Woodward, Inc. — Form 10-Q Summary
Business context and reporting period. Woodward designs and manufactures systems serving the aerospace and energy markets through its Aerospace and Energy segments. This unaudited report covers the three and nine months ended June 30, 2015, the third quarter and first nine months of fiscal 2015; comparisons are with the corresponding 2014 periods. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Net sales | $494.8 | $524.3 | $1,475.7 | $1,435.8 |
| Net earnings | $43.8 | $46.0 | $131.4 | $114.2 |
| Diluted EPS | $0.66 | $0.69 | $1.98 | $1.68 |
| Gross margin | 29.0% | 28.9% | 28.8% | 28.4% |
| Net margin | 8.8% | 8.8% | 8.9% | 8.0% |
| EBITDA, as reported by company | $81.9 | $87.2 | $244.8 | $227.9 |
- Cash flow and investment: Nine-month operating cash flow was $167.3, versus $183.9 a year earlier. Capital expenditures were $190.9, up from $104.5, resulting in company-defined free cash flow of negative $23.5 versus positive $79.4. Cash and cash equivalents fell to $87.4 from $115.3 at September 30, 2014.
- Liquidity and debt: Working capital was $654.7, compared with $668.6 at fiscal year-end. Total debt was $878.2, up from $710.0; this included $875.0 of long-term debt and $3.2 of short-term borrowings. The amended $1.0 billion revolving facility had $616.5 of additional availability, net of letters of credit; the company also reported $32.7 of availability under foreign facilities. Management said it was in compliance with debt covenants.
- Shareholder returns: Woodward paid $0.28 per share in dividends during the first nine months, versus $0.24 a year earlier, and repurchased $157.1 of stock. A $125.0 accelerated share repurchase agreement began in June; final shares depend on the agreement’s pricing terms.
Material changes and segment results
- Third-quarter sales fell 5.6%, while nine-month sales rose 2.8%. Foreign currency movements reduced sales by $19.4 in the quarter and $46.3 year to date; management attributed nearly all of the sales impact to Energy.
- Aerospace: Q3 sales increased 4.9% to $288.5 and segment earnings increased 17.8% to $46.4. Nine-month sales rose 7.8% to $825.7 and earnings rose 25.0% to $127.8. Management cited commercial OEM and defense aftermarket volume growth.
- Energy: Q3 sales declined 17.3% to $206.3 and segment earnings declined 23.8% to $30.6. Nine-month sales fell 3.0% to $650.0 and earnings fell 2.1% to $97.1. Lower Chinese natural-gas truck-system sales and adverse currency effects weighed on results; industrial gas turbine sales partly offset the declines.
- Nine-month net earnings increased 15.1% despite lower Q3 earnings. The lower year-to-date effective tax rate—23.7% versus 25.0%—contributed; management cited the U.S. research and experimentation tax credit and other tax items. Q3 tax rate was 24.0%, compared with 26.4%.
Outlook, commentary, risks and unusual items
- Outlook and investment: The filing gives no specific revenue or earnings guidance. Management expects operating cash flow and available borrowing capacity to fund operations and anticipated capital spending. Woodward expected to invest about $500 million through fiscal 2016 across campus and facility projects and had spent about $375 million by June 30, 2015.
- GE joint venture: Woodward and GE agreed to form a 50/50 venture for fuel systems for specified existing and future GE commercial aircraft engines above 50,000 pounds of thrust. Subject to regulatory approvals, Woodward expects to assign certain contractual rights for a $250 million payment, subject to customary adjustments, plus 15 annual payments of approximately $4.9 million. The company expects to defer and recognize the proceeds over the economic lives of the rights and use equity-method accounting for the venture.
- Credit and currency: Debt increased alongside investment spending and share repurchases. Foreign exchange movements adversely affected reported sales and EBIT. About $79.3 million of cash was held at foreign locations; repatriation could result in additional taxes, whose amount the company said could not be determined.
- Contingencies and other items: The company reported ordinary-course litigation, investigations and claims, but management did not expect resulting liabilities to materially affect liquidity, financial condition or results. The Duarte defined-benefit pension plan was terminated effective June 30, subject to regulatory approval for benefit payouts; the related liability was about $0.08 million. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective.
Investor verification points
- Track Energy demand, particularly Chinese natural-gas truck systems, and the persistence of currency effects on sales and earnings.
- Verify completion, regulatory approval, payment terms and accounting treatment of the GE joint venture; assess the implications for future fuel-system business.
- Monitor capital spending, project completion and returns on the announced facilities, alongside free cash flow and cash balances.
- Review debt levels, covenant headroom, the October 2015 Series C notes maturity and the refinancing plan described by management.
- Confirm final shares and effective cost under the $125 million accelerated repurchase agreement, and subsequent use of the $300 million authorization.
- Assess tax exposures and possible changes in unrecognized tax benefits; the filing estimated these liabilities could decrease by up to $3.1 million over the next 12 months.