Woodward, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise. Woodward reports Aerospace and Industrial segments.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $507.7 | $494.8 | $1,432.2 | $1,475.7 |
| Net earnings | $51.0 | $43.8 | $117.7 | $131.4 |
| Diluted EPS | $0.81 | $0.66 | $1.85 | $1.98 |
| Operating cash flow | Not separately reported | Not separately reported | $362.5 | $171.5 |
- Quarterly change: Sales increased 2.6%; net earnings rose 16.7%. Gross margin declined to 27.0% from 29.0%, while net margin increased to 10.1% from 8.8%. EBIT was $69.3 million, up 9.3%; EBITDA was $86.6 million, up 5.7%.
- Nine-month change: Sales decreased 2.9%; net earnings fell 10.4%. Gross margin declined to 26.7% from 28.8%, and net margin to 8.2% from 8.9%. EBIT was $163.9 million, down 13.3%; EBITDA was $213.8 million, down 12.6%.
- Segment trends: Q3 Aerospace sales rose 7.0% to $308.6 million and segment earnings rose 24.5% to $57.7 million; earnings margin improved to 18.7% from 16.1%. Industrial sales fell 3.5% to $199.1 million and earnings fell 28.3% to $22.0 million; margin declined to 11.0% from 14.8%. For the nine months, Aerospace sales increased 5.1%, while Industrial sales decreased 13.2%.
- Cash flow and investment: Nine-month capital spending was $128.6 million versus $190.9 million. Company-defined free cash flow was $233.9 million, but included $250 million gross proceeds from the GE joint venture; excluding net after-tax JV proceeds, free cash flow was $31.5 million, versus an outflow of $19.4 million in the prior period.
- Liquidity and debt: June 30 cash was $118.1 million, total debt $785.0 million, and working capital $498.7 million. Revolver availability was $600.5 million, net of letters of credit, with another $43.9 million available under foreign facilities. Cash less debt implies net debt of approximately $666.9 million. The company reported compliance with debt covenants.
Material developments, outlook, and risks
- GE joint venture: GE paid $250 million for a 50% interest in a venture covering fuel systems for specified GE commercial aircraft engines. Woodward deferred the proceeds and will recognize them as sales over the remaining lives of applicable engine programs. GE also agreed to 15 annual contingent payments of $4.894 million beginning in January 2017, subject to claw-back conditions. Woodward uses equity-method accounting and recorded $4.9 million of JV earnings for the six months ended June 30.
- Special charges and operating costs: Nine-month earnings included approximately $16.1 million of charges for facility consolidation, cost reduction, and market conditions, about $9.9 million after tax. New-facility start-up costs also pressured margins. Planned serial production at the new Rockford-area campus is expected to begin in fiscal 2017.
- Management outlook: No specific full-year revenue or earnings guidance is provided in the filing. Management expects operating cash flow and available borrowing capacity to fund operations and anticipated capital spending for the foreseeable future. It expects ongoing variability in R&D spending as project timing changes.
- Tax and accounting items: The effective tax rate declined to 19.5% for Q3 and 19.2% year to date, partly due to stock-compensation tax benefits and the U.S. research credit. A revised depreciation-life estimate reduced depreciation on existing assets by approximately $12 million for fiscal 2016; management said this would be largely offset by depreciation on new facilities and would not significantly affect segment earnings.
- Demand and risk factors: Industrial markets remained weak, including China’s natural-gas truck market, reciprocating-engine power generation, and large capital projects; depressed oil and gas prices and currency movements also weighed on results. Aerospace benefited from defense and commercial aftermarket demand, while commercial OEM and rotorcraft demand showed areas of weakness. The filing identifies Brexit-related uncertainty and GBP volatility as additional risks; approximately 4% of fiscal 2015 sales were invoiced to UK customers and 28% to Europe overall.
- Other matters: The company recorded an $8.2 million reserve in Q1 for a vacated leased facility, with $9.6 million remaining at June 30. Management stated pending legal matters were not expected to materially affect liquidity, financial condition, or results. Disclosure controls were reported effective.
Investor verification priorities
- Assess whether Industrial demand and margins stabilize, and whether Aerospace growth offsets continued weakness in industrial markets.
- Separate recurring operating cash generation from the JV cash proceeds and associated tax payments; verify capital spending and cash conversion in subsequent periods.
- Track the timing and amount of deferred JV income recognition, JV operating performance, and the contingent annual payments and their claw-back terms.
- Monitor facility start-up costs, the fiscal 2017 Rockford production ramp, and whether new capacity delivers expected volume and margins.
- Review debt maturities, revolving-credit utilization, covenant headroom, and the impact of cash held overseas and potential repatriation taxes.
- Check subsequent filings for Brexit, currency, tax-rate, pension, lease-reserve, and legal-contingency developments.