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Woodward Governor Company (NASDAQ:WGOV)

Q2 2009 Earnings Call

April 22, 2009 6:00 pm ET

Executives

Thomas A. Gendron – Chairman of the Board, President & Chief Executive Officer

Robert F. Weber, Jr. – Chief Financial Officer & Treasurer

Analysts

Tyler Hojo – Sidoti & Company

Peter Lisnic – Robert W. Baird & Co.

J. B. Groh – D. A. Davidson & Company

Gregory J. McKinley – Dougherty & Company, LLC

[Greg Baccaccio – Lord Abbott]

Operator

Welcome to Woodward Governor Company Second quarter 2009 earnings conference call. At this time I’d 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’ll 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.

Robert F. Weber, Jr.

We would like to welcome all of you to Woodward’s second quarter fiscal 2009 conference call. In a few minutes Tom will talk about the highlights of our second quarter 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 of who have not seen the release you can find one on our website at Woodward.com.

As noted in the press release we have 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 25, 2009 and 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 30 days.

Before we begin I would like to provide our cautionary statement as shown on Slide there. In the course of the 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, 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 press release and our public filings with the Securities & Exchange Commission including our 10K for 2008 and 10Q for the quarter ended December 31, 2008. Now, I will turn the call over to Tom to discuss our progress towards achieving our strategic goals in the second quarter.

Thomas A. Gendron

I’ll begin by highlighting our financial results for the second quarter. Total sales were up 9% reflecting the MPC acquisition and the formation of our air frames systems segment. Organic sales were down 8% but organic operating earnings excluding special charges were consistent with the prior year. Our earnings were $0.27 per share including special charges of $0.16 per share. However, excluding the special charges that we first highlighted in February, our earnings were $0.43 per share consistent with last year.

The work force management and other charges sized our business appropriately for the downturn at this time. We generated $51.8 million in cash from operations during the first half of the year. Our results for this quarter and our market outlook for 2009 remain generally consistent with the update we provided in February. Market highlights for the quarter included our commercial aerospace sales excluding business jets were consistent with the prior year, sales related to business jets were down significantly, defense sales were slightly up, industrial gas turbine sales were very strong, wind inverter sales were again up significantly almost 25% in a flat market.

This is before the negative effects of exchange rates. Also, as anticipated, some other markets were down significantly, notably reciprocating engines for power generation, transportation and industrial uses and electrical equipment used in power generating and distribution. Also, currency remains a headwind although it moderated somewhat in the second quarter. We generally expect these market conditions to continue through the balance of fiscal 2009 with the exception of industrial gas turbines where growth may moderate in the second half of the year.

We announced in February that we were taking costs out of our businesses for these expected levels of sales and much of this activity has already been implemented. We are further consolidating operations in to fewer facilities and reducing staffing in all of our businesses. Our total headcount including temporary and contract labor is being reduced by over 1,000 people as a result of these initiatives. These actions are difficult but necessary given the current economic environment.

Despite the negative effects of the economic downturn and required actions, Woodward continues to advance next generation technologies and products in all of our businesses. We are making significant investments, meeting commitments and pursuing identified opportunities. Our integration efforts at MPC are on track. Actions to improve the performance of the business have already produced results and we look forward to significant improvements in the second half of this year.

Our HRT acquisition earlier this month combined with our prior acquisition of MPC completes a long stand strategy of expanding our presence in the dynamic aerospace market where Woodward has a proven track record of success. We believe these acquisitions will significantly enhance shareholder value making Woodward stronger as we exit the recession. Woodward’s solid cash flows will allow us to delever quickly and return to our more historical debt levels.

The HRT integration that’s underway and we are confident that we are building on a strong base of technology and talent to unlock future opportunities and deliver expected financial results. In line with our expectations we obtained favorable financing for the HRT acquisition despite the current economic climate with respect to credit markets. We appreciate the support shown by our lenders during these difficult times.

