Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Woodward Incorporated First Quarter Fiscal Year 2021 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 today from the company are Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer.

I would now like to turn the call over to Mr. Guzzardo..

Thank you, operator. We would like to welcome all of you to Woodward's first quarter fiscal year 2021 earnings call. In today's call, Tom will comment on our markets and related strategies, and Bob will discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions.

For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have again included some 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 via phone or on our website through February 15, 2021.

The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call. I would like to refer to and highlight our cautionary statement as shown on Slide 3.

As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the ongoing COVID-19 pandemic. Those elements can and do frequently change.

Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S.

GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional information -- financial information will help in understanding our results. Now turning to our results for the first quarter.

Net sales for the first quarter of fiscal 2021 were $538 million compared to $720 million for the prior year quarter, a decrease of 25%. Net earnings and adjusted net earnings for the first quarter of 2021 were both $42 million or $0.64 per share.

For the first quarter of fiscal 2020, net earnings were $53 million or $0.83 per share, and adjusted net earnings were $71 million or $1.10 per share. Net cash provided by operating activities for the first quarter of 2021 was $147 million compared to $27 million for the prior year quarter.

For the first quarter of 2021, free cash flow and adjusted free cash flow were both $139 million. For the first quarter of 2020, free cash flow was $10 million and adjusted free cash flow was $29 million. Now I will turn the call over to Tom to comment further on our results, strategies and markets..

Thank you, Don, and good afternoon, everyone. The negative impact of COVID-19 continues to weigh heavily on the world's economy with resurgences and new viral variants contributing to significant uncertainty.

While the first quarter of fiscal '21 showed signs of stabilization in many of our markets across the globe, we still anticipate quarterly volatility related to the pandemic. Importantly, we took swift action at the beginning of the pandemic to prioritize cash management in a lean operational structure.

As a result of these actions, our balance sheet and cash flow have remained strong, and as we announced today, we have restored the first quarter dividend at the same level as the first quarter last year.

We continue to closely monitor the situation and strategically adjust our business to align with customer expectations, while maintaining our strong financial position and continuing to invest for the future. Moving to our markets.

Aerospace continues to be challenged with commercial OEM and aftermarket seeing the most substantial declines year-over-year. We're anticipating future improvements in passenger traffic with the rollout of vaccines across the globe.

Additionally, the Boeing 737 MAX is returning to service in many key markets with production rates expected to improve in '21. Defense OEM spending remains solid across fixed wing and rotorcraft applications. However, we continue to anticipate a softening of guided weapons production volumes.

Defense aftermarket activity remains strong due to improved U.S. fleet readiness initiatives as well as global upgrade programs. Turning to our Industrial Market segment.

In power generation, given the already depressed gas turbine market, low inventory levels and pent-up demand for repair and overhaul, we do not expect this market to be as negatively impacted by the pandemic. Increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines.

We also foresee continued growth in global energy demand moving forward with the bulk of this expansion coming from Asia's developing economies. In transportation, China natural gas truck demand was strong, though we anticipate seasonal pressure due to higher demand for natural gas during the winter months.

The global marine market continues to be severely impacted by the pandemic. The oil and gas market remains weak globally due to lower oil prices and lack of investment, although rig counts are showing some signs of improvement in recent weeks. In summary, our markets are stabilizing.

We are beginning to see the payoff of our aggressive actions to address the challenges of COVID-19. We are consistently engaging with our business partners to assess near-term market demand and capitalize upon emerging opportunities.

While we'll still see significant amount of uncertainty and volatility in our markets, we do anticipate improvement as we progress through the fiscal year. We remain focused on operational excellence, delivering value to our shareholders and positioning Woodward to capitalize upon future market opportunities as they emerge.

Now, I'd like to turn the call over to Bob to discuss our financials in detail..

Thank you, Tom. Aerospace segment sales for the first quarter of fiscal 2021 were $322 million, a decrease of 32% from the prior year quarter. Commercial OEM and aftermarket sales remain weak as a result of the pandemic.

