Woodward, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014, compared with the three months ended December 31, 2013. Financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $487.6 | $429.0 | +13.7% |
| Gross margin | 29.5% | 26.5% | +3.0 percentage points |
| Earnings before income taxes | $57.1 | $32.9 | +73.2% |
| Net earnings | $43.8 | $23.4 | +87.2% |
| Diluted EPS | $0.66 | $0.34 | +$0.32 |
| EBIT, non-GAAP | $62.9 | $38.9 | +61.5% |
| EBITDA, non-GAAP | $81.5 | $58.1 | +40.3% |
| Cash from operations | $37.9 | $44.4 | Down $6.6 |
| Capital expenditures | $46.6 | $37.1 | Up $9.5 |
| Free cash flow, non-GAAP | $(8.8) | $7.3 | Down $16.0 |
Net margin was 9.0%, compared with 5.5% in the prior-year quarter. The effective tax rate fell to 23.3% from 29.0%, primarily because the retroactive extension of the U.S. research and experimentation tax credit contributed a $5.1 million after-tax benefit, or $0.08 per diluted share, relating to the nine months ended September 30, 2014.
At December 31, 2014, cash and cash equivalents were $58.5 million, total debt was $700.0 million, and working capital was $616.7 million. The company reported $391.0 million of additional availability under its revolving facility, net of letters of credit, and $27.6 million under foreign facilities. Long-term debt declined by $10.0 million from September 30, 2014. Cash was $115.3 million at the fiscal year-end; $53.1 million of December cash was held outside the United States.
Cash used in investing was $46.5 million, mainly reflecting capital spending. Financing used $45.5 million, including $32.1 million to repurchase shares and $5.3 million in dividends. Foreign exchange reduced cash by $2.7 million.
Material changes and business drivers
- Sales increased in both reportable segments: Aerospace to $255.8 million from $229.9 million, and Energy to $231.9 million from $199.2 million. Management attributed growth primarily to higher volumes across most markets.
- Aerospace segment earnings rose to $35.8 million from $22.5 million; segment margin increased to 14.0% from 9.8%. Drivers included commercial aftermarket strength, some defense aftermarket recovery, higher volume, favorable mix, and productivity. Defense OEM sales were roughly flat.
- Energy segment earnings rose to $39.3 million from $27.1 million; segment margin increased to 16.9% from 13.6%. Higher sales of industrial gas turbine systems, natural-gas vehicle systems, wind converters, and steam turbine controls were partly offset by weaker diesel engine and power-control sales, unfavorable mix, and currency effects.
- Foreign exchange reduced consolidated sales by $12.2 million and Energy segment earnings by $2.2 million versus the prior-year quarter. Cost of goods sold declined to 70.5% of sales from 73.5%; management cited higher volume and fixed-cost leverage, improved Aerospace mix, and operational improvements, partly offset by higher variable compensation.
- Research and development spending increased to $34.0 million from $29.4 million. Management said R&D spending may vary with customer needs and program timing.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided in the filing. Management expected operating cash flow and available borrowing capacity to fund operations and planned capital spending for the foreseeable future, subject to operating performance and financing availability.
- Woodward anticipated approximately $500 million of investment through FY2016 across its Rockford-area campuses, Niles facility, and Fort Collins campus; approximately $250 million had been spent by the reporting date. The Rockford-area workforce could increase 70%–90% from current levels by the end of 2021 to support awarded aerospace platforms.
- Management noted stronger-than-average first-quarter customer buying patterns relative to first quarters in the previous five years. It cautioned that Chinese natural-gas truck demand was volatile and partly supported by customer rebates, and that defense sales could vary with U.S. government budget constraints and contract timing.
- Key stated risks include significant-customer financial distress, global economic uncertainty, competition and input costs, supplier performance, debt covenants and financing access, foreign exchange, tax exposures, product liability, regulatory and legal matters, pension assumptions, and operational disruptions. Management said risk factors had not materially changed since the latest Form 10-K.
- The company reported ordinary-course litigation and claims, including product liability, employment, contractual, warranty, and regulatory matters; management did not expect resulting liabilities to materially affect liquidity, financial condition, or results. No material off-balance-sheet arrangements were reported.
- Other comprehensive earnings were affected by a $12.9 million foreign-currency translation loss before related tax effects. Management reported no goodwill impairment trigger in the quarter. The new revenue-recognition standard was still being assessed and was expected to be effective for Woodward in FY2018.
Investor facts to verify
- How much of the earnings increase is sustainable after excluding the $5.1 million retroactive tax-credit benefit?
- Whether sales growth and improved segment margins persist, particularly given unusually strong first-quarter buying and the rebate-sensitive China market.
- Capital project spending, timing, expected returns, and funding needs against the approximately $500 million FY2016 investment plan.
- Free-cash-flow conversion, working-capital requirements, and the effect of continued share repurchases and dividends on cash and debt.
- Foreign-exchange exposure, debt covenant headroom, and the potential effect of repatriating foreign-held cash.