Woodward, Inc. — Form 10-K Summary
Business context and reporting period
Woodward designs, manufactures, and services energy-control systems for aerospace and industrial markets. This filing covers the fiscal year ended September 30, 2022; amounts below are in U.S. dollars, generally shown in millions unless stated otherwise. Fiscal 2022 performance reflected recovering end markets alongside supply-chain and labor disruption, inflation, and unfavorable foreign exchange.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $2,382.8 | $2,245.8 | +6.1% |
| Gross margin | 22.0% | 24.5% | -2.5 percentage points |
| Net earnings | $171.7 | $208.6 | -17.7% |
| Diluted EPS | $2.71 | $3.18 | -14.8% |
| Operating cash flow | $193.6 | $464.7 | Down $271.0 |
| Free cash flow (non-GAAP) | $140.8 | $427.0 | Down $286.2 |
Cost of goods sold rose to 78.0% of sales from 75.5%, with inflation, supply disruption, and hiring and training inefficiencies weighing on margins. The effective tax rate declined to 14.1% from 15.1%. Adjusted net earnings were $173.8 million and adjusted diluted EPS was $2.75; these are company-defined non-GAAP measures.
Aerospace sales rose 8.2% to $1,519.3 million; segment earnings fell 1.5% to $230.9 million, and segment margin decreased to 15.2% from 16.7%. Industrial sales increased 2.6% to $863.5 million; segment earnings declined 23.8% to $82.8 million, and margin fell to 9.6% from 12.9%. Management estimated supply-chain and labor disruption reduced fiscal-year sales by approximately $40 million in Aerospace and $45 million in Industrial.
At September 30, 2022, cash and cash equivalents were $107.8 million, working capital was $772.9 million, total debt was $777.4 million, and stockholders’ equity was $1,901.1 million. Revolver borrowings were $66.8 million; remaining availability under the revolving facility was $923.5 million, plus $27.3 million under foreign credit facilities. Operating cash flow and free cash flow fell substantially, primarily due to production delays, higher working capital and supplier-payment timing, higher capital spending, and lower earnings. Capital expenditures were $52.9 million.
Material changes and notable items
- Consolidated sales increased by $137.0 million, supported by higher Aerospace commercial OEM and aftermarket activity, Industrial turbomachinery demand, and pricing; unfavorable currency effects reduced sales by $54.2 million.
- Fiscal-year-end cash declined from $448.5 million to $107.8 million. Financing cash outflow included $485.3 million of share repurchases, versus $33.3 million in FY2021. The company authorized a new $800 million repurchase program in January 2022, running through January 2024.
- Remaining performance obligations were $1,558.6 million at September 30, 2022, primarily Aerospace, with almost all expected to be recognized within two years. Separately, backlog reported at October 31, 2022 was $1,572.9 million, up from $1,270.2 million a year earlier; 79% was expected to be satisfied by September 30, 2023.
- Woodward acquired PM Control for total consideration of $22.3 million, including settlement of pre-existing relationships; the acquisition closed August 31, 2022 and its FY2022 contribution was immaterial. It also received $6.0 million in proceeds related to the sale of its renewable power systems and related businesses.
- Restructuring expense was a net benefit of $3.4 million, versus a $5.0 million charge in FY2021, chiefly because $4.5 million of previously accrued costs was reversed. SG&A included an expense tied to a non-recurring matter unrelated to ongoing operations and business-development costs; the filing does not clearly identify the nature of the non-recurring matter.
Outlook, commentary, and risks
Management expected continued recovery in commercial aerospace, rising aircraft production and utilization, and further improvement in business aviation. It anticipated fiscal 2023 growth in several defense and industrial markets, while noting expected lower demand in certain guided-weapons programs. These are qualitative expectations; the filing provides no specific consolidated FY2023 sales, earnings, or EPS guidance.
Management cited ongoing supply-chain and labor constraints, inflation, foreign-exchange headwinds, and delayed customer price increases under existing contracts. Other key risks include customer concentration (the five largest customers represented approximately 43% of FY2022 sales), supplier availability and delivery, government-contract exposure, international and geopolitical conditions, cybersecurity, and debt covenants. Sales to U.S. Government agencies and through government contractors represented 23% of FY2022 sales, down from 29% in FY2021. Sales to Russia were less than 1% of sales in each of FY2020–FY2022. The company said it expected available operating cash flow and committed borrowing capacity to fund operations and capital needs, and reported compliance with debt covenants at year-end.
The revolving credit agreement was amended on October 21, 2022, after fiscal year-end: its maturity was extended to October 2027 and certain covenants were removed, subject to the terms described in the filing. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The annual goodwill impairment test found no impairment; the auditor identified valuation of the Woodward L’Orange trade name as a critical audit matter because it depended on significant valuation assumptions.
Important facts for investors to verify
- Whether supply constraints, labor availability, inflation, and pricing actions improve enough to restore gross and segment margins.
- Whether cash generation rebounds as elevated inventory and receivables convert to cash, and how liquidity changes after buybacks, capital spending, and acquisition activity.
- How the reported backlog and remaining performance obligations convert into revenue, particularly given customer delivery delays and the distinction between the two reported measures and dates.
- The identity, amount, and any continuing implications of the non-recurring FY2022 matter, which the filing does not clearly describe.
- Customer concentration, future government-related sales, debt maturities and covenant terms, and the effect of the post-year-end credit-agreement amendment.