Woodward, Inc. 10-Q Summary: Quarter Ended June 30, 1998
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, and the nine-month period ended June 30, 1998, for Woodward, Inc. (Woodward Governor Company). The company operates in three primary groups: Aircraft Engine Systems (formerly Aircraft Controls), Industrial Controls, and the newly launched Automotive Products group. The reporting period was defined by significant strategic expansion through two major acquisitions: Baker Electrical Products, Inc. (May 1998) and Fuel Systems Textron, Inc. (FST) (June 1998).
Key Financial Metrics
| Metric (in thousands) | Q2 1998 | Q2 1997 | 9M 1998 | 9M 1997 |
|---|---|---|---|---|
| Net Billings (Revenue) | $119,399 | $115,761 | $330,699 | $321,336 |
| Net Earnings | $4,891 | $4,838 | $12,764 | $13,406 |
| Diluted EPS | $0.43 | $0.42 | $1.12 | $1.16 |
| Operating Cash Flow (9M) | $22,898 (1998) vs $34,139 (1997) | |||
| Cash and Equivalents (End of Period) | $7,421 | |||
| Short-Term Borrowings | $83,272 | |||
| Long-Term Debt | $117,659 | |||
| Total Debt | $205,911 |
Margins: Gross margins improved due to efficiency efforts and a favorable revenue mix. The effective tax rate for the nine months ended June 30, 1998, was 40.0% compared to 39.0% in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Net billings increased 3% year-over-year for both the quarter ($119.4M vs $115.8M) and the nine-month period ($330.7M vs $321.3M). Aircraft Engine Systems shipments rose 5% due to the FST acquisition, while Industrial Controls shipments remained flat.
- Earnings: Quarterly net earnings were flat ($4.89M vs $4.84M), while nine-month earnings declined slightly ($12.76M vs $13.41M). The decline in nine-month earnings was partially attributed to a larger equity loss from the unconsolidated GENXON affiliate ($0.22 per share impact vs $0.19 per share).
- Balance Sheet Expansion: Total assets increased significantly from $348.1M to $547.5M, driven by $159.6M in new intangible assets and $25.6M in inventory increases related to acquisitions. Liabilities surged, with short-term borrowings rising by $75.4M and long-term debt increasing by $99.9M to finance the acquisitions.
- Cash Flow: Net cash provided by operating activities decreased to $22.9M for the nine months ended June 30, 1998, from $34.1M in the prior year, largely due to increased inventory levels and changes in working capital. Investing activities consumed $187.8M, primarily for business acquisitions ($169.5M).
Guidance, Outlook, and Risks
Management Commentary: Management views the acquisitions as strategic moves to broaden capabilities in aircraft engine fuel delivery and industrial control systems. The FST acquisition is expected to have minimal impact on fiscal 1998 earnings but positions the company for expanded roles in future engine programs. The Automotive Products group is expected to leverage automotive derivative technology for smaller industrial engines.
Outlook and Risks:
- Acquisition Integration: The company is integrating FST and Baker Electrical Products. Purchase price allocations are subject to adjustment.
- Debt Covenants: The new $100M term loan and $150M revolving credit facility require maintaining a minimum fixed charge coverage ratio and a maximum funded debt to total capitalization ratio.
- Year 2000 Compliance: The company estimates costs for Year 2000 remediation to be less than $1.5M, with completion expected by March 1999.
- Market Risks: Forward-looking statements note risks including the Asian economic slowdown, a strong dollar, and increased customer caution.
- Tax Election: The company expects to elect Section 338(h)(10) treatment for the FST acquisition, which may require an additional payment to Textron of up to $13.5M.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to meet the new debt covenants (fixed charge coverage and debt-to-capitalization ratios) given the $205.9M total debt load.
- Acquisition Synergies: Monitor the integration progress of FST and Baker Electrical Products to ensure projected revenue growth materializes in future quarters.
- GENXON Affiliate Impact: Track the performance of the unconsolidated GENXON Power Systems affiliate, as its losses continue to reduce net earnings per share.
- Working Capital Trends: Observe inventory levels and accounts receivable to ensure the recent increases are driven by strategic stockpiling rather than slowing demand.
- Tax Liability: Confirm the finalization of the Section 338(h)(10) election and the associated additional payment to Textron.