Woodward, Inc. 10-Q Summary: Quarter Ended March 31, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003, and the six-month period ended March 31, 2003, for Woodward, Inc. (Woodward Governor Company). The company operates in two primary segments: Industrial Controls (energy control systems for industrial engines and turbines) and Aircraft Engine Systems (energy control systems for aircraft engines). The financial statements are unaudited.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Mar 31, 2003 | 3 Months Ended Mar 31, 2002 | 6 Months Ended Mar 31, 2003 | 6 Months Ended Mar 31, 2002 |
|---|---|---|---|---|
| Net Sales | $146,159 | $174,864 | $290,984 | $355,517 |
| Net Earnings | $4,511 | $13,623 | $10,776 | $24,853 |
| Diluted EPS | $0.40 | $1.18 | $0.95 | $2.15 |
| Operating Cash Flow (6mo) | $26,990 (2003) vs $29,371 (2002) | |||
| Cash and Equivalents | $30,852 (Mar 31, 2003) | |||
| Total Debt (Short + Long Term) | $92,290 (Mar 31, 2003) | |||
| Working Capital | $165,457 (Mar 31, 2003) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 16.4% year-over-year for the quarter and 18.2% for the six-month period. The Industrial Controls segment saw a significant drop due to a severe decline in domestic capital spending on power generation equipment. Aircraft Engine Systems sales declined due to weakness in the commercial aviation industry.
- Profitability Drop: Net earnings fell 66.9% for the quarter and 56.6% for the six-month period. The Industrial Controls segment reported a loss of $1.8 million for the quarter, compared to earnings of $12.4 million in the prior year, driven by reverse leverage on fixed costs.
- Workforce Reductions: The company incurred significant workforce management costs ($4.5 million accrued termination benefits as of March 31, 2003) to align staffing with demand and consolidate manufacturing operations (specifically servovalve operations in Buffalo, NY).
- Accounting Change: The prior year's six-month results included a cumulative effect of an accounting change (FAS 142) resulting in a $2.5 million after-tax goodwill impairment loss, which is not present in the current period.
Guidance, Outlook, and Risks
- Full Year Outlook: Management anticipates a decline in full-year 2003 earnings of at least 50% compared to 2002 (excluding the cumulative effect of the accounting change). The Industrial Controls segment outlook is particularly weak, with a projected earnings decline of at least 70%.
- Segment Outlook: Aircraft Engine Systems sales are expected to decrease about 5% in 2003, with segment earnings decreasing 15% to 20%.
- Cost Reductions: The company is implementing cost-saving measures expected to reduce operating costs by at least $20 million on an annualized basis by 2004.
- Liquidity: The company maintains a $100 million revolving credit facility (expandable to $175 million) expiring in March 2006. Management believes cash flows and credit lines are adequate for the next 12 months.
- Risks: Key risks include continued deterioration in industrial and aviation markets, potential for further sales declines, and environmental/product liability litigation (accrued at approximately $1 million).
Investor Verification Checklist
- Industrial Controls Demand: Verify the severity of the downturn in domestic capital spending for power generation equipment and its impact on the segment's ability to return to profitability.
- Cost Savings Execution: Monitor the realization of the projected $20 million annualized cost reduction and the completion of the Buffalo manufacturing consolidation.
- Debt Covenants: Review the company's compliance with debt covenants (minimum net worth, debt-to-EBITDA ratios) given the significant earnings decline.
- Termination Benefits: Track the actual cash outflow for the $4.5 million in accrued termination benefits and the impact on future operating expenses.
- Aviation Market Recovery: Assess the trajectory of commercial aviation OEM sales versus aftermarket sales to gauge the Aircraft Engine Systems segment's resilience.