Woodward, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports fourth-quarter results. Financial amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
Woodward designs, manufactures and services energy-control systems for aerospace and energy markets. Aerospace products serve commercial and defense aircraft and related platforms; Energy products serve turbines, engines, renewable power and electrical-grid applications. The company primarily sells to OEMs and equipment suppliers and also provides aftermarket support.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $1,936.0 | $1,865.6 | +3.8% |
| Net earnings | $145.9 | $141.6 | +3.1% |
| Diluted EPS | $2.10 | $2.01 | +4.5% |
| Gross margin | 28.9% | 30.1% | −1.2 percentage points |
| EBIT | $226.0 | $223.3 | +1.2% |
| Operating cash flow | $222.6 | $144.1 | +$78.5 |
| Capital expenditures | $141.6 | $64.9 | +$76.7 |
| Free cash flow | $81.0 | $79.2 | +$1.8 |
Net margin was 7.5% versus 7.6% in FY2012. EBIT and EBITDA are non-GAAP measures; reported EBIT was $226.0 million and EBITDA was $300.2 million. Adjusted EBIT, excluding the renewable-power charge, was $241.7 million; adjusted diluted EPS was $2.20, also excluding the charge and adjusting for the retroactive research-credit benefit.
Aerospace sales rose 18.5% to $1,061.5 million and segment earnings increased to $166.1 million from $130.2 million. Energy sales fell 9.8% to $874.5 million and segment earnings declined to $98.9 million from $126.4 million. Excluding renewable power operations and the related charge, Energy segment earnings were $120.2 million versus $112.5 million.
Cash and cash equivalents were $48.6 million; working capital was $544.0 million, down from $623.6 million. Total debt increased to $550.0 million from $392.2 million, including $200.0 million drawn on a line of credit. The company reported $595.5 million of remaining availability on its $600 million revolving facility, net of letters of credit, and stated it was in compliance with debt covenants. Total assets were $2,205.7 million and stockholders’ equity was $1,142.5 million.
Material changes versus the prior comparable period
- Consolidated sales growth was driven by the Duarte acquisition and stronger Aerospace volumes, partly offset by a $96.5 million decrease in Energy volume, chiefly from wind-turbine converter sales.
- Gross margin contracted as lower Energy volume reduced fixed-cost leverage and the renewable-power alignment included $8.3 million charged to cost of goods sold. Favorable Aerospace volume, mix and operating performance partly offset the decline.
- FY2013 net earnings included a $15.7 million renewable-power alignment charge, including workforce actions and asset and liability revaluation. The third-quarter impact was $0.17 per diluted share.
- Operating cash flow improved mainly because accounts receivable used less cash than in FY2012 and inventory requirements were lower. Higher capital spending and the $198.9 million Duarte acquisition drove investing cash outflows to $340.0 million.
- Woodward acquired the Duarte thrust-reverser actuation business for approximately $200 million in December 2012. It contributed $111.3 million of FY2013 sales and was slightly accretive to net earnings.
- Backlog at October 31, 2013 was $778.8 million, up from $656.7 million a year earlier; 82% was expected to be filled by September 30, 2014. Backlog is not necessarily predictive of sales.
Outlook, management commentary and risks
The filing provides no numerical FY2014 revenue or earnings guidance. Management described commercial aviation demand and newer, fuel-efficient aircraft platforms as supportive, while warning that U.S. defense sequestration could weigh on future activity. Management expected a gap in certain defense aftermarket upgrade and overhaul programs in FY2014 before they resume in 2015.
Management expected continued volatility in renewable power amid uncertain incentives, overcapacity and constrained project financing, while continuing to support existing customers and pursue selected opportunities. Excluding renewable power, Energy sales were approximately level year over year; management cited growth in compressed natural gas and aeroderivative turbine systems offset by weakness in other engine and heavy-frame turbine markets. Longer-term opportunities cited include emissions requirements, fuel efficiency, grid modernization and renewable integration.
Woodward planned approximately $275 million of investment over five years across its Rockford-area campuses, $150 million for a Fort Collins campus, and $50 million for a Niles facility. It anticipated substantial workforce growth in the Rockford area as new aircraft platforms ramp.
Key risks include customer concentration (the five largest customers represented 39% of sales; GE alone represented 15%), dependence on aerospace and government program spending, renewable-power market weakness, long customer qualification cycles, supplier and commodity risks, foreign-exchange exposure, acquisition integration, product liability and regulatory matters. Debt covenants, pension assumptions, goodwill and other asset valuations, and potential changes in tax treatment are also relevant. Goodwill was $551.6 million, 25% of total assets; annual impairment testing found no impairment.
After year-end, Woodward issued $100 million of new senior notes on October 1, 2013, using proceeds to repay Series B notes, and intended to issue another $150 million on November 15. The $200 million acquisition-related line of credit was due to mature in December 2013; the filing said it could be refinanced through new debt and/or the revolving facility. The independent auditor expressed unqualified opinions on the financial statements and internal controls; the acquired Duarte business was excluded from the FY2013 internal-control assessment and was to be included in FY2014.
Important facts for investors to verify
- Whether the Aerospace growth and awarded aircraft-platform programs convert to deliveries and aftermarket revenue as anticipated.
- Whether Energy profitability can be sustained excluding renewable power, and whether wind-converter demand and the related business realignment stabilize.
- Actual capital spending, campus construction commitments and returns, given FY2013 capex of $141.6 million and substantial planned investments.
- Debt refinancing and repayment status, covenant headroom, interest costs and the effect of the post-year-end note issuance.
- Customer concentration, government defense spending and the timing of defense aftermarket programs, including the anticipated FY2014 program gap.
- Cash conversion and working-capital trends, including the $73.0 million of Chinese bank drafts included in receivables at year-end.
- Acquisition integration and purchase-accounting estimates, as well as goodwill and pension assumptions that could affect future earnings or balance-sheet measures.