Woodward Inc (WWD) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Woodward Inc. second-quarter fiscal 2011 earnings call.

At this time, I would like to inform you that this call 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 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 call over to over to Mr. Weber.

Thank you operator. We would like to welcome all of you to Woodward's second-quarter fiscal 2011 conference call.

In a few minutes, I will cover the financial highlights of our second quarter and Tom will comment on our results, strategies and markets. I will then comment on today's earnings release and at the end of our presentation, we will take questions.

For those who have not seen the release, you can find it on our website at Woodward.com. As noted in the press release, we've included some visual presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available through April 29, 2011. The phone number for the audio replay is 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 14 days.

Before we begin, I would like to provide our cautionary statement as shown on Slide 3. In the course of this call when we present information and answer questions, any statements we make other than 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 aerospace and defense, power generation and distribution 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 on 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 fiscal 2010, 10-Qs for the quarter ended December 31, 2010, as well as the 10-Q for March 31, 2011, which we will expect to file shortly.

Going forward, as we refer to net earnings on these calls, we're technically speaking to net earnings attributable to Woodward. In addition, segment earnings, EBIT, EBITDA, and free cash flow are non-GAAP US operating measures that we use in the press release and during this call. A description of these measures and a reconciliation of each to the most comparable US GAAP measure is included in the appendix to our slide presentation and in our earnings release and related schedules, all of which are posted on our website. Management uses this information in monitoring and evaluating the ongoing performance of Woodward and each business segment.

I would like to now switch to our quarterly financial highlights. Our second-quarter results contain continued signs of improving conditions for Woodward and its markets. Sales for the second quarter were $419 million, up 20% from $349 million in the second quarter of last year. Reported earnings per diluted share were $0.46 for the second quarter of 2011 compared to $0.34 for the second quarter last year, a 35% increase. At the same time, we increased our R&D spending by $7 million, or 37%. Free cash flow for the quarter was $3 million, reflecting increased investments in working capital to support future sales growth. Overall, these results indicate that each of our businesses are in a phase of growth and improving results.

Now I will turn the call over to Tom to comment on our results, strategies and markets.

Thank you Bob. Welcome to all of you joining us today.

Overall, our markets continue to improve. We're seeing better participation by our longer cycle businesses such as industrial gas turbines and business jets. We anticipated a strong second half and that appears to be solidifying. Meanwhile, we have continued to win share and content on key new platforms across all of our businesses. To support marketshare growth, we have significantly increased our research and development spending in each of our businesses while still delivering solid levels of profitability.

We have also had numerous smaller wins that are having a significant positive cumulative effect. For example, we have secured several industrial turbine upgrade opportunities and our controls are now being used by a broader range of both turbine and engine OEMs.

Regarding our financial performance, Bob will cover the details, but I'd like to highlight that our Airframe segment made progress after a difficult first quarter. There's more work to be done here, particularly to capture opportunities related to our aftermarket offering and new platform growth. Airframe's continued improvement remains an important objective for us.

Now turning to our markets, the commercial aerospace market continues to show improvement with increased traffic and increased build rates. Overall, our commercial aftermarket sales saw an increase of approximately 16%. The Boeing 787 and 747-8 continue their certification testing, and our Turbine Systems business looks forward to ramping up our deliveries of GEnx fuel systems in the coming quarters to support these programs. The start of a recovery in regional business jets has become evident and should provide further support for growth in our aerospace businesses, particularly Airframe Systems.

Defense spending in our markets has remained steady with foreign military sales offsetting some declines in US government spending. New opportunities, such as the Boeing tanker and F-35, will continue to provide stability in Woodward's defense sales.

Turning to industrial turbine, the global economic recovery and the unfortunate Japanese crisis is leading to increased demand for industrial turbines. The long-term fundamentals for industrial turbines remain favorable to [supporting] increased build rates at the turbine OEMs.

We've continued to pursue and win share in the consolidating wind market. The globally wind market remains challenging in certain regions, notably Europe and North America. We have increased our share in China and India through internal development activity as well as the recently completed IDS acquisition. The IDS acquisition also strengthened our capabilities and inverter systems for energy storage, marine, and solar applications. Our grid-related business has had good performance as increasing global power needs and complexity of the grid have contributed to demand for our devices that measure, control, and protect both generation and distribution systems.

