Woodward, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2021; fiscal year ends September 30. Amounts are in U.S. dollars. The interim financial statements are unaudited.
Business context and results
Woodward designs and supplies energy-control products for aerospace and industrial markets, reported in Aerospace and Industrial segments. Results reflect the continuing effects of COVID-19 and the April 2020 divestiture of renewable power systems and related businesses.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $556.7 million | $523.8 million | $1,675.6 million | $1,964.4 million |
| Net earnings | $48.9 million | $38.5 million | $158.7 million | $183.2 million |
| Diluted EPS | $0.74 | $0.61 | $2.42 | $2.85 |
| Gross margin | 24.1% | 24.5% | 24.9% | 26.3% |
| Net margin | 8.8% | 7.3% | 9.5% | 9.3% |
- Q3 sales increased 6.3% year over year; management attributed the improvement primarily to recovering commercial aerospace demand and higher domestic air passenger traffic. Foreign exchange added about $11.9 million to Q3 sales.
- Q3 Aerospace sales rose 11.2% to $340.9 million; Industrial sales declined 0.7% to $215.8 million. Aerospace segment margin improved to 15.6% from 13.4%; Industrial segment margin was 12.6% in both periods.
- For the nine-month period, sales fell 14.7% and diluted EPS fell from $2.85 to $2.42. Aerospace sales declined 18.1%, mainly reflecting pandemic-related weakness in commercial aviation; Industrial sales declined 8.7%, with the divested businesses also affecting comparison.
- Q3 reported and adjusted EBIT were both $66.8 million, versus reported EBIT of $53.4 million in the prior-year quarter. Nine-month EBIT was $209.2 million versus $238.9 million. These EBIT measures are non-GAAP.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $317.9 million, compared with $212.4 million. Capital expenditures were $21.3 million; company-defined free cash flow was $296.6 million, versus $173.3 million.
- Cash and cash equivalents were $362.0 million at June 30, 2021, up from $153.3 million at September 30, 2020. Working capital was $1,103.0 million.
- Total debt was $740.1 million, down from $838.5 million at September 30, 2020. Woodward repaid $100 million of notes in November 2020. No borrowings were outstanding under its $1.0 billion revolving credit facility; remaining availability, net of letters of credit, was $989.4 million.
- The company paid $25.7 million in dividends during the nine months and repurchased no shares under its public repurchase authorization. The board approved a further $0.1625-per-share dividend on July 28, 2021.
Outlook, risks and unusual items
- Management said it believed markets would continue to improve for the remainder of FY2021 and into FY2022, but provided no specific financial guidance in the supplied filing text. It cautioned that pandemic effects, reduced passenger travel and new variants make near-term forecasts uncertain.
- Supply-chain disruptions delayed scheduled shipments and reduced Q3 sales by approximately $20 million in Aerospace and $10 million in Industrial.
- Management cited continued weakness in oil and gas and aerospace aftermarket markets, while noting recovering commercial aerospace activity, strong Chinese natural-gas-truck demand over the nine-month period, and expected continued strength in defense aftermarket activity. It anticipated defense OEM demand could soften in future periods.
- Prior-year comparisons include significant unusual items, including a $37.9 million impairment charge, $19.0 million of restructuring charges, and a $30.5 million gain on cross-currency swaps. Those items did not recur in FY2021 and affect comparisons. Management’s adjusted measures are non-GAAP and should be considered alongside GAAP results.
- Firm-order remaining performance obligations were $1.366 billion at June 30, 2021; Woodward expected almost all to be recognized within two years. Material-right obligations are recognized over underlying program lives, potentially as long as 40 years.
- Management said it was in compliance with debt covenants and believed cash flows and available borrowing capacity would fund operations and planned spending for the foreseeable future. It said pending legal matters were not expected to materially affect liquidity, financial condition or results. Risk factors were unchanged from the latest Form 10-K.
Most important facts for investors to verify
- Whether commercial aerospace recovery continues and whether delayed orders from supply-chain constraints convert to sales.
- Whether the improvement in Q3 earnings and cash flow is sustainable, given lower year-to-date sales and gross margins and the timing-related contributors to operating cash flow.
- How pandemic conditions, passenger travel, Boeing 737 MAX activity, defense demand and oil-and-gas weakness affect segment sales and margins.
- The composition, timing and customer concentration of the $1.366 billion firm-order obligation balance, and the much longer recognition period for material-right obligations.
- Debt maturities, covenant compliance, and the assumptions underlying management’s liquidity outlook and non-GAAP adjustments.