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Woodward Inc (NASDAQ:WWD)
Q4 2020 Earnings Call
Nov 19, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Woodward, Inc's. Fourth Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions] Following the presentation, you will be invited to participate in a question-and-answer session. Joining us today from the company are, Mr. Tom Gendron, Chairman and Chief Executive Officer; Mr. Bob Weber, Vice Chairman and Chief Financial Officer; and Mr. Don Guzzardo, Vice President of Investor Relations and Treasurer. I would now like to turn the call over to Mr. Guzzardo.

Don Guzzardo -- Vice President of Investor Relations and Treasurer

Thank you, operator. We would like to welcome all of you to Woodward's fourth quarter fiscal year 2020 earnings call. In today's call, Tom will comment on our markets and related strategies and Bob will discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com.

We have again included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through December 3, 2020. The phone number for the audio replay is on the press release announcing this call as well as on our website and will be repeated by the operator at the end of the call.

I would like to refer to and highlight our cautionary statement, as shown on Slide 3. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing COVID-19 pandemic and related measures taken by individuals, governments and private industry. Those elements can and do frequently change. Please consider our comments in light of the risks and uncertainties surrounding those elements, including the risks we identify in our filings.

In addition, Woodward is providing certain non-US GAAP financial measures. We direct your attention to the reconciliations of non-US GAAP financial measures, which are included in today's slide presentation, and our earnings release and related schedules. We believe this additional financial information will help in understanding our results.

Now turning to our results for the fourth quarter. Net sales for the fourth quarter of fiscal 2020 were $531 million compared to $737 million for the prior year quarter, a decrease of 28%. Net earnings were $57 million or $0.89 per share compared to $67 million or $1.03 per share for the prior year quarter. Adjusted net earnings were $48 million or $0.75 per share compared to adjusted net earnings of $79 million or $1.22 per share for the prior year quarter.

And results for the full year, net sales were $2.5 billion compared to $2.9 billion for the prior year, a decrease of 14%. Net earnings were $240 million or $3.74 per share compared to $260 million or $4.02 per share for the prior year. Adjusted net earnings were $254 million or $3.96 per share compared to adjusted net earnings of $314 million or $4.88 per share for the prior year. Net cash generated from operating activities for fiscal 2020 was $340 million -- $349 million compared to $391 million for the prior year. Free cash flow was $302 million compared to $292 million for 2019. Adjusted free cash flow was $315 million for 2020.

Now I will turn the call over to Tom to comment further on our results, strategies and markets.

Thomas Gendron -- Chairman and Chief Executive Officer

Thank you, Don, and good afternoon everyone. During fiscal year '20, Woodward and the world experienced incredible volatility brought on by the COVID-19 pandemic. We acted swiftly to ensure the health and safety of our entire Woodward team and took immediate and aggressive actions to mitigate the adverse impacts on our business. While we continue to grapple with this volatility in our markets, we remain keenly focused on diligent cash management, enhancing our financial strength and flexibility and optimizing our cost structure in line with the lower demand environment. Our team has executed well throughout the pandemic and I'm proud of their commitment and dedication to ensure we are able to successfully navigate the headwinds in front of us and position Woodward to emerge stronger.

Moving to our markets in more detail. Our Aerospace markets were mixed for the quarter with weakness in commercial OEM and aftermarket of the strength in defense. Commercial markets were impacted by the sustained decline in global passenger traffic and OEM production activity. Commercial passenger demand remains weak across the globe with industry sentiment generally predicting a prolonged recovery for travel. The traffic well below past levels we are seeing a significant number of retirements of older aircrafts, the fleet is predicted to be smaller for several years.

On a positive note, the FAA approved the return to service of the Boeing 737 MAX. Together with the MAX, the post-COVID fleet will be comprised of newer aircrafts with a greater Woodward content. When recovery does materialize, we anticipate the commercial aftermarket will be first which will bode well for Woodward in terms of earnings and cash flow. In defense, we continue to see strong aftermarket demand related to upgrade and fleet readiness programs. Military OEM remained strong for fixed-wing and rotorcraft. Guided weapons volumes have increased substantially over the last several years, and we anticipate some moderation going forward.

I'll turn to our Industrial markets. The power generation, demand for gas turbines improved from a very weak 2019, but remained soft driven by impacts related to COVID-19. Engine applications are down across the board, except for data center backup power. On a more macro level, developing economies across Asia, such as India and China continue to show signs of energy, demand growth, natural gas and renewables expanding their share of the energy mix. In transportation, marine markets have been depressed in almost all areas as a result of the pandemic, which has caused reduced demand for oil and gas and decreased ship utilization. These headwinds were partially offset by the continued strength of the China natural gas truck market driven by more stringent emission regulations.

Oil and gas markets continue to be pressured due to a drastic decline in oil and gas prices and weak customer demand. However, natural gas and crude oil prices appear to be stabilizing around current levels. Rig counts are increasing which may indicate the potential for future growth in drilling activity. The release of an effective vaccine or therapeutic could stimulate demand and lead to higher oil and gas prices and increased investment. Speaking to our Industrial business overall, environmental concerns and related emission regulations, continue to drive the move to natural gas, clean burning diesel engines, where we have significant content and market share.