Industrial reciprocating engine demand accelerated this quarter. Demand has also broadened from short cycle markets to now include long cycle markets such as power generation and marine. Global industrial needs are driving demand for alternative fuel systems, specifically for engines that burn biogas and compressed natural gas.

In summary, our markets are improving and we are pursuing a variety of important growth opportunities while continuing to deliver solid financial performance and substantially increasing our investments in research and development.

I'd like to turn it back to Bob for more review of our financials.

Thank you Tom.

At the Woodward consolidated level, net sales this quarter were $419 million compared to $349 million for the 2010 second quarter. All four of our business segments saw improvement in the top line this quarter compared to the second quarter of 2010.

Net earnings for the second quarter of 2011 were $32 million, or $0.46 per share, compared to $24 million or $0.34 per share in last year's second quarter. This improvement included the absorption of $6 million in variable compensation as well as $7 million of increased research and development investments focusing on new opportunities as outlined by Tom.

EBIT, or earnings before interest and taxes, was $53 million for this quarter compared to $43 million for the prior year's quarter. EBIT was favorably impacted by the sales volume increases but was somewhat offset by the increases in research and development and variable compensation expense.

Free cash flow for the second quarter of 2011 was $3 million. Our return to growth is driving increases in both inventory and Accounts Receivable.

Turning to our business segments, Turbine Systems segment net sales for the second quarter of fiscal 2011 which include intersegment sales were $170 million compared to $147 million for the second quarter a year ago. Sales increased in both aerospace and industrial platforms. Segment earnings for the second quarter of 2011 increased to $41 million from $32 million for the same quarter a year ago. As a percent of sales, segment earnings were 23.9% this quarter compared to 22% in the same quarter a year ago. Segment earnings benefited from the volume gain and operating leverage, partially offset by increased variable compensation and R&D investments.

Moving onto our Airframe Systems results, Airframe Systems' segment net sells for the second quarter of fiscal 2011 which include intersegment sales were $97 million compared to $91 million in the second quarter a year ago. Sales levels reflected increased demand in business and regional jet applications, somewhat offset by a decline in customer funded development revenues.

Segment earnings for this most recent quarter were $4 million, or 4.1% of segment net sales, compared with $5 million, or 5.5% of segment net sales, in the second quarter of 2010. Earnings were positively impacted by the increase in sales volume and mix but were more than offset by the customer funding decline as well as increased variable compensation and R&D investments. Segment earnings include non-cash amortization of $7 million associated with the Airframe Systems acquisitions. This quarter market a substantial sequential improvement in Airframe sales and earnings, and we expect further improvement over the long-term, though quarterly variability could continue in the near-term.

Now turning to Electrical Power Systems, Electrical Power Systems segment net sales for the second quarter of fiscal 2011, which include intersegment sales, were $73 million compared to $55 million for the second quarter a year ago. Deliveries of wind converters lead the increase but were partially offset by declines in power station project deliveries which tend to vary quarter to quarter.

Segment earnings for this quarter were $5 million, up slightly from the prior quarter. Segment earnings as a percent of segment net sales were 7.3% this quarter compared to 8.9% in the same quarter for the prior year. Segment earnings were favorably impacted by the effective increased sales volumes but were offset most significantly by a $1.5 million field quality issue along with variable compensation and impacts associated with marketshare gains and global expansions.

Moving to our Engine Systems results, Engine Systems segment net sales for the second quarter of 2011 which include intersegment sales were $108 million compared to $78 million for last year's second quarter, an increase of 38%. We saw broad improvement in sales related to both large and small engine systems. Segment earnings for this quarter increased to $10 million from $6 million for the same period a year ago. Segment earnings as a percent of segment net sales were 9.5% this quarter compared to 7.9% in the same quarter last year. Segment earnings improved due primarily to the increased volumes, partially offset by increased variable compensation and increased R&D investments to drive future growth as clean energy opportunities expand.

