Woodward, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results. Unless noted otherwise, amounts are in millions of U.S. dollars; the filing presents most financial statements in thousands.
Business context
Woodward designs, manufactures and services energy-control systems for aerospace and industrial markets. Aerospace serves commercial and defense aircraft and related aftermarket; Industrial serves turbines, reciprocating engines, power generation and distribution, wind, and other industrial applications. General Electric was Woodward’s largest customer, representing approximately 17% of FY2016 sales. The five largest customers accounted for approximately 42%.
Key financial metrics
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Net sales | $2,023.1 | $2,038.3 | Down 0.7% |
| Gross margin | 27.1% | 28.7% | Lower, including restructuring charges and facility start-up costs |
| Earnings before income taxes | $226.5 | $240.9 | Down 6.0% |
| Net earnings | $180.8 | $181.5 | Down 0.3%; net margin was 8.9% in both years |
| Diluted EPS | $2.85 | $2.75 | Up 3.6%, with fewer weighted-average shares |
| EBIT / EBITDA | $251.2 / $320.3 | $265.0 / $340.3 | Down 5.2% / 5.9%; non-GAAP measures |
| Operating cash flow | $435.4 | $296.0 | Includes the $250.0 million GE JV payment |
| Adjusted free cash flow | $104.7 | $9.4 | Company-defined non-GAAP measure; excludes JV proceeds after related tax payments |
| Cash and working capital | $81.1 / $463.8 | $82.2 / $579.2 | Working capital decreased |
| Total debt | $729.2 principal | $850.0 principal | FY2016 includes $150.0 million current revolving borrowings; balance-sheet debt carrying value was $727.2 million |
Capital expenditures were $175.7 million, down from $286.6 million, following substantial facility construction. Cash and cash equivalents included $80.7 million held outside the United States. The company reported $835.5 million of remaining availability under its revolving facility, net of letters of credit, plus $44.0 million under foreign credit facilities.
Material changes versus FY2015
- Aerospace sales rose 6.2% to $1,233.2 million; segment earnings increased 23.7% to $232.2 million, and segment margin rose to 18.8% from 16.2%. Growth reflected defense OEM and aftermarket demand and commercial aftermarket sales.
- Industrial sales fell 10.0% to $789.9 million; segment earnings declined 35.1% to $82.2 million, with margin down to 10.4% from 14.4%. Weakness included China’s natural-gas truck market, engine power generation and large equipment projects, alongside low oil and gas prices.
- Unfavorable foreign exchange reduced consolidated sales by approximately $14.9 million and earnings by approximately $3.0 million compared with FY2015.
- The effective tax rate decreased to 20.2% from 24.7%, primarily reflecting the permanently reinstated U.S. research and experimentation credit and a tax benefit from stock-based compensation accounting.
- Net debt declined, while the current portion of borrowings increased to $150.0 million, classified as current based on management’s intent and ability to repay it within 12 months.
Outlook, commentary and notable items
- FY2017 outlook is qualitative, not quantified. Management expected softness in industrial turbine markets to continue, citing global industrial weakness and low oil and gas prices. It anticipated customer share gains, increased content on newer equipment and aftermarket demand to temper the effect. It also expected favorable contributions from industrial engine customer gains and aftermarket activity.
- Management described continued growth in global commercial air traffic and aircraft production as supportive of Aerospace, while business and general aviation demand had declined. Defense aftermarket demand was expected to remain variable.
- In January 2016, Woodward and GE formed a jointly controlled 50/50 fuel-systems JV. GE paid $250 million, recorded as deferred income rather than immediate earnings; $238.2 million remained unamortized at year-end. GE also agreed to 15 annual contingent payments of approximately $4.9 million beginning in January 2017, subject to claw-back conditions. Woodward recorded $6.2 million of equity-method earnings from the JV.
- FY2016 included approximately $16.1 million of special charges for facility consolidation, cost reduction and market alignment. The company also recorded an $8.2 million charge for a vacated facility’s lease commitments. Management said FY2016 cost savings generally offset the special-charge expenses.
- A revised review of asset useful lives reduced depreciation on existing assets by approximately $12 million in FY2016. No goodwill impairment was recorded; goodwill was $555.7 million, approximately 21% of total assets.
- Key risks include customer concentration and dependence on GE, aerospace and industrial market cycles, government spending, product liability and contract exposure, supplier disruption, foreign currency and international risks, debt covenants, pension assumptions, cybersecurity, and potential environmental or tax liabilities. The filing says pending legal matters are not expected to materially affect liquidity, financial condition or results, while noting outcomes cannot be predicted with certainty.
Fourth-quarter snapshot
FY2016 fourth-quarter sales were $590.9 million, compared with $562.6 million in the prior-year quarter. Net earnings were $63.1 million, versus $50.1 million, and diluted EPS was $0.99, versus $0.77. The filing does not provide a clear standalone fourth-quarter cash-flow figure.
Important facts for investors to verify
- Whether Industrial sales and margins stabilize, given the segment’s 10.0% sales decline and 35.1% earnings decline.
- How much recurring cash generation supports the reported operating cash flow, which benefited from the one-time JV proceeds; review the company-defined adjusted free cash flow reconciliation.
- The timing, terms and revenue recognition of deferred JV income, as well as the JV’s future performance and contingent payments.
- Debt maturities, covenant headroom and the company’s ability to repay or refinance borrowings, including the $150.0 million current revolving balance.
- Execution and returns from the new facilities and aerospace program ramps, including start-up costs and the effect of revised depreciation lives.
- Customer concentration, foreign exchange exposure, pension underfunding and tax contingencies; the filing reports pension underfunding of $24.1 million and other postretirement underfunding of $35.6 million.