Woodward, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended March 31, 2015; fiscal Q2 and first half of FY2015. The interim financial statements are unaudited. Dollar figures below are in millions unless stated otherwise.
Financial results
| Metric | Q2 FY2015 | Q2 FY2014 | First half FY2015 | First half FY2014 |
|---|---|---|---|---|
| Net sales | $493.2 | $482.5 | $980.9 | $911.5 |
| Net earnings | $43.9 | $44.8 | $87.6 | $68.2 |
| Diluted EPS | $0.66 | $0.66 | $1.32 | $1.00 |
| Gross margin | 27.9% | 29.5% | 28.7% | 28.1% |
| Operating cash flow | Not presented separately for the quarter | $122.5 | $124.6 | |
| Capital expenditures | Not presented separately for the quarter | $109.4 | $68.6 | |
| Free cash flow | Not presented separately for the quarter | $13.1 | $56.1 |
Q2 pretax earnings were $57.6 million and income tax expense was $13.7 million; the effective tax rate was 23.9%, versus 21.1% a year earlier. First-half pretax earnings were $114.7 million and the tax rate was 23.6%, versus 24.0%.
At March 31, cash and cash equivalents were $80.8 million, working capital was $600.8 million, total debt was $713.0 million, and stockholders’ equity was $1,195.6 million. The company reported $378.5 million of remaining availability under its $600 million revolver, net of letters of credit, plus $35.6 million under foreign facilities. Management said it was in compliance with debt covenants.
Changes and operating performance
- Q2 sales rose 2.2%, but net earnings fell 2.1%; diluted EPS was unchanged. First-half sales increased 7.6%, net earnings rose 28.5%, and diluted EPS increased from $1.00 to $1.32.
- Foreign exchange reduced sales by $14.8 million in Q2 and $26.9 million in the first half, mainly from the euro and Brazilian real; management attributed most of the sales impact to Energy. FX reduced Q2 earnings by approximately $2.6 million and first-half earnings by approximately $4.0 million.
- Aerospace Q2 sales increased to $281.4 million from $261.0 million, and segment earnings rose to $45.6 million from $40.3 million. Higher commercial and defense OEM volumes and defense aftermarket sales supported results; segment margin improved to 16.2% from 15.4%.
- Energy Q2 sales declined to $211.8 million from $221.4 million, and segment earnings fell to $27.2 million from $31.9 million. Currency and lower natural-gas bus and truck system sales weighed on the quarter; segment margin declined to 12.9% from 14.4%. First-half Energy sales and earnings nevertheless increased year over year.
- Q2 gross margin contracted 1.6 percentage points, reflecting quarterly variability and planned new-facility start-up costs. First-half gross margin improved 0.6 percentage points, helped by higher volume and fixed-cost leverage.
Cash, investment, and outlook
Operating cash flow was nearly flat year over year in the first half. Higher capital spending drove free cash flow down to $13.1 million from $56.1 million. Cash declined by $34.5 million from September 30, 2014; investing activities used $107.1 million, primarily for facility and equipment investment.
Woodward is developing Aerospace campuses in the greater Rockford, Illinois area and Niles, Illinois, and a campus at its Fort Collins, Colorado headquarters to support Energy growth. The company anticipated approximately $500 million of investment in land, buildings, and equipment through FY2016 across these projects and reported approximately $315 million spent to date. Management expected operating cash flow and borrowing capacity to fund operations and planned capital spending for the foreseeable future; no specific revenue or earnings guidance was provided in the filing.
The board replaced its prior share repurchase authorization with a new program permitting up to $300 million of repurchases over three years through 2018. No repurchases had been made under the new authorization as of the filing date.
Risks, contingencies, and notable items
- Management cited customer financial distress, economic and market uncertainty, defense-budget variability, competition and input costs, supplier performance, product liability, debt and covenant requirements, foreign currency exposure, taxes, legal and regulatory matters, pension assumptions, and operational or information-system disruptions as risks.
- The filing describes ordinary-course litigation and claims, including product liability, employment, warranty, and contractual matters. Management did not expect resulting liabilities to materially affect liquidity, financial condition, or results; outcomes remain uncertain.
- The Q2 tax rate reflected smaller favorable tax-matter resolutions than in the prior year and a $3.3 million reversal of a deferred-tax-asset valuation allowance. First-half results also benefited from the retroactive extension of the U.S. research and experimentation tax credit, including a $5.1 million benefit related to the prior fiscal year.
- Foreign-currency translation reduced first-half other comprehensive earnings by $33.7 million after tax. The filing reports no new derivative or hedging transactions during the periods.
- Cash includes $76.9 million held at foreign locations; repatriation could create U.S. or foreign withholding taxes. The company reported no material off-balance-sheet arrangements and no material change in risk factors from its latest 10-K.
Important facts for investors to verify
- Whether Aerospace growth and planned facility start-up costs translate into sustained margin improvement, and whether the $500 million expansion plan remains on schedule and within budget.
- Whether Energy demand, especially natural-gas bus and truck systems, stabilizes and whether currency movements continue to weigh on sales and earnings.
- How capital spending, working-capital needs, and debt affect free cash flow and liquidity; confirm revolver availability and covenant compliance in subsequent filings.
- Whether tax benefits or discrete tax items materially change the effective tax rate in later periods, and how outstanding unrecognized tax benefits develop.
- Whether ordinary-course legal, product, warranty, or pension matters produce costs beyond current accruals or management’s stated expectations.