Woodward, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended March 31, 2022; fiscal second quarter and first half. Unaudited results. Amounts below are in millions except per-share data.
Business context and results
Woodward designs and manufactures energy-control products for aerospace and industrial markets. Second-quarter sales rose 1.0% year over year, but earnings and margins declined amid inflation, supply-chain and labor disruption, and weaker segment profitability.
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net sales | $586.8 | $581.3 | $1,128.4 | $1,118.9 |
| Gross margin | 22.7% | 25.3% | 22.7% | 25.3% |
| Net earnings | $47.9 | $68.3 | $78.2 | $109.9 |
| Diluted EPS | $0.74 | $1.04 | $1.21 | $1.68 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $50.1 | $219.0 |
Segments and material period changes
- Aerospace: Q2 sales increased 2.2% to $372.8 million; segment earnings fell 13.3% to $59.8 million and margin declined to 16.0% from 18.9%. Commercial OEM and aftermarket recovery was offset by lower defense OEM sales, including guided weapons.
- Industrial: Q2 sales decreased 1.2% to $214.1 million; segment earnings fell 38.2% to $17.2 million and margin declined to 8.1% from 12.9%. Weak natural-gas-engine sales in China and unfavorable currency effects weighed on results; marine sales improved.
- Higher prices and favorable mix supported sales, but cost of goods sold rose to 77.3% of sales from 74.7%. Management cited lower-margin aerospace commercial OEM mix, inflation, COVID-related manufacturing disruption, and hiring and training inefficiencies.
- For the first half, aerospace sales increased 3.3%, while industrial sales decreased 3.1%. Consolidated net earnings declined about 29% year over year for both the quarter and first half.
Cash flow, debt, and liquidity
- First-half operating cash flow was $50.1 million versus $219.0 million a year earlier. Free cash flow, a non-GAAP measure, was $26.0 million versus $205.7 million. Management attributed the decline principally to working-capital investment for anticipated second-half growth, supplier-payment timing, and higher capital spending.
- Cash and cash equivalents were $208.4 million at March 31, 2022, down from $448.5 million at September 30, 2021. Total debt was $728.7 million, slightly below $734.9 million at fiscal year-end; no revolving-credit borrowings were outstanding. Revolver availability, net of letters of credit, was $989.6 million, with another $27.7 million available under foreign facilities.
- Financing cash outflow was $276.8 million, including $273.5 million of cash share repurchases and $22.1 million of dividends. Capital expenditures were $24.2 million. The company reported compliance with debt covenants.
- Current assets were $1,331.4 million and current liabilities $369.0 million at March 31, 2022. Inventory increased to $484.9 million from $420.0 million at September 30, 2021.
Outlook, commentary, risks, and unusual items
- No quantified earnings or sales guidance is provided in the supplied filing text. Management said it expected industry disruptions to improve and end markets to continue recovering during the remainder of FY2022, while noting uncertainty.
- Management reported estimated COVID-related sales impacts as of Q2 of approximately $60 million in Aerospace and $40 million in Industrial, from supply constraints, labor shortages, and customer shipment delays. These are reported impacts, not a forecast.
- Russia sales were less than 1% of total sales in each of the first six months of FY2022 and FY2021. The company cited uncertain potential effects of further sanctions, supply/logistics disruption, currency and interest-rate volatility, inflation, and cybersecurity risks.
- Q2 SG&A included a partial reversal of an expense relating to a non-recurring matter. The company’s non-GAAP adjusted results exclude specified non-recurring and business-development items; Q2 adjusted net earnings were $46.6 million versus GAAP net earnings of $47.9 million. First-half adjusted net earnings were $82.9 million versus GAAP net earnings of $78.2 million.
- The board authorized a new $800 million share-repurchase program in January 2022, ending in January 2024. First-half purchases under it were $245.4 million; additional purchases under the prior authorization were $26.7 million.
- CEO and President Thomas Gendron announced his retirement effective May 9, 2022; Charles Blankenship was appointed CEO and President, and Chairman, effective that date. The filing describes ordinary-course legal matters and says management does not expect resulting liabilities to materially affect the company’s financial position or results.
- The filing identifies the COVID-19 pandemic, supply-chain and labor constraints, inflation, foreign exchange and interest-rate exposures, and customer/market conditions as risks. Management said the risk factors had not materially changed since the latest Form 10-K.
Key facts for investors to verify
- Whether expected second-half growth converts the elevated receivables, contract assets, and inventory into cash; operating cash flow and free-cash-flow recovery are key watchpoints.
- Whether pricing and productivity can offset inflation, manufacturing inefficiencies, and the lower margins associated with aerospace commercial OEM mix.
- Progress in resolving supply-chain, labor, and shipment disruptions, and the underlying assumptions behind the stated $60 million Aerospace and $40 million Industrial sales impacts.
- Share-repurchase pace and remaining authorization, alongside liquidity needs, capital spending, dividends, and debt maturities.
- CEO transition execution and the continuing performance of the Aerospace and Industrial segments, including China natural-gas-engine demand and defense guided-weapons sales.