Additionally, our focus on controls technology, presents growth opportunities integrating new fuel sources, HybriDrive systems and advanced emission strategies. As the world searches for cleaner and more renewable fuel sources, we are partnering with our OEM customers to create the next generation of control solutions.

In summary, we have faced continual headwinds since the onset of the pandemic, though many of our markets have started to stabilize. We are working closely with our customers and suppliers across the globe to ensure a lean operational structure, strong balance sheet and diligent cash management throughout the downcycle. We continue to monitor the situation very closely and remain positioned to how quickly should the environment worsen or improve. With current market fog generated by the pandemic, we anticipate continued headwinds in the near term.

However, we believe that our proactive efforts to mitigate the impact on our business and enhance our financial strength and flexibility, have positioned us well to weather this uncertainty. These efforts coupled with our very favorable capital structure, our ability to generate significant cash, our completed modernization investments have us poised to deliver on our long-term growth and margin targets. As we go forward and we see clarity in our markets, we intend to return to our pre-COVID capital deployment strategy. We will emerge stronger from this crisis and leaner than before.

Now I'll turn the call over to Bob to discuss the financials in detail.

Robert Weber -- Vice Chairman and Chief Financial Officer

Thank you, Tom. Aerospace segment sales for the fourth quarter of fiscal 2020 were $336 million, a decrease of 34% from the prior year quarter. Results were mixed for the segment with considerable softness in commercial OEM and aftermarket offset partially by strong defense aftermarket sales. Commercial aftermarket sales were down 41% in the fourth quarter of 2020 as compared to the prior year quarter as a result of the sustained decline in flight hours across our markets.

Defense OEM sales were down in the quarter although our backlog remain strong and continues to grow. Lower sales were primarily related to COVID-19 supply chain issues impacting guided weapons and fixed-wing aircraft. Defense aftermarket was a bright spot for the quarter due to continued military spending to improve US fleet combat readiness along with global upgrade programs. Aerospace segment earnings for the fourth quarter of 2020 were $58 million or 17.4% of segment sales, compared to $111 million or 22% of segment sales for the fourth quarter of 2019.

Segment earnings were negatively impacted by the lower sales volume, partially offset by cost reduction initiatives. For fiscal year 2020, aerospace segment net sales were $1.59 billion compared to $1.88 billion for the prior year, a 15% decrease. Aerospace segment earnings for fiscal year 2020 were $310 million or 19.5% of segment sales compared to $389 million or 20.7% of segment sales for the prior year.

Turning to industrial. Industrial segment sales for the fourth quarter of fiscal 2020 were $195 million compared to $231 million in the prior-year period, a decrease of 15%. Excluding the renewable power systems and related businesses, which were divested in the third quarter of 2020 and I will now refer to as RPS, industrial segment sales of $195 million for the fourth quarter of 2020 decreased 5% as compared to $206 million for the fourth quarter of the prior year. Industrial segment sales excluding RPS, declined compared to the prior year quarter primarily as a result of the pandemic and low oil and gas prices impacting our global markets, partially offset by an increase in China natural gas engine sales.

Industrial segment earnings for the fourth quarter of 2020 were $19 million or 9.6% of segment sales, compared to $11 million or 4.8% of segment sales for the same period in the prior year. Industrial segment earnings of $19 million for the fourth quarter of 2020 were up compared to $10 million of industrial segment earnings excluding RPS or 4.9% of segment sales for the same period last year. Industrial segment earnings for the fourth quarter of 2020 were positively impacted by cost reductions, but more than offset the impact of the lower sales volume. We continue to focus on industrial segment margin improvement through the strategic divestiture of RPS, segment infrastructure consolidation and strategic product line rationalization.

For fiscal year 2020, industrial segment net sales were $905 million compared to $1.02 billion for the prior year and a 11% decrease. Excluding RPS, industrial segment sales for fiscal year 2020, were $837 million compared to $932 million for the prior year, a decrease of 10%. Both industrial segment earnings and adjusted industrial segment earnings for fiscal year 2020 were $100 million or 11.1% of segment sales. Industrial segment earnings for fiscal year 2019 were $94 million or 9.2% of segment sales for the prior year. Adjusted industrial segment earnings for fiscal year 2019 were $115 million or 11.2% of segment sales. Excluding RPS, industrial segment earnings and adjusted industrial segment earnings for fiscal year 2020 were $97 million or 11.6% of segment sales. Excluding RPS, industrial segment earnings for fiscal year 2019 were $97 million or 10.4% of segment sales. Excluding RPS, adjusted industrial segment earnings for 2019 were $118 million or 12.7% of segment sales.

Non-segment expenses were $0.2 million for the fourth quarter of fiscal 2020 compared to $36 million for the same period of the prior year. Adjusted non-segment expenses for the fourth quarter of 2020 were $12 million compared to $20 million for the same quarter last year. Non-segment expenses totaled $95 million for 2020 compared to $119 million for the prior year. Adjusted non-segment expenses were $67 million for 2020 compared to $80 million for the prior year. At the Woodward level, R&D for the fourth quarter of 2020 was $27 million or 5.1% of sales compared to $36 million or 4.9% of sales for the prior year quarter. For fiscal 2020, R&D expenses were $133 million or 5.3% of sales compared to $159 million last year or 5.5% of sales. The decrease in R&D for both the quarter and the full year was primarily due to cost reduction initiatives and the divestiture of RPS.

