Woodward, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. Amounts are in U.S. dollars; financial figures below are shown in millions unless otherwise noted. This is an annual report, with fourth-quarter results separately noted.
Business context
Woodward designs, manufactures, and services energy-control systems for aerospace and energy markets. Its products serve commercial and defense aircraft, turbines, engines, renewable power, and electrical-grid applications. Revenue comes mainly from OEM and equipment-packager sales, plus aftermarket products and services.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,001.2 | $1,936.0 |
| Net earnings | $165.8 | $145.9 |
| Diluted EPS | $2.45 | $2.10 |
| Operating cash flow | $268.1 | $222.6 |
| Capital expenditures | $207.1 | $141.6 |
| Free cash flow | $61.0 | $81.0 |
- Sales increased 3.4%; excluding the first three months of acquired Duarte Business sales, growth was 1.7%. Net earnings rose 13.6% and diluted EPS rose about 16.7%.
- Gross margin was 28.8%, versus 28.9%; net margin was 8.3%, versus 7.5%. Earnings before tax were $227.2 million, or 11.4% of sales, compared with $199.6 million, or 10.3%.
- Operating cash flow improved with higher earnings and better receivables collections, but capital spending increased substantially, lowering free cash flow. Inventory growth used $27.8 million of cash.
- Cash and cash equivalents were $115.3 million; working capital was $668.6 million. Total debt was $710.0 million, up from $550.0 million. The company reported $384.6 million of remaining revolver availability and $27.9 million under foreign credit facilities, and was in compliance with debt covenants.
- Research and development expense was $138.0 million, or 6.9% of sales. Cash dividends were $0.32 per share. Woodward repurchased 3.272 million shares for $141.5 million during FY2014.
Segments, trends, and comparison with prior year
- Aerospace: Sales were $1,084.0 million, up 2.1% reported; excluding Duarte’s first-quarter contribution, sales declined 0.8%. Segment earnings fell 4.2% to $159.2 million, and segment margin declined to 14.7% from 15.7%. Lower defense OEM and aftermarket sales, and higher variable compensation, outweighed commercial OEM and aftermarket gains.
- Energy: Sales increased 4.9% to $917.2 million. Segment earnings rose 35.7% to $134.3 million, with margin increasing to 14.6% from 11.3%. Higher volumes in wind converters, aero-derivative turbines, and large gas and diesel engines contributed; lower natural-gas bus and truck system sales were a partial offset. The comparison benefited from $15.7 million of renewable-business realignment charges in FY2013.
- FY2014 sales growth reflected Energy volume, price and mix, favorable currency effects, and $31.4 million of Duarte sales for the first quarter, for which there was no FY2013 comparison. Aerospace volume declined $30.4 million, partly reflecting weaker defense activity.
- Unshipped backlog at October 31, 2014 was $827.9 million, up from $778.8 million a year earlier; 71% was expected to be filled by September 30, 2015. Management cautions that backlog is not necessarily an indicator of future sales.
- Fourth-quarter FY2014 sales were $565.4 million and net earnings were $51.7 million, compared with $558.4 million and $52.5 million in the prior-year quarter. Diluted EPS was $0.77 versus $0.76.
Outlook, unusual items, and risks
- No quantified FY2015 earnings or sales guidance is provided in the filing. Management described favorable commercial-aircraft production and aftermarket trends and opportunities from new aircraft platforms, while noting uncertainty in defense budgets. Energy commentary was mixed: turbine aftermarket and selected engine markets improved, while renewable power remained volatile amid uncertainty over subsidies, pricing, and project financing.
- Woodward plans approximately $500 million of investment through FY2016 across facilities in Rockford, Niles, and Fort Collins; approximately $200 million had been spent by the filing date. FY2014 capital expenditures were $207.1 million.
- FY2014 fourth-quarter items included a $6.6 million pension curtailment gain, a $3.1 million impairment of non-U.S. assets held for sale, and $2.7 million of accelerated costs for unused property leases and related assets. FY2013 included $15.7 million in renewable-power realignment charges. Variable compensation expense increased $29.7 million year over year.
- Key exposures include customer concentration (the five largest customers represented 39% of sales; GE alone represented 15%), dependence on government and defense programs, commercial aviation cycles, international operations and currency movements, supplier and production disruptions, competition, product liability, and debt covenants. U.S. Government-related sales were 17% of FY2014 sales, down from 21%.
- Environmental remediation liabilities were described as not significant; two sites were undergoing remediation, with management stating the chance of material costs was remote. Management did not expect pending legal matters to materially affect liquidity, financial condition, or results, while acknowledging outcomes cannot be predicted with certainty.
- The financial statement audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective as of September 30, 2014.
Important facts for investors to verify
- How much of backlog converts to FY2015 revenue, and whether new-platform aerospace growth offsets continued defense weakness.
- Whether Energy earnings gains persist after the FY2013 renewable-power charge comparison and whether renewable-market conditions stabilize.
- Returns and timing from the planned facility investments, and the effect of elevated capital spending on free cash flow.
- Debt repayment schedule, covenant headroom, and the sustainability of repurchases and dividends alongside capital commitments.
- Customer concentration, exposure to government spending, and any developments in product-liability, tax, environmental, or other contingencies.