Commercial aftermarket sales were down 47% in the first quarter of 2021 compared to the prior year as a result of depressed passenger traffic. On a bright note, sequentially, commercial OEM was up 13%, driven by increasing demand for narrowbody systems.

Defense OEM was down slightly in the quarter compared to a strong first quarter of the prior year, primarily due to lower sales of guided weapons, partially offset by higher sales in both fixed wing and rotorcraft. Defense aftermarket sales were flat compared to the prior year quarter, although activity remained solid.

Overall, defense sales in the quarter were negatively impacted by COVID-related absenteeism and supplier disruptions. Our defense backlog remains strong, and we anticipate defense spending to continue at healthy levels.

Aerospace segment earnings for the first quarter of 2021 were $46 million or 14.4% of segment sales compared to $93 million or 19.6% of segment sales for the first quarter of 2020. The decline in segment earnings compared to the prior year was a result of lower volume, partially offset by cost reduction initiatives.

Sequentially, the margin decrease from the fourth quarter of fiscal 2020 was primarily due to lower defense aftermarket sales as well as the timing of spending on R&D programs. Turning to industrial. Industrial segment sales for the first quarter of fiscal 2021 were $216 million compared to $246 million in the prior year period, a decrease of 12%.

Excluding the renewable power systems and related businesses, which were divested on April 30, 2020, and I will refer to as RPS, Industrial segment sales for the first quarter of 2020 were $218 million.

The decrease in industrial sales was primarily due to the RPS divestiture, the weak oil and gas market and ongoing impacts of the pandemic, partially offset by strong demand in the current quarter for China natural gas trucks. Foreign currency exchange rates positively impacted Industrial segment sales by approximately $9 million for the quarter.

Industrial segment earnings for the first quarter of 2021 were $33 million or 15.2% of segment sales compared to $28 million or 11.5% of segment sales in the prior year. Industrial segment earnings increased primarily as a result of cost reduction initiatives.

Excluding RPS, Industrial segment earnings for the first quarter of 2020 were $26 million or 11.9% of segment net sales. Non-segment expenses and adjusted non-segment expenses were $23 million for the first quarter of 2021 compared to non-segment expenses of $51 million and adjusted non-segment expenses of $27 million for the same period last year.

Non-segment expenses for the first quarter of 2021 were favorably impacted by cost reduction initiatives. At the Woodward level, R&D for the first quarter of 2021 was $32 million or 6.0% of sales compared to $37 million or 5.1% of sales for the prior year quarter.

SG&A for the first quarter of 2021 was $56 million compared to $62 million for the prior year quarter. The declines in both R&D and SG&A reflect our cost management actions taken in response to the pandemic. The effective tax rate and the adjusted effective tax rate were both 12.6% for the first quarter of 2021.

For the first quarter of 2020, the effective tax rate was 13.3%, and the adjusted effective tax rate was 17.1%. Looking at cash flows. Net cash provided by operating activities for the first 3 months of fiscal year 2021 was $147 million compared to $27 million for the prior year period.

Capital expenditures were $7 million for the first quarter of 2021 compared to $17 million for the prior year quarter. Free cash flow and adjusted free cash flow for 2021 were both $139 million compared to free cash flow of $10 million and adjusted free cash flow of $29 million for the prior year period.

The decrease -- excuse me, the increase in free cash flow and adjusted free cash flow was primarily related to aggressive cost control, effective working capital management and lower capital expenditures.

We are paying down debt and reduced -- have reduced our leverage to 1.7 times EBITDA at the end of the first quarter from 2.0 times EBITDA at the end of the prior year quarter.

We have significant liquidity available through approximately $1.2 billion of combined cash on hand and revolver capacity, which allows us to invest in new programs and other future growth opportunities, which will contribute to increased shareholder value.

Importantly, we increased this quarter's dividend to pre-COVID levels, underscoring our confidence in Woodward's financial position.

While the sales volume declines we are seeing are significant, the aggressive actions we took at the beginning of the pandemic to prioritize cash management and a lean operational structure are having a positive impact on our performance. Lastly, turning to our fiscal 2021 outlook.