Non-segment expenses for this quarter were $7 million compared to $5 million for the same quarter last year. Non-segment expenses were 1.8% of external sales for the second quarter of 2011 compared to 1.5% in the prior-year quarter. The increase resulted primarily from increased variable compensation. Also included were acquisition costs related to IDS, which offset by revaluation of certain previously recorded restructuring provisions.

Now I would like to focus on certain specific elements of our consolidated financial statements. Gross margin, defined as net sales less cost of goods sold, was relatively flat as a percent of sales at 30.2% in the second quarter of 2011 compared to 30.1% for the second quarter of 2010.

Selling, General and Administrative expenses were $38 million, or 9.2% of net sales this quarter, compared to $34 million or 9.8% of net sales in the same period of 2010.

Research and Development costs were $27 million for the second fiscal quarter of 2011 compared to $20 million for the second quarter of 2010. As a percentage of net sales, Research and Development was 6.5% in the second quarter of 2011 compared to 5.6% in the second quarter of 2010. The increase relates to our efforts on both previously awarded programs and future opportunities with respect to new platforms and market share gains.

Total Depreciation and Amortization expense for the second quarter of both 2011 and 2010 was $19 million. Our effective tax rate for the second quarter of 2011 was 31%, compared to 32.5% for the same quarter last year. We still expect our effective tax rate for the full fiscal year to be approximately 31%.

Capital expenditures were $10 million for the second quarter of 2011, compared to $5 million for the second quarter of 2010. As previously announced, we are constructing a new $20 million systems test facility for our Turbine segment. Construction will continue throughout most of 2011. We expect full fiscal year 2011 capital expenditures to be approximately $65 million.

Looking at cash on the balance sheet, Woodward generated $13 million of cash flow from operations for the second quarter of 2011 and $3 million of free cash flow. Cash flow will improve significantly over the balance of the year. However our focus on order fulfillment in this period of rising demand may require increased investments in working capital. Total debt was $430 million at March 31, 2011 compared to $466 million at September 30, 2010. The ratio of debt to debt equity was 33.4% at the end of the second quarter compared to 36.7% at September 30, 2010.

During the quarter, we repaid $2 million of long-term debt. Our total debt was 1.6 times EBITDA at March 31, 2011, down from 1.8 times at September 30, 2010.

Our cash balance declined from $106 million at September 30 to $61 million at March 31, 2011, reflecting debt repayments, share repurchases and dividends. Working capital, defined as current assets less current liabilities, was $512 million at March 31, 2011, $475 million at December 31, 2010, and $457 million at September 30, 2010.

Lastly, let me turn to our outlook. Confidence in our original guidance has strengthened as this year progresses. The stronger second half is developing for 2011 as anticipated. As a result, we continue to expect sales for fiscal 2011 to be in line with our original guidance of $1.55 billion to $1.65 billion with earnings per share for 2011 to be between $1.75 and $1.90 per fully diluted share. This outlook continues to reflect an expected full-year increase in variable compensation from fiscal 2010 to fiscal 2011 of approximately $0.25 per share.

That concludes comments on our business and results for the second quarter of fiscal 2011. Operator, we are now ready to open the call to questions.

(Operator Instructions). Fred Buonocore, CJS Securities.

It's a pretty dramatic sequential improvement on the Airframe Systems segment, so congratulations for that. Just want to drill into may be more details on what the big swing was, say, from Q4 and Q1 when we look at Q2.

Most notably, it's the volume. I think we've kind of called out sales volume as the predominant issue there. We were very close to a point where we were not getting anywhere near the operating leverage that business should enjoy. In addition, one of the other areas we've been calling out, and you can see it rather dramatically as we progress from quarter to quarter, is customer funded development revenue. We believe we are at a point where that is probably -- I don't want to call it bottomed out, but we don't have as much potential for continuing sequential decline in that area.

Then we had a favorable mix and we're finally starting to get a handle on some of the operating issues we called out earlier.

Great. So in terms of volume, I mean you really saw that big of a turn on the biz jet side or did you also see some pickup on military?

Yes, a little bit. It was across the board. Military was up. Biz jets are now starting to ramp back up. The regionals were kicking up and we did see aftermarket as well. So it's turning the corner.

