areas where we would be interested, some of the multiples are kind of sticky.

Okay. They're holding.

They'll come down a little bit but they're -- because they're attractive markets so they're still not getting the real pummeling some areas are. That's not the areas we're interested in.

Sure. I understand. And just in regards to where you're comfortable taking that leverage to on the balance sheet?

Yes, I think where we're at, at the moment, is probably the upper level of our comfort level. We would not want to lever up substantially more than that, but we do have the cash flow I referred to that will allow us to fairly quickly delever as well. So a lot of this kind of becomes a timing from the standpoint of as our cash flow allows us to delever somewhat, then we'd be back in a position to -- so there might be kind of a -- if you call it a peak and a trough sort of process that would go on here.

Great. Thanks a lot.

Sure.

There are no further questions at this time. I will now turn the conference back to you.

Okay. Well, thank you for everyone for joining us today. We look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available at 10:00 p.m. Eastern time by dialing 1-888-266-2081, domestic. Or 1-703-925-2533 international and by entering the access code 1319207. A rebroadcast will also be available at the Company's website at www.Woodward.com for 30 days. We thank you for your participation on today's conference call and ask that you please disconnect your lines.