The dynamic and volatile nature of the COVID-19 global pandemic has continued to cause uncertainty in many of our markets. While the ongoing rollout of vaccines across the globe has begun, new viral variants and regional resurgences make forecasting the future of our business challenging in the near term.

Given this uncertainty and the protracted nature of this crisis, we will not be providing financial guidance at this time, although we are optimistic that ongoing stabilization will lead to recovery across the globe. This concludes our comments on the business and results for the first quarter of 2021.

And operator, we are now ready to open the call to questions..

[Operator Instructions] Our first question comes from Robert Spingarn from Credit Suisse..

You just -- Bob, I think you talked about the sequential increase in commercial OE, I guess, from quarter-to-quarter here.

When should we start to see that A320 rate hike factor and when we start drawing that through? And where are you on MAX rate?.

Maybe, Tom, I'll let you go ahead and comment that..

Yes. I'll say, the A320, we're tracking with the Airbus production schedule as it flows back through from Airbus for the direct sales to them and also through the engine OEMs. So we're right on line with what they're doing, we always -- or maybe a couple of months ahead of those rates. On the MAX, it's a little hard to say in that.

There's a lot of inventory in the system, and we're following Boeing's guidance to the supply base on how to prepare for the ramp up, but that will be something we'll be watching very closely. We're well prepared to meet the ramp as they move forward. But I don't think I can comment much more on what rate they're at today..

Okay. And then just on the aftermarket side, we've started hearing some of the airlines talking about loading up for heavy maintenance just because so little has been done over the past year.

Are you starting to see any corresponding evidence of an increase in engine inductions for shop visits coming up here during '21?.

Yes. Rob, we're seeing forecasts and discussion with our customer that it's going to ramp up but we did -- our first fiscal quarter was still a soft commercial aftermarket quarter, where we were sequentially down, but the forecast looks positive. And as we've highlighted in previous calls, the aftermarket definitely will be the first to recover.

And we do anticipate as we move into the second half of our fiscal year that we're going to start seeing aftermarket recover..

Okay.

And then just the last one on the 777X schedule change, how does that affect you? I imagine you're on the engines, but possibly also elsewhere on the aircraft, are you involved at all in the actuation side? And is there anything you can tell us about what's happening with that airplane in terms of actuation issues?.

Yes, I'm not aware of any actuation issues. So I can't comment on that. But we're on the aircraft, both on the direct to Boeing, but also on the GE9X to GE. We're in good shape in terms of certification and having the hardware ready, and we're just working with the customers on the extended entry into service timeline.

But from a Woodward standpoint, we're in quite good shape on that program and….

There's no significant incremental cost for you from this push to the ride or anything like that?.

Not significant, Rob. Obviously, when things move out, there's additional costs. There's no doubt because we have to continue to support, but it's not significant cost to us. No..

Our next question or comment comes from the line of Gautam Khanna from Cowen..

Following up on Rob's question, I was a little curious, the implied aftermarket sales were down to whatever, $63 million or something in the quarter, which is lower than the last 2 quarters. And we've heard, like General Electric had talked about a fairly significant sequential ramp in their -- in spares in their quarter.

Honeywell saw a big pickup sequentially as well.

I'm just curious, do you -- any lumpiness or anything you could point to that, are you seeing anything since the quarter where you're starting to see evidence of demand picking up? I'm just curious what might explain the difference between you and some of the other guys?.

Sure. There's always variability in the aftermarket depending on products you make and timing. As I mentioned to Rob, we are seeing increased forecast coming in terms of like engine shop visits. We're starting to see activity in terms of RFQ activity for inquiring about spares.

So we do see -- another one is the MAX starts to come online, both production ramp but also reintroducing the parked aircraft. We do anticipate and are seeing signs of increased initial provisioning sales. So we do have confidence that as we move through our fiscal year, we are going to see a ramp up.

