Woodward, Inc. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, and the nine-month period ended June 30, 2007, for Woodward, Inc. (Woodward Governor Company). The company designs, manufactures, and services energy control systems for aircraft and industrial engines. Operations are divided into two segments: Industrial Controls and Aircraft Engine Systems. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Nine Months Ended June 30, 2007 |
|---|---|---|
| Net Sales | $269,026 | $751,572 |
| Net Earnings | $23,974 | $62,123 |
| Earnings Per Share (Diluted) | $0.68 | $1.76 |
| Gross Margin | 30.8% | 30.8% |
| Cash and Cash Equivalents | $68,472 (as of June 30, 2007) | N/A |
| Total Debt | $66,769 (as of June 30, 2007) | N/A |
| Operating Cash Flow | N/A | $56,706 |
Note: All figures in thousands except per share amounts and percentages.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 24% year-over-year for the quarter ($269.0M vs. $217.1M) and 21% for the nine-month period ($751.6M vs. $621.6M). Growth was driven by the acquisition of SEG Schaltanlagen-Elektronik-Geräte GmbH (SEG) and higher sales in power generation, marine, and turbine markets.
- Profitability: While segment earnings increased significantly, consolidated net earnings for the quarter decreased to $23.97M from $28.92M in the prior year. This decline is primarily due to a one-time tax benefit of $13.71M recorded in the prior year related to changes in valuation allowances. For the nine-month period, net earnings increased to $62.12M from $52.81M.
- Margins: Gross margins improved to 30.8% for both the quarter and nine-month period, up from 29.0% and 27.9% respectively in the prior year, due to higher sales volume on fixed costs and cost reduction initiatives.
- Balance Sheet: Total assets increased to $809.3M from $735.5M at the prior fiscal year-end. Inventory levels rose significantly to $188.2M from $149.2M.
Guidance, Outlook, and Risks
- Acquisition Impact: The company acquired SEG on October 31, 2006, for a total cost of $44.9M. The acquisition cost allocation is subject to change and is expected to be finalized by the end of the fiscal year. SEG results are included in the Industrial Controls segment.
- Tax Matters: The nine-month results included a $1.18M reduction in income tax expense due to the retroactive extension of the U.S. research and experimentation tax credit.
- Legal Contingencies: The company settled a class action lawsuit regarding alleged discrimination for $5.0M (previously accrued). Additionally, an adverse arbitration ruling resulted in a pre-tax loss of $4.03M in the second quarter. Management believes potential additional losses from other pending matters are less than $10M in the aggregate.
- Liquidity: The company maintains a $100M revolving line of credit (expandable to $175M) expiring in March 2010. Borrowings under all facilities were $4.6M at June 30, 2007. The company is in compliance with all debt covenants.
- Outlook: Management expects to continue funding expanded R&D and exploring investment opportunities. No specific forward-looking financial guidance was provided in this filing.
Investor Verification Checklist
- Verify the final allocation of the $44.9M SEG acquisition cost, as it remains subject to change.
- Monitor the impact of the $4.03M arbitration loss and the status of other pending litigation.
- Review the sustainability of the improved gross margins (30.8%) given the increase in R&D costs.
- Assess the company's ability to manage rising inventory levels ($188.2M) relative to sales growth.
- Confirm compliance with debt covenants, specifically the maximum debt-to-EBITDA ratio, as debt levels fluctuate.