Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016. The interim financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context and results
Woodward serves aerospace and industrial markets through its Aerospace and Industrial segments; the company renamed its former Energy segment to Industrial. Results reflect stronger Aerospace demand and continued weakness across most Industrial markets, including effects from foreign exchange.
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Net sales | $479.4; down 2.8% year over year | $924.5; down 5.7% |
| Net earnings | $40.8; down 6.9% | $66.6; down 24.0% |
| Diluted EPS | $0.65, versus $0.66 | $1.05, versus $1.32 |
| Gross margin | 27.8%, versus 27.9% | 26.5%, versus 28.7% |
| Net margin | 8.5%, versus 8.9% | 7.2%, versus 8.9% |
| EBIT / EBITDA | $60.2 / $75.7 | $94.6 / $127.2 |
Segment trends: Aerospace sales rose 3.3% in the quarter and 4.1% year to date; segment earnings margins improved to 17.4% and 16.8%, respectively. Higher commercial aftermarket and defense sales were partly offset by weaker commercial OEM sales. Industrial sales fell 10.9% in the quarter and 17.7% year to date; margins declined to 10.3% and 11.2%, primarily due to lower volume and unfavorable currency. Industrial weakness reflected delayed maintenance and capital investment amid slower global growth and depressed oil and gas prices.
Cash flow, liquidity and debt
- Six-month operating cash flow was $361.7, versus $123.3 a year earlier; free cash flow, as defined by Woodward, was $262.4 versus $13.9. Both comparisons benefited substantially from the $250.0 GE joint-venture payment recorded in operating cash flow.
- Capital expenditures were $99.3 for the half year. Cash and equivalents were $84.7 at March 31, 2016, and working capital was $413.0.
- Total debt was $717.0, including $100.0 classified as current; debt was $852.4 at September 30, 2015. The company reported $724.2 of additional availability under its revolving facility, net of letters of credit, plus $42.1 under foreign facilities, and stated it was in compliance with debt covenants.
- Cash dividends paid were $13.1 for the half year. Woodward repurchased approximately $119.1 of stock under its program during the period. Most cash was held outside the United States; repatriation could result in additional taxes.
Material changes, outlook and risks
- GE joint venture: GE paid $250.0 for a 50% interest in a venture covering fuel systems for specified large GE commercial aircraft engines. Woodward deferred the payment as income because it has continuing performance obligations; it will recognize the amount as sales over the relevant program lives. GE also agreed to 15 annual contingent payments of $4.894 beginning January 2017, subject to claw-back conditions. Woodward reported $2.2 of equity-method earnings from the venture in the quarter.
- The JV payment was taxable when received. Woodward recorded approximately $94.1 of related current income taxes payable and a corresponding deferred tax asset; it expected to make estimated tax payments during the remainder of calendar 2016 and early 2017.
- First-half earnings included approximately $16.1 of special charges for facility consolidation, cost reduction and market conditions—$13.3 in cost of goods sold, $1.7 in SG&A and $1.1 in R&D. The charges reduced first-half net earnings by approximately $9.9 after tax, or $0.16 per diluted share.
- Woodward recorded an $8.2 charge in the first quarter for the vacated Skokie facility lease commitment. It also revised estimated asset useful lives after reviewing its new campuses; the change reduced depreciation on existing assets by approximately $12.0 for fiscal 2016. Management expected this reduction and depreciation on new facilities to largely offset for the full year.
- Management provided no specific full-year sales or earnings guidance in the supplied filing text. It said operating cash flow and available borrowing capacity should fund operations and anticipated capital spending, including approximately $100.0 of fiscal 2016 spending on Illinois and Colorado facilities.
- Key risks identified include Industrial market weakness, currency movements, customer and supplier risks, aerospace market consolidation and the JV’s effect on securing certain long-term sales, debt and covenant obligations, tax exposures, legal and product-liability matters, and potential operational disruptions. Management said ordinary-course claims were not expected to materially affect liquidity, financial condition or results.
Important facts for investors to verify
- How quickly the $250.0 of deferred JV income will be recognized as sales, and the venture’s future economics, obligations and contingent-payment conditions.
- Whether cash generation excluding the one-time JV receipt supports working capital, facility investment, dividends and repurchases.
- Whether Industrial demand and segment margins recover, and whether foreign exchange continues to weigh on sales and earnings.
- The effect of special charges, facility start-up costs and revised depreciation estimates on subsequent-period margins and earnings.
- The timing and funding of debt maturities, including the $57.0 Series E note repayment made after quarter-end on April 4, 2016, and the tax payments associated with the JV proceeds.