Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; comparison is with the corresponding periods of 2022. Amounts below are in millions of dollars except per-share data. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $718.2 | $586.8 | $1,336.8 | $1,128.4 |
| Gross margin | 22.1% | 22.7% | 21.3% | 22.7% |
| Net earnings | $35.5 | $47.9 | $65.1 | $78.2 |
| Diluted EPS | $0.58 | $0.74 | $1.07 | $1.21 |
| Operating cash flow | Not separately stated | Not separately stated | $40.2 | $50.1 |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $(3.9) | $26.0 |
- Q2 sales rose 22.4%; six-month sales rose 18.5%. Growth reflected higher volume and pricing, partly offset by unfavorable currency movements.
- Q2 segment sales were $437.0 for Aerospace and $281.2 for Industrial. Segment earnings were $73.3 and $37.6, respectively. Q2 segment margins were 16.8% for Aerospace and 13.4% for Industrial.
- Despite higher sales, GAAP earnings and EPS fell in both comparison periods. Higher cost of goods sold as a share of sales, increased SG&A and interest expense contributed to lower reported profitability.
- Management reported Q2 adjusted net earnings of $61.7 and adjusted diluted EPS of $1.01, versus $46.6 and $0.72 a year earlier. These are non-GAAP measures and exclude specified charges; they should be considered alongside GAAP results.
Balance sheet and liquidity
- At March 31, 2023, cash and cash equivalents were $129.4; total debt was $858.6, up from $777.4 at September 30, 2022. Stockholders’ equity was $2,012.1 and working capital was $803.7.
- Debt included $130.5 outstanding on the revolving facility, classified as short-term. The company reported $860.7 of availability under its revolving facility, net of letters of credit, and $27.5 of additional foreign borrowing capacity. Woodward stated it was in compliance with debt covenants.
- Six-month operating cash flow declined to $40.2 from $50.1. Management attributed the decrease primarily to tax-payment timing and working-capital increases supporting anticipated growth. Capital expenditures increased to $44.0 from $24.2, resulting in negative free cash flow.
- Cash dividends paid in the first half totaled $24.5. The board subsequently approved a $0.22-per-share dividend, payable June 5, 2023.
Material changes, outlook and risks
- Management described demand across aerospace and industrial markets as robust and reported supply-chain and labor conditions stabilizing, with late deliveries gradually declining. It continued to cite supply-chain disruption, labor constraints and costs, and material inflation as pressures on operations and results, and said it was taking pricing and operational-efficiency actions.
- Q2 included $34.9 of specified pretax non-GAAP adjustment items: excess and obsolete inventory ($12.0), product rationalization ($10.5), restructuring ($5.2), a customer-collection charge ($5.0), and separation costs ($2.2). The new workforce cost-reduction plan related primarily to the Industrial segment; restructuring charges are expected to be paid within twelve months.
- Management provided no specific numeric revenue, earnings or cash-flow guidance in the filing. It expects operating cash generation and borrowing capacity to fund operations and anticipated capital spending for the foreseeable future, while noting forecasts remain uncertain.
- Remaining performance obligations from firm orders were $1,916.5, most expected to be recognized within two years. Material-right obligations were $474.8 and may be recognized over program lives extending up to 40 years.
- Other risks and uncertainties include foreign-exchange and interest-rate exposure, customer concentration, credit losses, and dependence on financial institutions and operating cash generation. The allowance for uncollectible receivables increased to $9.9 from $3.9 at September 30, 2022. Management said pending ordinary-course legal matters were not expected to materially affect liquidity, financial condition or results. Disclosed risk factors were reported as not materially changed from the latest Form 10-K.
Important facts for investors to verify
- Whether volume growth and pricing can offset inflation, labor and manufacturing costs, and whether the reported supply-chain stabilization continues.
- The composition and recurrence of the Q2 charges, and the assumptions behind management’s non-GAAP adjustments.
- Cash conversion, working-capital needs and capital spending, given negative first-half free cash flow and higher debt.
- Execution of the Industrial cost-reduction plan, Aerospace commercial-market growth, and the outlook for defense OEM demand, particularly guided weapons.
- Customer-collection exposure, the rise in the receivables allowance, and the timing and realization of remaining performance obligations.