Woodward Governor Company F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Jan.20.09 | About: Woodward Governor (WGOV)

Woodward Governor Company (NASDAQ:WGOV)

F1Q09 Earnings Call

January 20, 2009 6:00 pm ET

Executives

Tom Gendron – President & CEO

Bob Weber - CFO

Analysts

Peter Lisnic – Robert W. Baird

Greg McKinley – Dougherty & Company

Tyler Hojo – Sidoti & Company

William Bremer – Maxim Group

Rene Reynolds – Unspecified Company

Operator

Welcome to the Woodward Governor Company fiscal year 2009 first quarter earnings call. (Operator Instructions) 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.

Bob Weber

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 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.

Tom Gendron

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 reflecting 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 remain stable overall and provide a solid basis for future OEM shipments.

Financing for deliveries remains an uncertainty. 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 a reduced production outlook for 2009 versus 2008. In the aftermarket revenue [inaudible] miles and cargo service are expected to decline during 2009 and airlines are withdrawing aircraft from service although at a slower rate then previously announced.

There is aftermarket exposure associated with the potential for aircraft to be removed from service predominantly related to 737 Classics, and MD 80’s. 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 system 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 in motor systems for use on a wide variety of aircraft. Our breadth of applications and customers has expanded along with it 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 then $10 million which is already reflected in our outlook.

Our turbine system segment has recently secured key customers in long-term agreements that aid and offset any exposure to reduced flight hours and the associated aftermarket sales declines. Both turbine and airframe systems segments have obtained new multiyear repair and upgrade agreements and are pursuing several other new opportunities.

Increase in our overall aftermarket business within our airframe system segment is key priority for us. This quarter we celebrated receiving a United Technologies Corporation Supplier Gold Award at our turbine combustion facility in Zealand, 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 in tact.

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 system 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 in tact for wind power. Given these expectations, our strong first quarter growth in encouraging and Woodward expects to do better in 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, North America, and continues to pursue further opportunities. In transportation markets the depressed economy is more evident. Compressed 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 shipbuilders. 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 to 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 effect 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 in 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 merge 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.

Bob Weber

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 intersegment sales were $145 million, an increase of 11% over first quarter sales of $131 million a year ago. Turbine system 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 system 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 goods 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 sizeable project at our turbine facility in Illinois.

We previously announced that we expected annual CapEx to be close to our 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 or 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 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 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 then 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 remain 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 downside 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 of fiscal year 2009 earnings conference call. We are now ready to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Peter Lisnic – Robert W. Baird

Peter Lisnic – Robert W. Baird

I was wondering, if I look at the turbine systems segment and you posted double-digit growth and I understand with aero and the strong industrial side of the business, how sustainable is that sort of growth rate 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.

Tom Gendron

Right now we still believe we’ve got 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. Its 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 is turbine 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 wildcard.

Peter Lisnic – Robert W. Baird

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.

Tom Gendron

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

Peter Lisnic – Robert W. Baird

I’m just wondering what the sales comparisons actually were quarter over quarter, December 2008 versus December 2007 quarter.

Bob Weber

Its much more difficult, on the industrial its 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 run the numbers here on where we’re at is roughly flat with the prior year, the industrial being up, its up slightly. So that would say that aftermarket for aerospace would be up very slightly during the quarter from last year.

Peter Lisnic – Robert W. Baird

If I look at the electrical power segment you through up a 45% incremental margin there, which was ahead of our expectations and I know you outlined a couple of things in the slides about what you’re doing to improve margins, but I’m wondering if you could give us more color as to where you think the margin in that business could go and should we continue to expect strong incrementals as some of these restructuring initiatives flow through the numbers.

Bob Weber

One of the things we mentioned, we have a kind of an engineering solutions business inside of that business that had a very tough comparison last year to this year. 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 then those so this quarter with wind growing but the solutions business declining is why we flowed through a little higher operating earnings level.

Operator

Your next question comes from the line of Greg McKinley – Dougherty & Company

Greg McKinley – Dougherty & Company

I wanted to ask about how your fiscal year view in your mind right now sort of flows through quarter-by-quarter, I know you’re not going to give specific quarterly guidance but you have highlighted some cautionary outlook on the transportation mark even though marine has a real strong order book you’re anticipating some softening trends there as the year progresses, 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.

Bob Weber

In terms of how we see the quarters I would say they are maybe a little bit flatter then 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, it looks like it may be a little more tempered throughout the year.

Greg McKinley – Dougherty & Company

With still some sequential growth implied as the year progresses simply because that’s what’s required to get us into that $1.4 to $1.5 billion range.

Bob Weber

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

Greg McKinley – Dougherty & Company

I’m wondering if you comment on within that electrical power system 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 the 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.

Tom Gendron

We call our power generation and distribution controls, PG&D, that business we would classify more as short cycle. So that’s controls that are used in protective relays, AC measurements, [gen] set controls. And as such they move a lot closer and react a lot closer to the economy. That was anticipated. And that business will move with, as I highlighted earlier, with infrastructure investments so its, we’re going to keep a real close eye on that because its 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’d categorize as a project oriented business. So you get large projects so you get a bit of lumpiness in the order intake and also the deliveries and we were, and because 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.

But its project business so those were anticipated and as we said on the wind side, continued to see good orders and the growth is continuing in wind.

Greg McKinley – Dougherty & Company

Relative to what your mindset was when you initially provided guidance and compared to today 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.