So I think it's just between what you saw from GE and Honeywell, and ours is, it's in the normal quarter-to-quarter variability. I don't think there's any disconnect between the companies and the markets. So I think you'll start seeing sequential improvements as we move through the year..

Okay.

So you think the December quarter sort of marks the trough based on what you're seeing today?.

Definitely, it's -- we're down at the bottom. Now how fast you come out of that trough, there's no doubt about that, but that we're down at the bottom. But we do anticipate we're going to be increasing as we move forward..

Okay. One other question and forgive, it's a non-operating one, but the non-segment, I'm just trying to get a sense for what the non-segment would be on an ex-items, one-time items basis? And the tax rate was also fairly low this quarter and maybe, Bob, can you comment on what -- I don't want to be wrong in our modeling because of those items.

If you can maybe baseline us on what we should be utilizing for non-segment tax rate?.

Yes. From -- the first quarter is always a little heavy for us for non-segment compared to the full year. The one-time items we had, if you recall, and you'll see this later in the -- it's in the back of the release also, the gain on the sale of Duarte and the impairment of the RPS asset. So that's what we took out to get to a more run rate oriented.

So you'll see a decline to a more consistent level with the prior year as we go through the year..

Okay.

And tax rate as well?.

Yes. Tax rate will probably hover in this area a little bit higher in the 17%, 18% range overall as we go through the year..

Our next question or comment comes from the line of Christopher Glynn from Oppenheimer..

Nice job on the cash work. I was curious, the incremental margins sequentially for Industrial, 65%, 70%. I'm just wondering with RPS more -- getting a little room behind you on that divestiture and some restructuring.

Is the kind of mid-teens level sustainable now or substantial variability still expected on that, if we could remove the variable of pandemic might be in such a way in subsequent months?.

Yes. Well, first, what I'd say is we're committed and working hard on increasing our Industrial margins like we talked over the last couple of years. So some of the improvements have come from the divestiture cost reductions, but we did have -- in the quarter, we had really a favorable margin mix on products.

As we move through the year, it would be aggressive to say that we were going to hold at that level, but we definitely are going to be year-over-year improved Industrial margins. And as we go through the year, we have to see how that margin mix plays out. But year-over-year, Industrial will definitely be improved.

Mid-teens is a little on the aggressive side for this year, but that's the path we're on..

Okay.

And just defense, several quarters in a row where the supply chain issues and some absenteeism have seemingly impacted that end market with those kind of specific criteria more than your other end markets, I'm just curious about why there, what you're seeing? And as supply chain issues ease, does defense have a nice rebound just structurally kind of waiting for the start date type thing?.

Yes. What I'd first say is we've got a really strong backlog in defense. A lot of our defense sales on Aerospace come out of our Santa Clarita site and also our Niles site. But California had -- with the pandemic was hit hard. We had severe absenteeism, supplier issues to where we didn't get out due to that.

The sales weren't as high as they could be with the backlog we had. So we do have that backlog, which we will be able to sell through the remainder of the fiscal year. So we expect to have a dent in that as we move forward.

And it just happened to be location-specific and supplier-specific problems, and it happened to hit the defense side harder than it did our commercial side just due to location..

Our next question or comment comes from the line of Pete Skibitski from Alembic Global..

Switching back to Industrial, I guess, Bob, can you give us maybe a ballpark of how much China CNG was up in the quarter?.

I couldn't give you a specific, but it was significant in the quarter. Yes. And Pete, you've followed us long enough, how volatile that could be, right? So that's one thing that's extremely difficult for us to peg any given quarter..

Yes. That was kind of my second question. The language on the slides, it seemed to indicate that you guys thought that maybe sequentially that China CNG could be down on revenue.

Is that just, I guess, because of seasonality? Is that what you guys are expecting?.

Well, one, you always have to look at is the Chinese New Year. And the Chinese New Year always slows down production. You kind of look at it as our holiday season, less working days slows down production. So in the first calendar quarter, you definitely have that.