SG&A for the fourth quarter of 2020 was $41 million compared to $51 million for the prior year quarter. Adjusted SG&A was $43 million for the fourth quarter of 2020 compared to $53 million for the prior year quarter. For fiscal 2020, SG&A expenses were $218 million compared to $211 million last year. Adjusted SG&A which primarily excludes merger and divestiture transaction costs was $196 million for fiscal year 2020 compared to $211 million for the prior year quarter. The decrease in adjusted SG&A for both the quarter and the full year was primarily the result of cost reduction initiatives and the divestiture of RPS.

The effective tax rate for the fourth quarter of 2020 was 16% compared to 12.8% in the fourth quarter of 2019. The adjusted effective tax rate was 13.8% in the fourth quarter of 2020 compared to 15.5% for the fourth quarter of 2019. The full-year effective tax rate for 2020 was 14.7% compared to 19% in the prior year. The adjusted effective tax rate for the full year 2020 was 17.8% compared to 17.5% for the prior year. Looking at cash flows, net cash provided by operating activities for fiscal year 2020 was $349 million compared to $391 million for the prior year period. Capital expenditures were $47 million for 2020 compared to $99 million for the prior year period. Free cash flow for 2020 was $302 million compared to free cash flow of $292 million for the prior year period.

Adjusted free cash flow was $315 million for 2020. The increase in free cash flow and adjusted free cash flow was primarily the result of lower capital expenditures, aggressive cost control and effective working capital management. As a result of closely managing cash and reducing debt, leverage declined to 1.7 times EBITDA at the end of the fourth quarter. We also have significant liquidity available through approximately $1 billion of combined cash on hand and our revolver capacity. During fiscal year 2020, $51 million was returned to stockholders in the form of $38 million of dividends and $13 million of repurchase in shares.

Lastly, turning to our fiscal 2021 outlook. The global economic effects associated with pandemic have been unprecedented in the scope and depth. We continue to see severe volatility in our markets, making forecast of our future business challenging. With that uncertainty, we will not be providing financial guidance for fiscal 2021at this time. Although we are encouraged by recent developments with respect to vaccine, and therapeutics related to pandemic. This concludes our comments on the business and results for the fiscal year and fourth quarter 2020.

Operator, we are now ready to open the call to questions.

Questions and Answers:

Operator

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] And your first question comes the line of Robert Spingarn with Credit Suisse.

Robert Spingarn -- Credit Suisse -- Analyst

Hi, good afternoon.

Robert Weber -- Vice Chairman and Chief Financial Officer

Good afternoon, Robert.

Robert Spingarn -- Credit Suisse -- Analyst

Bob, you just talked about the Aero margins, and you had a nice sequential uptick here in the fourth quarter. Is this indicative or how we should think about the first half of next year? I know you're not guiding, but I want to get a sense of how that exit rate continues?

Robert Weber -- Vice Chairman and Chief Financial Officer

As you said, it is extremely difficult to give any sort of guidance even in the near term given what's going on. So we are encouraged. We did take significant cost reduction actions that we believe contributed to that on the fourth quarter. We will continue to monitor the situation and respond accordingly.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then Tom with the MAX on grounding are positive obviously here across the industry. Does this help margins at all going into '21 not so much because of OE, but more because of provisioning?

Thomas Gendron -- Chairman and Chief Executive Officer

We definitely anticipate we will see some pickup in provisioning, but it would probably in the latter half of '21. So that's when we expect to see it upfront. We'll be working with our customers and trying to see how quickly the MAX aircrafts are brought back online out of storage, and then what the new production rate ramp looks like. So overall, if you look out over the next 18 months, it is a positive. And it's a very good thing for the industry, and very good thing for Woodward.

Robert Spingarn -- Credit Suisse -- Analyst

And one of your peers talked about a six, maybe nine-month lag from the time of a recovery in air travel to when the pickup in the aftermarket might materialize? Would you agree with that kind of time frame? They, I think were talking more about their airframe business, but in general, is that about the right lag?

Thomas Gendron -- Chairman and Chief Executive Officer

I actually think it's a little faster than that, Rob in that, I think the airlines have done an admirable job of managing costs and balancing their aircraft to optimize maintenance expenses. I think as we get the fleets flying again that we will, I believe there is a pent-up demand that will be coming fairly quickly once we start. Once the vaccines are out there, once pandemic is over, if you want to call it that way, I think you're going to see pick up and we refer -- a lot of people do, but we refer to it as a bullwhip effect in the aftermarket. And we do anticipate both aircraft and industrial markets that we participate in, will see somewhat of a bullwhip coming. It is hard to pin down what that is, but I believe it's little quicker than your other client or your other coverage.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you very much.

Thomas Gendron -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Pete Skibitski with Alembic Global.

