Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2022. The interim financial statements are unaudited. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $614.3 | $556.7 | $1,742.8 | $1,675.6 |
| Gross margin | 21.8% | 24.1% | 22.4% | 24.9% |
| Earnings before taxes | $50.3 | $58.7 | $142.1 | $184.8 |
| Net earnings | $39.4 | $48.9 | $117.7 | $158.7 |
| Diluted EPS | $0.64 | $0.74 | $1.84 | $2.42 |
| Operating cash flow | Not separately provided | Not separately provided | $86.0 | $317.9 |
- Q3 sales rose 10.4% year over year, while nine-month sales rose 4.0%. Net earnings declined about 19% in Q3 and 26% year to date.
- Q3 cost of goods sold was 78.2% of sales, versus 75.9% a year earlier. Management attributed lower gross margin primarily to material and labor inflation, supply-chain disruption and inefficiency, and a greater mix of lower-margin commercial OEM sales.
- Q3 effective tax rate was 21.6%, compared with 16.8%; the nine-month rate was 17.2%, compared with 14.1%. Management cited lower stock-compensation tax benefits and prior-period tax items, among other factors.
- Nine-month adjusted net earnings were $122.3 million and adjusted diluted EPS was $1.91, including $4.7 million of after-tax adjustments for a non-recurring matter and business-development costs. These are non-GAAP measures.
Segments and material changes
- Aerospace: Q3 sales increased 17.8% to $401.7 million; segment earnings rose to $56.6 million, but margin declined to 14.1% from 15.6%. Nine-month sales rose 8.1%, while earnings slipped to $167.5 million. Commercial OEM and aftermarket demand improved; defense sales were affected by supply and labor constraints.
- Industrial: Q3 sales declined 1.5% to $212.6 million and earnings fell 22.3% to $21.1 million; margin was 9.9%, down from 12.6%. Nine-month sales declined 2.5% and earnings fell 29.5%. Weak Chinese natural-gas engine demand, currency impacts, unfavorable mix, inflation and operating disruption weighed on results.
- Management estimated supply-chain and labor disruptions reduced sales by approximately $55 million in Aerospace and $45 million in Industrial through Q3.
Cash, debt and liquidity
- Cash and cash equivalents were $99.7 million at June 30, 2022, down from $448.5 million at September 30, 2021. Working capital was $829.2 million, versus $1,098.5 million.
- Total debt was $766.4 million, including $49.2 million of revolving-credit borrowings classified as short-term. The company reported $940.7 million of remaining availability under its $1.0 billion revolving facility, net of letters of credit, plus $27.4 million under foreign facilities; it reported compliance with debt covenants.
- Nine-month operating cash flow was $86.0 million and capital expenditures were $37.1 million, resulting in company-defined free cash flow of $48.9 million, down from $296.6 million. Management attributed the cash-flow decline chiefly to working-capital needs, supplier-payment timing and production delays.
- Financing cash outflow was $405.0 million, including $440.2 million of share repurchases and $33.6 million of dividends. The board approved a further $0.19-per-share dividend payable August 29, 2022.
Outlook, risks and unusual items
- The filing provides no specific quantified earnings or sales guidance. Management said working capital was being built to support anticipated growth in Q4 FY2022 and the following fiscal year, and expects operating cash generation and borrowing capacity to fund foreseeable needs.
- Management continued to cite COVID-19 effects, inflation, supply-chain and labor disruption, and Russia-Ukraine-related uncertainty. Price actions were underway, but contractual arrangements may delay their impact. Russia sales were below 1% of total sales in each nine-month comparison period.
- Other income declined year over year, primarily reflecting losses on deferred-compensation investments where the prior year had gains. Foreign-currency movements also affected results and comprehensive income.
- Routine litigation, investigations and claims include product liability, employment, contractual and warranty matters. Management said resulting liabilities were not expected to materially affect liquidity, financial condition or results, though outcomes cannot be predicted with certainty. Previously disclosed risk factors were reported as not materially changed.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether supply-chain, labor and inflation pressures ease, and whether pricing offsets higher costs without further margin erosion.
- Whether anticipated demand and growth convert into shipments and cash collection, particularly given the sharp decline in operating cash flow and higher inventory and contract assets.
- Industrial segment recovery and Aerospace margin performance, including the effects of product mix and commercial OEM growth.
- Liquidity and debt trends after substantial buybacks, including short-term revolver repayment, covenant compliance and continued credit availability.
- The nature and financial effect of the non-recurring matter and business-development expenses, as well as developments in tax examinations, legal contingencies and foreign-exchange exposures.