The bridge commitment which was obtained to support our HRT offer was not used because long term financing was in place at closing as planned. Slide 15 of our presentation summarizes the HRT financing. We are now focused on cash generation to return to our more conservative capital structure and deliver the significantly enhanced shareholder value that we know our new air frame segment promises.

Our energy control and optimization strategy and our mix of businesses position us well during this difficult time and as the economy eventually returns to health. The global movement embraced greater energy efficiency and lower emissions, continues with strength even in these difficult times. Woodward is poised to take advantage of these long term opportunities in each of our businesses.

Now, I’ll turn the call over to Bob to review our financial results in more details and to update our outlook for the year.

Robert F. Weber, Jr.

At the Woodward consolidated level, net sales for the quarter were $335 million, a 9% increase over last year’s second quarter sales of $306 million. $52 million of this growth was attributable to the acquisition of MPC. Organic sales declined 8%. Foreign exchange rates negatively impacted quarterly sales comparisons by approximately $13 million. Operating earnings defined as earnings before income taxes and interest for the quarter were $31.3 million or 9.4% of sales compared with $44.2 million or 14.5% of sales in the same period a year ago.

Operating earnings were $47.9 million excluding $16.6 million of restructuring and other special charges, or 14.3% of sales. Net earnings for the quarter were $18.5 million or $0.27 per share compared with $29.7 million or $0.43 per share for the same quarter a year ago. Net earnings for the quarter include after tax special charges of $0.16 per share. Without the special charges earnings per share were in line with the prior year.

Turning to our segments, turbine systems net sales for the quarter including intersegment sales, were $157.8 million, an increase of 7% over second quarter sales of $147.5 million a year ago. Turbine systems segment earnings in the second quarter of fiscal 2009 were $34.8 million compared with $31 million for the same quarter a year ago. Segment earnings as percent of sales were 22% in the second fiscal quarter of 2009 compared with 21% in the prior year.

Our sales performance reflects strength in our industrial offerings offset by weakness in the business jet segment. Commercial and military offerings including aftermarket were generally consistent with the prior year. Earnings increased largely to cost control efforts throughout the quarter. Engine systems net sales for the quarter including inter segment sales were $92.5 million compared to $125.8 million a year ago, a decrease of 27%.

Sales declines were a result of significant and anticipated declines in our power generation and transportation markets. Foreign exchange impacts provided additional downward pressure of approximately $4 million. Segment earnings for the quarter decreased 41% to $7.7 million compared to $13 million for the same quarter last year. The decline in segment earnings was attributable to the decrease in sales which was only partially offset by cost control initiatives.

Segment earnings as a percent of sales were 8.3% in the second fiscal quarter of 2009 compared to 10.3% in the same quarter of the prior year. The electrical power systems net sales for the quarter including intersegment sales were $58.5 million compared to $64.9 million a year ago, a decrease of 10%. Sales were flat compared to second quarter a year ago without the negative effects of exchange rates. Again, this quarter we took market share in wind inverter sales.

We experienced declines in other portions of this segment including intersegment sales. Segment earnings for the quarter were $9.1 million compared to $9.5 million for the same quarter last year. Segment earnings as a percent of sales improved to 15.6% in the second quarter of 2009 from 14.7% in the prior year. Segment earnings were negatively impacted by approximately $1 million of foreign exchange, partially offset by cost control initiatives.

Our recently acquired air frame systems segment contributed $51.6 million in net sales for the quarter including intersegment sales. Segment earnings for the quarter were $3.2 million or 6.3% of sales. Segment earnings include $3.4 million in amortization on acquisition intangibles, a non-cash charge. We began to implement significant cost reductions in the second quarter and these will accelerate in the third quarter. Included in MPC’s opening balance sheet were $10 million of accruals related to restructuring actions.

By the end of the third quarter approximately $7 million will be incurred related to these actions which include staffing reductions totaling about 300 members. In addition to the restructuring at MPC Woodward took special charges through earnings totaling $16.6 million pre-tax related to work force management and certain asset impairments to size our business appropriately for the current economic environment. These charges are reflected in our non-segment earnings and related to our turbine, engine and electrical power segments. The work force management initiatives will impact approximately 700 members and contractors.