Pete Skibitski -- Alembic Global -- Analyst

Hey, good afternoon, Tom and Bob and Don. Maybe, Tom to start, could you give us a sense of the declines that you saw in the industrial niches in fiscal year '20 commuted by power gen and transportation and oil and gas?

Thomas Gendron -- Chairman and Chief Executive Officer

That -- by segment. I missed the question.

Robert Weber -- Vice Chairman and Chief Financial Officer

Power gen, transportation and oil and gas, was that the question Pete?

Pete Skibitski -- Alembic Global -- Analyst

It was, yes. For fiscal '20.

Robert Weber -- Vice Chairman and Chief Financial Officer

How each of those fared?

Pete Skibitski -- Alembic Global -- Analyst

Correct, correct.

Thomas Gendron -- Chairman and Chief Executive Officer

Well, they were all down, there wasn't a single one. The only part of our business that was slightly up was China natural gas truck, everything else is down.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Okay. So just thinking about fiscal year '21, I know for turbines, for power I think the GE order book year-to-date has been pretty soft. So I imagine you're expecting and you've noted that that area lagged. So I imagine you're expecting power gen to be soft in fiscal year '21. I guess I'm wondering about the transportation area, marine and China CNG. China CNG, that seems like a secular play. Are you seeing continued growth there? And then marine not many people on the call, I don't think are marine analysts, but are we seeing a soft comp going into fiscal year '21? Or is there more downside in marine expected?

Thomas Gendron -- Chairman and Chief Executive Officer

I really expect that our fiscal third and fourth quarter and partly into this first is kind of the bottom exactly where it's a little hard to call. And then we anticipate based on economic recovery, we started seeing some pickup. But as you're going in on the marine market, there is no doubt as we look at the marine market, every segment of the marine market was down and utilization was also down. We do see over the next few years some brighter spots in particular when you look at like LNG carriers and like we see strong order book for those and we have good share on those type of vessels.

Power gen when you talk about gas turbines, we kind of believe that's at the bottom here. So we're kind of have seen some movement, and it's a kind of a combination again, you heard me earlier talk about, we say gas turbines as a combination of new builds, but also aftermarket, I believe, a lot of inventory in the system has been drained.

I think we're going to start seeing some of that once again as Bob was highlighting. Timing is uncertain but we watch carefully the material and the pipeline and we do think it's being drained and that there is some activity picking up and we'd start to see something there. So a lot of our markets, everybody has taken aggressive action, people have attacked inventory. So as we see a little turn in the demand pickup, you're going to see some recovery first in service activity. Secondly, in filling the pipeline with the inventory and then third with OEM production picking up.

Pete Skibitski -- Alembic Global -- Analyst

Okay. So when you comment on the bottom, you meant that for industrial as a whole, maybe we're kicking along the bottom here for the first half of your fiscal '21 and then better days ahead in the back half of fiscal '21 for industrial as a whole?

Thomas Gendron -- Chairman and Chief Executive Officer

That's what we're anticipating, again some uncertainty of course with -- if we get a -- and we start shutting down the economy again or do the vaccines come out and get widely distributed and people start generating economic activity again. So that's the uncertainty, but we would anticipate second half to be seeing some improvements.

Pete Skibitski -- Alembic Global -- Analyst

Right. Great. Thanks for the color, guys.

Thomas Gendron -- Chairman and Chief Executive Officer

Hey, you bet.

Operator

Your next question comes from the line of Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hey, good afternoon, guys and thanks for the time. Bob, you're not biting on your Aero margins and we should do going forward. So, maybe I'll ask you on industrial. You guys have gone into the double digits and fell into single digits this quarter, the decrementals were a little bit lower despite I think organic declines decelerating. So kind of puts and takes, I just sort of thought your margins would have been better, especially given the divestiture as well.

Robert Weber -- Vice Chairman and Chief Financial Officer

Yeah. Again, back to nothing, no color in terms of 2021, but we are very confident that we have taken the actions that need to be taken to, A, get us through this crisis and B, provide the long-term path to get us to the targets that we've called out in the past. And as you know, we've called out 16% as a target and then going from there, and we believe on the longer term, we have made those actions, we've taken the right initiatives and we see a path to get there. And maybe we have some renewed confidence in that. But as you point out, it's very, very difficult to see anything in the near term. And industrials even buffeted by between the oil and gas prices and COVID, they've kind of got both. So they're almost even more difficult if you will than the aerospace side. So but confident going forward.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, cool. I'll take it. Tom, maybe one for you. Can you -- it doesn't seem like the aftermarket was down 41%, just sequentially not much improvement. Maybe kind of what are your expectations, any details you could provide on what you saw in the quarter on that business -- on the commercial aftermarket, sorry.

Thomas Gendron -- Chairman and Chief Executive Officer

Yeah. Aftermarket, I'd say on it is we've seen -- I'll go back to the airlines doing a good job of managing their costs. We've seen some -- depending on which aircraft and which engines, we've seen sharper declines where they're not in service. The core narrowbody applications from the 320ceo, 320neo and we're seeing -- and the 787 like we're seeing pretty good -- given the pandemic, pretty good activity in those and we expect those narrowbody programs to pick up here shortly in the aftermarket just given their utilization will be the first to rise. So very, very difficult to forecast and monitor but we track, we're working with our customers daily, trying to make sure we keep them serviced just make sure they can fly, but the hours aren't being put on enough to see that turn yet, but we anticipate it will be coming.

