Woodward, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended December 31, 2018. The unaudited filing covers Woodward’s Aerospace and Industrial businesses. Unless otherwise indicated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $652.8 | $470.1 |
| Gross margin | 24.6% | 26.1% |
| Earnings before income taxes | $61.5 | $37.5 |
| Net earnings | $49.1 | $18.3 |
| Diluted earnings per share | $0.77 | $0.29 |
| Operating cash flow | $84.7 | $(2.5) |
| Capital expenditures | $31.3 | $28.5 |
| Free cash flow (non-GAAP) | $53.4 | $(31.0) |
- Sales increased 38.9% year over year. Aerospace sales were $392.9 million, up 28.4%; Industrial sales were $259.9 million, up 58.3%. Excluding acquired Woodward L’Orange sales, management reported organic sales growth of 20.2% consolidated and 4.9% in Industrial.
- Reported growth includes $87.7 million of L’Orange sales and the effects of adopting ASC 606. The new revenue standard increased current-quarter sales by $20.2 million but reduced net earnings by $2.7 million, or $0.04 per diluted share, versus prior accounting guidance. Prior-year results were prepared under ASC 605.
- Management reported adjusted net earnings of $61.6 million and adjusted diluted EPS of $0.96, compared with $33.0 million and $0.52 in the prior-year quarter. These are non-GAAP measures; adjustments include Duarte relocation costs and L’Orange purchase-accounting amortization. The filing also reports $7.0 million of Duarte move costs and $9.5 million of Industrial backlog-intangible amortization.
- Gross margin declined to 24.6% from 26.1%. The filing attributes the reduction primarily to L’Orange backlog amortization, capacity-expansion costs, and ASC 606 customer-supplied inventory recorded at equal sales and cost, with no related gross margin.
- The effective tax rate was 20.1%, versus 51.3%. The prior-year rate included a one-time Tax Act charge; the comparison also reflects changes in tax credits, foreign earnings taxation, and other tax items.
- Operating cash flow improved substantially, with management citing higher earnings and payment timing, including lower accounts-payable cash payments. Investing cash outflow was $32.0 million; financing cash outflow was $63.9 million, including $100.1 million of long-term debt payments. Cash declined by $12.0 million during the quarter.
- At December 31, cash and cash equivalents were $71.6 million; working capital was $550.5 million. Total debt was $1,184.9 million, compared with $1,246.0 million at September 30, 2018. Revolver availability, net of letters of credit, was $677.2 million; additional foreign credit capacity was $7.5 million.
- Interest expense was $11.9 million, up from $8.9 million, primarily due to financing the L’Orange acquisition. Stockholders’ equity was $1,630.9 million at quarter-end, versus $1,538.1 million at fiscal year-end.
Material changes and business developments
- Woodward acquired L’Orange on June 1, 2018, and included it in Industrial. The business contributed $87.7 million in sales and $10.6 million in pretax income this quarter. Acquisition consideration was approximately €700 million; the preliminary purchase-price allocation included $257.4 million of goodwill.
- Aerospace growth reflected higher commercial and defense OEM and aftermarket sales, including next-generation aircraft production, aircraft utilization, and defense demand. Industrial organic growth was supported by engine sales and stabilization in industrial gas turbines, partly offset by weaker renewables sales.
- ASC 606 adoption on October 1, 2018 increased opening retained earnings by $28.9 million. Management said it does not expect a significant full-year FY2019 impact, but expects quarterly sales and earnings variability. The standard did not affect cash flows.
Outlook, risks, and other notable matters
- No specific earnings or revenue guidance was provided. Management expects operating cash flows and committed borrowing capacity to fund operating needs and anticipated capital spending for the foreseeable future, while noting this depends on future performance and access to financing.
- Capital spending is expected to continue for Aerospace production equipment at the Rockford campus and for the Fort Collins Drake campus. Management expects a gain on the eventual sale of the Duarte facility assets held for sale, whose carrying value was $8.1 million at quarter-end.
- Key disclosed risks include customer and market downturns; competition, pricing and input costs; supplier performance; acquisition integration; debt service and covenant compliance; tax uncertainty; foreign-exchange, interest-rate and tariff exposure; defense spending; aviation and energy-market changes; product liability; and operational disruptions.
- Woodward reported routine legal, regulatory, product-liability, employment, warranty, and other claims. Management stated that resulting liabilities are not expected to materially affect liquidity, financial condition, or results, while noting outcomes cannot be predicted with certainty.
- A UK court ruling requires equalization of certain defined-benefit pension benefits. Woodward expects to amend its UK plan and initially assessed that the ruling did not require a quarter-end remeasurement or represent a significant event.
- Disclosure controls were assessed as effective. Woodward was still conducting a broader review of L’Orange’s internal controls and planned to align them with Woodward’s controls.
Important facts for investors to verify
- How much of reported and organic growth reflects underlying volume and demand versus L’Orange acquisition effects and ASC 606 timing or noncash consideration.
- Whether margins recover as capacity-expansion costs and L’Orange backlog amortization change, and how the acquired business performs after integration.
- Whether operating cash flow remains strong beyond the quarter, given management’s stated role of payment timing in the year-over-year improvement.
- Debt maturities, refinancing plans, interest costs, revolver availability, and compliance with debt covenants, including the revolving facility’s April 2020 maturity.
- The final L’Orange purchase-price allocation and the treatment of acquisition-related amortization and other items in management’s non-GAAP measures.
- Developments in the Duarte relocation and asset sale, the UK pension-plan amendment, tax matters, and the L’Orange internal-controls review.