Woodward, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; unaudited. Comparisons are with the three months ended December 31, 2016 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $470.1 | $442.9 |
| Gross margin | 26.2% | 25.7% |
| Earnings before income taxes | $37.5 | $47.1 |
| Net earnings | $18.3 | $46.5 |
| Diluted earnings per share | $0.29 | $0.73 |
| EBIT / EBITDA | $43.9 / $64.9 | $53.5 / $72.4 |
| Cash from operating activities | $(2.5) | $52.4 |
| Capital expenditures | $28.5 | $21.1 |
| Free cash flow | $(31.0) | $31.3 |
At December 31, 2017, cash and cash equivalents were $85.8, working capital was $626.1, and total debt was $649.6. The company reported $922.4 of availability under its revolving credit facility, net of letters of credit, and $7.5 of additional capacity under foreign facilities. Stockholders’ equity was $1,400.5. The quarterly dividend paid was $0.125 per share.
Material changes versus the prior comparable quarter
- Sales rose 6.2%. Aerospace sales increased 14.7% to $305.9, while Industrial sales fell 6.8% to $164.2.
- Aerospace growth reflected stronger commercial OEM and aftermarket sales and defense OEM demand, including smart weapons. Industrial declines in gas turbines and renewables partly offset gains in large gas engines and Asian CNG truck fuel systems.
- Gross margin improved to 26.2% from 25.7%, but pretax earnings fell 20.3%. Aerospace segment earnings declined to $43.6 from $46.9, while Industrial segment earnings rose to $19.3 from $18.0.
- Net earnings fell substantially, mainly because income tax expense increased to $19.2 from $0.5. The current-quarter effective tax rate was 51.3%, versus 1.1% in the prior-year quarter; the prior-year rate included tax benefits associated with repatriation of foreign earnings.
- SG&A rose 20.8% to $46.3, primarily reflecting the timing of stock-based compensation recognition. R&D increased 31.1% to $34.8, reflecting investment in new awards and opportunities. The filing notes that most annual stock-compensation expense was recognized in Q1 this year, versus mainly Q2 last year.
- Operating cash flow swung to an outflow, which management attributed to lower earnings and greater working-capital cash use, particularly payments of accounts payable and accrued liabilities. Investing outflows increased with higher capital spending.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating cash generation and available borrowing capacity to fund operations and anticipated capital spending for the foreseeable future, while continuing equipment purchases to support Aerospace program growth.
- Management said the enacted U.S. tax-law changes are expected to benefit future U.S. tax expense and operating cash flows. The company recorded a provisional $14.8 net discrete tax charge, including a provisional $26.0 transition-tax liability expected to be paid over eight years beginning in FY2019. Tax calculations remain subject to refinement; the filing says the impact of GILTI and BEAT was not recorded in this quarter’s tax rate.
- The company expects to adopt revenue standard ASC 606 in FY2019. It anticipates that most customer-contract revenue will continue to be recognized at shipment, but some revenue will shift to recognition over time. Funded engineering revenue and related costs are also expected to be deferred; management expects lower reported revenue and R&D expense for the adoption year and subsequent years, with an immaterial pretax earnings impact from these contract balances.
- The $100.0 Series D notes mature in October 2018. Woodward classified them as long-term based on its intent and ability to refinance using its revolving facility. The revolving facility matures in April 2020; management reported compliance with debt covenants at quarter-end.
- Of the $85.8 in cash, $82.0 was held outside the United States. Management reported no significant known restrictions on repatriation, but taxes may apply. The company also recorded a provisional $26.0 transition-tax liability.
- Woodward reported ordinary-course legal, regulatory, product-liability, warranty and other claims; management does not expect resulting liabilities to materially affect liquidity, financial condition or results. The company said disclosed risk factors had not materially changed from its latest Form 10-K.
- Other notable items: the company made no share repurchases during the quarter; it spent $28.5 on property, plant and equipment. The GE joint venture generated $0.6 of equity earnings, and Woodward recognized $1.1 of deferred income from its formation as sales.
Important facts for investors to verify
- How the provisional tax estimates, including the transition-tax liability and deferred-tax remeasurement, change as the company completes its analysis of the Tax Act.
- Whether operating cash flow and free cash flow recover as working-capital timing normalizes, and how planned Aerospace capacity spending progresses.
- Whether Aerospace earnings margins improve despite expansion costs, unfavorable mix and higher R&D, and whether Industrial demand in gas turbines and renewables stabilizes.
- The company’s refinancing plan for the $100.0 Series D notes due October 2018 and continued compliance with debt covenants.
- The eventual effects of ASC 606 on revenue timing, balance-sheet contract balances and disclosures.