Sheila Kahyaoglu -- Jefferies -- Analyst

Got it. Thank you. Thanks a lot guys.

Thomas Gendron -- Chairman and Chief Executive Officer

Thanks.

Operator

Your next question comes from David Strauss of Barclays.

David Strauss -- Barclays -- Analyst

Thanks. Good afternoon, everyone.

Thomas Gendron -- Chairman and Chief Executive Officer

Good afternoon.

David Strauss -- Barclays -- Analyst

Following up on that on the last question about the aftermarket. Is there -- Tom, are you seeing any sort of discernible difference between engine and non-engine, I guess your flight deck products in terms of the aftermarket?

Thomas Gendron -- Chairman and Chief Executive Officer

Well, generally we always do, just from a standard, the engine products generate substantially more aftermarket than what we would call our airframe products. And even in this downturn that's continuing. So that is the case. And as soon as we see more hours on the fleet, we can then forecast forward more aftermarket coming because we have pretty good analytical tools to equate what the hours per application means in terms of maintenance activity. So it is definitely much more heavy weighted to our engine applications.

David Strauss -- Barclays -- Analyst

Yeah, I guess I was just calling about the level of decline, I mean, the 41%. Is that pretty similar in terms of the decline you're seeing across both, I would have thought the flight deck side maybe a little bit more discretionary than the engine side?

Thomas Gendron -- Chairman and Chief Executive Officer

I think it's good question. I don't have exactly in my head, but I'm going to tell you, as we look at the aftermarket, it's pretty uniform declines.

David Strauss -- Barclays -- Analyst

Okay.

Robert Weber -- Vice Chairman and Chief Financial Officer

Most of our products thrust versus and things like that, they are more of a function of the flight profiles than anything else. And so I think as Tom said earlier that the airlines have done a good job. You're right, of where they can apply discretionary spending, but otherwise it's the engine is running 24/7 and the thrust reversers are going twice every flight or once every flight, excuse me.

David Strauss -- Barclays -- Analyst

Yeah, OK. And then what was the commercial OE business down in the quarter? I think you were down 63% in Q3. What was that in Q4? And how does that breakout between business jet and air transport?

Robert Weber -- Vice Chairman and Chief Financial Officer

Biz jet hasn't been as bad. Commercial OE was down 64%. So obviously big decline. Biz jets, the lower end of the smaller aircraft, a bit more impacted than the larger aircraft and we've kind of referred to it as a flight to safety. So if you have the ability to fly business jet during these times as opposed to commercial traffic, some people are taking advantage of that. So it hasn't been down as much as commercial OE.

David Strauss -- Barclays -- Analyst

Okay. And last one, I guess on cash for next year. I know you're not giving guidance, but what's the right way above -- what's the right way to think about I guess, working capital, cash taxes, capex, I mean, are any of those meaningful headwinds or tailwinds, I guess, either way, relative to what we saw you put up this last fiscal year?

Robert Weber -- Vice Chairman and Chief Financial Officer

Sure. What I can tell you is capex is under our control and so we intend to hold that down to a number similar to this year. So call it $50 million range is where we intend to hold that. Obviously equipment isn't being used at the same utilization levels as in high times. So there's not as much maintenance needed in that regard. What I will tell you is that the pattern on working capital is during times of declining sales, working capital generates cash. And in terms of when we start to see increasing sales, it will start to flatten and then eventually be a use of working capital.

One major area that we've been focused on that will be the wildcard next year is our inventory levels. And we've been talking a lot about our operational enhancements and operational excellence and True North. And we do believe that that will allow us to make progress toward our long-term targets and inventory management as a percent of sales. And so hopefully that will continue to be a tailwind in 2021, even as we come out of the downturn hopefully.

David Strauss -- Barclays -- Analyst

Okay. [Technical Issues]

Robert Weber -- Vice Chairman and Chief Financial Officer

Sorry, you're breaking up there.

David Strauss -- Barclays -- Analyst

Sorry. The cash taxes is that meaningful change next year with the payroll deferral?

Robert Weber -- Vice Chairman and Chief Financial Officer

No.

Thomas Gendron -- Chairman and Chief Executive Officer

All right. Thank you very much.

Robert Weber -- Vice Chairman and Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Gautam Khanna with Cowen.

Gautam Khanna -- Cowen -- Analyst

Hi, good afternoon guys. Wanted to -- I had a couple of quick ones. First, maybe you said this already, but the non-segment, I was just curious why it was so low relative to historical levels. And what it might infer about the future?

Robert Weber -- Vice Chairman and Chief Financial Officer

Yeah. The best way to -- sorry, the best way to look at that, there is a table in the back of the release that will show you all the puts and takes. We had a fairly large number as you can imagine during a crisis and so on of one-off events that we tried to take out of the numbers so that you can see more of what the operational side of your equation looks like. So they are kind of laid out in the back. And in terms of going forward, net-net, we still did cost reduction activities in our non-segment portion of the business as well. And so we do believe that we will run a little bit lower on ongoing basis than we have in the past.

