Woodward, Inc. Q1 Fiscal 2010 Summary (Period Ended Dec 31, 2009)
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended December 31, 2009 (First Quarter of Fiscal 2010). Woodward, Inc. is an independent designer, manufacturer, and service provider of energy control and optimization solutions for aerospace, power generation, and transportation markets. The company operates through four segments: Turbine Systems, Airframe Systems, Electrical Power Systems, and Engine Systems. The reporting period includes the full impact of the HR Textron Inc. (HRT) acquisition completed in April 2009, which was integrated into the Airframe Systems segment.
Key Financial Metrics
| Metric | Q1 2010 (Dec 31, 2009) | Q1 2009 (Dec 31, 2008) |
|---|---|---|
| Net Sales | $339,308 | $344,744 |
| Net Earnings (Attributable to Woodward) | $22,356 | $27,064 |
| Diluted EPS | $0.32 | $0.39 |
| Gross Margin | 29.4% | 29.1% |
| Operating Cash Flow | $61,269 | $5,470 |
| Total Debt | $524,704 | $572,340 (Sep 30, 2009) |
| Cash and Equivalents | $76,620 | $100,863 (Sep 30, 2009) |
| Working Capital | $427,907 | $434,166 (Sep 30, 2009) |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 1.6% year-over-year. Organic net sales (excluding HRT) declined 18.5% due to volume decreases across all segments, particularly in Engine Systems and Turbine Systems. The HRT acquisition contributed $58.2 million in sales, partially offsetting organic declines.
- Earnings Pressure: Net earnings decreased 17.4% to $22.36 million. Diluted EPS fell to $0.32 from $0.39. Segment earnings were impacted by lower sales volumes, though cost control initiatives and workforce management savings mitigated some of the decline.
- Amortization Increase: Amortization of intangible assets rose to $9.18 million (2.7% of sales) from $4.83 million (1.4% of sales) due to the HRT acquisition.
- Cash Flow Improvement: Operating cash flow surged to $61.3 million from $5.5 million in the prior year, driven by strong accounts receivable collections, reduced inventory levels, and lower variable compensation payments.
- Debt Reduction: Total debt decreased by approximately $47.6 million during the quarter through scheduled and unscheduled prepayments.
Guidance, Outlook, and Risks
- Outlook: Management expects cash generation from operations, combined with existing cash and available borrowings ($222.3 million available under revolving credit), to adequately support ongoing operations. The company continues to focus on cost reduction and restructuring actions initiated in fiscal 2009.
- Legal Contingency Resolution: A significant legal matter involving subsidiary MPC Products Corporation was resolved in Q1. MPC pled guilty to wire fraud regarding pre-2005 pricing practices, paid a $2.5 million fine, and settled civil claims for $22.5 million. The Department of Defense suspension was lifted, restoring full eligibility for government contracts.
- Risks: Key risks include continued instability in financial markets, prolonged unfavorable economic conditions, declines in aerospace and industrial engine demand, and the ability to integrate acquisitions successfully. The company also faces exposure to foreign currency fluctuations and interest rate changes.
Investor Verification Checklist
- Organic Growth: Verify the sustainability of the 18.5% organic sales decline and the specific drivers in the Engine and Turbine segments.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the leverage ratio (net debt to EBITDA) and minimum net worth requirements, given the high debt load.
- Acquisition Integration: Assess the progress of integrating HRT into Airframe Systems and the realization of anticipated cost synergies.
- Legal Settlement Impact: Review the long-term implications of the MPC Products settlement and the requirements of the three-year administrative agreement with the DOD.
- Working Capital Trends: Monitor the trend in accounts receivable and inventory levels to ensure the strong Q1 cash flow performance is repeatable.