We do see variation depending on oil or diesel and gas pricing spread, there was some volatility in that. It's coming down. Gas has now dropped quite a bit and is in a good place moving in the right direction. We also see positives going forward.

And you just have to expect some volatility in that market, but positives going forward is, there is still the regulations emissions compliance regulations coming up where we're going to see higher use of natural gas. The China VI regulations on diesel engines goes into effect in July, that's favorable to natural gas-powered trucks.

So we see some positives going, but due to seasonality and some just normal variability in that market, we always have to be a little cautious, but the trends are in the right direction..

Tom, are you expecting another buy ahead like in -- like the June quarter in front of China VI? It seems like you had some buy ahead last time..

There were some buy aheads. But one of the things that's a little bit different is there's some restrictions that are going to go into place in various large cities that won't allow non-China VI trucks to come in. So I think there'll be -- maybe some buy ahead, but it might be more limited than in the past..

Our next question or comment comes from the line of Greg Konrad from Jefferies..

Just to follow-up on commercial Aerospace, I mean you mentioned some sequential improvement on narrow bodies, but what are you seeing on the widebody side given some commentary around destocking and some further rate cuts on the widebody side?.

Well, we definitely have seen the rate cuts on the widebody, and I think -- yes, we would say from a Woodward impact that the inventory destocking has occurred. So that, I think, we believe has occurred, but the rates are down low.

We're working with our OEMs on those rates, but we definitely do anticipate wide bodies are going to take a fair amount longer than the narrow bodies to recover. And that's built into our production plans and on our activity, yes..

And then just the decremental in Aerospace has been held pretty constant, a little bit over 30% despite maybe some unfavorable mix with the aftermarket, at least, in the quarter.

I mean, given some of the productivity improvements and cost takeout, I mean, how do you -- when this market does turn, how are you kind of thinking about incremental margins?.

Yes. The one thing you're highlighting is some we will be looking forward to. We were -- have facilitized and have the capacity to handle much higher rates. So that's had an effect on us to be operating below capacity as we move forward. First thing, I would say, Bob, you may want to jump in and comment, too.

With the margins we have in Aerospace and the 30% decremental is actually fairly good, given the significant volume drops. We would expect to see that reverse on the other end as we ramp up.

I don't know, Bob, you have anything to add to that?.

Yes. Early on, when the pandemic started, I threw out of 40%. We didn't know and still really don't know how it's all going to pan out, but we thought it would be much higher. And so I think it speaks to a lot of the cost actions that everybody took that have kind of blunted that on the downside.

We would hope because of those same reasons that we get some leverage as we come out but we've got a ways to go to get the capacity up first, right? So as Tom said, we got a very -- a lot of capacity available and a lot of capital that's not being employed. So once we get that humming, we should see some nice incrementals going forward..

Our next question or comment comes from the line of Chris Howe from Barrington Research..

Following up just on some of the questions we went through.

As it pertains to the last one, the longer this is prolonged as it relates to an Aerospace recovery, can you talk about how this may change your outlook as far as this perhaps accelerating the rate at which we go into a recovery? And along that same path of thinking for the Industrial segment, you mentioned the gas turbine expectations not being so influenced by the pandemic, perhaps some additional insight into the positives you're seeing in the Industrial segment? Who knows how the current administration will help economic growth as far as infrastructure spending, but some more detail on the positives there that may offset some of the continuing pressures that you're seeing in the industrial markets?.

Sure. And particularly on the turbomachinery side, I think as everybody is well aware of, that market was down for a long time and it was depressed. What we're seeing right now is that the inventory have been really pulled out of the pipeline. The market was down, but now we're starting to see the order books starting to fill in.

We're seeing pent-up demand in the aftermarket. So we really think that in that gas turbine and the rest of the turbomachinery, steam turbines compressor market that we're only going to head up. There really isn't -- really any more room to go down. We just don't see it happening.

So all indicators are pointing up, as we move through the year, we see the order book filling in and that we will have enhanced sales in that part of our business going forward. So that's why we highlighted that things are all moving in the right direction. The orders are starting to flow. The RFQ activity is picking up, and that's globally.

