Woodward, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017 ended June 30, 2017. The interim financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 FY17 | Q3 FY16 | Nine months FY17 | Nine months FY16 |
|---|---|---|---|---|
| Net sales | $548.6 | $507.7 | $1,491.9 | $1,432.2 |
| Net earnings | $53.6 | $51.0 | $138.3 | $117.7 |
| Diluted EPS | $0.85 | $0.81 | $2.18 | $1.85 |
| Gross margin | 28.4% | 27.0% | 27.3% | 26.7% |
| Net margin | 9.8% | 10.1% | 9.3% | 8.2% |
| EBIT | $75.1 | $69.3 | $185.1 | $163.9 |
| EBITDA | $95.7 | $86.6 | $244.7 | $213.8 |
Quarterly sales rose 8.1% year over year and nine-month sales rose 4.2%. Nine-month net earnings increased 17.5%; the prior-year period included approximately $16.1 million of pre-tax facility-consolidation, cost-reduction and market-related charges. Q3 diluted EPS increased 5%; nine-month diluted EPS increased 18%.
Business segments and drivers
- Aerospace: Q3 sales increased 15.4% to $356.0 million; nine-month sales increased 8.7% to $943.2 million. Higher defense OEM, commercial aftermarket and commercial OEM sales supported growth. Segment margin was 18.9% for Q3 and 18.3% year to date, up from 18.7% and 17.5%, respectively. Higher volume was partly offset by facility ramp-up costs and lower joint-venture earnings.
- Industrial: Q3 sales declined 3.2% to $192.6 million; nine-month sales declined 2.8% to $548.7 million. Lower industrial gas turbine and wind converter sales were partly offset by growth in Chinese CNG truck systems and reciprocating-engine power generation. Segment margin declined to 10.8% for Q3 and 10.2% year to date, from 11.0% and 11.2%.
Management attributed consolidated sales growth mainly to Aerospace volume, partly offset by Industrial declines and unfavorable foreign currency effects. Q3 gross margin improved with Aerospace volume leverage, while planned facility ramp-up costs remained a headwind.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $183.8 million, versus $362.5 million a year earlier. The prior-year amount included $202.4 million in after-tax joint-venture proceeds.
- Nine-month capital spending was $65.1 million, down from $128.6 million. Free cash flow was $118.7 million; adjusted free cash flow, excluding the prior-year JV proceeds, was $118.7 million versus $31.5 million.
- Cash and cash equivalents were $89.0 million at June 30, 2017, of which $86.6 million was held abroad. Working capital was $528.3 million.
- Total debt was $691.1 million, down from $727.2 million at September 30, 2016. The company reported $873.2 million of availability under its $1.0 billion revolving facility, net of letters of credit, plus $7.5 million under foreign facilities. It reported compliance with debt covenants.
- Nine-month dividends paid were $22.1 million; the company repurchased $61.2 million of shares under its new authorization of up to $500 million through 2019. Cash dividends per share were $0.125 for Q3 and $0.360 year to date.
Outlook, risks and unusual items
- No specific fiscal-year 2017 sales or earnings guidance is provided in the filing. Management expects operating cash flow and borrowing capacity to fund operations and anticipated capital spending for the foreseeable future.
- The GE Aviation joint venture generated sales to the JV of $52.4 million year to date. A substantial portion of the $250 million received at formation remains deferred and is recognized as sales over the applicable engine-program lives. Woodward also recorded a $17.2 million year-to-date sales reduction for royalties paid to the JV. The filing notes lower JV earnings contribution year over year.
- The nine-month effective tax rate was 16.7%, compared with 19.2%, reflecting foreign tax credits related to repatriation and favorable tax matter resolutions; the Q3 rate rose to 21.9% from 19.5%. Unrecognized tax benefits were $18.1 million, and management considered a decrease of up to $7.7 million reasonably possible over the next 12 months.
- In Q3, Woodward reduced its reserve for the vacated Skokie facility by $2.3 million after entering an additional sublease. The remaining lease-loss reserve was $5.7 million.
- Management expects ASC 606 adoption in fiscal 2019. It anticipates most product revenue will continue to be recognized at shipment, but some revenue will move to recognition over time. Funded engineering revenue and related costs are expected to be deferred/capitalized, reducing reported revenue and R&D expense in the adoption year and subsequent years; management expects an immaterial pre-tax earnings effect.
- Ordinary-course litigation, product liability, warranty, employment and regulatory matters are disclosed. Management does not expect resulting liabilities to materially affect liquidity, financial condition or results. The company reported no material change in its previously disclosed risk factors or market risks.
Most important facts for investors to verify
- Whether Aerospace demand and new-platform production sustain growth, and whether Industrial market weakness persists.
- Whether planned facility ramp-up costs and working-capital needs, including the increase in inventory to $508.3 million, affect future cash generation.
- The durability of adjusted free cash flow, which excludes the nonrecurring JV formation proceeds, and the effect of buybacks and dividends on liquidity and leverage.
- How JV sales, royalties, deferred formation proceeds and equity earnings evolve over time.
- The eventual effects of ASC 606 on revenue timing, balance-sheet accounts and disclosure controls, and the resolution of tax examinations and uncertain tax positions.
- Future debt maturities, covenant compliance, and any material developments in legal, warranty or other contingencies.