Woodward, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing also reports fourth-quarter results. Woodward designs, manufactures, and services energy-control systems for aerospace and energy markets. Figures below are in millions of dollars except per-share amounts.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales | $1,865.6 | $1,711.7 | +9.0% |
| Net earnings attributable to Woodward | $141.6 | $132.2 | +7.1% |
| Diluted EPS | $2.01 | $1.89 | +6.3% |
| EBIT (non-GAAP) | $223.3 | $212.4 | +5.1% |
| EBITDA (non-GAAP) | $291.9 | $287.8 | +1.4% |
| Operating cash flow | $144.1 | $114.6 | +$29.5 |
| Capital expenditures | $64.9 | $48.3 | +$16.6 |
| Free cash flow (non-GAAP) | $79.2 | $66.4 | +$12.8 |
Gross margin was 30.1%, versus 30.0%; net margin was 7.6%, versus 7.7%. Pretax margin declined to 10.6% from 11.0%. The effective tax rate fell to 28.4% from 29.5%, including a $3.3 million benefit from changing the expected repatriation treatment of certain foreign earnings. FY2012 dividends were $0.31 per share, up from $0.27.
- Segments: Aerospace sales rose 6.3% to $896.1 million; segment earnings edged up 0.5% to $130.2 million, while segment margin declined to 14.5% from 15.4%. Energy sales increased 11.6% to $969.5 million; segment earnings rose 11.0% to $126.4 million, with margin roughly steady at 13.0% versus 13.1%.
- Fourth quarter: Sales were $528.7 million and Woodward-attributable earnings were $46.1 million, or $0.66 diluted EPS, compared with $489.3 million, $41.7 million, and $0.60 in the prior-year quarter. Fourth-quarter pretax earnings were $65.9 million.
Liquidity, debt, and financial position
- At September 30, 2012, cash and equivalents were $61.8 million, working capital $623.6 million, total debt $392.2 million, and stockholders’ equity $1,008.1 million. Total debt was down from $425.2 million a year earlier.
- The $400 million revolving facility, extended to January 2017, had no borrowings outstanding; remaining availability was $394.1 million after letters of credit. Foreign facilities had $20.6 million of stated availability across facilities, with $0.3 million borrowed.
- Scheduled long-term principal payments include $7.5 million in FY2013 and $134.4 million in FY2014. The Series B notes include a $100 million balloon payment due October 2013.
- Operating cash flow improved mainly because inventory consumed less cash than in FY2011; higher receivables from sales partially offset the improvement. The company spent $44.1 million repurchasing 1.132 million shares in FY2012 and paid $21.4 million in dividends.
Changes, outlook, and risks
- Energy was the main sales-growth driver, aided by wind-turbine converters, natural-gas engine controls, and industrial gas turbines. Aerospace benefited from aftermarket, commercial OEM, and military OEM demand. Foreign exchange reduced FY2012 sales by $20.8 million.
- Research and development expense rose 23.9% to $143.3 million, or 7.7% of sales, reflecting investment in new aerospace programs. Aerospace earnings were held back by higher development and production-process costs; Energy earnings faced unfavorable mix/pricing, warranty costs, and customer credit issues.
- Backlog at October 31, 2012 was $656.7 million, down from $759.1 million a year earlier. Management cautions that open orders are not necessarily an indicator of future sales.
- No quantified FY2013 earnings or sales guidance is provided in the supplied filing text. Management described commercial aviation and industrial markets as recovering, while noting uncertainty in renewable energy markets and potential U.S. defense spending reductions, including sequestration. The company planned approximately $200 million of Rockford-area facilities and equipment investment over ten years, with an intended workforce roughly twice current levels there by 2021.
- Key exposures include customer concentration (five largest customers generated 36% of sales; GE alone 14%), government-related sales (18% directly or indirectly), customer credit quality, defense-budget changes, wind-market financing and subsidy uncertainty, foreign-exchange movements, supplier and commodity risks, and pension assumptions. Bad-debt expense increased approximately $3.2 million; the allowance for doubtful accounts rose to $7.2 million from $2.3 million.
- Defined-benefit pension plans were underfunded by $37.0 million and other postretirement plans by $37.6 million. The filing estimates FY2013 pension contributions of approximately $9.4 million in one contractual-obligations discussion; the detailed pension note separately lists expected contributions totaling about $9.4 million. Other postretirement contributions were estimated at $4.9 million.
- Goodwill was $461.4 million, about 25% of assets; annual impairment testing found no impairment. Management reported no material adverse effect expected from pending legal matters or environmental remediation. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether increased aerospace R&D and program costs translate into durable revenue and margin growth.
- Collection and credit risk among airline and renewable-energy customers, and the adequacy of receivable and warranty reserves.
- Effects of U.S. defense sequestration and changing renewable-energy incentives on orders, backlog, and sales.
- Ability to meet debt maturities and covenants, particularly the October 2013 Series B note balloon payment.
- Progress, funding, and expected returns from the planned Rockford expansion and other capital spending.
- Potential pension funding needs, foreign-currency exposure, and sensitivity of goodwill valuations to assumptions.