Woodward, Inc. (Woodward Governor Company) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1999, and the nine-month period ended on the same date. Woodward, Inc. operates in three primary segments: Aircraft Engine Systems, Industrial Controls, and Automotive Products. The company reported improved financial performance in the third quarter, driven by the initial benefits of a second-quarter restructuring in Industrial Controls and contributions from recent acquisitions.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 1999 | 3 Months Ended June 30, 1998 | 9 Months Ended June 30, 1999 | 9 Months Ended June 30, 1998 |
|---|---|---|---|---|
| Net Billings | $139,239 | $119,399 | $428,555 | $330,699 |
| Net Earnings | $8,079 | $4,891 | $15,347 | $12,764 |
| Diluted EPS | $0.72 | $0.43 | $1.36 | $1.12 |
| Operating Cash Flow (9mo) | $41,354 (1999) | $22,898 (1998) | ||
| Cash & Equivalents (End) | ||||
| Total Debt (Current + Long-term) | $200,501 (as of June 30, 1999) | |||
| Working Capital | $127,155 (as of June 30, 1999) |
Note: Gross margin for the three months ended June 30, 1999, was approximately 28.0% ($38,994 / $139,239). Net margin was approximately 5.8%.
Material Changes vs. Prior Period
- Revenue Growth: Net billings increased 17% for the quarter and 30% for the nine-month period compared to the prior year. Aircraft Engine Systems billings rose 34% (quarter) and 61% (nine months), largely due to the Woodward FST, Inc. acquisition.
- Profitability: Net earnings increased 65% for the quarter and 20% for the nine-month period. Earnings per share (diluted) increased 67% for the quarter.
- Expense Management: Cost of goods sold and administrative expenses decreased as a percentage of net billings following the restructuring of Industrial Controls. However, amortization of intangible assets and interest expense increased due to acquisitions made in fiscal 1998.
- Restructuring: The nine-month period included a one-time restructuring expense of $8,174,000. Excluding this and a gain on the sale of real estate, adjusted net earnings for the nine months would have been $19,643,000 ($1.74 per share).
- Balance Sheet: Total assets decreased slightly to $546,643,000. Long-term debt decreased to $167,650,000, and short-term borrowings were reduced to $7,901,000.
Guidance, Outlook, and Risks
- Outlook: Management expects the positive impact of the Industrial Controls restructuring to continue through the remainder of the year. Aircraft Engine Systems is on track for solid full-year increases. Industrial Controls markets in Asia and oil/gas appear to have stabilized.
- Liquidity: Future cash flows and revolving credit lines are expected to be adequate for the next twelve months. However, future business acquisitions may require amendments to debt agreements.
- Dividends: A quarterly dividend of $0.2325 per share was declared, payable September 1, 1999.
- Year 2000 (Y2K) Risk: The company has completed remediation of mission-critical systems. External costs for Y2K compliance are estimated at less than $700,000 total, with $217,000 incurred through June 30, 1999. Risks remain regarding non-compliance by external suppliers and partners.
- Other Risks: Key risks include global economic developments (particularly in Asia), currency fluctuations, interest rate changes, and the performance of the unconsolidated affiliate, GENXON Power Systems, LLC.
Investor Verification Checklist
- Verify the sustainability of the 17% revenue growth in the Aircraft Engine Systems segment post-acquisition.
- Confirm the long-term impact of the Industrial Controls restructuring on operating margins.
- Review the status of Year 2000 compliance for critical external suppliers and partners.
- Monitor the performance and funding requirements of the unconsolidated affiliate, GENXON.
- Assess the potential impact of new accounting pronouncements (SFAS No. 131 and SFAS No. 133) on future disclosures.