Woodward, Inc. — Form 10-Q Summary
Business context and reporting period
Woodward designs and manufactures systems serving aerospace and energy markets. This unaudited quarterly report covers the third quarter and first nine months of fiscal 2012, ended June 30, 2012, with comparisons to the corresponding fiscal 2011 periods. The company reports two segments: Aerospace and Energy. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | 9M FY2012 | 9M FY2011 |
|---|---|---|---|---|
| Net sales | $460.2 | $438.5 | $1,336.9 | $1,222.4 |
| Net earnings | $28.3 | $36.1 | $95.5 | $90.5 |
| Diluted EPS | $0.40 | $0.51 | $1.36 | $1.29 |
| Gross margin | 28.4% | 30.6% | 30.0% | 29.8% |
| EBIT, as reported by the company | $44.1 | $57.1 | $150.9 | $147.7 |
| EBITDA, non-GAAP | $61.7 | $77.0 | $204.8 | $205.0 |
| Effective tax rate | 24.9% | 29.1% | 27.6% | 29.7% |
Q3 sales grew 5.0%, while net earnings fell 21.5%. For the first nine months, sales rose 9.4% and net earnings rose 5.4%. Quarterly earnings were pressured by lower Aerospace segment earnings and higher product-development and production-process investment. Research and development expense increased 33.1% in Q3 and 33.9% year to date.
Energy drove sales growth: Q3 segment sales increased to $245.8 million from $223.2 million, while Aerospace sales were nearly flat at $214.5 million. Q3 Energy segment earnings rose to $31.2 million from $29.3 million; Aerospace segment earnings declined to $21.5 million from $35.4 million. Year-to-date sales and earnings increased in Energy; Aerospace sales increased, but segment earnings declined.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $63.7 million, versus $46.8 million; capital expenditure was $44.2 million, versus $32.6 million. Company-defined free cash flow was $19.4 million, versus $14.2 million.
- Cash and cash equivalents were $39.9 million at June 30, 2012, down from $74.5 million at September 30, 2011. Working capital was $616.0 million, up from $536.9 million.
- Total debt was $413.8 million, versus $425.2 million at fiscal year-end. This included $5.0 million of short-term borrowings; no balance was outstanding on the principal revolving credit facility. The company reported $393.7 million of remaining availability under that facility, net of letters of credit, plus $14.8 million under other foreign facilities.
- The revolving facility was amended in January 2012, extending maturity to January 2017 and increasing committed capacity to $400 million, with an option to expand to $600 million subject to lender participation. Management said Woodward was in compliance with debt covenants.
- Nine-month financing cash use was $51.9 million, including $31.9 million of share repurchases and $15.9 million of dividends.
Material changes, outlook and risks
- Management attributed Energy growth to wind-turbine controls, natural-gas engine systems and industrial gas turbines; sales also benefited from market-share gains and, in some cases, customer ordering ahead of government incentives. Foreign-exchange movements reduced reported sales by $8.1 million in Q3 and $10.6 million year to date.
- Aerospace Q3 production and sales were affected by an IT hardware outage, a faulty supply-chain interface that caused part shortages, and implementation of a new ERP system. The filing says these issues had been addressed, but they contributed to unanticipated production delays. Lower defense sales offset stronger commercial OEM and aftermarket demand.
- Management said increased investment in development and production processes reflected significant new system-program awards. It also cited favorable year-to-date price and sales mix, partially offset by these investments. The filing provides no specific earnings or revenue guidance.
- The lower tax rate included tax benefits from tax-return estimate adjustments and settlements of prior-year issues; year-to-date results also included a $3.3 million benefit from changing expectations for repatriation of foreign earnings. The U.S. research tax credit had expired again after December 31, 2011.
- Risks discussed include customer and market downturns, defense-spending reductions, input costs and supplier performance, foreign-exchange exposure, debt covenants and financing access, product-development execution, goodwill impairment assumptions, pension assumptions, and legal, regulatory and tax matters. Management said pending ordinary-course claims were not expected to materially affect liquidity, financial condition or results. Goodwill impairment testing in 2011 found no impairment; no impairment was recorded in the reported periods.
Important facts for investors to verify
- Whether Aerospace margins and output recover following the reported production and ERP-related disruptions, and whether program-related investment translates into profitable growth.
- Whether Energy sales growth, including customer orders influenced by incentives, is sustainable and how product mix affects segment margins.
- Working-capital trends, especially inventory, which increased to $424.0 million from $381.6 million and remained a significant use of cash.
- Debt availability, covenant compliance, and the use of cash for repurchases, dividends and capital spending.
- The sustainability of the lower effective tax rate and the potential impact of tax audits, repatriation decisions and expiration of the research credit.