That's great. Realizing you commented on the call that you will still see lumpiness or maybe fits and starts as we look ahead, do you think that we could reasonably expect this to represent the trajectory we should be looking for as we move through the balance of '11 and into '12, or is it going to be like one step up, two steps back? How should we think about that?

Hopefully, it won't be two steps back. Maybe on occasion a half step back. This was clearly -- things started to really hit this quarter. I would not necessarily kind of draw a straight line with those two data points going into the future. There will be some lumpiness; there will be some flat; there will be some continued growth as we go forward. But this quarter things did start to come together for us.

Then finally just on the free cash flow, last quarter you mentioned on the call the shooting for maybe $140 million for the year. Do you anticipate that your investments in working capital will be to a degree that maybe free cash flow will come in somewhere lower than that for the year?

Yes. At this point, we're still kind of trying to anticipate how the sales growth will impact the year and the timing of that growth in terms of what receivables will do at the end of every given quarter. We have made increased investments in inventories to cover -- from time to time we've talked about supply chain issues and so one. So we anticipate that investments in working capital will continue. Our cash flow from operating activities will be substantially higher though overall in the second half than in the first half.

Also the preliminary look going into 2012 also looks very promising for accelerated growth. We're still getting our arms around that, but the early indicators are we should be seeing accelerating growth in 2012.

Great. Thank you very much.

Peter Lisnic, Robert W. Baird.

Good afternoon everyone. I guess first question just on the numbers in Airframe. I think, in the first quarter, the headwind from customer funded development on the EBIT line was about $5 million. Was it a comparable number in the second quarter or has that ramped down pretty significantly?

It's down from that. I think overall the half is down significantly, but I think we have somewhere in the neighborhood of $2 million to $3 million in incremental decline again in the second quarter.

Okay, and presumably that all tails off in the back half of this year, correct?

It should. As I mentioned, we're kind of down near the bottom of what it can continue to tail off from. So we do anticipate some of that hopefully will come back as the economy improves for some of our customers, but some of the areas we talked about strategically that we have exited from will cause that customer funded development never to be in the same levels that it was at one point in time.

Understood. Then on the -- just continuing with the numbers, the R&D $7 million year-over-year in the quarter, how should we think about R&D maybe not necessarily for the second half of the year but really into 2012 and 2013 as a percentage of sales we see? Is this a new elevated R&D as a percentage of sales kind of number that we should think about, or give us some guidance as to what we should be thinking about there?

Yes, I would say, Pete, that that's about the new level we're off. It is a positive from our viewpoint that we've been winning significantly at lot of different programs in each of our businesses, so we expect for at least a couple of years to have elevated R&D spending.

Okay so --.

I think if you use about where we are at about 6.5% or so of sales, that is probably about right.

Okay, perfect. Then the last question if I could? On Electrical Power Systems, the first question I guess would be the field issue that you have. Maybe give us a little color on that. But more importantly, it looks like the margin there might be a little bit weaker than maybe we would have guessed or hoped for. But what I'm wondering is, is there anything from a pricing perspective in that market, whether it be wind or power, that has structurally changed the return dynamics of that business and how you think about that business from a longer-term perspective?

I think, longer-term, we have given that we expect Electrical Power Systems to be in the 13% to 16% operating margin. We still believe that. There -- as the wind market is consolidating and going more from let's say kind of a start-up to an industrialized industry, we're starting to see some pressure on pricing, but it is kind of what we see in all of our businesses. What we look at is, the way we have attacked the market is to follow the model we use in the turbine market and that is really go global, sign long-term agreements on a couple basis, have facilities that support all around the world and then add share. That's what we've been doing, and then through that market share and the relationships hold our margins. So that is what we are doing, and we think we are holding the margin and can continue to grow. So the fundamentals look good.

The quality issue we had was a supplier component that goes into our system that is part of the safety, I will say the safety release mechanism, and it was not up to specification. There was a big concern about safety in the field, so we retrofitted the entire field of the defective parts. So, the charge we took covers everything that is in the field, and we won't do that going forward but we had to protect the machines.

The impact of that would've put us around 9.3%.

That was -- was that in the wind side of the business or power?

That was the wind.

