Woodward, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2019; filed May 7, 2019. Unaudited results. Amounts below are in millions unless stated otherwise. Woodward supplies engineered products and services to aerospace and industrial markets.
Financial performance
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Net sales | $758.8; +38.4% year over year | $1,411.7; +38.6% |
| Net earnings | $77.6 vs. $38.5 | $126.7 vs. $56.7 |
| Diluted EPS | $1.20 vs. $0.60 | $1.97 vs. $0.89 |
| Gross margin | 25.3% vs. 26.6% | 25.0% vs. 26.4% |
| Effective tax rate | 14.0% vs. 20.9% | 16.5% vs. 34.1% |
| Operating cash flow | $141.0 for six months vs. $56.7 | |
| Capital expenditures | $54.3 for six months; free cash flow was $86.6 vs. negative $1.8 |
Quarterly earnings before income taxes were $90.2 million, or 11.9% of sales, compared with $48.6 million, or 8.9%. Six-month pretax earnings were $151.7 million, or 10.7% of sales, versus $86.1 million, or 8.5%.
Segments and changes versus prior year
- Aerospace: Sales rose 25.0% to $483.0 million in the quarter and 26.5% to $875.8 million for six months. Segment earnings were $101.7 million and $174.6 million, respectively. Management cited commercial and defense OEM and aftermarket demand, including next-generation narrowbody aircraft, higher aircraft utilization, and defense programs.
- Industrial: Sales increased 70.4% to $275.9 million for the quarter and 64.3% to $535.8 million for six months. The L’Orange acquisition contributed $88.0 million and $175.7 million, respectively. Excluding L’Orange, quarterly sales grew 16.1% and first-half sales 10.4%; growth was led by reciprocating engines, while renewables declined.
- Reported sales growth includes the acquired L’Orange business, foreign-exchange effects, and ASC 606 timing and presentation changes. Management reported organic consolidated sales growth of 22.4% in the quarter and 21.4% for six months, but these figures include revenue recognized under the new accounting standard.
- ASC 606 increased reported sales by $35.6 million and net earnings by $8.0 million in the quarter; for six months, the increases were $55.8 million and $5.3 million. The standard had no cash-flow impact. Prior-year results were not restated, limiting direct comparability.
- Gross margin declined, principally due to L’Orange backlog intangible amortization, capacity-expansion costs, and customer-supplied inventory recognized as both sales and cost of goods sold. Higher volume and favorable Aerospace mix partly offset these factors. The prior-year periods included $17.0 million of restructuring charges; none were recorded in the current periods.
Cash, debt, liquidity, and other key items
- At March 31, 2019, cash and cash equivalents were $65.3 million, working capital $601.5 million, and total debt $1,160.5 million, versus $83.6 million, $523.6 million, and $1,246.0 million, respectively, at September 30, 2018.
- Woodward had $698.7 million of remaining availability under its $1.0 billion revolving credit facility, net of letters of credit, plus $7.5 million under foreign facilities. The revolver matures in April 2020; the company said it intends to refinance before maturity and reported covenant compliance at quarter-end.
- Cash used in financing was $112.7 million for six months, including $43.3 million of share repurchases and $18.9 million of dividends. The company paid $43.0 million of Series F notes with revolver borrowings on April 3, 2019.
- The L’Orange acquisition closed in June 2018. It added industrial fuel-injection operations and acquisition-related debt and amortization; acquisition financing costs were $7.5 million for the six months.
Outlook, risks, and unusual items
- Management said operating cash flow and available borrowing capacity should fund operations and anticipated capital spending for the foreseeable future. No specific consolidated sales or earnings guidance was provided in the filing.
- Management expected continued quarterly variability from ASC 606, while stating its full-year fiscal 2019 net-earnings impact versus prior accounting guidance was not expected to be material. Aerospace demand commentary was favorable; defense aftermarket timing could vary.
- Industrial risks include weaker renewables demand, lower market pricing, and competition associated with wind-turbine platform changes and subsidy-to-auction transitions. Customer Senvion entered insolvency proceedings in April 2019; management said any effect was not expected to be material to Woodward overall but could be significant to renewables.
- Quarterly non-GAAP adjusted net earnings were $90.3 million versus GAAP net earnings of $77.6 million; six-month adjusted net earnings were $151.9 million versus GAAP net earnings of $126.7 million. Adjustments include Duarte relocation costs and L’Orange backlog amortization, among other items. The quarter included $9.2 million of Duarte move-related costs; first-half costs were $16.1 million.
- Management described ordinary-course legal matters as not expected to materially affect results or liquidity. It also identified general risks involving customer financial distress, debt and refinancing, foreign exchange, suppliers, product liability, government spending, and tax matters.
Important facts for investors to verify
- Separate underlying sales and earnings growth from acquisition contributions and ASC 606 timing effects; review management’s reconciliations of non-GAAP measures.
- Assess whether Aerospace demand and Industrial organic growth persist, particularly in reciprocating engines and renewables, and monitor Senvion-related exposure.
- Track gross margin pressure, L’Orange amortization, capacity costs, and Duarte relocation spending and asset sale progress.
- Monitor cash conversion and working-capital needs, debt paydown, and refinancing of the revolver before its April 2020 maturity.
- Review the eventual L’Orange purchase-price allocation and the realization of remaining performance obligations; most firm-order obligations were expected to be recognized within two years, while material-right revenue may extend over program lives of up to 40 years.