Now, I’d 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 29.6% in the second quarter of 2009 as compared to 31.2% in the second quarter of 2008. The slight decline reflects the acquisition and the fixed cost impact of the sales decline. Selling, general and administrative expenses as a percent of sales decreased to 8.7% of sales or $29.1 million on the second quarter of 2009 compared to 10.4% or $31.7 million in 2008 as a result of cost reduction initiatives begun in the first half of 2009.

Research and development costs were $18.8 million in the second quarter of 2009 or 5.6% of sales compared to 6.1% of sales in the second quarter of 2008. This level of spending is consistent with our expectations and longer term requirements although quarterly variability will continue. Total depreciation and amortization expense for the first half of 2009 increased to $28.4 million from $18.3 million in the first half of the prior year. Our effective tax rate for the quarter was 25.5% compared to 31.9% last year. As a result of certain favorable tax resolutions, we now expect our full year 2009 tax rate to be approximately 32%.

Our capital expenditures were $12.7 million in the first half of 2009 compared to $16.5 million in 2008. For our fiscal year 2009 we anticipate capital expenditures of slightly less than $30 million excluding HRT. We remain focused on our low cost strategy and will break ground for our new facility in Poland this quarter. In the third quarter we will also deliver wind inverters out our Colorado facility and in the fourth quarter out of our China facility.

To turn briefly to our balance sheet, cash and cash equivalents increased to $126.9 million at March 31, 2009 from $109.8 million at September 30, 2008. Our total short term and long term debt was $432 million at March 31, 2009 reflecting the MPC acquisition financing. The ratio of debt to debt plus equity was 39.8% at the end of the second quarter compared to 40.1% at December 31, 2008.

During the quarter we generated $51.8 million of cash from operating activities compared to $29.2 million for the first six months of the prior year. As previously announced Woodward required FPC Products on October 1, 2008 and HRT Textron on April 3, 2009. We are confident that these acquisitions with combined annual sales of approximately $470 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 with further benefits to be realized during fiscal 2010. Turning to our outlook, in February, we lowered our earnings guidance to reflect the acceleration of the down turn in our served markets. We also announced that the cost reduction initiatives Tom and I referred to earlier. This quarter’s operating results are generally consistent with our overall expectations for the remainder of the year.

Substantially in line with our February guidance we now expect our 2009 fiscal year’s sales to be in a range of $1.4 to $1.5 billion including the acquisition of HRT. Based upon our year-to-date results and outlook for second half of 2009, earnings per share in fiscal 2009 are now expected to be in a range of $1.29 to $1.49 adjusting for a slight increase in special charges and improved performance from our February expectations.

These results include the effects of the $0.16 per share special charges commented on earlier. Without these charges, we expect earnings per share will be $1.45 to $1.65. Additionally, as noted on Slide 15, we expect to quickly begin returning to more historical levels of debt in our capital structure and approach 2.5 times debt to EBITDA by the close of the fiscal year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your fist question comes from Tyler Hojo – Sidoti & Company.

Tyler Hojo – Sidoti & Company

I guess the first question just in regards to the restructuring, I guess $0.16 this quarter I thought I remembered you guys said it was going to be about $0.13. What’s the expectation for additional restructuring that’s kind of in the guidance? I guess that would be a good starting point.

Robert F. Weber, Jr.

At present there is no further restructuring in our outlook for the remainder of the year. So, in our guidance the $0.16 represents everything that we anticipate at this point in time. So far, as we mentioned, our outlook and our quarter are consistent so we don’t see anything further at this time for the remainder of the year.

Tyler Hojo – Sidoti & Company

I guess just moving to something else, the engine systems business obviously, it was weak and I guess certainly it seems like most people probably anticipated that. But, can you maybe just talk about what your expectation is in regards to has that business bottomed here just in regards to an aggregate sales level? Or, do you anticipate further weakness? Any color you could provide there would be helpful.

Robert F. Weber, Jr.

