Woodward, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 30, 2014. Comparative periods ended June 30, 2013. Financial statement figures below are in millions of dollars unless noted. Interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $524.3 | $483.8 | $1,435.8 | $1,377.6 |
| Gross margin | 28.9% | 27.8% | 28.4% | 28.3% |
| Earnings before tax | $62.5 | $35.5 | $152.2 | $124.4 |
| Net earnings | $46.0 | $23.7 | $114.2 | $93.5 |
| Diluted EPS | $0.69 | $0.34 | $1.68 | $1.34 |
| Effective tax rate | 26.4% | 33.3% | 25.0% | 24.8% |
- Q3 revenue rose 8.4%; nine-month revenue rose 4.2%. Nine-month revenue excluding Duarte’s first-quarter 2014 contribution increased 1.9%.
- Q3 operating leverage lifted net margin to 8.8%, from 4.9%; nine-month net margin was 8.0%, versus 6.8%. Q3 and year-to-date 2014 diluted EPS were $0.69 and $1.68, respectively.
- Non-GAAP EBIT was $68.4 million in Q3 and $170.2 million year to date; EBITDA was $87.2 million and $227.9 million, respectively. These measures are not substitutes for GAAP results.
- Operating cash flow for the first nine months was $183.9 million, versus $133.0 million. Capital expenditures were $104.5 million, up from $78.5 million; company-defined free cash flow was $79.4 million, versus $54.5 million.
- At June 30, cash was $95.8 million, working capital $661.6 million, total debt $665.0 million, and stockholders’ equity $1,134.0 million. Cash at September 30, 2013 was $48.6 million and debt $550.0 million. The company reported no current portion of long-term debt at June 30.
- Available borrowing capacity was $428.5 million under the revolving facility, net of letters of credit, plus $28.2 million under foreign facilities. Woodward said it was in compliance with debt covenants.
- The company repurchased $141.5 million of stock in the first nine months, versus $45.8 million in the prior-year period; dividends paid were $16.0 million.
Business and material changes
- Woodward reports Aerospace and Energy segments. Q3 Aerospace sales were $274.9 million, up slightly, and segment earnings were $39.4 million. Energy sales were $249.4 million, up from $211.5 million, and segment earnings increased to $40.2 million from $12.4 million.
- For the first nine months, Aerospace sales were $765.8 million and earnings $102.2 million; Energy sales were $670.0 million and earnings $99.2 million. Aerospace earnings fell 8.5%, principally reflecting lower defense volumes and higher variable compensation. Energy earnings rose 63.7%, benefiting from volume, fixed-cost leverage, and realignment savings.
- Commercial aircraft OEM and aftermarket activity improved, while defense sales were weaker amid U.S. government budget constraints. Energy growth included wind turbine converters, aero-derivative turbines, and large gas and diesel engines; CNG system sales were lower.
- The prior-year Q3 and nine-month comparisons include $15.7 million of charges for renewable-power business realignment. The charge was a material contributor to the year-over-year earnings increase, particularly in Energy.
Outlook, commentary, and risks
- The filing provides no specific consolidated revenue or earnings guidance. Management expects operating cash flow and borrowing capacity to fund operations and planned capital expansion.
- Woodward anticipates approximately $500 million of investment through fiscal 2016 across its Rockford-area campuses, a Niles facility, and its Fort Collins campus. It expects its Rockford-area workforce could increase 70%–90% from current levels by the end of 2021, supporting awarded aerospace platforms and expected growth.
- Management cited continued commercial aircraft delivery and aftermarket improvement, but warned that defense budget uncertainty could cause quarterly sales variability. Renewable-power incentives and market conditions remain relevant to the Energy business.
- Key disclosed risks include customer financial distress, economic and market volatility, input costs and supplier performance, acquisition integration, foreign exchange, debt covenants and financing availability, government spending changes, legal and regulatory matters, and pension and impairment assumptions. Management said pending legal matters were not expected to materially affect liquidity, financial condition, or results.
- Tax rate movements were affected by earnings mix across jurisdictions, tax authority reviews, and the absence in 2014 of the U.S. research credit benefit reflected in 2013. A favorable $2.0 million tax matter resolution was recorded in Q3 2014.
- Other notable items: a $0.9 million pension curtailment gain related to the Swiss facility closure; $79.3 million of cash was held by foreign subsidiaries, some considered indefinitely reinvested; and a new revenue-recognition standard was under assessment, effective for Woodward beginning fiscal 2018.
Important facts for investors to verify
- How much of the earnings and margin improvement reflects recurring operating performance versus the prior-year $15.7 million renewable-power charge and the lower current-quarter tax rate?
- Whether Energy growth and profitability continue, and whether defense weakness or lower CNG sales persist.
- Execution, spending, and expected returns on the planned approximately $500 million of campus and facility investment.
- Debt levels, covenant headroom, and cash availability, including the location and potential tax cost of foreign-held cash.
- Working-capital trends, particularly inventory growth, and the sustainability of improved operating cash flow and free cash flow.
- Progress on stock repurchases and capital allocation relative to growth investment and debt service.