Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; compared with the three months ended December 31, 2012. Financial statements are unaudited. Dollar amounts below are in millions, except per-share data.
Business context and results
Woodward supplies systems and components to the aerospace and energy markets. Consolidated sales rose, largely because the Duarte thrust-reverser actuation business, acquired in December 2012, contributed $31.4 million in the quarter. Excluding Duarte, organic sales declined 2.6%.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $429.0 | $408.3 | +5.1% |
| Gross margin | 26.5% | 29.1% | -2.6 percentage points |
| Earnings before income taxes | $32.9 | $38.5 | -14.5% |
| Net earnings | $23.4 | $27.4 | -14.6% |
| Diluted EPS | $0.34 | $0.39 | -12.8% |
| EBITDA (non-GAAP) | $58.1 | $62.9 | -$4.8 |
The effective tax rate was 29.0% in both periods. The net margin was 5.5%, versus 6.7%.
Segments and material changes
- Aerospace: Sales increased 8.7% to $229.9 million, including Duarte; excluding Duarte, sales fell 6.1%. Segment earnings decreased 28.6% to $22.5 million, and segment margin fell to 9.8% from 14.9%. Lower defense aftermarket and OEM volume and unfavorable product mix weighed on results; commercial OEM and aftermarket sales improved.
- Energy: Sales increased 1.1% to $199.2 million. Segment earnings rose 13.2% to $27.1 million, with margin increasing to 13.6% from 12.1%, primarily on manufacturing productivity gains. Marine and aero-derivative sales were strong, partly offset by continued weakness in heavy-frame turbine power generation.
- Consolidated gross margin fell as lower organic aerospace volume and unfavorable mix—particularly reduced defense aftermarket sales—more than offset improved operational performance. R&D expense was $29.4 million, down 2.0%; amortization increased to $8.5 million, partly reflecting acquired intangibles.
Cash flow, liquidity, and debt
- Operating cash flow was $44.4 million, versus $40.0 million. Capital expenditures were $37.1 million, versus $29.9 million; reported free cash flow (non-GAAP) was $7.3 million, versus $10.1 million.
- Cash and equivalents were $54.6 million at December 31, 2013, including $42.9 million held by foreign subsidiaries. Working capital was $637.8 million.
- Total debt was $594.0 million, up from $550.0 million at September 30, 2013. The company had $10.0 million of short-term borrowings; $584.0 million was classified as long-term debt. It reported $500.6 million of additional availability under its $600 million revolving facility, net of letters of credit, plus $28.1 million under foreign facilities.
- Woodward issued $250 million of senior unsecured notes in October and November 2013, using proceeds to refinance maturing notes and repay part of its former uncommitted credit line. The company said it was in compliance with debt covenants at quarter-end.
- Financing activities included $43.6 million spent repurchasing 1.037 million shares and $5.4 million in dividends. Cash increased $6.0 million during the quarter.
Outlook, commentary, and risks
- No specific consolidated revenue or earnings guidance is provided in the filing. Management expected quarterly variability in defense sales to continue amid U.S. budget uncertainty; commercial aircraft deliveries and aftermarket demand were improving. Energy markets remained uncertain.
- Planned investment over the next five years was approximately $275 million for two Rockford-area aerospace campuses and $150 million for a Fort Collins campus supporting energy operations. Management said the Rockford-area workforce could grow 70%–90% by the end of 2021 as new aircraft-platform business ramps.
- Management expected operating cash flow and revolving-credit availability to fund ongoing needs, including capital expansion. Risks identified include customer weakness or financial distress, economic and market conditions, defense-budget changes, input costs and supply availability, acquisition integration, debt covenants and financing access, foreign-exchange exposure, legal and regulatory matters, and pension assumptions.
- The Duarte acquisition’s purchase-price allocation was finalized, including approximately $12.8 million of retrospective valuation adjustments to certain liabilities with corresponding increases to goodwill and intangible assets; prior-period earnings were not materially affected. Duarte contributed $31.4 million in sales and was slightly accretive to quarterly net earnings.
- Ordinary-course legal claims and proceedings were disclosed; management did not expect resulting liabilities to materially affect liquidity, financial condition, or results. The filing stated that risk factors had not materially changed from the latest Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether aerospace defense weakness and product mix persist, and whether commercial growth offsets it.
- How Duarte performs and whether expected integration benefits and synergies materialize.
- Gross-margin recovery, particularly given organic sales trends and planned capacity investments.
- Capital spending, free-cash-flow conversion, debt levels, and compliance with credit-agreement covenants.
- Availability of cash held overseas and any tax cost if repatriated; the filing does not quantify a potential repatriation tax.
- Progress and funding needs for the Rockford, Niles, and Fort Collins facilities, along with any material changes in contingencies or outlook.