Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Financial figures below are in U.S. dollars, rounded to millions unless stated otherwise. The interim financial statements are unaudited.
Key financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $483.8 million, up 5.1% from $460.2 million | $1,377.6 million, up 3.0% from $1,336.9 million |
| Net earnings | $23.7 million, down 16.4% from $28.3 million | $93.5 million, down 2.1% from $95.5 million |
| Diluted EPS | $0.34, versus $0.40 | $1.34, versus $1.36 |
| Gross margin | 27.8%, versus 28.4% | 28.3%, versus 30.0% |
| Net margin | 4.9%, versus 6.1% | 6.8%, versus 7.1% |
| EBIT (non-GAAP presentation in MD&A) | $42.2 million, down 4.3% | $144.4 million, down 4.3% |
Reported sales growth includes the Duarte acquisition. Excluding Duarte, sales were $449.0 million for the quarter and $1,307.8 million year to date; the latter was down 2.2% year over year. Management attributed the underlying pressure mainly to lower wind turbine converter sales, partly offset by Aerospace growth.
Cash flow and liquidity: Nine-month operating cash flow was $133.0 million, versus $63.7 million; capital expenditures were $78.5 million, versus $44.2 million. Company-defined free cash flow was $54.5 million, versus $19.4 million. Investing cash outflow was $277.0 million, including the Duarte acquisition. Cash was $61.0 million at June 30, 2013; working capital was $541.3 million, down from $623.6 million at September 30, 2012.
Debt: Total debt was $585.1 million, compared with $392.2 million at September 30, 2012. Debt included $100.0 million of Series B notes due October 2013 and a $200.0 million acquisition-related loan. Woodward said it expected to fund the Series B maturity through operating cash, revolving-credit availability and/or additional long-term borrowing. Management reported covenant compliance at quarter-end.
Business performance and changes
- Aerospace: Quarterly sales were $272.2 million, up from $214.5 million; nine-month sales were $754.1 million, up from $632.0 million. Segment earnings increased to $38.9 million for the quarter and $111.7 million year to date. Growth reflected commercial OEM and military aftermarket demand, including Duarte; segment margins were 14.3% and 14.8%, respectively.
- Energy: Quarterly sales fell to $211.5 million from $245.8 million; nine-month sales fell to $623.5 million from $704.9 million. Segment earnings were $12.4 million for the quarter and $60.6 million year to date, down from $31.2 million and $92.3 million. The decline was driven chiefly by reduced renewable-power/wind converter volumes and lost fixed-cost leverage.
- Consolidated cost of goods sold rose faster than sales, reducing gross margin. R&D expense declined as certain programs completed; amortization rose following the acquisition.
Acquisition, outlook, and risks
- Woodward acquired GE’s Duarte thrust reverser actuation systems business in December 2012 for approximately $198.9 million cash, net of cash acquired. Duarte contributed $34.7 million of quarterly and $69.8 million of year-to-date sales and was described as slightly accretive to consolidated earnings. Purchase accounting remained preliminary, including $88.2 million of goodwill and $79.3 million of acquired intangibles.
- Management recorded $15.7 million of third-quarter charges to realign and revalue its renewable power business amid uncertain incentives, industry overcapacity and financial distress. The renewable-power reporting unit passed an impairment test at June 30; management stated it would continue supporting existing customers and pursuing selected opportunities. Management’s adjusted results exclude these charges: adjusted diluted EPS was $0.51 for the quarter and $1.44 year to date. These are non-GAAP measures.
- No specific consolidated earnings or sales guidance is provided in the supplied filing text. Management expected operating cash flow and revolving-credit borrowing capacity to fund ongoing needs. Planned investment over five years was approximately $275 million across Illinois aerospace campuses and $150 million at a new Colorado campus.
- On July 10, 2013, after quarter-end, Woodward replaced its $400 million revolving facility with a $600 million facility maturing in July 2018, with an option to increase capacity to $800 million subject to lender participation. The filing stated that the new facility would have provided $564.3 million of availability at June 30, net of letters of credit.
- Key risks discussed include further weakness in wind and other Energy markets, uncertain U.S. defense spending effects from sequestration, customer and supplier risks, acquisition integration, foreign exchange, debt and covenant requirements, pension assumptions, and legal, tax, and environmental matters. Management said pending legal matters were not expected to materially affect liquidity, financial condition, or results.
- After quarter-end, the board approved a $0.08-per-share quarterly dividend and a new share-repurchase authorization of up to $200 million through July 2016.
Important facts for investors to verify
- Whether Duarte’s preliminary purchase-price allocation and expected synergies are finalized and realized.
- How the October 2013 $100 million note maturity and the acquisition-related loan were refinanced, and the company’s resulting borrowing costs and covenant headroom.
- Whether renewable-power demand and restructuring assumptions support the carrying values of related assets and goodwill; distinguish reported results from management’s adjusted measures.
- Whether Aerospace growth offsets continued Energy weakness, and how planned campus spending affects cash generation and returns.
- The sustainability of reported cash-flow improvement, including working-capital movements, and the tax-rate impact of credits, foreign rates, and potential repatriation.