We would love to say that we believe that it maybe bottomed out. I’d say at this point there is that possibility but I think we may still continue to see some continued decline albeit at a perhaps more moderated pace. So, I know that kind of sounds like an answer on both sides of the equation but I think the reality is we believe a lot of the downside has been reflected and there is the possibility that we would see kind of moderation here as we go. But, clearly I think the rate of decline will be less in the remainder of the year.

Thomas A. Gendron

I’ll just add to that Bob that a further slight decline is in our outlook.

Robert F. Weber, Jr.

That’s right.

Tyler Hojo – Sidoti & Company

Then just lastly, if you could maybe just talk about maybe where the wind inverter business is. I know there are kind of some opportunities with GE on that business and maybe if you could just generally talk about any sort of near term opportunities within the stimulus bill.

Thomas A. Gendron

I would highlight one, we’re really proud of our electrical power systems group here that if you look this year wind the market is expected to be flat returning to mid teen growth percentages next year and beyond. So, they’ve actually captured market share. We’ve talked a little bit about that on previous calls. A lot of reasons we captured market share from some of our current customers and expanded in to some new customers was through the expansion of our global footprint.

I think we highlighted that we were going to start building inverters in both the US and China as well as in Germany. That strategy is working, we’re capturing share. We’re still working on the opportunities with other wind turbine manufacturers in our customer base. At this point we don’t have anything to announce, we’re working hard we think we have a great platform of the power inverters as well as digital electronics and we expect to continue to do well in that market.

Tyler Hojo – Sidoti & Company

Just maybe if you could follow on to that, any sort of potential incremental upside from maybe some stimulus?

Thomas A. Gendron

What I would say right now is that the stimulus is keeping the market positive because without it, it probably would have declined, in my opinion at least. So, I think that’s keeping it positive and I think that’s going to stimulate the increase going back to like I said mid teens growth next year. So, I think it is working and that’s our outlook based on the fact that the stimulus has happened.

Operator

Your next question comes from Peter Lisnic – Robert W. Baird & Co.

Peter Lisnic – Robert W. Baird & Co.

I guess just to clarify on the second quarter it sounded like it was in line and then the new guidance for sales, can you give us a sense to whether or not your organic growth expectations have changed in that new guidance?

Robert F. Weber, Jr.

No, if you kind of do the math, the 1.3 to 1.4 moving to 1.4 to 1.5 obviously, the incremental increase for the acquisition is approximately where we had mentioned it was before. So, we’re inside of that range and it is in line with our organic projections earlier.

Peter Lisnic – Robert W. Baird & Co.

Then if I look at the turbine business, sales pretty strong and good margin increase. Can you give us some color or just some commentary on first aerospace versus industrial and then break apart OEM versus aftermarket for both of those segments. Because, my guess is like last quarter you had probably pretty strong demand on the aftermarket side in industrial so I was just wondering about that. Then, if you could comment also on OEM that would be great.

Thomas A. Gendron

Maybe first to talk about is the industrial. The positive thing that’s occurring in the industrial market is that the mix of turbines being sold at the moment are more the low emission turbines in which we have very good content. So, we have a lot higher content on the low emission turbines than the older equipment or the high emission turbines. So that on the OEM side on the industrial it’s kind of a mix at our customers that’s favorable to us. That was a positive.

The second part that we are seeing that I think we’ve highlighted before, what we call the bubble years back in the early 2000, late ’99, 2000 time frame. Those are in service and we’re starting to see aftermarket revenue coming from them. So, it’s a positive in that respect. From mix on OEM and still a solid aftermarket coming through from the large bubble here.

Then move over to aircraft, on the commercial OEM side, basically flat year-over-year. Biz jets obviously is dropping and dropping fast and we’ve talked about that previously. We encourage all of you to fly business jets, it would be helpful to us. Military holding together, slightly up and the commercial aftermarket is just slightly down. So, overall that adds up to a very good performance with our turbine group.

Peter Lisnic – Robert W. Baird & Co.

Can you maybe outside of business jet conversations can you maybe give us a sense as to what the backlog looks like in the IGT business and whether that business from an OEM perspective has been really impacted by credit markets and just the inability or the unwillingness to pull the trigger on large capital projects globally.