So we feel pretty confident that that's on the upturn. I think the other question was on the commercial aerospace markets, and I think a lot of saw what happened over the holidays. There's a huge -- we believe there's a huge pent-up demand for travel.

And as soon as the vaccines get out a little more, we're going to see a lot of people heading on trips and probably first-leisure travel business will pick up that more aircraft to get into service, that the utilization will go up.

And we also -- I commend the airlines for the job they've done during this pandemic and how they've managed utilization and how they've been able to keep the aircraft flying and safe but to balance off when they needed heavier maintenance. So that is going to come our way.

It's just a matter of timing, and we're beginning to see indications that that's picking up.

So as long as the vaccines get distributed and people get a little more confidence, I think you're going to see more rapid recovery and commercial aftermarket obviously followed up by the ramp-ups that the narrowbody players are talking about for the neo and the MAX, and then that hopefully, will follow-up with some international travel and then we'll start seeing maybe some production rate recovery on the wide bodies, but that will take a little longer..

Our next question or comment comes from the line of Michael Ciarmoli from Truist Securities..

Maybe -- I don't know if this is Tom or Bob, but you gave us a little bit of color on the Industrial margins and kind of what to expect. Looking at Aerospace, it's kind of a big sequential decline. And thinking about, I guess, the recovery here, it seems like the OEM, you had that sequential improvement.

I'm assuming there's a little bit of a mix issue there with OEM margins below aftermarket and then you talked about the guided weapons in that segment being down. I think you've historically said those are pretty good margins.

Should we think that this 14.5% level could stay if aftermarket is a bit squishy this quarter and you get an uplift in OEM, does that put more pressure on margins or just anything you can give us about the margin trajectory maybe here in aerospace?.

Yes. What I would say is a lot of it is based on recovery, and we anticipate commercial aftermarket to recover. We also expect to have higher military aftermarket and OE sales going in the remainder of the year. That will help the mix.

And I guess I would just say that as we look at the full fiscal year, we do anticipate that our aero margins are going to improve throughout the fiscal year. And as the volumes recover and the aftermarket activity takes place, I'm highly confident you'll see a little backup in that 20-plus percent segment margins for aero.

That may take us into fiscal year '22 to get to those numbers, but we will be ramping through the year if the outlook and recovery in travel picks up. So we always got to say there's still that volatility, uncertainty out in the market, but it definitely was -- during this quarter was tough quarter on the mix and the volume.

I do want to address your question. There's no doubt, our Aerospace model is the aftermarket carries higher margin in the OE. And so if you get higher OE without aftermarket enhancing -- increasing, you will see some pressure on your margins.

So that is a true point that our business has and -- but we see everything moving in the right direction going for the Aerospace segment going forward through the fiscal year..

Got it.

Can you -- maybe just on that, can you talk, Tom, maybe your current utilization at Rock Cut facility? I mean, give us a sense of where you are in terms of capacity because I would imagine as some of those OE lines come back on, even though they're dilutive versus aftermarket, maybe you get some better absorption? I mean, can you give us a sense of where Rock Cut is right now?.

Yes. There's no doubt we're going to see real leverage on the upswing. I would say Rock Cut is probably operating 40% of capacity. So we have a lot of capacity. And that's one thing everybody should take away is that those investments have already been made.

And during this downturn, at all of our facilities, including Rock Cut, we've been improving the production lines, doing a lot of continuous improvement with Kaizen activity. And it's all been a preparation so that when we do recover, the markets recover, we're improving velocity. That will help working capital.

We're improving the production lines so -- to improve productivity going through those lines. So we haven't just been sitting during this pandemic. We've been looking at it saying, hey, we're going to improve all of our production lines. We're going to come out of this stronger. We have the capacity.

We've got good investment in there, and we're going to have high leverage on that when the volumes recover or as they recover..

Got it. Just on -- last one for me. Just on the working capital. It looks like inventory is up a little bit. You had a great free cash flow quarter, obviously.

