Woodward, Inc. — FY2017 Form 10-K
Business context and reporting period. Woodward designs and services energy-control systems for aerospace and industrial markets. This 10-K covers the fiscal year ended September 30, 2017; the filing also reports fourth-quarter results. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2,098.7 | $2,023.1 |
| Net earnings | $200.5 | $180.8 |
| Diluted EPS | $3.16 | $2.85 |
| Gross margin | 27.3% | 26.6% |
| Net margin | 9.6% | 8.9% |
| Operating cash flow | $307.5 | $435.4 |
| Capital expenditures | $92.3 | $175.7 |
| Free cash flow, company-defined | $215.2 | $259.7 |
FY2016 operating cash flow included $155.0 million of after-tax proceeds from the GE joint venture (JV). Excluding those proceeds, FY2016 operating cash flow was approximately $280.4 million and adjusted free cash flow was $104.7 million.
- Segments: Aerospace sales rose 8.9% to $1,342.3 million; segment earnings increased 11.0% to $257.8 million, with a 19.2% margin. Industrial sales declined 4.2% to $756.3 million; earnings fell 3.9% to $79.0 million, with a 10.4% margin.
- Liquidity: Cash was $87.6 million; working capital was $594.0 million, up from $463.8 million. Current assets were $1,021.2 million and current liabilities $427.2 million.
- Debt: Balance-sheet debt carrying value was $612.9 million, including $32.6 million of current revolving borrowings. The debt note reports $614.7 million before unamortized issuance costs. Revolver availability, net of letters of credit, was $956.8 million; the company reported covenant compliance.
- Other metrics: R&D expense was $126.5 million, or 6.0% of sales. Cash dividends were $0.485 per share. Backlog at October 31, 2017 was $1,015.4 million, up from $875.2 million a year earlier; management cautioned backlog is not necessarily predictive of sales.
Fourth quarter: Sales were $606.8 million versus $590.9 million a year earlier; net earnings were $62.2 million versus $63.1 million, and diluted EPS was $0.98 versus $0.99.
Material changes versus the prior comparable period
- Annual sales increased 3.7%, principally from higher Aerospace defense OEM, commercial aftermarket and OEM sales, partly offset by lower Industrial turbine and wind-converter sales.
- Net earnings rose 10.9% and diluted EPS increased 10.9%. FY2016 included approximately $16.1 million of restructuring and alignment charges; none were recorded in FY2017.
- Gross margin improved to 27.3%, reflecting the absence of FY2016 special charges and Aerospace volume leverage, partly offset by unfavorable mix and facility ramp-up costs.
- Operating cash flow was lower year over year because FY2016 included the one-time JV proceeds; capital spending also declined substantially as major facility projects were completed.
- Total debt carrying value declined from $727.2 million to $612.9 million. Aerospace became a larger share of sales, while Industrial sales continued to contract.
Outlook, commentary, risks and unusual items
- Outlook: No quantified FY2018 earnings or revenue guidance is provided. Management expected strong commercial aircraft production and continued aftermarket activity, but weakness in business and general aviation. It anticipated continued near-term industrial turbine softness, while expecting growth in Asian natural-gas truck and bus systems and certain large-engine applications.
- JV: GE paid $250.0 million for a 50% interest in the JV in 2016. Most of the consideration remains deferred and is recognized as sales over the applicable engine programs; $243.3 million remained deferred at September 30, 2017. The filing also reports annual contingent payments of $4.9 million, subject to claw-back conditions.
- Concentration and market exposure: The five largest customers accounted for about 43% of sales; GE alone represented 16%. Government-related sales, direct and indirect, were 23% of sales. The filing highlights exposure to commercial aviation cycles, defense appropriations, industrial and energy markets, commodity prices, foreign exchange and global economic conditions.
- Other risks: Debt covenants and refinancing needs, supplier and production disruption, product liability, international and tax exposures, pension assumptions, cybersecurity, and possible environmental or legal liabilities could affect results. Management said pending legal matters were not expected to materially affect liquidity, financial condition or results.
- Unusual accounting and contingencies: Annual goodwill testing found no impairment. The company had $20.1 million of gross unrecognized tax benefits and estimated that up to $7.7 million could reverse within 12 months. Adoption of the new revenue standard was expected to change revenue timing and balance-sheet classifications; management expected funded engineering revenue and R&D expense to decrease, with an immaterial pretax earnings effect.
Important facts for investors to verify
- Reconcile the $612.9 million balance-sheet debt carrying value with the $614.7 million gross debt figure and review maturities, interest costs and covenant headroom.
- Assess how much Aerospace growth and backlog convert to recognized sales and cash, given the backlog caveat and platform ramp-up costs.
- Monitor Industrial recovery prospects and the extent of continued turbine, renewables and energy-market weakness.
- Review customer concentration, especially GE exposure, and the JV’s deferred revenue recognition, payments and earnings contribution.
- Compare cash generation after adjusting for the prior-year JV proceeds and assess working-capital movements, including receivables and payables timing.
- Track the effects of revenue-standard adoption, tax audits and unrecognized tax benefits, and pension funding assumptions.