Woodward, Inc. — Form 10-Q Summary
Business context and period: Woodward designs and manufactures energy-control products for aerospace and industrial markets. This unaudited 10-Q covers the fiscal third quarter and first nine months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Quarter ended June 30, 2023 | Year to date |
|---|---|---|
| Net sales | $800.7 million, up 30.3% | $2,137.5 million, up 22.7% |
| Gross margin | 25.5%, versus 21.8% | 22.8%, versus 22.4% |
| Net earnings | $84.6 million, versus $39.4 million | $149.7 million, versus $117.7 million |
| Diluted EPS | $1.37, versus $0.64 | $2.44, versus $1.84 |
| Operating cash flow | Quarterly figure not provided in the supplied text | $155.6 million, versus $86.0 million |
| Capital expenditures | Quarterly figure not provided in the supplied text | $57.1 million, versus $37.1 million |
| Free cash flow (non-GAAP) | Quarterly figure not provided in the supplied text | $98.5 million, versus $48.9 million |
Quarterly net margin was 10.6%, compared with 6.4%; year-to-date net margin was 7.0%, compared with 6.8%. Year-to-date adjusted net earnings were $175.9 million and adjusted diluted EPS was $2.87, versus $122.3 million and $1.91. These non-GAAP measures exclude specified unusual charges and should be considered alongside GAAP results.
Segments: Quarterly Aerospace sales rose 19.6% to $480.5 million, with segment earnings of $83.1 million and a 17.3% margin, versus 14.1%. Industrial sales rose 50.6% to $320.1 million, with earnings of $58.2 million and an 18.2% margin, versus 9.9%. Year-to-date segment margins were 16.1% for Aerospace and 13.0% for Industrial, up from 15.1% and 9.8%, respectively.
Cash, debt, and liquidity: At June 30, cash and cash equivalents were $114.1 million; total debt was $750.9 million, down from $777.4 million at September 30, 2022. Working capital was $903.8 million. The company reported $967.7 million available under its revolving credit facility, net of letters of credit, plus $27.2 million under foreign facilities, and stated it was in compliance with debt covenants. Operating cash flow improved, while receivables and contract assets increased; factoring activity added approximately $18.1 million to year-to-date operating cash flow.
Material changes and drivers
- Sales gains reflected stronger commercial aerospace OEM and aftermarket demand, higher production and utilization, price realization, and industrial volume growth. Industrial demand benefited from higher on-highway natural-gas truck production in China.
- Higher volume and pricing helped gross margin, partly offset by material and labor inflation. Management reported improving output, employee proficiency, and supply-chain performance, but said operating conditions remained challenging.
- Quarterly other income was $13.0 million, primarily reflecting $8.8 million of earnings from the GE joint venture and gains in deferred-compensation investments. Year-to-date JV earnings were $21.9 million.
- Interest expense increased to $12.2 million for the quarter and $36.2 million year to date, mainly due to higher borrowing and interest rates. The effective tax rate was 20.0% for the quarter and 15.8% year to date, down from 21.6% and 17.2%; stated drivers included stock-compensation benefits, state tax credits, and release of uncertain tax positions.
- Year-to-date nonsegment expenses included $12.0 million for excess and obsolete inventory, $10.5 million for product rationalization, $5.2 million of restructuring, $5.0 million related to customer collections, and $2.2 million of separation costs. The quarter had no restructuring charge.
Outlook, risks, and contingencies
The filing provides no specific quantitative sales or earnings guidance. Management said cash from operations and available borrowing capacity should fund expected operations and capital needs for the foreseeable future. Firm-order remaining performance obligations were $2.12 billion, most expected to be recognized within two years; a separate $481.4 million balance related to material rights is expected to be recognized over underlying program lives, potentially as long as 40 years.
Management highlighted ongoing supply-chain disruption, rising labor and material costs, uncertainty in forecasting, and continued pricing actions. Demand for Chinese on-highway natural-gas trucks beyond fiscal Q4 2023 was uncertain; lower guided-weapons demand reduced defense OEM sales. Other risks include interest-rate and foreign-exchange exposure, customer collections and credit losses, and reliance on major customers. The allowance for uncollectible receivables rose to $8.7 million from $3.9 million at September 2022. The company reported ordinary-course litigation and claims, but management did not expect resulting liabilities to materially affect liquidity, financial condition, or results.
The board approved a quarterly dividend of $0.22 per share payable August 28, 2023. The share-repurchase authorization allows up to $800 million through January 2024; $327.6 million remained available at quarter-end. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether elevated industrial demand in China and aerospace recovery persist, and how order backlog converts to sales and cash.
- Receivables, unbilled contract assets, customer collection trends, and the sustainability of the increased credit-loss allowance.
- How much earnings and cash flow depend on GE joint-venture income, deferred-compensation investment gains, and other non-operating items.
- The recurring versus unusual nature of the costs excluded from adjusted earnings, including inventory, product rationalization, restructuring, and customer-collection charges.
- Debt costs, upcoming maturities, covenant headroom, and the effect of interest rates and working-capital needs on cash generation.