But how should we think about maybe inventory specifically and planning for that recovery and OEM rates maybe ticking higher and being ready for that aftermarket? Do you think inventory investment is going to be a bit of a headwind to cash?.

It normally would be as we come back, but we've kind of talked from time to time about all the operational enhancements and improvements in True North work that we've been doing and so on. So we are fairly confident that we're going to be able to offset what would normally be the pattern.

So working capital needs would be a headwind as we go forward, and we still anticipate that receivables will be as things improve, hopefully, throughout the year. But we're feeling much better about inventories in terms of progress we're making to bring down our overall levels and counter some of that natural.

Clearly, we'll have to increase inventories to -- cope with increasing sales. But hopefully, we have brought the base down, and we'll continue to bring the base down so that we won't see significant inventory movement as we recover..

[Operator Instructions]. Our next question or comment comes from the line of David Strauss from Barclays..

In terms of what you're going to do with the cash, are you just going to use -- continue to use excess cash to delever now that you've readjusted the dividend or would you expect to get back into the repo market? And I guess, how are you thinking about your M&A pipeline at this point?.

Yes. Yes -- sorry, go ahead, Tom..

Go ahead, Bob. Go ahead, Bob..

Yes. You saw, one, we got the dividend back to our pre-COVID level. So that was kind of step number 1. Step number 2 is probably going to be more along the lines of growth. We have plenty of organic opportunities to invest in. We have inorganic opportunities to invest in, and we'll continue to watch for opportunities as they arise.

The repo market, we've said that we are normally kind of we'll watch and see where the share price is and so on. But while we continue to believe we're always a good investment at this point, I don't really have a lot of plans to get back into the repo market going forward.

On the debt side, the great news, we kind of paid off all of our short-term prepayable debt. And so there's almost the entire revolver is available to us, and we really don't know, for a number of years, have any tranches of long-term debt due.

And the last L'Orange acquisition gave us a fantastic opportunity to spread the debt out over the next -- at that time, about 15 years, and now we're probably 13 to 12 years. So I think we have a great runway with a lot of balance sheet strength, not a lot of debt due, some cash coming in, and it will give us some great opportunities..

Okay.

And without obviously giving us all the moving pieces in terms of free cash flow and earnings, Bob, would you expect this to be another year where your cash conversion is over 100% of net income?.

I would. We'll see how the year pans out. But obviously, this was a strong quarter. We don't anticipate that every quarter is going to be as strong as this quarter was. I've mentioned headwinds related to receivables if and as we recover, but we do believe it will probably be north of the 100%, yes..

Okay. And then last one for me. I know you guys aren't giving full year guidance, but in the past, you've talked about kind of what to expect sequentially for the next quarter.

Would you expect Q2 to be up sequential quarter from an EPS standpoint or more in the flattish range?.

I think the first part of your comment was the right part. We were not giving guidance. So yes, it's very hard to -- one minute, everything is looking great on vaccines. The next minute, we got all sorts of problems. We can't get them out. I agree with the comment Tom made.

I think there's a tremendous amount of pent-up demand and so forth that will really get passenger traffic going again. But when and how quickly, I think that was an earlier question about the prolonging of the pandemic and what impact that might have.

So, I think it's just too early to be able to see what's going to happen in the remainder of the year, much less than next quarter..

Our next question or comment comes from the line of Noah Poponak from Goldman Sachs..

Yes. Actually, following David's question there on the sequential kind of walk, for the Aerospace segment and looking at its revenues, we all look at year-over-year all the time for everything for a variety of reasons.

But in this very unique environment, it's sort of helpful to look at the sequential, if you can sort of envision where the bottom is and then walk along the bottom and then decide when the recovery occurs, but your Aerospace segment is really unique. If I look at the last really kind of 5 to 10 years, it just has a lot of seasonality.

There's several years where the 1Q to 4Q is something close to $100 million.

Does that seasonality hold in your fiscal '21, even if there's literally no end market change through the year or is that out the window given the very unique environment?.

