Woodward, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also reports fourth-quarter results. Unless stated otherwise, dollar amounts are in thousands; per-share amounts are in dollars.
Business context and reporting period
Woodward designs, manufactures and services energy-control systems for aerospace and energy markets, selling mainly to OEMs and equipment packagers and also providing aftermarket support. Effective September 30, 2011, it reorganized reporting into Aerospace and Energy segments; comparative segment data was retrospectively revised. In April 2011, Woodward acquired Integral Drive Systems (IDS), a power-electronics supplier, for estimated net purchase consideration of $47.2 million, and integrated it into Energy.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change or context |
|---|---|---|---|
| Net sales | $1,711.7 million | $1,457.0 million | Up 17.5% |
| Net earnings attributable to Woodward | $132.2 million | $110.8 million | Up 19.3% |
| Diluted EPS | $1.89 | $1.59 | Up 18.9% |
| Gross margin | 30.0% | 29.9% | Broadly stable |
| Net margin | 7.7% | 7.6% | Based on reported net earnings |
| EBIT / EBITDA | $212.4 million / $287.8 million | $183.8 million / $259.4 million | Non-GAAP measures |
| Operating cash flow | $114.6 million | $184.6 million | Down $70.0 million |
| Capital expenditures / free cash flow | $48.3 million / $66.4 million | $28.1 million / $156.5 million | Free cash flow is company-defined non-GAAP |
Sales growth was driven primarily by higher volume across both segments, with $18.0 million of favorable currency effects and $10.6 million from price and mix. R&D rose 40.1% to $115.6 million (6.8% of sales), reflecting investment in awarded platforms and next-generation technology. Interest expense fell to $25.4 million from $29.4 million, mainly due to debt reduction. The effective tax rate increased to 29.5% from 28.2%; FY2010 included a $6.4 million favorable tax benefit.
Aerospace sales increased 9.5% to $843.0 million and segment earnings rose 15.5% to $129.5 million; segment margin improved to 15.4% from 14.6%. Energy sales increased 26.3% to $868.7 million, including $13.5 million from IDS, and segment earnings rose 21.1% to $113.9 million; segment margin declined to 13.1% from 13.7%, reflecting R&D, compensation, and unfavorable price/mix pressures.
At September 30, 2011, cash and cash equivalents were $74.5 million, working capital $536.9 million, total debt $425.2 million, and stockholders’ equity $919.1 million. Short-term borrowings were zero. Remaining availability was $220.1 million under the $225 million revolving facility, net of letters of credit; the filing also reports $22.8 million of additional availability under foreign facilities. Management reported compliance with debt covenants. Scheduled debt principal payments include $149.4 million in FY2014 and $107.0 million in FY2016.
Material changes and unusual items
- Operating cash flow declined as working capital absorbed cash, particularly inventory and receivables. Inventory increased to $381.6 million from $295.0 million; management cited planned deliveries and sourcing inefficiencies.
- Investing cash outflow was $87.1 million, including approximately $38.9 million of net cash used for IDS and higher capital spending, including construction of an aerospace test facility.
- Cash declined by $31.0 million during FY2011. Debt declined to $425.2 million from $465.8 million; financing activities included $18.4 million of scheduled long-term debt repayment, $18.6 million of dividends, and $6.8 million of share repurchases.
- IDS added $24.2 million of goodwill and $11.9 million of intangible assets. IDS represented approximately 3% of year-end assets and less than 1% of FY2011 sales. Its controls were excluded from Woodward’s FY2011 internal-control assessment pending further integration; management planned inclusion in FY2012.
- No goodwill impairment was recorded. Goodwill was $462.3 million, or 26% of assets. The annual impairment analysis used management estimates of future cash flows, discount rates and growth rates.
- Fourth-quarter sales were $489.3 million versus $412.0 million a year earlier; Woodward-attributable earnings were $41.7 million versus $32.7 million, and diluted EPS was $0.60 versus $0.47.
Outlook, commentary and principal risks
Management described recovery across commercial aerospace, industrial turbines, reciprocating engines and power generation/distribution. It cited improving air traffic and aircraft deliveries, new-platform content, and higher Energy-market volumes. Wind energy remained challenged by project-financing constraints, pricing pressure, capacity, and uncertainty about government incentives. The filing gives no clear numerical sales, earnings or EPS guidance.
Key risks include customer concentration (the five largest customers generated 34% of sales; GE alone 14%), economic and industry downturns, and exposure to government spending and contracts (direct and indirect U.S. government-related sales were 19% of FY2011 sales). Other risks include supplier and commodity disruptions, competition and pricing, acquisition integration, debt covenants and refinancing, foreign exchange, pension assumptions, product liability, environmental matters, and legal or regulatory proceedings. The company reported no material adverse effect expected from pending proceedings, but outcomes remain uncertain. MPC Products remained subject to a three-year DOD administrative agreement concerning pre-2005 pricing practices; required compliance-program enhancements had been completed, with reporting obligations continuing.
Most important facts for investors to verify
- Whether inventory and receivables convert into cash as expected, and whether operating cash flow rebounds after the FY2011 working-capital build.
- Whether the Energy segment can sustain sales growth while improving its margin, particularly in wind converters and amid pricing pressure.
- Debt repayment capacity and covenant headroom, especially ahead of the FY2014 principal payment and under weaker operating conditions.
- IDS integration progress, realized synergies, and completion of its controls integration and FY2012 internal-control assessment.
- Customer concentration and exposure to government programs, including any changes in GE demand or U.S. appropriations.
- Assumptions supporting goodwill recoverability, pension funding needs, tax reserves, and outstanding legal or regulatory contingencies.