Fiscal Year 2019 First Quarter Results · Comparison under ASC 606 and ASC 605. PAGE 11. Woodward,...

PROPRIETARY INFORMATION - © 2019 WOODWARD, INC.PROPRIETARY INFORMATION - © 2019 WOODWARD, INC.

Fiscal Year 2019 First Quarter ResultsJANUARY 28, 2019

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PROPRIETARY INFORMATION - © 2019 WOODWARD, INC.

Today’s Agenda

Highlights Don Guzzardo Market Review Tom Gendron Financial Results & Outlook Bob Weber Q&A

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Cautionary StatementInformation in this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties,including, but not limited to, statements regarding our expectations related to our full fiscal year performance and ability to meet our outlook, our expectations related to theperformance of our segments, the effect of our adoption of ASC 606 on future financial results, our future sales, earnings, earnings per share, liquidity, tax rate, and relativeprofitability, and expectations regarding our markets. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, andassumptions that are difficult to predict. Factors that could cause actual results and the timing of certain events to differ materially from the forward-looking statements include, butare not limited to, a decline in our customers’ business, or our business with, or financial distress of, Woodward’s significant customers; global economic uncertainty and instability inthe financial markets; Woodward’s ability to manage product liability claims, product recalls or other liabilities associated with the products and services that Woodward provides;Woodward’s ability to obtain financing, on acceptable terms or at all, to implement its business plans, complete acquisitions, or otherwise take advantage of business opportunities orrespond to business pressures; Woodward’s long sales cycle, customer evaluation process, and implementation period of some of its products and services; Woodward’s ability toimplement and realize the intended effects of any restructuring and alignment efforts; Woodward’s ability to successfully manage competitive factors, including prices, promotionalincentives, competitor product development, industry consolidation, and commodity and other input cost increases; Woodward’s ability to manage expenses and product mix whileresponding to sales increases or decreases; the ability of Woodward’s subcontractors to perform contractual obligations and its suppliers to provide Woodward with materials ofsufficient quality or quantity required to meet Woodward’s production needs at favorable prices or at all; Woodward’s ability to monitor its technological expertise and the successof, and/or costs associated with, its product development activities; consolidation in the aerospace market and our participation in a strategic joint venture with General ElectricCompany may make it more difficult to secure long-term sales in certain aerospace markets; Woodward’s debt obligations, debt service requirements, and ability to operate itsbusiness, pursue its business strategies and incur additional debt in light of covenants contained in its outstanding debt agreements; Woodward’s ability to manage additional taxexpense and exposures; risks related to Woodward’s U.S. Government contracting activities, including liabilities resulting from legal and regulatory proceedings, inquiries, orinvestigations related to such activities; the potential of a significant reduction in defense sales due to decreases in the amount of U.S. Federal defense spending or other specificbudget cuts impacting defense programs in which Woodward participates; changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets; future results of Woodward’s subsidiaries; environmentalliabilities related to manufacturing activities and/or real estate acquisitions; Woodward’s continued access to a stable workforce and favorable labor relations with its employees;physical and other risks related to Woodward’s operations and suppliers, including natural disasters, which could disrupt production; Woodward’s ability to successfully manageregulatory, tax, and legal matters; changes in accounting standards that could adversely impact our profitability or financial position; risks related to Woodward’s common stock,including changes in prices and trading volumes; impacts of tariff regulations; risks from operating internationally, including the impact on reported earnings from fluctuations inforeign currency exchange rates, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which Woodward operates; fairvalue of defined benefit plan assets and assumptions used in determining Woodward’s retirement pension and other postretirement benefit obligations and related expenses;industry risks, including increases in natural gas prices, unforeseen events that may reduce commercial aviation and increasing emissions standards; any adverse effects onWoodward’s operations due to information systems interruptions or intrusions; risks associated with integrating the L’Orange business, including diversion of management time andattention, inability to meet our expectations, unexpected liabilities, loss of employees and difficulties integrating and retaining customers, suppliers and partners; certain provisions ofWoodward’s charter documents and Delaware law that could discourage or prevent others from acquiring the company; and other risk factors described in Woodward's AnnualReport on Form 10-K for the year ended September 30, 2018 and other risks described in Woodward’s filings with the Securities and Exchange Commission.

