Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2011. The interim financial statements are unaudited. Amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
Woodward reports four operating segments: Turbine Systems, Airframe Systems, Electrical Power Systems, and Engine Systems. Management attributed broad sales growth to the global economic recovery, while noting weaker Airframe Systems first-half performance and continuing uncertainty in wind-converter markets.
Financial performance and liquidity
| Metric | Three months ended March 31, 2011 | Three months ended March 31, 2010 | Six months ended March 31, 2011 | Six months ended March 31, 2010 |
|---|---|---|---|---|
| Net sales | $418.9 | $349.4 | $783.9 | $688.7 |
| Earnings before income taxes | $46.5 | $35.8 | $78.0 | $67.3 |
| Net earnings attributable to Woodward | $32.1 | $24.1 | $54.5 | $46.4 |
| Diluted EPS | $0.46 | $0.34 | $0.78 | $0.66 |
| Gross margin | 30.2% | 30.1% | 29.4% | 29.7% |
| EBIT (non-GAAP) | $52.7 | $43.0 | $90.6 | $82.7 |
| EBITDA (non-GAAP) | $71.2 | $62.1 | $128.0 | $120.6 |
- Quarterly sales rose 19.9%; first-half sales rose 13.8%. Quarterly net earnings attributable to Woodward increased 33.3%; first-half earnings increased 17.4%.
- For the quarter, higher volume was the principal earnings driver, partly offset by increased variable compensation and R&D investment. SG&A declined as a share of sales, while first-half gross margin eased 0.3 percentage points.
- Operating cash flow was $20.2 million for the first half, versus $126.0 million a year earlier. Capital expenditures were $20.1 million, leaving reported free cash flow of $0.1 million versus $111.8 million. Management linked the cash-flow decline chiefly to working-capital use, especially inventory and receivables; inventory increased to $357.8 million from $295.0 million at September 30, 2010.
- Cash and cash equivalents were $60.8 million at March 31, down from $105.6 million at September 30, 2010. Working capital was $512.4 million, up from $456.6 million.
- Debt was approximately $429.7 million at March 31; the filing gives slightly different totals in separate tables ($429.7 million and $429.684 million). Long-term debt including current portion had a carrying amount of $429.2 million. The company reported $219.8 million available on its $225 million revolver, net of letters of credit, plus $24.8 million under foreign facilities. It reported compliance with debt covenants.
- Six-month financing uses included $14.6 million of scheduled long-term debt repayment, $18.1 million net repayment of short-term borrowings, $8.9 million of dividends, and $6.8 million of share repurchases. Dividends paid were $0.07 per share in the quarter.
Material changes versus the prior comparable period
- All segments grew external sales in the second quarter. First-half segment sales increased in Turbine, Electrical Power, and Engine Systems, while Airframe Systems declined slightly.
- Engine Systems had the strongest reported segment earnings growth: second-quarter earnings increased to $10.2 million from $6.1 million, and first-half earnings to $18.3 million from $9.4 million.
- Airframe Systems earned $4.0 million in the quarter versus $5.0 million; its first-half segment result was a $1.0 million loss versus $7.4 million earnings. Lower customer-funded development revenue, mix, R&D, and a workers’ compensation estimate change weighed on results.
- Electrical Power Systems first-half earnings fell to $10.2 million from $12.2 million despite higher sales, reflecting global expansion costs, pricing, quality costs, and foreign-exchange effects.
- R&D expense rose 37.3% in the quarter and 33.6% for the half, reaching 6.5% of sales in both periods. Interest expense declined, which management attributed to debt reductions.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management expected R&D spending to increase somewhat in fiscal 2011’s second half compared with the first half.
- On April 15, 2011, Woodward completed the IDS acquisition for approximately $39.5 million, including about $6.5 million in marketable securities, and agreed to acquire additional China assets for approximately $5.5 million subject to conditions. The acquisition is to be funded with revolver borrowings; Woodward reported total debt of $491.7 million and revolver availability of $159.7 million as of April 21. Purchase accounting and pro forma results were not yet available.
- First-half earnings included an approximately $2.3 million workers’ compensation charge, net of an approximately $1.3 million tax benefit. The first-half tax provision also benefited by $1.9 million from retroactive extension of the U.S. research tax credit.
- The annual goodwill test found no impairment. Airframe Systems had the narrowest cushion: management estimated an impairment could result from roughly an 11% increase in the discount rate or a 15% decline in forecast cash flow, among other sensitivities.
- Other exposures include customer and industry demand, wind-project financing and policy uncertainty, input costs and supply availability, foreign-exchange movements, acquisition integration and financing, debt covenants, product quality and warranty claims, and legal, tax, pension, and environmental matters. Management said pending legal matters were not expected to have a material adverse effect.
- The company reported no material changes to previously disclosed risk factors or market risks. Disclosure controls were assessed as effective at March 31, 2011.
Important facts for investors to verify
- Whether the sharp first-half operating-cash-flow and free-cash-flow decline reverses as inventory and receivables convert to cash.
- Debt and revolver capacity after funding the IDS purchase and planned China asset acquisition; reconcile the small debt-total discrepancy in the filing.
- Whether Airframe Systems’ recovery and customer-funded development revenue improve, and whether the segment can return to profitability.
- Progress on Electrical Power Systems quality issues, pricing, expansion costs, and wind-converter demand.
- IDS purchase-price adjustments, final purchase accounting, integration performance, and contribution to results.
- Airframe goodwill valuation assumptions and sensitivity, alongside the workers’ compensation, tax, warranty, and other recorded estimates.