WWD

Woodward, Inc. (10-K) Filing Summary

Business Context and Reporting Period

Company: Woodward, Inc. (Woodward Governor Company)
Reporting Period: Fiscal year ended September 30, 2008
Business Overview: Woodward designs, manufactures, and services energy control systems and components for commercial and military aircraft, turbines, reciprocating engines, and electrical power systems. The company operates in three primary segments: Turbine Systems, Engine Systems, and Electrical Power Systems. On October 1, 2008, Woodward acquired MPC Products Corporation and Techni-Core, Inc., establishing a fourth segment, Airframe Systems.

Key Financial Metrics

Note: Per share amounts reflect a two-for-one stock split effective February 1, 2008.

Material Changes vs. Prior Period

• Sales Growth: Consolidated net external sales increased 21% driven by volume growth in Turbine Systems (aerospace and industrial), Engine Systems (marine and power generation), and Electrical Power Systems (wind power inverters). Foreign currency translation contributed approximately 22% to the sales increase.
• Segment Performance:
  • Turbine Systems: Earnings increased 33% due to volume leverage and price increases, partially offset by an unfavorable product mix shift toward OEM sales.
  • Engine Systems: Earnings decreased 1% despite volume growth, impacted by unfavorable sales mix and increased freight/expediting costs.
  • Electrical Power Systems: Earnings surged 108% driven by wind turbine inverter demand and favorable foreign currency translation (Euro strength).
• Acquisitions: Post-fiscal year-end, Woodward acquired MPC (forming Airframe Systems) for approximately $383 million and MotoTron for $17 million. These were financed by $400 million in new debt issued in October 2008.
• Tax Rate: The effective tax rate increased to 33.0% in 2008 from 25.6% in 2007, primarily due to changes in estimates for prior periods and the expiration of a retroactive research tax credit.

Guidance, Outlook, and Risks

Outlook: Management anticipates organic sales in 2009 to be flat to slightly up. While order volumes indicate a modest increase, this is expected to be offset by the rapid weakening of the Euro and British Pound against the U.S. dollar. The company remains focused on maintaining liquidity and profitability amidst economic uncertainty.

Key Risks and Contingencies:

• Customer Concentration: The five largest customers accounted for 43% of consolidated net sales in 2008. General Electric (17%) and Caterpillar (10%) were the two largest individual customers.
• Legal Proceedings: MPC (acquired Oct 2008) is subject to a U.S. Department of Justice investigation regarding pricing practices prior to 2006. A settlement in principle has been reached, but final fines are subject to court approval. The purchase price reflects the agreed amount; additional fines could materially impact results.
• Economic Conditions: Instability in credit markets and global economic slowdowns could reduce customer demand and affect the ability of customers to pay accounts receivable.
• Foreign Currency: Significant exposure to fluctuations in the Euro and GBP, which impacts both sales revenue and cost structures.

Investor Verification Checklist

• Acquisition Integration: Verify the final purchase price allocation and integration progress for the MPC and MotoTron acquisitions completed in October 2008.
• DOJ Investigation: Monitor the final resolution of the DOJ investigation into MPC's pricing practices to confirm if fines exceed the amount already factored into the purchase price.
• Currency Impact: Assess the sensitivity of 2009 earnings to continued weakness in the Euro and GBP, given the company's significant European operations.
• Debt Covenants: Review compliance with the new debt covenants (Debt/EBITDA ratios) established by the $400 million financing package issued in October 2008.
• Customer Concentration: Track order volumes from General Electric and Caterpillar, as they represent a significant portion of revenue.