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New Revenue Recognition Standard (ASC 606)

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Adopted October 1, 2018

Q1 2019 results presented under ASC 606

• Primarily impacted Aerospace sales and earnings; not significant to Industrial

Modified retrospective method

• Current year presented under ASC 606

• Presentation of prior year under previous standard (ASC 605)

For full fiscal year – impact expected to be immaterial

• Expect quarterly variability on sales and earnings

No impact to cash flow

Refer to slide 11 and the 10-Q to be filed by February 11, 2019


Adjusted and Organic Financial Results

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Reporting on U.S. GAAP, Organic, and Adjusted basis

Organic net sales exclude Woodward L’Orange

Adjusted amounts exclude (as applicable):• Transition impacts of change in U.S. tax legislation

• Special charges

— Restructuring charges

— Duarte move related costs

— M&A transaction and integration costs

— Purchase accounting related to inventory step-up and backlog

Refer to tables in the Appendix


Q1 Fiscal Year 2019 Highlights Net sales of $653 million, 39% increase compared to prior year

• Compared to $470 million last year • FY 2019 Q1 included $20 million related to adoption of ASC 606• Organic net sales were $565 million, 20% increase compared to prior year

Net earnings of $49 million, or $0.77 per share• Compared to $18 million, or $0.29 per share last year• FY 2019 Q1 included a reduction of $3 million, or $0.04 per share, related to adoption of ASC 606

Adjusted net earnings1 of $62 million, or $0.96 per share• Compared to $33 million, or $0.52 per share last year, as adjusted• FY 2019 Q1 included a reduction of $3 million, or $0.04 per share, related to adoption of ASC 606

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Q1 Fiscal Year 2019 Highlights (cont.)

Net cash provided by operating activities of $85 million• Compared to net cash used in operating activities of $3 million

in the prior year

Free cash flow1 of $53 million• Compared to free cash outflow of $31 million in prior year

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Aerospace Commercial OEM

• Ramp-up continues for next gen narrowbody aircraft• Historically high backlogs• Healthy production rates expected through next decade

Commercial Aftermarket • 24% increase for quarter, on ASC 605 basis

— Compared to prior year period

• Strong passenger and cargo traffic, initial provisioning and favorable fleet dynamics

Defense• Favorable defense budgets• Strength in guided weapons and fixed wing aircraft

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Industrial Power generation

• Industrial gas turbine market remains uncertain— Higher content on new generation turbines

• Data center and back-up power applications increasing for large engines

Transportation• Natural gas truck market conditions in Asia remain favorable

— Blue Sky initiative supporting natural gas truck sales

Oil and gas• Sustained growth in rig counts but volatile oil prices

Woodward L’Orange enhancing Industrial segment• Strong offering in power gen, marine transportation and O&G

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Q1 FY 2019 Consolidated Results

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• Refer to the definition of non-GAAP measures in the appendix. • See slide 11 for impacts of ASC 606.

Q1 2019 Q1 2018 ASC 605

653

470

633565

Woodward Sales (mil $)

Reported

ASC 605

Organic

Q1 2019 ASC 606 Q1 2019 ASC 605 Q1 2018 ASC 605

49 52

18

62 64

33

Net Earnings (mil $)

ReportedAdjusted

Q1 2019 ASC 606 Q1 2019 ASC 605 Q1 2018 ASC 605

$0.77 $0.81

$0.29

$0.96 $1.00

$0.52

Earnings Per ShareReported

Adjusted


Comparison under ASC 606 and ASC 605

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Woodward, Inc. and Subsidiaries

2017 2017(Unaudited - in thousands) ASC 606 ASC 605 ASC 605 ASC 606 ASC 605 ASC 605Net Sales:

Aerospace segment 392,887$ 372,665$ 305,905$ 392,887$ 372,665$ 305,905$ Industrial segment 259,924 259,976 164,243 259,924 259,976 164,243

