Woodward, Inc. (Woodward Governor Company) — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2010. The interim financial statements are unaudited; amounts below are in thousands except per-share data. Woodward supplies energy-control and optimization systems to aerospace and defense, power generation and distribution, and transportation markets through four segments: Turbine Systems, Airframe Systems, Electrical Power Systems, and Engine Systems.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $356,367 | $386,193 | $1,045,027 | $1,065,598 |
| Net earnings attributable to Woodward | $31,745 | $24,997 | $78,169 | $70,535 |
| Diluted EPS | $0.45 | $0.36 | $1.12 | $1.02 |
| EBIT (non-GAAP) | $44,904 | $37,424 | $127,557 | $112,798 |
| Operating cash flow | Not separately stated for the quarter | $161,609 | $115,732 | |
| Free cash flow (non-GAAP) | Not separately stated for the quarter | $142,775 | $97,817 |
- Margins: Gross margin was 29.9% in Q3 and 29.8% for the nine months, compared with 25.7% and 28.0%, respectively. Lower costs, cost controls, and the prior-year $12,500 HRT inventory step-up charge contributed to the improvement.
- Cash and liquidity at June 30: Cash was $78,708; working capital was $422,960. The $225,000 revolving facility had $222,848 available after letters of credit; no facility borrowings were outstanding. Management said cash, operating cash generation, and available borrowing capacity were expected to support operations and strategic initiatives.
- Debt: Total debt was $453,662, down from $572,340 at September 30, 2009. Woodward paid $118,582 of debt principal in the nine months, including $90,000 in unscheduled prepayments. Debt-to-total-capitalization declined to 37.7% from 44.7%. Management reported compliance with debt covenants.
- Other: Capital expenditures were $18,834 for the nine months; dividends paid were $0.18 per share. Total assets were $1,577,588 and total equity was $749,032 at June 30.
Changes versus the prior comparable period
- Q3 sales fell 7.7%; nine-month sales fell 1.9%. Excluding HRT’s acquired sales, nine-month organic sales decreased 12.9%. Declines reflected lower volume across most markets, partly offset by pricing, mix, foreign exchange, and HRT’s contribution.
- Reported Q3 net earnings and diluted EPS increased, but Q3 2010 included a $6,416 favorable resolution of prior-year tax matters, equal to about $0.09 per share. Q3 2009 included a $12,500 acquisition-related inventory charge; excluding that charge, 2009 Q3 EBIT was $49,924, above 2010 Q3 EBIT of $44,904.
- Nine-month reported EBIT rose year over year, but 2009 included $29,105 of inventory step-up and other special charges. The filing reports 2010 organic EBIT of $113,160 versus $112,798 in 2009, before considering differences in special items.
- Segment trends were mixed: Q3 segment earnings improved in Turbine, Airframe, and Engine Systems but fell sharply in Electrical Power Systems. Wind-converter weakness weighed on Electrical Power; Engine Systems benefited from stronger small-engine controls. Nine-month comparisons are affected by the 2009 HRT acquisition.
- Operating cash flow increased by $45,877 year over year, primarily from lower inventory and receivables and lower cash payments for accounts payable and variable compensation. Cash declined by $22,155 during the period, partly reflecting debt payments, the $25,000 DOJ settlement payment, and the $8,120 purchase of India subsidiary minority shares.
Outlook, commentary, risks, and unusual items
- Management provided no specific earnings or revenue guidance in the supplied filing text. It said restructuring and cost-reduction actions should support cash generation and that ongoing spending was expected to be similar to Q3 levels.
- Management described continued weakness in commercial and regional aviation, industrial gas and steam turbines, and wind-converter markets. Wind demand faced tight project financing and uncertainty about government subsidy programs; some Engine Systems short-cycle markets showed improvement.
- Goodwill testing in March 2010 found no impairment. The recently acquired Airframe reporting unit had an estimated fair-value cushion above carrying value of over 30%; management cautioned that weaker-than-forecast cash flows or a prolonged downturn could result in future impairment.
- MPC Products’ DOJ investigation over pre-June 2005 contracting practices was settled: MPC paid approximately $22,500 in compensation and a $2,500 fine, and was subject to two years’ probation. A three-year DOD administrative agreement requires compliance enhancements and periodic reporting; MPC was again eligible for U.S. government contracts. Woodward said it was implementing the requirements.
- Other risks include customer and market weakness, supplier performance and input costs, acquisition integration, substantial debt and covenant restrictions, tax examinations, foreign-exchange movements, pension funding, and legal, product-liability, environmental, and regulatory matters. Management did not expect ordinary-course claims to materially harm liquidity, financial condition, or results.
- Subsequent to quarter-end, the board approved a $0.06 quarterly dividend and a new share-repurchase authorization of up to $200,000 over three years, replacing the existing plan.
Important facts for investors to verify
- How much of reported earnings growth reflects the $6,416 tax benefit, and what are sustainable earnings and tax rates absent discrete tax items?
- Whether organic sales and segment profitability recover, particularly in wind power, commercial and regional aviation, and industrial turbine markets.
- Whether cash generation remains sufficient to fund operations, planned investment, dividends, and the new repurchase authorization while continuing debt reduction.
- Debt-covenant headroom, refinancing and maturity requirements, and the sensitivity of goodwill valuations to future demand and cash-flow assumptions.
- Ongoing compliance with the DOD agreement and MPC probation terms, as well as developments in open tax audits and other contingencies.