I think we would say we'd still see seasonality. It’d just be the magnitude of it. But some of that's just due to working with our customers on fiscal year versus calendar year activity and the amount of working days in our first quarter, those all play into that and that type of seasonality is still out there..

Okay.

So, the sort of low $300 million run rate that the segments had, you're going to move off of that not insignificantly just on seasonality alone and then if you get an actual end market pickup towards the end of the year, that would be on top of that?.

I would say that's correct. We definitely will see the seasonality. The tougher part, we watch very closely. We're very conservative during the crisis on our outlooks. And I think that paid off, and we monitor everything daily. And as we see order activity, shop visit activity, those things picking up, we react quick to that.

But our outlook is, as we move through the fiscal year that we will see OE volumes pick up, and we will see aftermarket volumes pick up. That's our outlook, but we're cautious about the volatility and the second dip happening. But outside of a second dip, yes, we're on a sequential quarterly improvement..

Okay.

Defense business, do you expect that to end up with a positive year-over-year growth rate for the year?.

Yes. We think it should be slightly up -- flat slightly up year-over-year..

Okay. In the oil and gas business, where you noted a recent -- a little bit of improvement in some of the leading indicators there.

What's the lag time that we should think about from those leading indicators you're referring to and the revenues in your business?.

Yes. The first thing, and we're seeing -- we monitor rig count and meaning how many rigs are in service. Looking at the activity of the -- starting with the drilling activity.

Second, we're looking at is, with customers as their plan to return equipment to service, and you could say it's very analogous to what happened in the commercial aerospace market, a lot of equipment was parked, mothballed that equipment, they're starting to look at.

And so we're starting to see some aftermarket activity meaning request for quotes, some parts ordering starting to happen. Our big OEM customers in those markets are talking to us about potential that they're seeing and increases. So we have some positive signs, but it's not all firmed up yet, but it's -- those are the things we track.

And if we continue to see oil move in the $50s to $60 a barrel range, we should start seeing a pickup in the second half of our fiscal year..

Okay. That's helpful. And then just one last one for me. I'll just try to follow-up on the free cash line of questioning as well. If I just kept the remaining 3 quarters of the year exactly flat year-over-year, maybe that's not quite fair for the March quarter because that's sort of -- most of the March '20 quarter isn't yet impacted by the end markets.

But given what you just did in the first quarter, maybe that is fair. So I guess, if I did that, the free cash for the year would be up 30% plus.

I mean have you attacked the cash flow savings items that above and beyond what you'd normally be doing enough that you could have very significant double-digit growth in free cash flow this year or is there a pull forward in the first quarter here?.

Yes. I think the error in that is kind of the way -- there is no way last fiscal year was kind of a normal year for us. It's kind of the tale of 2 halves, right? The first half started out normal and then the second half was totally different from what you would normally see from a seasonality perspective and anything else.

So the latter part, in particular, the fourth quarter, were not very normal. So in this year, I'd like to think it would be the tale of 2 halves going the other way, but in terms of recovering in the second half, I don't know that it's going to be that strong.

So I don't think that you could take that approach and come up with a reasonable number and outside of giving you a specific number, and we said we're not going to give guidance, it's kind of hard to give an outlook on that..

I guess I was thinking second half of last year had the end market -- the major end market headwinds, but I guess, it sounds like your point, Bob, is that you're then -- you have source of cash on working capital and there's abnormalities in what you're doing outside of the business segments that you wouldn't have if things are recovering?.

Yes. Because it was -- sales were down, but working capital was flowing cash..

Right.

So the recovering is not happening?.

Exactly. Not to the same extent, but....

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

Okay. Well, I'd like to thank everybody for joining us today. It's been -- the last year has been quite the year, quite the roller coaster. I think Woodward has managed and our home membership has managed the crisis quite well. We feel that we're coming out of it, and we look forward to the next couple of quarters reporting back to you.

And if we start seeing the downturn on this pandemic, we're going to look forward to improving results moving forward. So thanks again for joining us. We look forward to talking to you over the quarter. Good night to everyone..

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