Woodward, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012. The interim financial statements are unaudited. Dollar amounts below are in millions except per-share data.
Business context and results
Woodward serves aerospace and energy markets through its Aerospace and Energy segments. On December 28, 2012, it acquired GE’s Duarte thrust-reverser actuation systems business for approximately $198.9 million, integrating it into Aerospace. The acquisition closed too late to contribute sales or operating earnings this quarter; acquisition costs were $1.7 million.
Financial and operating metrics
- Revenue: $408.3 million, up 0.1% from $407.9 million. Aerospace revenue rose 9.4% to $211.4 million; Energy revenue fell 8.3% to $197.0 million.
- Profit: Net earnings were $27.4 million, down 3.7% from $28.4 million. Diluted EPS was $0.39 versus $0.40. EBIT was $44.9 million, down 3.1%; EBITDA was $62.9 million versus $64.8 million.
- Margins: Gross margin declined to 29.1% from 30.3%; net margin was 6.7% versus 7.0%. Aerospace segment earnings margin improved to 14.9% from 14.0%; Energy’s declined to 12.1% from 12.4%.
- Cash flow: Operating cash flow was $40.0 million versus $2.3 million. Free cash flow, defined by the company as operating cash flow less capital expenditures, was $10.1 million versus negative $14.9 million. Capital expenditures were $29.9 million. Improved receivables collections following strong prior-quarter sales were a major factor in the operating cash-flow increase.
- Liquidity and debt: Cash was $69.5 million and working capital $530.4 million at December 31, compared with $61.8 million and $623.6 million, respectively, at September 30. Total debt was $590.0 million, versus $392.2 million; the company reported $393.5 million available under its revolving facility and $29.0 million under foreign facilities. Management said it was in compliance with debt covenants.
- Other: The effective tax rate was 29.0%, compared with 29.3%. Cash dividends were $0.08 per share, up from $0.07.
Changes versus the prior-year quarter
Revenue was essentially flat: higher Aerospace volume and pricing across both segments were largely offset by lower Energy volume, unfavorable foreign exchange, and sales mix. Aerospace earnings increased on volume and lower variable compensation, partly offset by costs to expand manufacturing capacity for new programs. Energy earnings declined primarily because of lower volume, particularly wind turbine converter sales; favorable pricing and lower variable compensation partly offset the decline. Foreign exchange reduced sales by $2.7 million and EBIT by approximately $2.0 million, according to management.
Outlook, risks, and unusual items
- Guidance: The filing provides no quantified company-wide revenue or earnings guidance. Management expected no significant near-term effect on military sales from potential U.S. defense spending reductions, while monitoring longer-term effects.
- Market outlook: The extended U.S. wind tax credit applies to projects beginning construction in calendar 2013. Management was evaluating the effect and expected it to be minimal for Woodward given the market’s lengthy planning and ordering cycle.
- Acquisition: Duarte’s purchase-price allocation was preliminary, including $81.9 million of goodwill and $78.9 million of intangible assets. Management cited expected technology, customer, and operating synergies. Pro forma figures are informational and not indicative of results actually achieved.
- Financing: The $200 million acquisition-related loan carried a 1.12% rate and matured January 28, 2013; it was classified as long-term based on Woodward’s intention and ability to refinance it. Separately, a $40 million term loan and $100 million of Series B notes were due in October 2013.
- Other risks and items: The filing highlights foreign-exchange exposure, defense-spending uncertainty, weaker wind-related demand, acquisition integration and valuation, and goodwill impairment assumptions. The company reported ordinary-course legal matters and believed resulting liabilities would not materially affect its financial position or results. It expected an approximately $5 million, or $0.07 per diluted share, tax benefit in Q2 FY2013 from the retroactive research-credit extension.
Important facts for investors to verify
- Whether the $200 million loan was refinanced as intended and how the October 2013 debt maturities were funded.
- Whether Duarte delivered the anticipated revenue, customer, technology, and cost synergies, and how final acquisition valuations changed.
- Whether the expected $5 million tax benefit was recognized and whether segment demand trends—especially wind converters and military programs—changed.
- How much of the $69.5 million cash balance held abroad could be repatriated without additional tax cost; $60.2 million was held by foreign subsidiaries.
- Whether the working-capital-driven cash-flow improvement persisted beyond the quarter.