Woodward, Inc. — Q1 FY2012 Form 10-Q
Business context and reporting period: The unaudited quarter ended December 31, 2011, compared with the quarter ended December 31, 2010. Woodward serves aerospace and energy markets and reports two segments, Aerospace and Energy; prior-period segment results were recast to match the structure adopted in September 2011. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $407.9 | $365.1 | +11.7% |
| Gross margin | 30.3% | 28.5% | +1.8 percentage points |
| Earnings before income taxes | $40.2 | $31.5 | +27.6% |
| Net earnings | $28.4 | $22.4 | +26.9% |
| Diluted EPS | $0.40 | $0.32 | +$0.08 |
| Operating cash flow | $2.3 | $7.2 | -$4.8 |
| Capital expenditures | $17.3 | $10.2 | +$7.0 |
| Free cash flow | -$14.9 | -$3.0 | More negative |
- Net margin was 7.0%, versus 6.1%. EBIT was $46.4 million, up 22.5%; EBITDA was $64.8 million, up from $56.8 million. These are company-reported non-GAAP measures.
- Aerospace sales were $193.2 million (+6.7%) and segment earnings were $27.1 million (+35.9%); segment margin rose to 14.0% from 11.0%.
- Energy sales were $214.7 million (+16.7%) and segment earnings were $26.7 million (+9.1%); segment margin declined to 12.4% from 13.3%.
- Cash and cash equivalents were $50.4 million at quarter-end, down from $74.5 million at September 30, 2011. Working capital was $563.5 million. Current assets were $783.0 million and current liabilities $219.5 million.
- Total debt was $422.7 million, including $10.0 million of short-term borrowings. Stockholders’ equity was $938.2 million. The company reported $209.8 million of remaining availability under its then-current revolver, net of letters of credit, and $20.8 million under foreign facilities.
Material changes and management commentary
- Sales increased across both segments, primarily from higher volume; reported drivers included Aerospace aftermarket and aircraft demand, and Energy turbine, converter, and natural-gas-related markets. Price and mix contributed to Aerospace growth; Energy segment earnings were partly offset by less favorable price and product mix.
- Gross-margin improvement reflected favorable Aerospace pricing and mix. R&D expense increased to $30.8 million from $23.7 million as Woodward invested in new platforms and programs; management said the spending level was consistent with expectations for the remainder of FY2012. SG&A rose to $38.6 million, including higher employee and variable-compensation costs.
- Operating cash flow was lower primarily because of increased variable-compensation payments and working-capital investment to support sales growth. Higher capital spending also drove the decline in free cash flow.
- Q1 FY2011 included an approximately $2.3 million workers’ compensation charge, or about $0.03 per share after tax, weighing on the prior-period comparison. The prior-year tax provision also benefited by $1.9 million from the retroactive U.S. research-credit extension.
- The effective tax rate was 29.3%, versus 28.8%. The research credit expired December 31, 2011; without an extension, management anticipated a higher full-year FY2012 effective tax rate than in the prior year. This is a tax-rate outlook, not earnings guidance.
- After quarter-end, on January 4, 2012, Woodward amended and restated its revolver, extending maturity to January 2017 and increasing committed capacity from $225 million to $400 million, with an option to expand total capacity to $600 million subject to lender participation. Management stated it was compliant with debt covenants at December 31, 2011.
Outlook, risks and contingencies
- The filing provides no quantified sales or earnings guidance. Management said first-quarter sales are historically affected by holidays, maintenance shutdowns, and customer buying patterns, and noted that quarterly results are not necessarily indicative of full-year results.
- Key risks identified include customer or market weakness, economic and credit-market conditions, input costs and supplier performance, competition, product-development execution, acquisition integration, debt covenants and cash generation, foreign exchange, taxes, pensions, legal and regulatory matters, environmental liabilities, and potential impairment of goodwill or other assets.
- Woodward reported routine-course litigation and claims, including product liability, employment, contractual, warranty, and environmental matters. Management did not expect resulting liabilities to materially affect liquidity, financial condition, or results, but outcomes are uncertain.
- Unrecognized tax benefits were $17.5 million gross; $14.6 million, net of expected offsets, would affect the effective tax rate if recognized. The company estimated this liability could decrease by up to $0.6 million over the next 12 months as reviews conclude or statutes expire.
- Cash held by foreign subsidiaries was $46.9 million. Woodward reported no known repatriation restrictions, but repatriation could cause additional U.S. or foreign withholding taxes.
- Foreign-currency translation reduced other comprehensive earnings by $8.4 million in the quarter. The company reported no derivative contracts outstanding at quarter-end; $0.7 million of unrecognized losses on terminated hedges remained in accumulated other comprehensive earnings.
Important facts for investors to verify
- Whether sales growth and Aerospace margin improvement persist, and whether Energy’s weaker segment margin reflects temporary product mix or a continuing trend.
- How working-capital needs, variable-compensation payments, and capital spending affect operating cash flow and free cash flow in subsequent quarters.
- Use and covenant headroom under the amended revolver, including the effect of the higher borrowing capacity and its terms.
- Whether the U.S. research credit is extended and how tax audits, unrecognized tax positions, and potential foreign-cash repatriation affect the effective tax rate and cash taxes.
- Developments in the disclosed legal and warranty matters, goodwill assumptions, and integration and internal-control work related to the IDS acquisition.