Woodward, Inc. — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2015; the filing also reports fourth-quarter results. Woodward designs, manufactures, and services energy-control systems for aerospace and industrial and energy markets through its Aerospace and Energy segments. Amounts below are in U.S. dollars; annual financial amounts are shown in millions unless stated otherwise.
Financial performance and position
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net sales | $2,038.3 | $2,001.2 | Up 1.9%; unfavorable currency effects reduced sales by $65.6 |
| Net earnings | $181.5 | $165.8 | Up 9.4% |
| Diluted EPS | $2.75 | $2.45 | Up 12.2% |
| Gross margin | 28.7% | 28.8% | Essentially flat |
| Net margin | 8.9% | 8.3% | Improved |
| EBIT | $265.0 | $249.8 | Up 6.1%; currency reduced FY2015 EBIT by about $14.1 |
| Operating cash flow | $287.4 | $268.1 | Up |
| Capital expenditures | $286.6 | $207.1 | Up substantially |
| Free cash flow | $0.8 | $61.0 | Lower chiefly because of higher capital spending |
| Cash and cash equivalents | $82.2 | $115.3 | At September 30 |
| Total debt | $852.4 | $710.0 | At September 30 |
| Working capital | $609.3 | $668.6 | At September 30 |
FY2015 segment sales were $1,160.9 million for Aerospace, up 7.1%, and $877.4 million for Energy, down 4.3%. Aerospace segment earnings rose 17.9% to $187.7 million, with segment margin improving to 16.2% from 14.7%. Energy earnings declined 5.7% to $126.6 million, and segment margin was 14.4% versus 14.6%.
In the fourth quarter, sales were $562.6 million versus $565.4 million a year earlier; net earnings were $50.1 million versus $51.7 million, and diluted EPS was $0.77 versus $0.77.
Liquidity included $641.7 million of remaining availability under the $1.0 billion revolving facility, net of letters of credit, plus $37.8 million under foreign facilities. The revolver matures in April 2020. The company reported compliance with debt covenants. Long-term debt principal payments include $107 million in FY2016 and $143 million in FY2019; the remaining $250 million is due thereafter.
Material changes versus the prior year
- Sales growth reflected higher Aerospace and Energy volumes and price/mix, offset by $65.6 million of adverse foreign-exchange effects, largely in Energy. Excluding currency effects, Energy sales increased.
- Higher Aerospace sales drove improved segment earnings, partly offset by planned start-up costs at new facilities. Energy earnings were pressured mainly by currency effects.
- The effective tax rate fell to 24.7% from 27.0%, chiefly reflecting the retroactive U.S. research and experimentation tax credit; FY2015 included a $5.8 million tax benefit related to the credit.
- Capital spending increased to $286.6 million, principally for aerospace campuses in Rockford and Niles, Illinois, and the new Fort Collins campus. Property, plant and equipment, net, increased to $756.1 million from $513.3 million.
- Woodward repurchased $157.2 million of shares in FY2015 and paid $24.6 million in dividends; dividends per share increased to $0.38 from $0.32.
Outlook, management commentary, risks and unusual items
- FY2016 outlook: Management expected global new gas-turbine capacity sales to remain flat, with Energy revenue growth anticipated from customer share gains and increased scope on newer turbines; aftermarket turbine demand was expected to continue increasing. Steam-turbine and compressor markets were expected to remain flat, while oil-and-gas process demand was expected to be slightly down. Management anticipated about $100 million of FY2016 spending related to facility investments. The filing does not provide consolidated revenue or earnings guidance.
- Markets: Management cited ongoing commercial aviation growth and aircraft deliveries, while defense spending remained uncertain amid sequestration and potential budget changes. Energy markets faced weaker demand tied to low oil prices and slower industrial activity; renewable-power demand remained exposed to subsidy uncertainty and grid constraints.
- GE joint venture: Woodward and GE agreed to form a 50%-owned venture for fuel systems on specified existing and future GE commercial aircraft engines above 50,000 pounds of thrust. At closing, expected early in FY2016, Woodward was to assign contractual rights for $250 million and receive 15 annual payments of about $4.9 million. The company expected to defer and recognize the gain over the economic lives of the assigned rights and use equity-method accounting.
- Concentration and currency: The five largest customers accounted for about 40% of sales; GE alone accounted for 18%. Approximately 48% of sales were to customers outside the United States. Currency movements affected both reported sales and earnings.
- Debt and investment demands: Debt increased, while FY2015 free cash flow was only $0.8 million after elevated capital expenditures. Debt agreements include leverage and net-worth covenants and restrictions on actions such as additional borrowing, dividends, and asset sales.
- Other risks and contingencies: Risks include customer dependence, commercial aviation cycles, government-contract termination and audits, defense-budget reductions, supplier disruption, product liability, acquisition integration, foreign operations and taxes, pension assumptions, cybersecurity, and environmental obligations. Management said pending legal matters were not expected to materially affect liquidity, financial condition, or results. Environmental remediation accruals were described as not significant, with no more than a remote chance of material costs.
- Unusual items and controls: No goodwill impairment was recorded; the annual test found reporting-unit fair values above carrying amounts. FY2014 included a $7.5 million pension curtailment gain and a $3.1 million impairment charge, among other items. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether the GE joint venture closed as expected, the final terms and cash proceeds, and the timing of deferred-gain recognition.
- Whether FY2016 capital spending, particularly the Fort Collins campus investment, remains near management’s stated expectations and how it affects free cash flow.
- Whether Aerospace growth and new-platform awards translate into sustained sales and margins, and whether Energy stabilizes after currency and oil-and-gas market pressure.
- Debt maturities, covenant headroom, revolver availability, and the company’s ability to fund investment and shareholder returns from cash generation.
- Exposure to GE and other major customers, foreign-exchange movements, government spending, and the assumptions underlying pension and goodwill valuations.