Okay. Then just question on that same business -- wind I think in the first quarter last year, you were incurring some very significant expansion costs, I think $3 million in the first quarter. Was there a burden you had in the second quarter as well for wind converter expansion costs?

We're still carrying that. We expanded, if you recall, we expanded into China and then to Colorado and we also put some resources into Poland in addition to our German base for this business. We have some excess capacity. We had some extra expense with that, but it is starting to flatten out year-over-year and the sales volume that we predicted earlier is coming. It is happening. So we think we're going to absorb that capacity and then we will have that capacity well prepared for the growth we're starting to get.

So we'll see good leverage in the second half?

Exactly.

Thank you very much for your time. I will jump back in queue.

Tyler Hojo, Sidoti & Co.

Good evening guys. The first question, just go back to Airframe for a little bit, definitely nice to see some of the improvement there. I'm just kind of wondering. Outside of kind of volume increases and the all customer funded issue you kind of went into and the longer-term seeing kind of services related [or] kind of pick up, what from an operational standpoint needs to go right in order to see kind of further margin expansion over the next couple of quarters?

The best way to [lay] that, Tyler, is we're on the path. It's a really good business. We are getting everything from internal productivity moving forward. The supply chain early on, I think we said we had some supply chain issues. We I think have those under control, starting to move forward. Some of that has to pass through inventory. So we are starting to see some of the benefits of that.

In the aftermarket, to remind everybody, we acquired this business with about it's like 18% of sales from aftermarket. We believe the benchmark for this type of business is about 35%. We did see a little bit of aftermarket growth. We're continuing on the operations side on the aftermarket to get our turn times reduced and really turn times is what sells in the aftermarket. So we're getting that. We're getting a hand on the logistics around parts availability. So it is all -- it's not one large item. It is a lot of small items all working together. So we expect to continue to improve. Sales volume is a big help on this. We're starting to approach the size of really when we first bought the business and then did our integration where we thought the business would be. So we are starting to benefit from that. So I think it is starting to track the way we believed it would. There's a lot of hard work left to be done, but we see the path forward now.

Okay. In terms of business jet, specific to Airframe, is the bulk of the exposure to Cessna?

No. We've got a wide range. We're extremely well positioned and have been doing very well at Gulfstream. We are at [Dasso]. We're at Bombardier. We're at Embraer. We're at Cessna. We're at Lear, which is a Bombardier company but both at Canadair and Lear and also with Hawker. So we are wide across the market covering from light jets up to the large. So with that, we starting to pick up some -- during -- we highlighted during the downturn and even recently we picked up some more business. These start to recover. Our [comps and] share in the market is going to be increasing. So all indicators in the market for biz jets, the operating hours are up. Maintenance is up. We're seeing that, and we're actually seeing new order books looking much better than they were. So as we move into '12, I think you're going to see that market continue to increase. So it is definitely one of those businesses that some of the dynamics -- first you have to get the operating hours up, and those were pounded during the recession. The second thing is it tracks, it lags corporate profits. So you can see corporate profits have been increasing. So all of the market dynamics are pointing towards recovery and we're starting to feel it.

That definitely makes sense. Then just lastly, just in the prepared remarks, you guys spoke to starting to see the recovery in the large industrial gas turbine product line. I'm just trying to kind of square GE's commentary last Thursday. It seemed like a pretty big guide increase for them for large gas turbine going from down 10% for calendar '11 production for a large gas turbine to basically flat. Is that just kind of a timing issue with you guys having a different fiscal year, or is that just conservatism? I'm just trying to square that.

Yes, I can't really exactly count on GE's numbers. But one thing, Tyler, I would like to also remind everybody we also sell to Siemens, Hitachi, Mitsubishi and then we also have a very large steam turbine business. We also do compressor control. So as we talk about industrial turbine, that general statement is applied to all turbo machinery. But the gas turbine business for us is up across a little broader customer base than just one and we see the fundamentals are increasing and we see the order book coming up, and so year-over-year it is doing well.

Now, are you talking about new equipment or are you talking about services, or our you are talking about everything?

Both, yes, new equipment as well, but both. Our aftermarket business is holding together. On top of all this is, over the last few years, we have gained more share, more content, and more customer base, so that is also helping our numbers vis-a-vis GE. We picked up some other manufacturing OEMs.

