Woodward, Inc. — Q2 FY2021 Form 10-Q
Business context and reporting period. Woodward designs and supplies energy-control products through its Aerospace and Industrial segments. This unaudited filing covers the three and six months ended March 31, 2021; the comparable periods ended March 31, 2020. The results reflect continued COVID-19 disruption. The renewable power systems, protective relays and related businesses were divested on April 30, 2020, affecting year-over-year comparisons.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | First half FY2021 | First half FY2020 |
|---|---|---|---|---|
| Net sales | $581.3 million | $720.2 million | $1,118.9 million | $1,440.6 million |
| Net earnings | $68.3 million | $91.3 million | $109.9 million | $144.7 million |
| Diluted EPS | $1.04 | $1.41 | $1.68 | $2.24 |
| Gross margin | 25.3% | 28.1% | 25.3% | 26.9% |
| Net margin | 11.8% | 12.7% | 9.8% | 10.0% |
| Effective tax rate | 13.0% | 14.8% | 12.8% | 14.3% |
Q2 sales fell 19.3% year over year, primarily on lower Aerospace volume; foreign exchange added $11.0 million to sales. First-half sales declined 22.3%, with foreign exchange adding $20.5 million. Q2 results improved sequentially: Aerospace sales rose 13.4% from Q1, while Industrial sales were flat.
Aerospace Q2 sales declined 23.1% to $364.7 million and segment earnings fell 41.3% to $69.0 million; segment margin was 18.9%, versus 24.8%. Lower commercial OEM and aftermarket demand drove the decline, although these sales improved sequentially. Industrial Q2 sales were $216.6 million, down 11.9% as reported, but up 0.9% compared with prior-year sales excluding the divested businesses. Industrial segment earnings rose 7.3% to $27.9 million and margin improved to 12.9% from 10.6%, reflecting cost savings and favorable currency, partly offset by lower volume.
Management-reported non-GAAP measures: Q2 EBIT was $86.5 million and EBITDA $118.9 million; first-half EBIT was $142.4 million and EBITDA $208.0 million. These measures equaled adjusted EBIT and adjusted EBITDA in FY2021. Prior-year adjusted results exclude items including divestiture and merger costs, impairment charges and a property-sale gain.
Cash flow, debt and liquidity
- First-half operating cash flow was $219.0 million, versus $52.2 million; free cash flow, as defined by the company, was $205.7 million versus $22.8 million. Management attributed the cash-flow increase principally to the timing of supplier, bonus and tax payments, so the improvement may not reflect recurring operating trends.
- Cash and cash equivalents were $287.6 million at March 31, 2021, compared with $153.3 million at September 30, 2020. Working capital was $1.027 billion.
- Total debt was $737.5 million, down from $838.5 million at September 30, 2020. Woodward repaid $100 million of notes in November 2020. It had no revolving-credit-facility borrowings at quarter-end and reported $989.1 million of availability, net of letters of credit, plus $7.4 million under foreign facilities.
- Financing cash outflow was $87.8 million, including $100.8 million of net debt payments and $15.4 million of dividends. Capital expenditures were $13.3 million.
Outlook, commentary and risks
Management said Q2 improved from Q1 and expected markets to continue improving through the remainder of FY2021 and into FY2022; the filing provides no specific revenue or earnings guidance. Management cited vaccine rollout and recovery potential but cautioned that reduced global passenger travel, new virus variants and continued pandemic disruption cloud near-term forecasts. It also noted commercial aviation recovery, Boeing 737 MAX return-to-service effects, defense supply-chain and absenteeism pressures, and continued weakness in oil and gas. Natural-gas truck demand in China was strong; management described the industrial gas-turbine market as stable.
Other risks include customer delays affecting Aerospace unbilled receivables, foreign-exchange and interest-rate exposure, raw-material and inflation risks, and uncertainty in estimates and potential impairment assessments. Management concluded COVID-related factors had not triggered a goodwill impairment at March 31, but said it would continue monitoring. Woodward reported compliance with debt covenants and stated that ordinary-course legal matters were not expected to materially affect liquidity, financial condition or results. Disclosed risk factors had not materially changed from the latest Form 10-K.
Unusual comparisons include the $37.9 million prior-year impairment related to the divestiture, $16.9 million in prior-year Q2 merger and divestiture transaction costs, and a prior-year Duarte property-sale gain. No corresponding FY2021 adjustments were reported for these items. The company declared a subsequent quarterly dividend of $0.1625 per share, payable June 1, 2021.
Important facts for investors to verify
- Whether Aerospace demand and segment margins recover, especially in commercial aftermarket and OEM sales.
- How much of the large first-half operating cash-flow increase reflects payment timing rather than sustainable cash generation.
- Comparable Industrial performance after excluding divested operations, and the durability of cost savings and China natural-gas truck demand.
- Debt repayment plans, available credit, covenant headroom and any changes in borrowing costs or currency-hedge values.
- Ongoing COVID-19 effects, including passenger travel, supply constraints, customer delivery delays and potential impairment indicators.
- Potential changes in estimates, tax positions, pension obligations and legal or warranty contingencies.