Woodward, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016; compared with the three months ended December 31, 2015. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise. The interim statements are unaudited.
Financial performance and position
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $442.9 million | $445.1 million |
| Gross margin | 26.1% | 25.1% |
| Earnings before income taxes | $47.1 million | $28.0 million |
| Net earnings | $46.5 million | $25.8 million |
| Diluted EPS | $0.73 | $0.40 |
| Effective tax rate | 1.1% | 7.6% |
| Operating cash flow | $52.4 million | $37.4 million |
| Free cash flow (company-defined, non-GAAP) | $31.3 million | $4.2 million |
- EBIT was $53.5 million, up 55.4%; EBITDA was $72.4 million, up 40.7%. Both are non-GAAP measures.
- At December 31, cash and cash equivalents were $80.9 million; working capital was $468.3 million. Current assets were $884.8 million and current liabilities $416.5 million.
- Total debt was $721.9 million, including $150.0 million classified as current; debt net of unamortized issuance costs was $719.9 million. The company reported $830.6 million of available capacity under its revolving facility, net of letters of credit, and $43.5 million under foreign facilities.
- Cash used in investing was $16.6 million, including $21.1 million of capital expenditures. Cash used in financing was $22.2 million, including $24.0 million for share repurchases and $6.8 million in dividends. Foreign-exchange movements reduced cash by $13.7 million.
Changes versus the prior-year quarter
- Sales decreased 0.5%. Aerospace sales fell 0.7% to $266.7 million and Industrial sales fell 0.2% to $176.2 million.
- Net earnings rose 80.3%, but comparison is affected by approximately $16.1 million of prior-year special charges for facility consolidation, cost reduction, and market conditions; those charges did not recur. The prior-year charges included approximately $9.9 million net of tax.
- Profitability also benefited from a much lower effective tax rate. Management attributed the current-quarter rate primarily to U.S. foreign tax credits associated with repatriation of certain foreign profits and losses. The prior-year rate included a retroactive research-credit benefit that did not recur.
- Aerospace segment earnings increased 7.8% to $46.9 million, with margin rising to 17.6% from 16.2%, mainly reflecting lower R&D costs. Industrial segment earnings declined 16.5% to $18.0 million, with margin falling to 10.2% from 12.2%, mainly due to unfavorable product mix and new-facility costs.
- Operating cash flow increased, primarily with higher earnings; capital spending was lower than in the prior-year quarter.
Outlook, commentary, risks, and unusual items
- The filing provides no specific financial guidance. Management said operating cash flow and available borrowings should be sufficient for operating needs and planned capital expansion for the foreseeable future, subject to business conditions and continued access to financing.
- Management cited weaker commercial aerospace aftermarket sales versus a strong prior-year comparison, partly offset by defense and commercial OEM demand. Industrial sales were described as stabilizing; heavy-frame gas-turbine aftermarket gains were largely offset by lower wind-turbine converter sales. Facility ramp-up and new-facility expenses remain costs to monitor.
- Woodward’s GE Aviation joint venture was formed in January 2016. GE paid $250 million for a 50% interest; Woodward is recognizing the consideration as deferred income over the related program lives, including $1.5 million of sales recognized in this quarter. GE’s contingent payments to Woodward are scheduled at $4.894 million annually for 15 years beginning January 2017, subject to claw-back conditions. Woodward recorded $0.7 million of equity-method earnings from the JV this quarter.
- The company authorized a new share-repurchase program of up to $500 million over three years through 2019 and repurchased $24.0 million of shares during the quarter.
- Management identified risks including significant-customer and market exposure, aerospace demand and defense-spending changes, competition and input costs, supplier performance, foreign-exchange movements, debt covenants, tax matters, litigation and product liability, pension assumptions, and operational or information-systems disruptions. It said pending legal matters are not expected to materially affect liquidity, financial condition, or results, though outcomes are uncertain.
- Woodward is assessing new accounting standards. It expects revenue under most customer contracts to remain recognized at shipment under ASC 606, but anticipates some contracts may shift to over-time recognition, potentially affecting revenue timing and balance-sheet items.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating improvement versus the prior-year special charges, this quarter’s unusually low tax rate, and asset-sale gains?
- Whether Aerospace aftermarket trends and Industrial product mix improve, and whether planned facility ramp-up costs affect margins as production scales.
- The sustainability of cash generation and capital requirements, including spending for new platforms, repurchases, and dividends, alongside debt maturities and covenant headroom.
- The timing and financial effects of deferred JV income recognition, future contingent payments, and the JV’s operating performance.
- Potential outcomes of tax examinations and unrecognized tax benefits; the filing estimates these benefits could decrease by up to $3.4 million over the next 12 months.