Woodward, Inc. — Form 10-Q summary
Business context and reporting period. This unaudited filing covers the three and nine months ended June 30, 2020, Woodward’s fiscal third quarter and year to date. Woodward supplies energy-control products and services through its Aerospace and Industrial segments. The period was heavily affected by COVID-19, including a sharp contraction in commercial aerospace demand and customer deliveries.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $523.8 | $752.0 | $1,964.4 | $2,163.7 |
| Gross margin | 24.5% | 25.2% | 26.3% | 25.1% |
| Net earnings | $38.5 | $66.1 | $183.2 | $192.8 |
| Diluted earnings per share | $0.61 | $1.02 | $2.85 | $2.99 |
| Operating cash flow | Not provided separately | Not provided separately | $212.4 | $219.2 |
- Q3 sales fell 30.3% year over year; nine-month sales fell 9.2%. Q3 earnings before tax were $45.0 million versus $92.3 million.
- Aerospace sales declined 38.6% in Q3 to $306.5 million; segment earnings fell to $41.1 million from $103.2 million, and segment margin contracted to 13.4% from 20.7%.
- Industrial sales declined 14.2% in Q3 to $217.3 million. Segment earnings increased to $27.4 million from $26.2 million; segment margin rose to 12.6% from 10.4%. The comparison includes the businesses later divested.
- For the first nine months, reported EBIT was $238.9 million, down 13.8%; EBITDA was $336.5 million, down 12.7%. Management’s non-GAAP adjusted net earnings were $30.7 million for Q3 ($0.48 per diluted share) and $205.9 million year to date ($3.20 per diluted share). These exclude specified unusual and non-operating items.
- Nine-month free cash flow, defined by Woodward as operating cash flow less capital expenditures, was $173.3 million, compared with $141.3 million. Capital expenditures were $39.1 million.
Balance sheet and liquidity at June 30, 2020
- Cash and cash equivalents were $101.4 million; working capital was $701.3 million.
- Total debt was $929.4 million, compared with $1,084.9 million at September 30, 2019. This included $98.6 million of revolving-credit borrowings and $101.6 million of current long-term debt. $100 million of notes were due November 15, 2020.
- Woodward reported $889.9 million of remaining availability under its $1.0 billion revolving facility, net of letters of credit, and $7.5 million under foreign facilities. It stated that it was in compliance with debt covenants.
- Stockholders’ equity was $1,909.8 million. Cash dividends paid in the nine-month period were $32.6 million.
Material changes and unusual items
- COVID-19-related declines in global passenger traffic, aircraft OEM production, plant activity, and customer orders drove the steep Q3 sales decrease. The prolonged Boeing 737 MAX grounding also weighed on results. Industrial demand was further pressured by weakness in oil and gas.
- The company recorded $19.0 million of COVID-19 restructuring charges in Q3, primarily for severance and benefits; $14.1 million had been paid by June 30. It also reported a $37.9 million impairment charge related to the divestiture of Industrial businesses.
- Woodward terminated and replaced cross-currency swaps in May. The settlement produced a reported $30.5 million pretax gain and included a $3.0 million termination fee; net cash proceeds were $59.6 million. This substantially affected reported earnings and should be considered when assessing underlying performance.
- The sale of the renewable power systems, protective relays, and related businesses closed April 30 for $23.4 million, subject to adjustments; consideration included cash and a $6.0 million promissory note. The disposal group represented about $80 million of fiscal 2019 sales. A further $2.5 million loss was recorded for closing adjustments.
- Year-to-date investing cash outflow was $10.2 million, versus $79.8 million in the prior-year period, reflecting lower capital spending and proceeds from property and business sales. Financing cash outflow was $196.3 million, including net debt payments of approximately $165.2 million.
- Other comprehensive earnings were materially affected by derivatives: Q3 total comprehensive earnings were $1.5 million, versus net earnings of $38.5 million, largely reflecting derivative losses in other comprehensive income.
Outlook, management commentary, and risks
- Management said the full duration and financial effects of COVID-19 were unknown. It expected the Q3 volume declines to persist until markets stabilize and noted that timing and pace of recovery depend on reopening and containment. No specific full-year sales or earnings guidance was provided in the filing.
- The company continued operating as an essential business and described cost reductions, staff and hour reductions, furloughs, and supply-chain and inventory measures. Management said operating cash flow and committed borrowing capacity should fund operations and anticipated capital needs for the foreseeable future, while warning that adverse conditions could affect liquidity, customers, suppliers, and financial markets.
- Management expected U.S. defense funding for platforms on which Woodward has content to remain strong, but cited variability in defense aftermarket demand. It anticipated volatility in industrial gas turbines and lower demand until COVID-19 is contained and markets stabilize.
- Woodward said COVID-19 had not, as of June 30, triggered a goodwill impairment, but it would continue monitoring the situation. Risks include commercial aerospace exposure, customer payment defaults, supplier disruptions, debt covenant and refinancing capacity, foreign exchange and interest rates, and uncertain demand recovery.
- Ordinary-course legal matters were disclosed; management did not expect resulting liabilities to materially affect liquidity, financial condition, or results. The Hexcel merger agreement had been terminated April 5, 2020.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects recurring operations versus the $30.5 million swap gain, restructuring, divestiture impairment, and other excluded adjustments; review the non-GAAP reconciliations.
- Subsequent trends in commercial aerospace orders, aftermarket demand, Boeing 737 MAX production, and customer delivery delays, including the $28.3 million of long-term unbilled receivables linked primarily to Aerospace customer delays.
- Ability to service or refinance the $100 million of notes due November 2020 and maintain covenant compliance if the downturn continues.
- Final divestiture proceeds and adjustments, and whether the remaining Duarte property sale—expected by September 30, 2020—closed as anticipated.
- Effects of the new preferred-stock rights plan: a person or group acquiring 15% or more without Board approval may trigger rights; the plan was set to expire April 5, 2021 unless extended.