Woodward, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019; unaudited. Unless otherwise noted, dollar amounts below are in millions. Comparisons are with the three months ended December 31, 2018.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $720.4 | $652.8 | +10.3% |
| Gross margin | 25.7% | 24.6% | +1.1 percentage points |
| Earnings before tax | $61.5 | $61.5 | Flat |
| Net earnings | $53.4 | $49.1 | +8.7% |
| Diluted EPS | $0.83 | $0.77 | +7.8% |
| Effective tax rate | 13.3% | 20.1% | Lower |
| Operating cash flow | $27.4 | $84.7 | Down $57.3 |
| Capital expenditures | $17.2 | $31.3 | Lower |
| Free cash flow | $10.2 | $53.4 | Down $43.2 |
Management-reported non-GAAP adjusted net earnings were $71.2 million, or $1.10 per diluted share, versus $61.6 million, or $0.96, a year earlier. Adjusted EBIT was $94.5 million versus $89.5 million; adjusted EBITDA was $126.9 million versus $118.6 million. These measures exclude specified unusual items and are not GAAP results. GAAP EBIT was $70.1 million, down 4.0%, and EBITDA was $102.5 million, down 8.2%.
- Aerospace: Sales rose 20.6% to $473.9 million, supported by commercial and defense OEM and aftermarket demand. Segment earnings increased 27.5% to $92.9 million; segment margin rose to 19.6% from 18.5%.
- Industrial: Sales declined 5.2% to $246.4 million, mainly from weakness in oil and gas and related aftermarket demand, partly offset by renewables. Segment earnings were $28.2 million versus $29.2 million; margin was 11.5% versus 11.2%. Prior-year adjusted Industrial earnings were $38.7 million, including a $9.5 million L’Orange backlog amortization adjustment.
Sales growth reflected Aerospace volume, price and mix, and noncash consideration, partly offset by lower Industrial volume and $3.7 million of unfavorable currency effects. SG&A rose 19.5% to $62.0 million, while R&D fell 5.2% to $36.8 million. Net margin was 7.4%, compared with 7.5%.
Cash, debt and liquidity
At December 31, 2019, cash and cash equivalents, including restricted cash, were $148.0 million, versus $99.1 million at September 30, 2019. Total debt was $1,113.9 million, up from $1,084.9 million; this included $283.2 million of short-term borrowings and $101.6 million of current long-term debt. Working capital was $537.2 million, down from $563.8 million. The company reported $705.4 million of availability under its revolving credit facility, net of letters of credit, and $7.6 million under foreign facilities; management said it was in compliance with debt covenants.
Operating cash flow fell primarily because of working-capital timing, including payments to suppliers and customer collections. Investing cash flow was positive $1.6 million, including proceeds from a Duarte property sale. Financing cash flow was positive $17.2 million, including net debt borrowings of $19.7 million and $10.1 million of dividends paid. Adjusted free cash flow, which adds Duarte sale proceeds to free cash flow, was $29.0 million.
Material changes, unusual items and outlook
- A $37.9 million noncash impairment charge was recorded after the board approved a plan to divest the renewable power systems portfolio. It includes impairment of related long-lived assets and a valuation allowance on assets held for sale. A definitive agreement to sell certain portfolio assets to AURELIUS affiliates for $23.4 million, subject to customary adjustments, was signed January 31, 2020; closing was expected early in Q3 FY2020. The portfolio generated approximately $80 million of FY2019 sales.
- A $13.5 million pretax gain came from the sale of one Duarte property parcel. The company expected the sale of the remaining parcel, carried at $2.5 million, to close by June 30, 2020 and anticipated an additional gain.
- The lower tax rate reflected, among other factors, stock-based compensation tax benefits and a tax benefit associated with the impairment. Management cautioned that interim tax rates can be volatile.
- Management expected operating cash generation and available borrowing capacity to fund operations and anticipated capital spending for the foreseeable future. It cited ongoing strength in Aerospace demand, expected variability in defense aftermarket, and softness in oil and gas; it expected modest industrial gas turbine sales growth.
- On January 12, 2020, Woodward agreed to acquire Hexcel in a stock-for-stock merger: Hexcel shareholders would receive 0.625 Woodward shares per Hexcel share. The companies expected closing in Q3 calendar 2020, subject to shareholder, regulatory and other approvals. Merger completion, integration, costs, benefits, and timing are uncertain. The filing identifies a possible $250 million Woodward termination fee in specified circumstances.
- The merger agreement restricts share repurchases before closing, except for a previously authorized amount of approximately $17 million. A $0.28 quarterly dividend was declared for March 2020, up from $0.1625. Management discussed potential repurchases after the merger, which are plans rather than assured outcomes.
- Risk disclosures include the Boeing 737 MAX grounding and return-to-service uncertainty, general market and operating risks, and potential disruption from epidemics or pandemics, including coronavirus, affecting facilities, suppliers, transport or customer demand. Management also described normal-course legal matters and tax audits; it did not expect pending legal matters to materially affect the company.
Important facts for investors to verify
- Whether Aerospace growth and margins persist, and whether Industrial oil-and-gas weakness deepens or improves.
- Cash conversion and working-capital trends, given the sharp year-over-year decline in operating cash flow and free cash flow.
- Debt maturities, borrowing availability, covenant compliance, and the company’s ability to fund its plans while carrying substantial debt.
- Final sale proceeds, purchase-price adjustments, closing timing and any further gain or loss on the renewable power systems divestiture and Duarte property.
- Merger approvals, closing timetable, transaction and integration costs, termination provisions, and the assumptions behind expected benefits and capital-return plans.
- How GAAP earnings compare with management’s adjusted measures, including the treatment of the impairment, Duarte gain and other exclusions.