Total consolidated net sales 652,811$ 632,641$ 470,148$ 652,811$ 632,641$ 470,148$ Earnings:

Aerospace segment 72,854$ 74,882$ 45,241$ 72,854$ 74,882$ 45,241$ Segment earnings as a percent of segment sales 18.5% 20.1% 14.8% 18.5% 20.1% 14.8%Industrial segment 29,169 30,509 19,781 38,680 40,020 19,781 Segment earnings as a percent of segment sales 11.2% 11.7% 12.0% 14.9% 15.4% 12.0%

Consolidated Net Earnings 49,120 51,800 18,260 61,646 64,326 33,038 Consolidated diluted earnings per share $ 0.77 $ 0.81 0.29$ $ 0.96 $ 1.00 0.52$

2018Three-Months Ended December 31, Three-Months Ended December 31,

2018

As reported As adjusted (Non U.S. GAAP)Comparison of financial results under ASC 606 and ASC 605


Aerospace Q1 Fiscal Year 2019 Results

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Segment Net Sales• Strong commercial and defense OEM and

aftermarket

Segment Earnings• Leverage on higher sales volume• Strong aftermarket Q1 2019 Q1 2018

393 373

306

Aerospace Sales (mil $)

ASC 606

ASC 605

Q1 2019 Q1 2018

73 75

45

Segment Earnings (mil $)

ASC 606

ASC 605

Q1 2019 Q1 2018

18.5%20.1%

14.8%

Segment Margin %

ASC 606

ASC 605


Industrial Q1 Fiscal Year 2019 Results

PAGE 13* Refer to the definition of non-GAAP measures in the appendix.

Segment Net Sales• Increase primarily due to the addition of Woodward

L’Orange and improved natural gas truck market in Asia

Adjusted Segment Earnings• Increase due to higher sales volume and addition of

Woodward L’Orange

Q1 2019 Q1 2018

260

164172

Industrial Sales (mil $)

Reported

Organic

Q1 2019 Q1 2018

29

20

39

Segment Earnings (mil $)

Reported

Adjusted

Q1 2019 Q1 2018

11.2% 12.0%14.9%

Segment Margin %

ReportedAdjusted


Selected Financial Items

* Gross margin defined as (Net Sales less Cost of Goods Sold) / (Net Sales)

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Quarter Comparatives

Gross Margin * 24.6% 26.1%

SG&A Expenses - % of Sales 8.0% 9.9%

R&D Expenses - % of Sales 6.0% 7.4%

Effective Tax Rate 20.1% 51.3%

EBITDA1 (mils) $ 112 $ 67

Adjusted EBITDA1 (mils) $ 119 $ 67

Year-to-Date Comparatives

Cash from Operations (mils) $ 85 $ (3)

Capital Expenditures (mils) $ 31 $ 28

Free Cash Flow1 (mils) $ 53 $ (31)

Q1 FY 19 Q1 FY 18

YTD FY 19 YTD FY 18


Fiscal Year 2019 Outlook – Unchanged

Woodward Revenue between $2.65 and $2.80

billion

Effective tax rate ~21%

Free cash flow ~$300 million

Adjusted earnings per share between $4.40 and $4.70 (65 million shares)

Aerospace Revenue up ~10%

Margin to be ~20%

Industrial Revenue up ~30%

Margin to be ~14%*

* As Adjusted

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Appendix

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Non-U.S. GAAP Measures

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(Unaudited)

(mils) (mils) (mils) (mils)

Net Earnings $ 49.1 $ 0.77 $ 18.3 $ 0.29 Non-U.S. GAAP Adjustments

Other charges, net of tax* 12.5 0.19 - -

Total non-U.S. GAAP adjustments 12.5 0.19 - -

Transition impact of recent changes to U.S. tax law - - 14.8 0.23

Total non-U.S. GAAP adjustments 12.5 0.19 14.8 0.23

Adjusted net earnings1 $ 61.6 $ 0.96 $ 33.0 $ 0.52

* Includes Duarte move-related costs and the purchase accounting impacts related to amortization of backlog in connection with our L’Orange acquisition.

