Woodward, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. The filing is an annual report; it does not provide standalone fiscal fourth-quarter results. Unless stated otherwise, dollar amounts below are in millions.
Business context
Woodward designs, manufactures, and services energy-control systems for aerospace and industrial applications. Its two reportable segments are Aerospace and Industrial, serving OEMs and equipment packagers as well as aftermarket customers. Products control fuel, combustion, fluids, motion, and electrical energy in aircraft, defense platforms, turbines, engines, and related equipment.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $2,914.6 | $2,382.8 |
| Gross margin | 23.2% | 22.0% |
| Net earnings | $232.4 | $171.7 |
| Diluted EPS | $3.78 | $2.71 |
| Operating cash flow | $308.5 | $193.6 |
| Capital expenditures | $76.5 | $52.9 |
| Free cash flow (non-GAAP) | $232.0 | $140.8 |
| Total debt at year-end | $721.5 | $777.4 |
| Cash and cash equivalents at year-end | $137.4 | $107.8 |
| Working capital at year-end | $852.3 | $772.9 |
- Sales increased 22.3%. Aerospace sales grew 16.4% to $1,768.1 million; Industrial sales grew 32.8% to $1,146.5 million.
- Segment earnings rose to $290.1 million in Aerospace (16.4% margin, versus 15.2%) and $161.6 million in Industrial (14.1% margin, versus 9.6%).
- Net earnings margin was 8.0%, compared with 7.2%. Interest expense increased to $47.9 million from $34.5 million; the effective tax rate increased to 15.7% from 14.1%.
- Operating cash flow increased primarily with earnings, partly offset by working-capital needs and tax-payment timing. Free cash flow is a company-defined non-GAAP measure.
- At September 30, 2023, Woodward reported $991.0 million of unused capacity under its revolving credit facility, net of letters of credit, plus $25.1 million available under foreign facilities. It reported no revolving-credit borrowings outstanding at that date and stated it was in compliance with debt covenants.
Changes versus the prior year
- Growth reflected higher Aerospace commercial OEM and aftermarket activity, improved aircraft production and utilization, and price realization; defense OEM sales declined, mainly from lower guided-weapons demand.
- Industrial growth came from volume increases across markets, price realization, operational improvements, and stronger Chinese natural-gas truck production in the second half.
- Gross margin improved despite material and labor inflation. Management cited increased output, pricing, and productivity, partly offset by inflation and costs associated with hiring and training.
- Reported net earnings included $26.2 million of after-tax adjustments excluded from the company’s adjusted earnings measure, including inventory and product-rationalization charges, a customer-collections charge, separation costs, and restructuring. Adjusted net earnings were $258.6 million and adjusted diluted EPS was $4.21; these are non-GAAP measures.
- Other income increased to $50.3 million, mainly reflecting higher equity-method earnings from the GE joint venture and gains on deferred-compensation investments. GE joint-venture earnings were $36.8 million, versus $18.2 million.
- Cash dividends paid increased to $51.0 million from $45.0 million. Share repurchases were $126.4 million, down from $485.3 million in FY2022.
Outlook, risks, and contingencies
- Management described strong demand across aerospace and industrial markets, while noting continuing supply-chain challenges, rising labor costs, and material inflation. It cited supply-chain investment, operational execution, and pricing actions as ongoing priorities.
- Management expected further improvement in narrowbody aircraft deliveries in FY2024, supported by OEM backlogs and planned production increases. It also described commercial aftermarket demand and the defense aftermarket outlook as strong, while anticipating variability in guided-weapons programs.
- For Industrial, management expected continued power-generation growth and strong demand in FY2024 for new high-speed and marine engines; it noted uncertainty in future Chinese natural-gas truck demand. These are directional expectations, not numerical financial guidance.
- Remaining performance obligations were $2,325.5 million at September 30, 2023, with almost all expected to convert to revenue within two years. Separately, backlog disclosed at October 31, 2023 was $2,489.9 million, up from $1,572.9 million a year earlier; these measures use different dates and the October figure includes segment detail.
- Customer concentration is material: the five largest customers represented about 40% of sales in FY2023. GE contributed about 12% of sales and RTX about 10%. U.S. Government-related sales were 17% of sales, down from 23% in FY2022.
- Key risks include customer concentration, supplier shortages and inflation, government-contract exposure and changes in defense spending, debt covenants and refinancing needs, foreign-exchange and international risks, cybersecurity, product liability, and the ability to hire and retain specialized personnel.
- Woodward disclosed ordinary-course legal claims and proceedings; management did not expect resulting liabilities to materially affect liquidity, financial condition, or results. No sites were undergoing environmental remediation. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the trade-name impairment valuation was identified as a critical audit matter, with no impairment recorded.
- After fiscal year-end, Woodward repaid $75.0 million of Series H and K notes on November 15, 2023, using borrowings under its revolving credit facility.
Important facts for investors to verify
- Whether aerospace production ramps and aftermarket strength convert into sales and cash flow as expected, and whether supply constraints and labor/material inflation continue to pressure margins.
- How much of the large backlog and remaining performance obligations is delivered on schedule and at expected profitability.
- Customer and program concentration, including exposure to GE, RTX, defense programs, and the GE joint venture.
- Working-capital and receivables trends: accounts receivable rose to $749.9 million, and FY2023 operating cash flow benefited by approximately $26.3 million from receivables factoring.
- Debt-service capacity, covenant headroom, and the effect of the post-year-end $75.0 million repayment funded with revolver borrowings.
- The nature and recurrence of the FY2023 inventory, product-rationalization, customer-collections, and restructuring charges, and the assumptions supporting goodwill and trade-name valuations.