Woodward, Inc. — Fiscal 2022 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2021, compared with the three months ended December 31, 2020. The interim financial statements are unaudited. Woodward designs, produces, and services energy-control products through its Aerospace and Industrial segments.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $541.6 million | $537.6 million | Up 0.7% |
| Gross margin | 22.6% | 25.3% | Down 2.7 percentage points |
| Earnings before tax | $37.7 million | $47.6 million | Down 20.7% |
| Net earnings | $30.3 million | $41.6 million | Down 27.1% |
| Diluted EPS | $0.47 | $0.64 | Down 26.6% |
| Operating cash flow | $39.3 million | $146.7 million | Down $107.4 million |
| Free cash flow (non-GAAP) | $26.2 million | $139.5 million | Down $113.3 million |
Cost of goods sold rose to 77.4% of sales from 74.7%, primarily reflecting a higher mix of lower-margin commercial aerospace OEM sales and increased manufacturing costs. SG&A increased 11.0% to $62.3 million; R&D decreased 20.6% to $25.4 million. The effective tax rate rose to 19.7% from 12.6%.
Segment results
| Segment | Sales | Sales change | Segment earnings | Earnings margin |
|---|---|---|---|---|
| Aerospace | $336.4 million | Up 4.6% | $51.1 million, up 9.9% | 15.2%, versus 14.4% |
| Industrial | $205.2 million | Down 5.0% | $23.7 million, down 28.0% | 11.5%, versus 15.2% |
Aerospace growth reflected recovering passenger traffic, aircraft production and fleet utilization, and the return to service of the Boeing 737 MAX in some jurisdictions. Industrial weakness reflected lower natural-gas-engine sales in China, unfavorable foreign exchange, lower volume and mix, and inflationary impacts; higher marine sales partly offset the decline.
Cash, debt and liquidity
- Cash and cash equivalents, including restricted cash, were $427.0 million at December 31, 2021, down from $448.5 million at September 30, 2021.
- Total debt was $730.3 million, versus $734.9 million at fiscal year-end. There were no revolver borrowings; $989.1 million of revolving availability remained after letters of credit, plus $7.3 million under foreign facilities.
- Working capital was $1.117 billion. The company reported compliance with debt covenants and stated it expects operating cash and available borrowing capacity to fund foreseeable needs.
- Capital expenditures were $13.1 million. Financing cash outflows included $39.3 million of share repurchases and $10.2 million of dividends. The quarter’s $21.5 million net cash decrease also reflected operating cash generation and foreign-exchange effects.
Operating cash flow and free cash flow fell sharply, which management attributed mainly to working-capital investment to support anticipated growth, including supplier-payment timing, and higher capital expenditures. Inventory increased to $451.8 million from $420.0 million at September 30.
Outlook, commentary and risks
- Management reported positive signs of recovery across most end markets and expects recovery to continue through the rest of fiscal 2022. It did not provide quantitative full-year sales or earnings guidance.
- Industry-wide COVID-19 disruption, including supply constraints, labor shortages and customer shipment delays, reduced first-quarter sales by approximately $42 million in Aerospace and $28 million in Industrial, according to management.
- Remaining performance obligations on firm orders were $1.388 billion; Woodward expects to recognize almost all within two years. A further $472.2 million related to material rights is expected to be recognized over underlying program lives, potentially up to 40 years.
- Management cited uncertainty from the pandemic and related supply and demand effects, as well as foreign-exchange, inflation, tax, financial-institution and market risks. It said disclosed risk factors had not materially changed from the latest Form 10-K.
- Ordinary-course litigation and claims include product liability, employment, contractual, warranty and regulatory matters. Management does not expect resulting liabilities to materially affect liquidity, financial condition or results, but outcomes are uncertain.
- Woodward excluded a $5.0 million pretax charge for a non-recurring matter unrelated to ongoing operations and $3.0 million of business-development costs from certain adjusted non-GAAP measures. Adjusted net earnings were $36.3 million and adjusted diluted EPS was $0.56, versus GAAP net earnings of $30.3 million and diluted EPS of $0.47.
- In January 2022, the board replaced the prior repurchase authorization with a new program of up to $800 million through January 2024. It also approved a $0.19-per-share dividend payable March 7, 2022.
- Management concluded disclosure controls were effective as of December 31, 2021; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether reported end-market recovery converts into sales and margins despite supply-chain constraints, labor shortages and customer shipment delays.
- Whether working-capital and inventory growth unwind as anticipated, supporting a recovery in operating and free cash flow.
- Whether Industrial performance improves amid China natural-gas-engine weakness, inflation and unfavorable product mix, and whether Aerospace growth sustains its improved segment margin.
- The recurrence, final cost and treatment of the non-recurring matter and business-development spending, and how GAAP results compare with management’s adjusted non-GAAP measures.
- Progress against firm-order obligations and the timing of revenue recognition, especially long-duration material-rights revenue.
- Capital allocation under the new $800 million repurchase authorization, alongside dividends, capital needs and debt service.