Thomas A. Gendron

What I would say is there is still good backlog but a lot of our markets, I can’t say it’s all finance so there’s still risk due to that. You’ve seen probably some of the large turbine guys announce that the backlogs are still good and it’s still a concern on financing that backlog. The backlog is positive in terms of mix for us. So, as long as the credit markets can come through that will be there but that’s still a little hard to predict.

Peter Lisnic – Robert W. Baird & Co.

Does the backlog imply growth over the next few quarters or a couple of years out?

Thomas A. Gendron

What we are saying is we will probably see moderating growth. It won’t get as high as we had. We’re more or less saying it’s going to hold.

Robert F. Weber, Jr.

The one part we won’t see until it kind of shows up is the aftermarket side. So, as Tom mentioned, that could be the beginning of a trend but it’s way too early to really identify whether or not that will continue.

Peter Lisnic – Robert W. Baird & Co.

Then I could probably back in to this I think but, the pro forma leverage number of 2.5 times, my guess is that you’re not really altering your full year free cash flow of $110 to $140? Is that right?

Robert F. Weber, Jr.

That’s right.

Operator

Your next question comes from J. B. Groh – D. A. Davidson & Company.

J. B. Groh – D. A. Davidson & Company

I think my cash flow question got asked and answered but just a clarification on the tax rate Bob I think you mentioned. Did you say that’s going to be 32% second half of the year or 32% for the full year?

Robert F. Weber, Jr.

32% for the full year.

J. B. Groh – D. A. Davidson & Company

So that implies roughly 35% and change for the second half correct?

Robert F. Weber, Jr.

It’s got to be about that, yes.

Operator

Your next question comes from Gregory J. McKinley – Dougherty & Company, LLC.

Gregory J. McKinley – Dougherty & Company, LLC

A couple of questions, first of all we’ll just talk about a few numbers for a second with the HR Textron deal closed, should I be thinking about sort of interest expense migrating to maybe what kind of $8 million quarterly run rate? Am I in the ballpark there?

Robert F. Weber, Jr.

Hold on one second let’s see if I have something here that’s got that average. It’s probably going to be a little bit north of that Greg, closer to a 10 number.

Gregory J. McKinley – Dougherty & Company, LLC

Per quarter?

Robert F. Weber, Jr.

Yes.

Gregory J. McKinley – Dougherty & Company, LLC

Then, in terms of your progress on integrating MPC and obviously HR Textron was just closed, but can you share with us sort of your thoughts where the margins goal is for that air frames segment as the year progresses and where maybe your real long term goals are?

Thomas A. Gendron

What I would highlight and we mentioned this after we first acquired MPC, we do expect to have the air frame systems operating margins at or above 15% within 18 months. As we previously stated HRT is right [inaudible] with that. When we bring it all together we still expect that to be our plan.

Gregory J. McKinley – Dougherty & Company, LLC

Does that sort of take a little bit of a step back or moderate here in the near term with HRT coming on board or can we actually expect what you’re doing with MPC to allow it to show sort of sequential progress there in the near term?

Thomas A. Gendron

You will see sequential progress in the next quarters.

Gregory J. McKinley – Dougherty & Company, LLC

In terms of your revenue comments there again you said it’s $470 million sort of annual for HRT and MPC combined?

Robert F. Weber, Jr.

That’s right.

Gregory J. McKinley – Dougherty & Company, LLC

Obviously you guys have made a fair amount of progress in right sizing the cost infrastructure. There are not more anticipated restructuring charges during the remainder of the year, but we’ve gone from what, $32 million of SG&A in Q1 to $29 million here in Q2. Where are we in the cost modification process? Again are we seeing a run rate emerge here or do you expect to continue the improvements on that line?

Robert F. Weber, Jr.

We would expect continued improvements. In the second quarter, there were some cost reductions, but the vast majority have been implemented in this quarter. We still do have some remaining, but the majority of the workforce management activities have taken place here now in the third quarter. So you will see sequential improvement as we go forward.

