Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2012. The interim financial statements are unaudited. Amounts below are in millions of dollars, except per-share data.
Business context and performance
Woodward serves aerospace and energy markets through its Aerospace and Energy segments. The filing compares the quarter and first half of fiscal 2012 with the corresponding 2011 periods.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $468.8, up 11.9% from $418.9 | $876.7, up 11.8% from $783.9 |
| Net earnings | $38.8, up from $32.1 | $67.2, up from $54.5 |
| Diluted EPS | $0.55, versus $0.46 | $0.95, versus $0.78 |
| EBIT | $60.5, up 14.8% from $52.7 | $106.9, up 18.0% from $90.6 |
| Gross margin | 31.2%, versus 30.2% | 30.8%, versus 29.4% |
| Net margin | 8.3%, versus 7.7% | 7.7%, versus 7.0% |
Revenue growth reflected higher volume across both segments and market-share gains. Aerospace sales increased 9.5% for the quarter and 8.2% for the half; Energy sales increased 14.3% and 15.4%, respectively. Aerospace growth included commercial and military aftermarket and commercial OEM demand; Energy growth was led by wind turbine converters and industrial gas turbines.
For the first half, operating cash flow was $12.2, compared with $20.2 a year earlier. Capital expenditures were $30.5, producing negative free cash flow of $18.3 versus positive $0.1. Cash and equivalents were $56.3 at March 31, down from $74.5 at September 30, 2011. Working capital was $607.1.
Total debt was $443.2, including $32.5 of short-term borrowings; cash less total debt was approximately negative $386.9. The company reported $365.7 of remaining availability under its revolving facility, net of letters of credit, and $15.4 under other foreign facilities. Total stockholders’ equity was $988.0.
Material changes and management commentary
- First-half earnings growth benefited from increased sales volume and favorable Aerospace pricing and mix. Gross margin improved, while R&D investment rose to $68.2 from $50.8 for the half, principally for new and awarded customer programs.
- Quarterly Aerospace segment earnings were nearly flat at $33.7 versus $33.2; higher volume and price/mix were largely offset by R&D and manufacturing costs. Energy segment earnings rose 27.4% for the quarter to $34.3, primarily on higher volume.
- Operating cash flow declined in part because variable-compensation payments were approximately $25 million higher year over year. Management attributed higher investing cash use mainly to planned capital expenditures supporting growth.
- On January 4, 2012, Woodward extended its revolving credit facility maturity to January 2017 and increased committed capacity from $225 million to $400 million, with an option to expand total capacity to $600 million subject to lender participation. Management stated it was in compliance with debt covenants.
- The effective tax rate was 28.3% for the quarter and 28.7% for the half, down from 31.0% and 30.1%. A $3.3 million tax benefit arose from the decision to keep certain foreign earnings indefinitely invested abroad.
Outlook, risks, and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management expected R&D costs as a percentage of sales in each of fiscal Q3 and Q4 to be slightly below Q2’s level.
- Management said operating cash flow and revolver borrowings were expected to fund ongoing operating needs. It also noted that repatriating foreign cash could create U.S. or foreign withholding taxes; $39.6 million of cash was held by foreign subsidiaries.
- Key disclosed risks include customer and end-market weakness, supplier availability and input costs, competition, product development and acquisition integration, debt covenants and financing access, foreign exchange, tax matters, legal and regulatory proceedings, and pension assumptions. Management did not expect pending legal matters to have a material effect on liquidity, financial condition, or results.
- Unrecognized tax benefits were $17.9 million gross; Woodward said the liability could decrease by up to $1.1 million in the next 12 months. The filing also identifies estimates in long-term contract accounting, inventory valuation, goodwill, and retirement benefits as areas requiring judgment.
Important facts for investors to verify
- Whether sales momentum and segment margins persist, particularly given Energy customers’ accelerated ordering tied to government incentives and renewable-energy programs.
- Whether increased R&D and manufacturing costs translate into future program revenue and productivity gains.
- Whether working-capital needs and capital spending improve cash conversion after first-half negative free cash flow.
- Revolver availability, covenant headroom, and debt levels as the company funds growth, dividends, and repurchases.
- The sustainability of the lower effective tax rate, including the foreign-earnings tax benefit and resolution of uncertain tax positions.