Tom Gendron

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 then we do today but we still are, we’re not currency traders so, 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 but, so that’s something that’s in our plans.

We’ve been factoring it in for that. So we saw the big drop in the Euro then it kind of bounced back so that was kind of a little different then we were anticipating.

Operator

Your next question comes from the line of Tyler Hojo – Sidoti & Company

Tyler Hojo – Sidoti & Company

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

Tom Gendron

I don’t think we’ve quantified that. You have to look at and I think we’ve shared this on past calls, you look at the end production Boeing aircraft, the main one we have [counted] 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 is going to be a big, 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 be a single engine choice of the [GNR] so those are going to be very good programs for us. So going forward we’re going to have more exposure at Boeing but during the strike, it had minor amount of impact in the quarter.

Tyler Hojo – Sidoti & Company

Just on 787 could you just update us on what your ship set content is currently and then what are the lead times in regards to when one of your products gets ordered relative to when the plane [inaudible].

Tom Gendron

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’ve got to look at the OEM, initial provisioning spares, and then repair and overhaul as the total estimate. That’s why we always take that in total. The second part of your question, its usually about right now I’d say with the supply chain the way it would be operating would be about four months.

Tyler Hojo – Sidoti & Company

On the acquisition, 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, what is your outlook for business jet.

Tom Gendron

For clarity we expect the acquisition of MPC 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 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 its already reflected in our belief with the ability to have that neutral to slightly accretive.

Tyler Hojo – Sidoti & Company

So its 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?

Tom Gendron

I would say its playing out pretty close to what our thoughts were and the other thing I would want to highlight with MPC is there is, half the sales are defense and we believe the outlook for those are very secure. The programs have long lead times, we’re comfortable with them. So the outlook is holding but there is no doubt some softening in certain segments of the market but we believe we’ve captured that in our forecast and in our financial outlook.

Tyler Hojo – Sidoti & Company

Just in regards to the inverter business I was hoping that you could maybe discuss just where exactly you are in expansion effort especially in the United States and when you expect to actually be able to ship product.

Tom Gendron

We’ve built our first units here so that was key to building and in fact certifying the production line. We see really production more starting towards latter part of third quarter, early fourth quarter and then in China its going to be probably another quarter behind that.

Tyler Hojo – Sidoti & Company

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

Tom Gendron

Right now we are pursuing new customers but right now the orders are in support of our existing customer base and there initiatives both in the US and in China. As I said, we’ve positioned some global agreements with them to support their localization in both countries so its really more tied to their existing business then the growth in that existing business. That’s where we’ve highlighted we’ve captured some share in the last year.

Tyler Hojo – Sidoti & Company

If you could maybe update us on your CapEx expectations and free cash flow for the year.

Bob Weber

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’ve 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 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 the same levels.

Operator

Your next question comes from the line of William Bremer – Maxim Group

William Bremer – Maxim Group

The electrical power systems are we close to 50-50 ratio between power gen as well as wind at this point?

Bob Weber

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

William Bremer – Maxim Group

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 2009, especially with the integration of MPC and the synergies that we’re expecting.

Bob Weber

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.

Operator

Your next question is a follow-up from the line of Peter Lisnic – Robert W. Baird

Peter Lisnic – Robert W. Baird

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—

Bob Weber

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

Peter Lisnic – Robert W. Baird

But the net for this fiscal 2009 is that your tax rate is going to be somewhere around 33, is that the right way to think about it?

Bob Weber

That’s the right way to think about it.

Peter Lisnic – Robert W. Baird

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

Bob Weber

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

Peter Lisnic – Robert W. Baird

So that suggests that that business really is mid to high single-digits operating margin, is that the right way to think about it?

Bob Weber

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

Peter Lisnic – Robert W. Baird

How much improvement do you, are you targeting and relative to your legacy aerospace businesses, that’s a pretty significant difference so how much of that gap do you think you can close this year, how much of that gap can you close overall.

Tom Gendron

The best way to highlight it, we expect that business over time to operate at or above 15% and we’ll be working out 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.

Peter Lisnic – Robert W. Baird

The overtime part is the part that I’m wondering about. Is this a two, three year kind of time horizon or is it longer then that.

Tom Gendron

Eighteen months.

Peter Lisnic – Robert W. Baird

Okay.

Operator

Your next question comes from the line of Rene Reynolds – Unspecified Company

Rene Reynolds – Unspecified Company

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

Bob Weber

The majority of the growth was due to the acquisition. I’d like to say that more then 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.

Operator

Your final question is a follow-up from the line of Tyler Hojo – Sidoti & Company

Tyler Hojo – Sidoti & Company

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

Tom Gendron

We’d have to say, we looked at this in previous discussions, 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 come available in a 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 but in the areas where we would be interested some of the multiples are kind of sticky.

They’re holding, they’ll come down a little bit but they’re, because they’re attractive markets so there still not getting the real pummeling some areas are and that’s not the areas we’re interested in.

Tyler Hojo – Sidoti & Company

Just in regards to where you’re comfortable taking that leverage to on the balance sheet.

Bob Weber

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 then that. But we do have the cash flow I referred to that will allow us to fairly quickly de-lever as well. So a lot of this kind of becomes a timing from the standpoint of as our cash flow allows us to de-lever somewhat then we’d be back in a position to, and so there might be kind of a call it a peak and a trough sort of process that would go on here.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Tom Gendron

Thank you everyone for joining us today. We’ll look forward to talking to you next quarter. Thank you.

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