Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The quarter was unaudited. Amounts below are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $720.2 | $758.8 | $1,440.6 | $1,411.7 |
| Net earnings | $91.3 | $77.6 | $144.7 | $126.7 |
| Diluted EPS | $1.41 | $1.20 | $2.24 | $1.97 |
| Gross margin | 28.1% | 25.3% | 26.9% | 25.0% |
| Operating cash flow | Not separately stated | Not separately stated | $52.2 | $141.0 |
Q2 sales declined 5.1%, while first-half sales increased 2.0%. Q2 net earnings rose despite lower sales; management attributed improved results in part to the elimination of 2020 annual bonuses, including a reversal in Q2 of bonus expense recorded in Q1. Adjusted Q2 net earnings, a non-GAAP measure, were $104.1 million, or $1.61 per diluted share, versus $90.3 million, or $1.40, a year earlier. First-half adjusted net earnings were $175.3 million, or $2.71 per diluted share.
- Segments: Q2 Aerospace sales fell 1.8% to $474.2 million; Industrial sales fell 10.8% to $246.0 million. First-half Aerospace sales rose 8.3% to $948.2 million, while Industrial fell 8.1% to $492.4 million.
- Segment margins: Q2 Aerospace was 24.8% versus 21.1%; Industrial was 10.6% versus 9.8%. First-half margins were 22.2% and 11.0%, respectively.
- Cash generation: First-half free cash flow, defined by the company as operating cash flow less capital expenditures, was $22.8 million versus $86.6 million. Adjusted free cash flow was $54.7 million, including Duarte property-sale proceeds and excluding merger and divestiture transaction payments.
Balance sheet and liquidity
At March 31, 2020, cash and cash equivalents were $102.8 million, total debt was $1,070.9 million, working capital was $745.0 million, and stockholders’ equity was $1,907.7 million. Woodward reported $745.5 million of available capacity under its revolving credit facility, net of letters of credit, and another $7.5 million under foreign facilities. The company said it was compliant with debt covenants and believed it could meet obligations, while noting that future performance and market conditions affect that assessment.
First-half operating cash flow decreased to $52.2 million from $141.0 million, principally due to timing of customer receipts, tax payments, and accounts-payable payments. Capital expenditures were $29.4 million, compared with $54.3 million a year earlier. The company paid $27.5 million in dividends and repurchased $13.3 million of stock during the half-year.
Material changes, outlook and risks
- COVID-19: Management reported declining demand, sharply reduced orders and shipments, and supply-chain delays. Aerospace and Industrial markets were affected; the Boeing 737 MAX grounding also weighed on aerospace sales. Woodward expected Q2 volume declines to continue in Q3, while stating that the pandemic’s full effect and recovery timing remained uncertain. No specific full-year earnings or sales guidance is provided in the supplied filing text.
- Business mix and demand: Defense OEM and aftermarket demand supported Aerospace, while commercial aviation weakened. Industrial faced softness in oil and gas and lower China natural-gas-truck demand; management also expected volatility in industrial gas turbines.
- Divestiture and impairment: Woodward recorded a $37.9 million noncash impairment charge in the first half related to planned divestitures of renewable power systems, protective relays, and other Industrial businesses. Agreements to sell most of the disposal groups for $23.4 million, including a $6.0 million promissory note, closed April 30, 2020. Renewable-market sales were expected to become insignificant.
- Merger termination: Woodward and Hexcel mutually terminated their merger agreement on April 5, 2020, citing COVID-related economic uncertainty; neither party owed a termination fee. First-half merger and divestiture transaction costs were $16.0 million.
- Actions after quarter-end: To preserve flexibility, Woodward cut its quarterly dividend from $0.28 to $0.08125 per share. It also eliminated 2020 annual bonuses, reduced executive and director compensation, imposed hiring and wage freezes and other cost controls, and implemented workforce actions. The company anticipated approximately $18 million of restructuring and related charges and an approximately 15% workforce reduction on an FTE-equivalent basis for the remainder of 2020, excluding temporary furloughs.
- Other unusual items: A Duarte property sale generated a $13.5 million pretax gain in the first half. Management concluded COVID-related conditions had not triggered a goodwill impairment as of March 31, but said it would continue monitoring impacts. A new shareholder rights agreement adopted in April generally imposes significant consequences for an unapproved acquisition of 15% or more of common stock.
- Risks and contingencies: Key risks include prolonged commercial aerospace weakness, supply disruption, customer payment delays or defaults, volatile oil and gas markets, and potential effects on liquidity and debt-covenant compliance. The company disclosed ordinary-course litigation and regulatory matters and did not expect resulting liabilities to materially affect its financial condition, liquidity, or results.
Most important facts for investors to verify
- Whether COVID-19-driven sales, order, and supply-chain declines continued beyond Q2, particularly in commercial aerospace and Industrial markets.
- Whether cash flow, working capital, and revolver availability remained sufficient as restructuring costs, debt maturities, and customer collections evolved.
- The final proceeds, adjustments, and continuing financial effects of the April 30 divestiture, including the promissory note component.
- Whether the anticipated restructuring charges and workforce reductions were realized, and whether cost actions offset lower demand.
- How much Q2 and first-half earnings improvement depended on bonus reversals, unusual gains, impairment, and other adjustments; non-GAAP measures are not substitutes for GAAP results.