Gautam Khanna -- Cowen -- Analyst

Okay. That's helpful. Additionally, any sort of color on go forward tax rate. And then pardon me if you already said this, I may have missed it.

Robert Weber -- Vice Chairman and Chief Financial Officer

No, we didn't cover it. Well, your guess is as good as ours probably on where the administration is going to. They've kind of made their position known in terms of what they would like to do and now it's just a matter of when and if this election ever is finalized and we see what happens with the Congress in terms of what the ability will be to make any changes. And if so, when. So, no, we don't have any forward-looking statements with respect to the impact of our tax rate going forward.

Gautam Khanna -- Cowen -- Analyst

Okay. And then just somebody asked about the aerospace margin improvement on a sequential basis. And I know this -- I wondered what we should read in if anything to the sequential incremental margin which was nearly 60% it looks like. Is that -- it didn't look like the mix was dramatically better but the aftermarket down as much as it was and OE still down where you do make some money. But I was just curious like what's -- how should we think about incremental margins? Should we be thinking about it on a sequential basis? Because we're not in kind of a normal seasonal pattern relative to prior years because of the destocking and kind of the real time nature of what's going on in commercial.

Thomas Gendron -- Chairman and Chief Executive Officer

Right. So when you look at the ratios -- Bob can jump in here too. The ratio of OE to aftermarket, we are really seeing some favorable ratio there, even though they are both down but down dramatically. As we move forward, and this is the -- we keep going back to the uncertainty in the market, but we can tell you and we kind of alluded to that in the prepared remarks that aftermarket is going to recover first, which carries better margins. And so as we start to see that recovery, I think you're going to see improved aircraft margins that then moderate as the OEM production rates come up.

So it's a little hard to exactly draw that curve without knowing exactly when the utilization will kick up, but that is we have a very strong aftermarket. I think everybody knows that very, very good installed base and the fleet, yeah, as we would now say the fleet demographics, we're working in our favor pre-COVID. Now, we think the aircraft that are going to get the most hours and like are going to be more heavily weighted to Woodward content than in the past, which will help lead to better aftermarket revenue going forward. So since things pick up, I think you are going to see good margin growth tied to aftermarket and tempering as OE production grows.

Robert Weber -- Vice Chairman and Chief Financial Officer

The only thing I'd add would be kind of the numbers, which I think are significant. We said the commercial OE down 64%, aftermarket only down 42%. So that kind of speaks to Tom's comment about the mix. So it's a much more favorable mix. And in addition, sequentially the biggest increase we saw was in military OE, which we've kind of talked about there isn't as much differential on the defense side between OE and aftermarket. So that's a nice tailwind for overall mix as well.

Gautam Khanna -- Cowen -- Analyst

Good point. And -- sorry I did not hear that correctly when you said the mix, that makes complete sense. But speaking to that, was OE down in the 60% range for two quarters in a row? Presumably that's well in excess of the underlying consumption right, there are some destock leading into that. Do you have a sense for kind of where that should eventually level out and how long it will take to get back to kind of underlying consumption versus the destock? Thank you.

Thomas Gendron -- Chairman and Chief Executive Officer

Yeah, I think we have to look at is, and then we have to track closely the -- our customers stated production rates. So obviously as Airbus moves to their 40 and 47 rates and then on the -- on the A320 and Boeing brings the MAX back up and starts working toward their stated 31 per month rate, it's kind of a timing issue when do those rates actually materialize. But we'll start seeing the supply chain and then the stocking of the supply chain as those ramps occur. So we stated earlier that these couple -- these three quarters, if you want to look at looking back and looking forward one, are probably the bottom as the customers start those ramp rates. And then there is the restocking of the pipeline.

So a little challenging to forecast as we highlighted, but the pattern will occur and we will see those ramps and then we will see some inventory coming. So as we move into second half of '21, we'll probably see better visibility on that and better able to identify what that looks like for sales and production rates.

Gautam Khanna -- Cowen -- Analyst

Thank you, guys.

Thomas Gendron -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn -- Oppenheimer -- Analyst

Hey, good evening. I was curious, use of the term severe volatility in the press release. I'm wondering about the Aero commercial aftermarket, in particular. Is that kind of steady sort of pattern or is that all over the place too?

Thomas Gendron -- Chairman and Chief Executive Officer

Well, I think the severe volatility is more on where we were, you could say in February to where we are today. So we took it as a broader look. I think if your question is, are we seeing month to month large swings? No. We see minor swings at this much lower rate, which was high volatility.

Christopher Glynn -- Oppenheimer -- Analyst

Got you. And then on the cash flows, the working capital looks kind of normal flows for the revenue pressure. I'm just curious about the overall supply chain or some players acting as temporary bankers for weaker players and if it takes a while for aftermarket to pick up but there are sort of different sort of strains on working capital flows across the industry?