Very good. Just actually one more -- just a clarification on the earlier free cash flow question. Are you guys not updating the free cash flow guidance that you had before of $140 million?

No, other than to say it probably will not be at the $140 million level. We're working on that and we will have further color I think as we progress, but I lot of it really depends on the timing of certain things as we go through the quarters.

Understood. Thanks a lot.

Greg McKinley, Dougherty & Co.

I wonder if you guys could maybe help us understand. First of all, Engine Systems business has demonstrated significant margin recovery as volumes have come back in. Where are you, do you think, in the cycle there toward getting back to peak margins?

Secondly, maybe just revisit what causes some of the big margin volatility within Engine Systems as I look back to my model? We had nice margin profitability in your fourth quarter last year but probably three of the last four quarters seem to have been somewhat below your long-term margin view. Maybe just refresh my memory in terms of nonrecurring items or special circumstances that created that and what would cause that to come back more in line with your view?

Just kind of as a reminder to everybody, we've kind of set our longer-term margin targets at 9% to 13% on the operating margin. First, I would say that volume would be driving part of that, and we're starting to see volume recover.

This is on Engine Systems now?

Engine Systems. Yes. We're starting to see good leverage on the fixed asset or fixed structure base.

The second part of it is, in our engine business, we have a real difference between our short cycle and longer cycle businesses. Short cycle would be our small diesel engine controls, small gas and propane and biofuel controls versus the longer-cycle large diesels and large gas engines. The large diesels and large gas engines carry better margins. Those are starting to recover. That is really a lot of applications in the marine, power generation, large off-highway vehicles, locomotives, and then also oil and gas. As you see, a lot more work going into the gas pipelines and the like. That's where those machines are used, and we're starting to see those recover. So those take a long time but they are sequentially increasing, and we're starting to see the recovery there. So that is where we get the extra -- as the sales grow and those larger engine numbers come back, that will start pushing us up to those higher margins.

Okay. Then just some historical context on your recent quarters within Electrical Power. Margins were nice and strong Q4 last year, but they have been it looks somewhat below your long-term view in maybe three out of the last four quarters. I think you had alluded to some business development costs, etc. But what -- are there one or two things that stand out that cause that big quarter-to-quarter variability? Getting back to that 13% to 16% view longer-term, what's it going to take from what we have seen in the last six months?

There's a few. One is we have increased R&D expense, or R&D investment. The other one that we are highlighting is we anticipated strong growth in the wind converter market, and we started building capacity. The margin was a little slower than we anticipated coming back, so we do have that capacity online today which -- and we are seeing the growth coming. It might have lagged about six months from what we had really anticipated, so that kicks in. We expect to see the margins come up. We get some variability in some of -- we have some what we call in our power solutions, subsegment of the Power Systems group some variability that comes with the project type business. So we had a strong power solutions quarter. That fourth quarter had some large sales. So it was kind of a mix volume kind of thing, but the bigger fundamentals I think are the added capacity that we put in place for order fulfillment but also for our R&D investment. Those will start being absorbed with the volume.

Great. Then last question -- you highlighted some cycle recovery in small business jets and regional, which is helping Airframe. Are there any significant platform or content wins that could give the business a boost outside of what is happening with the turn in the cycle?

Yes. Through the cycle, we have secured some programs where our customers aren't allowing us to announce from large biz jets to commercial airline. You know, we highlighted we see and we're in the process of finalizing on the tanker. That is something we've been on for a long time but we don't have the final contract in front of us, but we anticipate that we will be on there, and that will be a substantial program for us. So there's quite a few. Other ones that we call out, if you remember we talked about this ILWS, which is a remote weapons station. That it is going to be, we think, a sizable program. We also want some new missile programs. We've got the ones I just highlighted. So we actually have been very successful and it is a matter of these working their way through development which could take two to four years, but we think we are in a really good position for growth based on what we secured.

Thank you.

(Operator Instructions) Gary Farber, CL King.

Can you just speak to raw materials? Is anything outstanding there that could be an issue, price of oil or anything like that?

