Woodward, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; unaudited. Comparative periods ended March 31, 2016. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $500.4 | $479.4 | $943.3 | $924.5 |
| Net earnings | $38.1 | $40.8 | $84.7 | $66.6 |
| Diluted EPS | $0.60 | $0.65 | $1.33 | $1.05 |
| EBIT (non-GAAP) | $56.6 | $60.2 | $110.0 | $94.6 |
| EBITDA (non-GAAP) | $76.6 | $75.7 | $149.1 | $127.2 |
| Effective tax rate | 24.1% | 24.9% | 13.0% | 19.0% |
- Q2 gross margin was 27.0%, down from 27.8%; net margin was 7.6%, versus 8.5%. Six-month gross margin was 26.6%, compared with 26.5%, and net margin was 9.0%, versus 7.2%.
- Q2 sales rose 4.4%, while net earnings fell 6.7%. For the first half, sales rose 2.0% and net earnings increased 27.0%. The prior-year first half included about $16.1 million of pre-tax facility consolidation, cost-reduction and market-response charges.
- Cash from operating activities was $130.0 million for the first half, compared with $361.7 million. The 2016 figure included a one-time $250 million payment tied to formation of the GE joint venture. Adjusted free cash flow, the company-defined non-GAAP measure, was $86.9 million versus $12.4 million; capital expenditures were $43.1 million versus $99.3 million.
- At March 31, cash and cash equivalents were $79.0 million, working capital was $489.5 million, and current assets and current liabilities were $910.5 million and $421.1 million, respectively. Cash declined $2.1 million from fiscal year-end.
- Debt was $698.2 million at principal value; balance-sheet debt carrying value was $696.3 million. The company reported $855.5 million of available capacity under its revolving facility, net of letters of credit, plus $7.6 million under foreign facilities. It reported covenant compliance.
Business and material changes
- Woodward serves aerospace, industrial and energy markets through its Aerospace and Industrial segments. Aerospace generated $320.5 million of Q2 sales, up 10.3%, and $58.2 million of segment earnings. Industrial sales were $179.9 million, down 4.7%, with segment earnings of $17.1 million.
- Aerospace growth reflected defense aftermarket and OEM demand and commercial OEM programs. Aerospace segment margin improved to 18.2% from 17.4%, with higher volume and lower R&D costs partly offset by new-facility ramp costs.
- Industrial sales and earnings declined amid weaker industrial gas turbine aftermarket and wind turbine converter sales. Segment margin fell to 9.5% from 10.3%; lower volume and new-facility costs outweighed cost-reduction savings.
- Q2 cost of goods sold rose faster than sales, partly due to planned facility ramp-up costs. SG&A increased 17.2% in Q2, primarily from timing of stock-based compensation. Six-month R&D expense decreased 10.2%, reflecting lower Aerospace program spending and project timing.
- Inventory increased to $506.3 million from $461.7 million at fiscal year-end; accounts receivable decreased to $279.9 million from $343.8 million.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management expects operating cash flows and available borrowings to fund operations and anticipated capital spending for the foreseeable future; it also anticipates continued equipment purchases as new aircraft platforms ramp up.
- Management cited planned facility ramp costs and variability in R&D timing. It described defense demand and next-generation commercial aircraft programs as supportive, while business jets, rotorcraft, industrial gas turbine aftermarket and wind converter demand remained weak.
- The GE commercial-engine fuel-system joint venture paid Woodward $250 million in 2016, recorded as deferred income rather than immediate sales; recognition is tied to applicable future program revenue. Woodward also received a $4.9 million annual contingent payment and a $2.5 million JV cash distribution in the first half of 2017.
- The six-month tax rate benefited from repatriation of certain foreign profits and losses and stock-compensation tax benefits. Tax provisions can be volatile; the company estimated unrecognized tax benefits could decrease by up to $3.7 million over the next 12 months.
- Woodward said pending ordinary-course legal and regulatory matters were not expected to materially affect liquidity, financial condition or results. It reported no material change in risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
- Revenue standard ASC 606 adoption was expected in fiscal 2019. Woodward anticipated most contract revenue would remain recognized at shipment, but some revenue—including certain customer-funded development revenue—would shift to recognition over time, affecting revenue timing and balance-sheet items.
Important facts for investors to verify
- Whether Aerospace growth and new-platform production ramp-up translate into sustainable margins and cash generation, and whether facility costs moderate.
- Whether Industrial demand and segment profitability recover, particularly in turbine aftermarket and wind converter markets.
- How much of first-half earnings growth reflects recurring operations versus the prior-year restructuring charges and the lower current-period tax rate.
- Working-capital needs, especially rising inventory, and the distinction between operating cash flow and the prior-year one-time JV proceeds.
- Debt reported at principal value versus carrying value, facility availability, covenant headroom, and ongoing share repurchases and dividends.
- The timing and financial-statement effects of ASC 606, including deferred recognition of customer-funded development revenue.