Woodward, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020. Unless otherwise noted, financial amounts below are in U.S. dollars. The interim financial statements are unaudited.
Business context and results
Woodward supplies energy-control products and services to aerospace and industrial markets. The quarter was significantly affected by COVID-19-related reductions in demand and supply-chain disruption. The company had completed the divestiture of its renewables, protective relays and related businesses in April 2020.
- Revenue: $537.6 million, down 25.4% from $720.4 million a year earlier. Management attributed the decrease mainly to lower volume, especially in Aerospace; foreign exchange added $9.5 million. The divestiture also reduced the comparison-period sales base by $28.6 million.
- Profit and margins: Net earnings were $41.6 million, down from $53.4 million; diluted EPS was $0.64 versus $0.83. Pretax earnings were $47.6 million. Gross margin was 25.3%, compared with 25.7%; net margin was 7.7%, compared with 7.4%. The prior-year quarter included a $37.9 million impairment charge and a $13.5 million gain on Duarte property, so reported comparisons include unusual items.
- Segments: Aerospace revenue fell 32.1% to $321.7 million; segment earnings declined 50.0% to $46.5 million, and segment margin was 14.4% versus 19.6%. Industrial revenue decreased 12.4% to $216.0 million, but segment earnings rose to $32.9 million and margin increased to 15.2% from 11.5%. Excluding the divested businesses, Industrial revenue was down 0.9% year over year.
- Cash flow: Operating cash flow was $146.7 million, versus $27.4 million. Free cash flow, a company-defined non-GAAP measure, was $139.5 million versus $10.2 million. Management said the increase chiefly reflected customer-receipt timing and the absence of annual bonus payments made in the prior-year quarter. Capital spending was $7.3 million.
- Liquidity and debt: Cash and cash equivalents were $201.9 million, working capital was $918.4 million, and total debt was $747.1 million at December 31, 2020. Debt was $838.5 million at September 30, 2020; the company repaid $100 million of notes during the quarter. No revolving-credit borrowings were outstanding, and $988.4 million of revolver availability remained, net of letters of credit, plus $7.6 million under foreign facilities.
- Other metrics: The effective tax rate was 12.6%, compared with 13.3%. Remaining performance obligations for firm orders were $1.274 billion, primarily Aerospace; Woodward expected to recognize almost all within two years.
Material changes versus the prior-year quarter
- Commercial Aerospace OEM and aftermarket sales fell amid reduced passenger traffic and OEM production rates. Defense sales also faced absenteeism and supply-chain disruption, though defense aftermarket demand remained strong.
- Industrial results benefited from cost-reduction measures and favorable currency effects, partly offset by lower volume and weakness in oil and gas. Natural-gas truck demand in Asia was strong.
- SG&A and R&D expenses declined in dollars, but each increased as a percentage of sales. Cost of goods sold also declined in dollars, while its share of sales increased slightly.
- Prior-year results included the divestiture-related impairment and Duarte property gain. Management reported Q1 FY2021 adjusted net earnings of $41.6 million and adjusted diluted EPS of $0.64, versus adjusted net earnings of $71.2 million and adjusted diluted EPS of $1.10 in the prior-year quarter. These are non-GAAP measures; the filing provides reconciliations.
Outlook, risks and unusual items
- The filing provides no quantified sales or earnings guidance. Management said it expected economic activity to improve once COVID-19 was contained, while emphasizing that the timing and extent of recovery were uncertain.
- COVID-19 continued to weigh on demand and disrupt suppliers. Woodward described cost controls, workforce actions, working-capital reduction and limits on nonessential capital spending. Customer delivery delays left $12.1 million of unbilled Aerospace receivables not expected to be invoiced and collected within twelve months.
- Management noted the potential effects of the Boeing 737 MAX’s status and return to service, market activity, supply-chain conditions, foreign exchange, interest rates, raw-material costs, taxes and pension assumptions. It found no goodwill impairment trigger at quarter-end but said it would continue monitoring pandemic impacts.
- The company reported ordinary-course litigation, product-liability, employment, warranty and regulatory matters; management did not expect resulting liabilities to materially affect liquidity, financial condition or results. It reported compliance with debt covenants and no material change to previously disclosed risk factors.
- Derivative liabilities were $83.1 million at quarter-end, compared with $51.4 million at September 30, 2020; derivative adjustments reduced other comprehensive earnings by $11.0 million, net of tax. The quarter’s $100 million note repayment and prior-year divestiture impairment/property gain are notable items.
Important facts for investors to verify
- Whether Aerospace demand, production rates and margins recover, and how the 737 MAX’s status affects Woodward’s sales.
- Whether strong Q1 operating cash flow is sustained, given management’s explanation that customer receipts and bonus-payment timing drove much of the year-over-year increase.
- How Industrial performance develops in oil and gas, natural-gas trucks, turbines and other markets, distinguishing ongoing operations from the divested businesses.
- The composition and timing of firm-order performance obligations, customer delivery delays and deferred material-right revenue.
- Debt maturities, revolver availability, covenant compliance, and the cash, tax and currency implications of funds held overseas and derivative positions.
- How reported results compare with non-GAAP measures; review the company’s definitions and reconciliations rather than treating adjusted figures as U.S. GAAP results.