Thomas Gendron -- Chairman and Chief Executive Officer

Yeah, right now and then for Woodward, I'll only comment on that. We are seeing a very good AR management, very good collections. We know various suppliers in the industry have -- are under more stress. But we are doing very well on collections. AR is in very good shape. And we will -- we are confident that we will be able to continue that going forward. So from that standpoint, it's positive. We did mention a little bit about supply chain pressure and even some supply chain issues hampering sales and really what that is all about is more tied to disruptions due to people not being able to be in the factories, transportation around the world, things like that have caused some supply chain disruptions, on product flow and we're managing that quite well. But it's still out there, especially this month as cases are picking up all over the US, we are seeing some impact from that. But that -- we know that will tamper with time, but overall for Woodward, there is any pressure my side, I won't say that, but we're doing very well on AR.

Christopher Glynn -- Oppenheimer -- Analyst

Great. Thanks for that.

Operator

[Operator Instructions] And your next question comes from the line of Chris Howe with Barrington Research.

Chris Howe -- Barrington Research -- Analyst

Hi, Tom, Bob and Don. Good afternoon.

Thomas Gendron -- Chairman and Chief Executive Officer

Hey, Chris.

Chris Howe -- Barrington Research -- Analyst

Hey. I wanted to touch on aftermarket. If we kind of breakout commercial aftermarket, you're seeing strength in defense aftermarket, continue the industrial aftermarket as well as consideration of the longer-term opportunity that we could potentially see for LNG carriers. Can you perhaps provide some color or just some general thoughts on the mix of aftermarket and how we could see that potentially play out as we look into Q4 of '21 and the early part of fiscal year '22? Could we see a situation where as we normalize it put this virus behind us that aftermarket for each of these respective areas normalizes in conjunction?

Thomas Gendron -- Chairman and Chief Executive Officer

Yeah, I think you have it right and what -- try to give you some little more color. We -- if we start on our industrial side, we do see strong aftermarket sales in the marine market, in the oil and gas market. And if you want to say in prime power applications. So these are where you get very high utilization of the equipment. And as we said earlier, all those are down today and we have seen destocking or if you want to say inventory management occurring. So we do anticipate as we're looking at those as utilization picks up which solid economic activity will drive that pick up. We will see both normal utilization driving aftermarket plus we should see some restocking in the supply chain.

So we anticipate that, it's just the timing is difficult to predict, but that would follow a pattern that at Woodward, we've seen quite a bit. I've -- Bob and I have both been here quite a while and we've been through many downturns, and that is an exact pattern we see coming out of every downturn. So we're confident in the pattern, it's just nailing the timing of that. So we do see that. It is very applicable to the aircraft side as we think there's going to be a pent-up demand for maintenance. And as that utilization goes up and the airlines I always want to make sure I'm not saying anything different than this. Airlines are flying safe, but they are being very smart in how they utilize their assets to not generate the need for extra maintenance. But once they are all flying again, that maintenance is there and those hours are accumulating and we will see that kick in.

And so again it's going to happen, it's just exactly when. And we do think there has been destocking in the aerospace side as well. So we anticipate we'll see some pickup there. So latter half '21 or '22 based on the vaccine being successful, probably but exact dates, somewhat challenging to predict.

Chris Howe -- Barrington Research -- Analyst

Okay, great. Most of my other questions have been taken, but I'll try for one more. Perhaps you can comment on backlog today where it was last quarter, where it is now and what your expectations are more specifically to the mix of backlog, what are you seeing there on a more granular level as far as COVID impact and how that backlog starts to accrue, we're turning the corner as we move forward?

Robert Weber -- Vice Chairman and Chief Financial Officer

Yeah. We've talked from time to time that we're on real-time systems that the formal backlog isn't very indicative. But to give you a kind of some color, we did mention on the OEM -- defense OEM side that largely driven by the supply chain issues and so forth. We've seen significant increase in backlog related to that. And same is true on the aftermarket side. On the industrial side, not as much there, it's probably more in pent-up demand, it's not as much backlog as it is pent-up demand.

Tom mentioned the power generation side. Well, we've got a lot of work that is -- those are utilized a lot. And when you can't get into -- you can't get people in the country to service them, etc, etc, you don't necessarily see an order backlog. But you see the clock ticking down at the time when they have to do something. So I think it's more of a -- I'll call it an informal backlog that we're seeing on the industrial side. On the commercial OEM, obviously, there's not a lot of backlog there until we start seeing the production rates increase again.

Chris Howe -- Barrington Research -- Analyst

Great. Thanks, Bob. I appreciate all the color. I'll hop back in queue. Thanks.

Robert Weber -- Vice Chairman and Chief Financial Officer

Thanks.

Operator

Your next question comes from the line of Michael Ciarmoli with Truist.

Michael Ciarmoli -- Truist -- Analyst

Hey, good evening guys. Thanks for taking the call here, taking the question. Bob, maybe I'll go back to the beginning of the call and try and dig into these margins a little bit. Not asking for guidance, but looking at the SG&A and R&D, I think the combination of both of those down $24 million sequentially, you obviously got rid of the renewable, but are those sustainable run rates? And then again, just going back to that non-segment, close to $40 million of operating expenses gone this quarter. How do we think about that going forward?