Gregory J. McKinley – Dougherty & Company, LLC

Last question really relates to a longer term outlook. As you see your order books change in the turbine segment and engine systems, etc., I know United Technologies yesterday for the first time commented on how they’re seeing the OEM aerospace order book shape their view for 2010. As you probably notice there’s a huge range of estimates and expectations out there for 2010.

I’m wondering do you directionally believe that an order book that you’re seeing unfold today allows for maybe stabilizing earnings and revenue trends next year or are we starting 2010 at a lower trough level from the health of order book given what’s happened to the economy this year?

Thomas A. Gendron

A little bit. There’s no doubt that moving to 2010 will be a challenging environment still. We haven’t put a forecast out yet for 2010 but a little bit on the order books again when you think about our aircraft market, which I think was one of your questions, the mix we absolutely still see military holding up well.

There’s been questions I’ve had asked of me about Secretary Geitz proposed budget and the like and if you look at that budget, it’s still very healthy. Any of the programs he discussed in that budget for reduction or cancellation would not impact our outlook until after 2010. We have to recognize those programs in the funding, all that solid throughout 2010. Defense looks really good still and the mix of our programs we feel good about that.

Commercial aftermarket we’ve seen some parkings but that’s already occurring. We feel like we have that under control so I think that’s going to be okay. We’re seeing maybe a little bit down but we’ve been holding our own. Then what we really have to still find out is on the commercial aircraft what if any production rates beyond what’s been discussed are going to go down and that really I think is are the aircraft going to get financed?

We’re monitoring and have contingency plans around that. We think we’re building that into our cost structure but that’s still a wild card. I don’t think anybody has a real great handle on exactly how well those aircraft will be financed. So you take that all together, we think we’ve got our cost structure correct, we’re looking okay out there but it’s going to be a challenging environment.

Gregory J. McKinley – Dougherty & Company, LLC

Obviously I would think 2010 also enters into that year a little more challenging on the engine systems side and maybe to a degree on the electrical power systems side of the business. You may not want to comment at all, but I would generally think a flattish to maybe modestly down environment given where you probably have the beginning of next fiscal year from an order book standpoint is something that to me makes sense.

Can you comment if you think that rationale is inconsistent with how you’re looking at it?

Thomas A. Gendron

I think we mentioned a little earlier already in the call. We do expect that there still could be some slight downside in those what we call our shorter cycle businesses and that’s the reciprocating engine and the power gen distribution control. That’s probably correct. The wind business on the other part half of our EPS looks like it should be up going forward.

As I said the outlook is year-over-year ’08 to ’09 flat wind turbine deliveries with double digit growth in 2010, that’s the market outlook at the moment in the industry and I think that seems reasonable.

Operator

Our next question comes from Greg Baccaccio – Lord Abbott.

Greg Baccaccio – Lord Abbott

With regard following up on engine systems, the discussion there, obviously the margin is down a bit, particularly a bit given the cost controls, etc. you’re attempting. Give us a sense of when we might see that in place in terms of stabilization of margins, etc.

Robert F. Weber, Jr.

From a longer term perspective during the cycle here that we’re in, I think that the level that we’ve seen this quarter is fairly indicative of where that business will be for at least, I’ll call it the medium term defined by the two years of the down cycle that we had talked about before.

One of the things that you see going on if you would take our normal sales decline at a normal 40% contribution margin and then take a look at what the earnings as a percent of sales are for that business you see the extent of the cost savings going on counteracting what would be the normal flow through there. We do believe we have some upside off the current quarter but there’s still an awful lot of pressure from an earnings perspective that is counteracting that.

Greg Baccaccio – Lord Abbott

Obviously the debt is increasing and your expectation of 2.5 debt to EBITDA by year end. Is the long term goal with respect to cash flow to continue to improve that ratio? I heard the discussion of the Poland facility. Maybe you could do the tradeoff between cap ex and Poland and China, etc., give us some feeling for the spending going forward x acquisitions.

