Woodward, Inc. 10-Q Summary: Quarter Ended March 31, 1999
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1999, and the six-month period ended on the same date. Woodward, Inc. operates in three primary segments: Aircraft Engine Systems, Industrial Controls, and Automotive Products. The reporting period reflects the impact of two acquisitions made in the prior fiscal year (Woodward FST, Inc. and Baker Electrical Products, Inc.) and a significant reorganization of the Industrial Controls segment.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 1999 | 3 Months Ended Mar 31, 1998 | 6 Months Ended Mar 31, 1999 | 6 Months Ended Mar 31, 1998 |
|---|---|---|---|---|
| Net Billings (Revenue) | $144,408 | $113,160 | $289,316 | $211,300 |
| Net Earnings | $2,064 | $5,415 | $7,268 | $7,873 |
| Diluted EPS | $0.18 | $0.48 | $0.64 | $0.69 |
| Operating Cash Flow (6 mo) | $21,801 (1999) vs $13,194 (1998) | |||
| Cash and Equivalents | $19,217 (Mar 31, 1999) vs $12,426 (Sep 30, 1998) | |||
| Total Debt (Short + Long Term) | $213,204 (Mar 31, 1999) | |||
| Shareholders' Equity | $220,870 (Mar 31, 1999) |
Material Changes vs. Prior Period
- Revenue Growth: Net billings increased 28% for the quarter and 37% for the six months compared to the prior year. This growth was driven primarily by the Aircraft Engine Systems segment (up 67% for the quarter) due to acquisitions and strong existing business performance.
- Profitability Decline: Despite revenue growth, net earnings dropped significantly (62% for the quarter, 8% for six months). This was primarily due to a one-time restructuring expense of $8.174 million and increased amortization of intangible assets from recent acquisitions.
- Segment Performance: While Aircraft Engine Systems surged, Industrial Controls billings declined 12% for the quarter and 5% for six months, attributed to softness in Asian markets and the oil and gas industry.
- Cost Structure: Cost of goods sold and interest expense increased year-over-year, largely due to the inclusion of acquired entities (FST and Baker) in the current period.
Guidance, Outlook, and Risks
- Restructuring: The company incurred $8.174 million in restructuring costs to reorganize Industrial Controls and consolidate facilities. This included terminating 197 members (188 terminated by quarter-end). Management expects this to improve productivity and profitability in the balance of the year.
- Adjusted Earnings: Management notes that excluding restructuring expenses and a gain on real estate sales, adjusted net earnings would have been $0.56 per share for the quarter and $1.02 per share for the six months.
- Liquidity: The company maintains a strong financial position with working capital increasing 9% since the prior fiscal year-end. Future cash flows and revolving credit lines are deemed adequate for the next 12 months, though future acquisitions may require additional financing.
- Year 2000 (Y2K) Risk: The company is actively managing Y2K compliance for products and internal systems. External corrective costs are estimated at less than $650,000. Risks remain regarding third-party suppliers and partners.
- Dividends: A quarterly dividend of $0.2325 per share was declared, payable June 2, 1999.
Investor Verification Checklist
- Restructuring Execution: Verify the actual cost savings and productivity gains realized from the Industrial Controls reorganization and facility consolidation.
- Industrial Controls Recovery: Monitor billings in the Industrial Controls segment for signs of recovery in Asian and oil/gas markets.
- Acquisition Integration: Assess the ongoing integration and performance contribution of Woodward FST, Inc. and Baker Electrical Products, Inc.
- Y2K Contingencies: Review the status of critical supplier compliance and the migration of the FST business system scheduled for June 1999.
- Debt Covenants: Confirm that current debt levels and future acquisition plans remain within the limits of existing credit agreements.