Q1 FY 19 Q1 FY 18

Net EarningsEarnings Per

Share Net EarningsEarnings Per

Share(mils) (mils)

Industrial Segment Earnings $ 29.2 $ 19.8

Purchase accounting impacts 9.5 -

Adjusted Industrial Segment Earnings1 $ 38.7 $ 19.8

Q1 FY 19 Q1 FY 18

PROPRIETARY INFORMATION - © 2019 WOODWARD, INC. PAGE 18

Non-U.S. GAAP Measures (cont.)(mils) (mils)

Net Earnings $ 49.1 $ 18.3

Income Taxes 12.4 19.2

Interest Expense 11.9 8.9

Interest Income (0.4) (0.4)

EBIT1 73.0 46.0

Restructuring and other charges* 16.5 -

Adjusted EBIT1 $ 89.5 $ 46.0


Q1 FY 19 Q1 FY 18

(mils) (mils)

Cash From Operations $ 84.7 $ (2.5)

Payments for PP&E (31.3) (28.5)

Free Cash Flow1 $ 53.4 $ (31.0)

Q1 FY 18Q1 FY 19

PROPRIETARY INFORMATION - © 2019 WOODWARD, INC. PAGE 19

Non-U.S. GAAP Measures (cont.)(mils) (mils)

Net Earnings $ 49.1 $ 18.3

Income Taxes 12.4 19.2

Interest Expense 11.9 8.9

Interest Income (0.4) (0.4)

EBIT1 73.0 46.0

Amortization of Intangibles 17.5 6.2

Depreciation Expense 21.2 14.8

EBITDA1 111.7 67.1

Restructuring and other charges* 7.0 -

Adjusted EBITDA1 $ 118.6 $ 67.1

Q1 FY 19 Q1 FY 18



Explanation of Non-U.S. GAAP Measures1Adjusted and Non-U.S. GAAP Financial Measures: Adjusted net earnings, adjusted earnings per share, adjusted EBIT and EBITDA, adjusted effective tax rate,and adjusted nonsegment expenses exclude, as applicable, (i) restructuring charges, (ii) move costs associated with the relocation of our Duarte, Californiaoperations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado (“Duarte move related costs”), (iii) purchase accounting impacts relatedto backlog in connection with our L’Orange acquisition, and (iv) the transition impacts of the change in U.S. federal tax legislation in December 2017. Woodwardbelieves that these items are short-term costs or are otherwise not related to the ongoing operations of the business and therefore, uses them to illustratemore clearly how the underlying business of Woodward is performing. Organic sales exclude sales attributable to L’Orange, which was acquired on June 1,2018.

EBIT (earnings before interest and taxes), EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted cash flow from operating activities,free cash flow, adjusted free cash flow, organic net sales, organic Industrial net sales, adjusted net earnings, adjusted Industrial segment net earnings, adjustednet earnings per share, adjusted EBIT, adjusted EBITDA, adjusted effective tax rate, and adjusted nonsegment expenses are financial measures not prepared andpresented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Management uses EBIT to evaluateWoodward’s operating performance without the impacts of financing and tax related considerations. Management uses EBITDA in evaluating Woodward’soperating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capitalstructure impacts of various strategic scenarios. Management uses free cash flow, which is derived from net cash provided by or used in operating activities lesspayments for property, plant, and equipment, in reviewing the financial performance of Woodward’s various business segments and evaluating cash generationlevels. Securities analysts, investors, and others frequently use EBIT, EBITDA and free cash flow in their evaluation of companies, particularly those withsignificant property, plant, and equipment, and intangible assets that are subject to amortization. The use of any of these non-U.S. GAAP financial measures isnot intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. BecauseEBIT and EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financialinformation should consider the information that is excluded. Free cash flow does not necessarily represent funds available for discretionary use and is notnecessarily a measure of our ability to fund our cash needs. Management’s calculations of EBIT, EBITDA, and free cash flow may differ from similarly titledmeasures used by other companies, limiting their usefulness as comparative measures.

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