Robert F. Weber, Jr.

I want to be very clear. Our focus is de-levering. Our focus with our cash flow which is still very strong and is increasing with the acquisitions will be first and foremost on de-levering. There has been some strategic capital expenditures that as a result of the current economic downturn we can defer and push out because quite honestly the needs of our customers have also pushed out.

Some other things that allow us to get our for example focus on our cost structure such as Poland, those we are going forward on. Also all expenditures related to any of our customer programs we’re continuing to drive and the ramp up speed with respect to Colorado and China will be matched to what our customers are asking us to do with respect to wind growth in both the US and Asia.

Greg Baccaccio – Lord Abbott

With regard to facilities, I assume that the facilities in place will stay in place. Anything being closed? Are you still contemplating some consolidation on that score?

Robert F. Weber, Jr.

We are. In terms of large facilities, nothing planned there. We did in prior quarters comment that we had closed the Niles facility and moved that production to both China and some to Colorado. We have downsized some relatively small sales and engineering facilities recognizing where they’re at in the process and that’s why we said smaller facilities. But we have no significant facilities that we would be entertaining shutting down in the near future.

Greg Baccaccio – Lord Abbott

Is there much more headcount after this quarter to be cut?

Robert F. Weber, Jr.

Almost all the activities that we announced in that $16.6 not all. The majority have already been implemented.

Operator

Our next question comes from Tyler Hojo – Sidoti & Company.

Tyler Hojo – Sidoti & Company

Just a follow up here, what was the earnings headwind from DFX? I don’t know if you mentioned that.

Robert F. Weber, Jr.

The earnings side was not significant. We had it on the sales side but earnings quite honestly was like $1 million and that was largely in our EPS, electrical power business.

Tyler Hojo – Sidoti & Company

That was from the inverters, the inverter product line, correct?

Robert F. Weber, Jr.

That entire business is pretty much European based. So it’s a combination of the power generation that we have [inaudible] our facilities there as well as the wind facilities so both of those have foreign exchange headwind.

Tyler Hojo – Sidoti & Company

But there was nothing incremental to the $1 million you mentioned in your prepared remarks?

Robert F. Weber, Jr.

No, nothing significant, no.

Tyler Hojo – Sidoti & Company

Then just on the HRT financing, obviously a good rate there but I know a bit hunk of it is attached to LIBOR. What are your expectations just in regards to potentially locking in the rate? I know you guys wanted to delever but does it make sense to kind of lock in?

Robert F. Weber, Jr.

At the moment we’re about 50/50 fixed on floating and yes, we would entertain and are currently looking at increasing the amount of fixed rate. I think we do believe that the current rates are very favorable when you look at any of the long term charts. So yes, we will be looking at that.

Tyler Hojo – Sidoti & Company

Then just lastly, you mentioned your cap ex budget, your unchanged cap ex budget excluding HRT but could you give us an idea of any sort of level of where HRT is running just in regards to maintenance cap ex or if they have any sort of significant expenditures upcoming?

Thomas A. Gendron

No, there won’t be anything significant in the fiscal year and we’re going through really looking at all of our capital for the air frame systems, the combination of our businesses so before we start spending money we’re going to first make sure we need to. That’s part of the integration process.

Robert F. Weber, Jr.

And your maintenance comment is probably a good comment, that’s pretty much the level they’ve been at to date.

Operator

I’m showing no further questions at this time. I’d now like to hand the conference over to Mr. Gendron for any closing remarks.

Thomas A. Gendron

Thanks again for all of you that joined us today. I appreciate the questions and we look forward to talking to you at the end of our third quarter. Thank you.

Operator

Ladies and gentlemen this concludes our conference call for today. If you’d like to listen to a rebroadcast of this conference call it will be available today at 10 pm Eastern Standard Time by dialing 1-888-266-2081 or 1-703-925-2533 and by entering the access code 1351597. A rebroadcast will also be available at the company’s website www.Woodward.com for 30 days. Again, ladies and gentlemen thank you for participating in today’s conference. You may all disconnect and have a wonderful day.

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