Woodward, Inc. 10-Q Summary: Quarter Ended March 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009, and the six months ended March 31, 2009. Woodward, Inc. is an independent designer, manufacturer, and service provider of energy control and optimization solutions for aerospace, power, process, and transportation industries. The company operates through four segments: Turbine Systems, Engine Systems, Electrical Power Systems, and Airframe Systems. The Airframe Systems segment was established following the October 1, 2008, acquisition of MPC Products Corporation (MPC) and Techni-Core, Inc.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2009 |
|---|---|---|
| Net Sales | $334.7 million | $679.4 million |
| Net Earnings | $18.5 million | $45.5 million |
| Earnings Per Share (Diluted) | $0.27 | $0.66 |
| Gross Margin | 29.6% | 29.4% |
| Operating Cash Flow (6 months) | $51.8 million | |
| Free Cash Flow (6 months) | $39.2 million | |
| Total Debt (Long-term + Current) | $431.9 million | |
| Cash and Cash Equivalents | $126.9 million | |
| Working Capital | $476.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.5% for the quarter and 17.6% year-to-date compared to the prior year. This growth was primarily driven by the inclusion of the MPC acquisition in the Airframe Systems segment. Organic sales decreased 7.9% for the quarter and 0.9% year-to-date.
- Earnings Decline: Net earnings decreased 37.8% for the quarter and 17.3% year-to-date. The decline was driven by special charges of $16.6 million (pre-tax) related to restructuring and inventory write-downs, increased interest expense due to new debt, and unfavorable foreign exchange rates.
- Restructuring Charges: The company recorded $15.2 million in restructuring and other charges for the quarter, primarily consisting of $14.3 million in workforce management costs (impacting ~450 employees) and $0.9 million in facility impairment.
- Debt Increase: Total debt increased significantly from $44.9 million at September 30, 2008, to $431.9 million at March 31, 2009, due to $400 million in long-term debt issued in October 2008 to finance the MPC and MotoTron acquisitions.
- Segment Performance: Turbine Systems earnings increased 12.4% due to higher industrial gas turbine demand. Engine Systems earnings decreased 40.7% due to weakened demand in transportation and power generation. Airframe Systems contributed $3.2 million in earnings for the quarter.
Guidance, Outlook, and Risks
- Subsequent Acquisitions: On April 3, 2009, Woodward acquired HR Textron Inc. (HRT) for $377 million. This was financed through a new $120 million term loan, $100 million in senior notes, $105 million drawn from the revolving credit facility, and available cash. HRT will be integrated into the Airframe Systems segment.
- Cost Reduction: Management is implementing restructuring initiatives to align workforce capacity with current economic conditions, aiming to maintain profitability despite sales shortfalls.
- Legal Contingency: MPC is subject to a U.S. Department of Justice (DOJ) investigation regarding pricing practices prior to 2006. A settlement in principle has been reached involving a $25 million reduction in the purchase price. Any fines or sanctions beyond this amount could have a material negative impact.
- Debt Covenants: The company is subject to financial covenants, including a maximum debt-to-EBITDA ratio of 3.5 to 1.0. Management stated compliance with these covenants as of March 31, 2009, and after giving effect to the HRT acquisition debt.
- Economic Outlook: The company notes that the global economic downturn and credit market instability have reduced demand in the Engine Systems segment and business jet markets. Management expects continued volatility in foreign exchange rates to impact reported earnings.
Investor Verification Checklist
- DOJ Settlement Finalization: Verify the final terms of the DOJ settlement with MPC and confirm no additional fines or debarment risks exist beyond the $25 million provision.
- HRT Integration and Synergies: Monitor the integration progress of the HRT acquisition and the realization of anticipated cost savings and synergies in the Airframe Systems segment.
- Debt Covenant Compliance: Track the company's ability to maintain the 3.5:1 debt-to-EBITDA ratio given the increased debt load from the HRT acquisition and potential earnings pressure from the economic downturn.
- Restructuring Execution: Assess whether the $15.2 million in restructuring charges yields the projected long-term cost reductions and margin improvements.
- Engine Systems Demand: Evaluate the recovery trajectory of the Engine Systems segment, which faced a 26.5% sales decline in the quarter due to weak demand in transportation and power generation.