Well, right now, some of the commodities that -- if you see the price of oil, where we're seeing it hitting at the moment is in freight costs, and so we have seen that. So far, we have been absorbing it pretty well. Copper is another one. It has been a little bit volatile but it's at an elevated commodity price right now. Again, we have been absorbing it, but that could cause some issues.

The other one that we are monitoring very closely right now is electronic components, which really have been -- there are some key components that were affected by the earthquake and tsunami in Japan. We have some concern about supply, so we're working hard on that one, but that is an open item that we're still grinding through. So those are a couple of ones that we're concerned on and working hard to try to mitigate.

If you could also remind us of your liquidity, where it stands right now.

we're at 1.6 times EBITDA versus 1.8 times at the end of the fiscal year.

And the credit sales (inaudible) and everything?

Fully available, no real changes in that at this time.

How much is it?

Credit availability total, we have a revolver that is $225 million with an option to go another, what was it, $400 million over that, $[125] million over that, and then $61 million on the revolver currently available.

And then just the last question is on acquisitions. Any update on your thought process there?

Excuse me, $61 million in cash. The revolver is almost fully available, less some minor lines of credit. What was your last question?

Yes, sure, on acquisitions, any update on your thoughts there, what it looks like or anything like that?

Other than we continue to go through our strategic process, there is nothing really specific to update. We did close on the IDS acquisition. That went as planned, and we continue to go through our strategic gap and funnel process as we have all along.

J.B. Groh, D.A. Davidson.

Most of my questions have been asked, but could you talk about the ramp up in 777 and 787? And have you started to see like the 777 back to 7 a month? Are you starting to see that benefit? When do you start to see some real benefit from 787 and the pull-through from GE there?

Yes, and then I would also throw 747-8 in there.

Right, right, right.

That actually has a nice ramp, especially with four engines [per] -- really start very late this fiscal year and into next year we're going to start seeing those hit. The anticipation is in the 777 ramp up, there we're going to start seeing OEM but on the 47 and 87, we have not sold any initial provisioning spares as of date. All of the airlines have put those on hold until they have confidence in the delivery schedule. So, I really anticipate starting to see some of the initial provisioning spare activity kick in early fiscal year 2012. So we really do expect, as we move late this fiscal/year early next year, we're going to start seeing that materialize and have an impact.

So when we think about 87 ship sets that have kind of gone out the door, is it roughly 50, something like that, or I think they're working on numbers around 40 right now?

You know, we're probably anticipating this fiscal year on the order of 100 ship sets but for us, that is two per (inaudible), so it is proximately plus or minus you've got to put a percent around that depending on how everything moves, but that is about what we are anticipating.

Okay. Then one for Bob. I know there were a little bit of open market purchases during the quarter. What is remaining on the current authorization?

The vast majority of the --

Vast majority of (multiple speakers)

We really haven't dented it in any significant way.

Can you remind me what the number was? I don't have it in front of me.

Originally, the total was $220 million -- excuse me, $200 million.

So you've only taken maybe $10 million out of that?

It might be between $10 million and $20 million but (technical difficulty) this last quarter.

Tyler Hojo, Sidoti & Co.

Hi. Just on the wind inverter product line. It doesn't seem like you are changing anything there, but do you still expect that to be up about 30% year-on-year?

Yes, we're tracking really well, Tyler, so we're confident we'll hit that.

Good deal. Just lastly, I think, in the last conference call or maybe the one before, you provided some growth rates on a segment level in terms of meshing with your annualized guidance. Does that change around at all or is that still pretty much good to go?

Yes, we're still looking at that. It's good, maybe up slightly.

Great. Thanks a lot.

Thank you. Mr. Gendron, there no further questions at this time. I will turn the conference back over to you.

Okay. Well, we appreciate everybody calling in today and your questions, and we look forward to speaking with you over the next quarter. Thank you.

Ladies and gentlemen, that concludes our conference for today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 8.00 PM Eastern daylight time by dialing 1-888-266-2081 for US calls and 1-703-925-2533 for non-US calls, and by entering the access code 1522879. A rebroadcast will be available at the Company's website, www.Woodward.com, for 14 days. We thank you for your participation on today's conference call and ask that you please disconnect your line.