Robert Weber -- Vice Chairman and Chief Financial Officer

Yeah. There are clearly elements of it that are sustainable, but there is also elements that are purely driven by where we're at in the crisis and phases of the crisis. So I think it's very difficult to say what types of costs are you going to have to put on when things start returning. So you don't necessarily need to have that activity going on now, but as things return, you're going to have to invest in that as we go. There were a number of items, when you go through the list of all the actions that we took, that you can see, for example forgoing the -- our bonus for the year and so. Some of the salary reductions that were taken, some of the furloughs that we took during the year, furloughs are temporary, they come back as the demand goes up.

Yes, there were a substantial number of layoffs, a substantial reduction in a lot of the temporary labor and things like that, that will not come back early on, but may come back as the recovery progresses. So, well, the only thing I can tell you for certain is that we do believe that the cost reductions and the actions that are sustainable will improve profitability as we go forward. But I can tell you that when you look at some of the dollar amounts we're showing as savings today that those are all sustainable going forward. It will be, some portion of that, but not all.

Michael Ciarmoli -- Truist -- Analyst

Got it. No, I get it. What about the gross margins down sequentially on higher volumes and getting rid of the renewables. You have the favorable mix with aftermarket. What drove the sequential decline in margins -- gross margins?

Robert Weber -- Vice Chairman and Chief Financial Officer

Most of that's still just -- you got a lot of fixed cost base that you get to a point where it bleeds into the -- it's not the variable margin, but when you get down to the gross margin level, that you see the -- for degradation.

Michael Ciarmoli -- Truist -- Analyst

Okay. So I mean, I guess last quarter you gave one quarter out. As you sit here today, is your visibility better or worse you think from three months ago?

Robert Weber -- Vice Chairman and Chief Financial Officer

Today, I'd say it's worse. I mean we're heading back in. Right? Right now it's kind of like, well, we'll see what happens, but everybody is starting to shut down again. So I think it's actually gotten worse than it was a month ago. And everything was kind of gone along, we're bouncing along the bottom. And now I will certainly see the cases and everything else, increasing, we can see states shutting down, I think the visibility is actually less. And I think that also contributes to the volatility Tom mentioned that every day we seem to have more news, some negative, some positive, vaccines, therapeutics, lockdowns, wow, what a month, tremendous amount of uncertainty.

Michael Ciarmoli -- Truist -- Analyst

Yeah. No, I get it. Yeah, certainly don't envy what you guys are trying to navigate through. All right, perfect. I'll jump back in the queue. Thanks guys.

Robert Weber -- Vice Chairman and Chief Financial Officer

Thanks.

Operator

And your last question comes from line of Robert Spingarn with Credit Suisse.

Robert Spingarn -- Credit Suisse -- Analyst

Hi. Just wanted to follow up with a couple of things. Tom, have you seen any change in new serviceable material coming into the market? I think in the beginning of the pandemic, people were not yet parting out aircraft or taking apart engines, but have you seen any evidence that this is happening?

Thomas Gendron -- Chairman and Chief Executive Officer

Well, we're confident it is happening. We haven't seen actual impact from that. So but, yes, you're correct. I mean people are parting out, there will be more new serviceable material. A lot of that we think once again you got to look at the fleets, it impact certain fleets more than others, narrowbodies is sweet spot for us both on neo and the new narrowbodies MAX and neo but also on A320ceo. I don't think there's going to be much impact from new service material on those applications. But we will see it on some of the much older aircraft. And we're monitoring that, but to-date we haven't seen it, but it's hard to say, how much it will impact going forward.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then just as a last one, when we look back at the 787 delays and partnering for success, there were changes in contracts to help Boeing get back on its cost curve. Is anything like that happened with the MAX?

Thomas Gendron -- Chairman and Chief Executive Officer

No. Not for Woodward. Yeah.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, good. Thank you very much.

Thomas Gendron -- Chairman and Chief Executive Officer

Okay. Thank you.

Robert Weber -- Vice Chairman and Chief Financial Officer

Thank you.

Operator

Okay. Mr. Gendron, there are no further questions at this time. I will now turn the conference back to you.

Thomas Gendron -- Chairman and Chief Executive Officer

Okay. Well, I appreciate everybody joining us today. We appreciate always talking with you. It's interesting times, I guess is what you could also call as. We did highlight and I just want to leave you all with the message. Woodward is strong. We managed this pandemic well to-date. We anticipate we will continue to manage it well. Coming out of it, we're going to be even stronger financially as well as technology and product and growth-wise. So I look forward, as we get into next few quarters, ideally seeing a change in inflection point happening and we'll be talking to you about upturns and sales, not too long from now, we hope. So, thanks again for joining. We'll talk to all of you, I'm sure, during the next quarter. Thanks again. Bye.

Operator

Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 PM Eastern Standard Time by dialing 1-855-859-2056 or 1-404-537-3406, and by entering the access code 3429007. A rebroadcast will also be available at the Company's website, www.woodward.com for 14 days.

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Don Guzzardo -- Vice President of Investor Relations and Treasurer

Thomas Gendron -- Chairman and Chief Executive Officer

Robert Weber -- Vice Chairman and Chief Financial Officer

Robert Spingarn -- Credit Suisse -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

David Strauss -- Barclays -- Analyst

Gautam Khanna -- Cowen -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Chris Howe -- Barrington Research -- Analyst

Michael Ciarmoli -- Truist -- Analyst

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