WWD

Woodward, Inc. (WWD) - Q1 Fiscal 2009 Summary

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended December 31, 2008 (First Quarter of Fiscal 2009). Woodward, Inc. is a designer and manufacturer of energy control and optimization solutions for aerospace, power, and transportation industries. The quarter was defined by the completion of two major acquisitions: MPC Products Corporation (forming the new Airframe Systems segment) and MotoTron Corporation (integrated into Engine Systems). These transactions significantly altered the company's asset base and debt profile.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26.7% year-over-year. Organic growth was 7%, with the remainder driven by the MPC and MotoTron acquisitions.
• Acquisition Impact: The company acquired MPC for approximately $370 million and MotoTron for $17 million. This resulted in a significant increase in goodwill ($188 million addition) and intangible assets ($172 million addition).
• Debt Expansion: To finance the acquisitions, Woodward issued $400 million in long-term debt (Term Loan and Senior Notes). Total debt increased from $44.9 million to $434.1 million, raising the debt-to-total-capitalization ratio from 7.2% to 40.1%.
• Interest Expense: Interest expense surged to $6.5 million from $0.96 million due to the new debt load.
• Tax Rate: The effective tax rate decreased to 29.0% from 34.2%, primarily due to the retroactive extension of the U.S. research and experimentation tax credit.
• Segment Performance:
  • Turbine Systems: Sales up 10.6%; earnings up 7.0%.
  • Engine Systems: Sales flat (0.2%); earnings down 3.1% due to foreign currency headwinds.
  • Electrical Power Systems: Sales up 7.6%; earnings up 27.4% driven by wind turbine inverter demand.
  • Airframe Systems: New segment contributing $52.3 million in sales and $1.8 million in earnings.

Guidance, Outlook, and Risks

• Full-Year Guidance: Management anticipates full-year organic sales to be flat to slightly up. Total sales, including acquisitions, are projected to be between $1.4 billion and $1.5 billion.
• Outlook: Management notes that the economy remains a concern with tight credit markets. However, they believe their cash generation and balance sheet support operations. They expect synergies from the MPC acquisition to be realized significantly in the second half of fiscal 2009.
• Key Risks:
  • DOJ Investigation: MPC is under investigation by the U.S. Department of Justice regarding pricing practices prior to 2006. A settlement in principle has been reached involving a $25 million reduction in purchase price, but additional fines could have a material negative impact.
  • Economic Downturn: Declines in commercial airline travel and cargo service could adversely affect Turbine and Airframe segments.
  • Debt Covenants: The company must maintain specific leverage ratios (Net Debt/EBITDA) and minimum net worth. Management states they are currently in compliance and expect to remain so.

Investor Verification Checklist

• Verify the final resolution and potential additional costs of the DOJ investigation regarding MPC pricing practices.
• Monitor debt covenant compliance given the significant increase in leverage and the current economic environment.
• Assess the integration progress of MPC and MotoTron and the realization of projected synergies in the second half of the fiscal year.
• Track foreign currency impacts, which negatively affected sales and earnings by approximately 3% and $0.03 per share, respectively.
• Review working capital management, specifically inventory levels which increased significantly due to acquisitions and sales volume anticipation.