Woodward, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results. Woodward designs and supplies energy-control systems for aerospace and industrial markets. Unless noted otherwise, amounts below are in U.S. dollars and millions.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2,495.7 | $2,900.2 |
| Net earnings | $240.4 | $259.6 |
| Diluted EPS | $3.74 | $4.02 |
| Gross margin | 25.7% | 24.4% |
| Net margin | 9.6% | 9.0% |
| Operating cash flow | $349.5 | $390.6 |
| Capital expenditures | $47.1 | $99.1 |
| Free cash flow (non-GAAP) | $302.4 | $291.5 |
| Cash and cash equivalents | $153.3 | $99.1 |
| Total debt | $838.5 | $1,084.9 |
| Working capital | $818.5 | $563.8 |
Fourth-quarter FY2020 sales were $531.3 million, earnings before tax were $68.1 million, net earnings were $57.2 million, and diluted EPS was $0.89. Operating cash flow declined year over year, while free cash flow increased primarily as capital spending fell substantially. Woodward reported $988.2 million of remaining availability under its revolving credit facility, net of letters of credit, and said it was in compliance with debt covenants.
Segments and material changes
- Aerospace: Sales fell 15.4% to $1,591.0 million; segment earnings fell 20.3% to $310.1 million, and segment margin declined to 19.5% from 20.7%. Commercial aviation demand and OEM production weakened sharply amid COVID-19, while the 737 MAX grounding further reduced sales. Defense aftermarket activity provided partial support.
- Industrial: Sales fell 11.3% to $904.7 million, including the effect of the divested businesses. Excluding the disposal group, sales declined 10.2%. Segment earnings increased 7.3% to $100.3 million and margin rose to 11.1% from 9.2%, supported by cost reductions and the absence of prior-year L’Orange backlog amortization. Excluding the disposal group, earnings declined slightly.
- Consolidated sales decreased 13.9%. Lower volume was the primary driver; the filing attributes the decline mainly to the pandemic, reduced commercial aerospace activity, the 737 MAX grounding, and weakness in oil and gas. Foreign exchange reduced sales by $9.4 million.
- Sales to the five largest customers were approximately 45% of consolidated sales. Boeing represented approximately 14% and GE 11% of FY2020 sales.
Outlook, risks, and unusual items
- Management said the pandemic’s effects and recovery timing were uncertain. It expected commercial aerospace recovery to be gradual; airline capacity could remain below 2019 levels until approximately 2023 or later. Management anticipated slower recovery in 737 MAX OEM sales and somewhat better recovery in initial provisioning after return to service.
- The FAA approved the 737 MAX to return to commercial service on November 18, 2020, after fiscal year-end. Woodward expected flights could resume as early as FY2021’s first quarter and anticipated many deferred deliveries would be fulfilled over time, but more slowly than previously estimated.
- Management described defense aftermarket demand as strong and expected modest defense-market growth in FY2021. Industrial outlook was mixed: natural-gas truck demand in China was expected to continue, while pandemic-related uncertainty could weaken industrial turbine and large-engine demand.
- Cash-generation and liquidity risks include commercial aviation exposure, customer and supplier concentration, and the possibility of prolonged market disruption. Other notable risks include debt covenants, foreign exchange, pension funding, goodwill valuation, and government-contract exposure. Approximately 28% of FY2020 sales were U.S. Government-related, directly or indirectly.
- FY2020 included a $37.9 million noncash impairment related to the disposal group, $22.2 million of restructuring charges, $16.4 million of merger and divestiture transaction costs, a $30.5 million gain on cross-currency swaps, and property-sale gains of $24.7 million. Adjusted net earnings, a non-GAAP measure, were $254.0 million ($3.96 per diluted share), versus $314.5 million ($4.88) in FY2019.
- Woodward completed the sale of its renewable power systems, protective relay, and related businesses on April 30, 2020. It mutually terminated its proposed Hexcel merger on April 5, 2020, without a termination fee. The company also reported a $8.6 million goodwill impairment within the disposal group; its annual test found no impairment in the other reporting units, although one Aerospace reporting unit had only about a 17% fair-value cushion over carrying value.
- The board maintained a $500 million share-repurchase authorization through November 2022, but Woodward made no further repurchases after the first part of FY2020, citing the need to preserve cash amid uncertainty. The company paid $0.605 per share in dividends during FY2020.
Important facts for investors to verify
- Whether commercial aerospace, aftermarket activity, and 737 MAX-related deliveries recover on the timing and at the pace management anticipated.
- Whether reported and adjusted earnings remain resilient as cost reductions, restructuring, and unusual gains or charges change in subsequent periods; review the company’s non-GAAP reconciliations.
- Debt repayment and refinancing needs, including the $100 million of notes due in FY2021 and the November 2020 repayment reported after year-end, as well as ongoing covenant headroom.
- Progress in the industrial business after the divestiture and whether remaining performance obligations convert to revenue as expected.
- Exposure to concentrated customers, suppliers, and pension obligations, and sensitivity of goodwill valuations—particularly the Aerospace reporting unit with the approximately 17% cushion.
- The filing reports unqualified audit opinions on the financial statements and internal controls. Consider the auditor’s critical audit matters concerning goodwill and the L’Orange tradename valuation assumptions.