SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20122013
or
or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-8408
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on March Number of shares of the registrant’s common stock outstanding as of November 12, DOCUMENTS INCORPORATED BY REFERENCE Portions of our proxy statement for the Annual Meeting of Stockholders to be held January
1 PART I This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that are deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecast,” “intend,” “continue,” “outlook,” “plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:
Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:
2
These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed under the caption “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K for the fiscal year ended September 30, Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-K to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries. Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-K are in thousands, except per share amounts.
General Woodward enhances the global quality of life and sustainability by optimizing energy use through improved efficiency and lower emissions. We are an independent designer, manufacturer, and service provider of energy control and optimization solutions. We design, produce and service reliable, efficient, low-emission, and high-performance energy control products for diverse applications in challenging environments. We have significant production and assembly facilities in the United States, Europe and Asia, and promote our products and services through our worldwide locations. 3 Our strategic focus is providing energy control and optimization solutions for the aerospace and energy markets. The precise and efficient control of energy, including fluid and electrical energy, combustion, and motion, is a growing requirement in the markets we serve. Our customers look to us to optimize the efficiency, emissions and operation of power equipment in both commercial and Our components and integrated systems optimize performance of commercial aircraft, We were established in 1870, incorporated in 1902, and are headquartered in Fort Collins, Colorado. The mailing address of our world headquarters is 1000 East Drake Road, Fort Collins, Colorado 80525. Our telephone number at that location is (970) 482-5811, and our website is Markets and Principal Lines of Business We serve two primary markets – aerospace and energy. Within the aerospace market, we provide systems, components and solutions for both commercial and
Within the energy market, our key focus areas are:
Our customers require technological solutions to meet their needs for performance, efficiency, and reliability, and to reduce their costs of operation. Additional information about our operations in fiscal year Products, Services and Applications Aerospace Our Aerospace segment designs, produces and services systems and products for the management of fuel, air, combustion and motion. These products include main fuel pumps, metering units, actuators, air valves, specialty valves, fuel nozzles, We have significant content on a wide variety of commercial aircraft, rotorcraft and business jet platforms, including the Airbus A320, Boeing 787, Bell 429 and Gulfstream G650, and we have significant content on Revenues from the Aerospace segment are generated primarily by sales to OEMs, tier-one suppliers, and 4 aftermarket repair, overhaul and other services to commercial airlines, Energy Our Energy segment designs, produces and services systems and products for the management of fuel, air, fluids, gases, electricity and motion. These products include power converters, actuators, valves, pumps, injectors, solenoids, ignition systems, governors, electronics and devices that measure, communicate and protect low and medium voltage electrical distribution systems. Our products are also used on industrial gas turbines, including heavy-frame and aeroderivative turbines, reciprocating engines, electrical grids, wind turbines and compressors. The equipment on which our products are found is used to extract and distribute fossil and renewable fuels, to generate, distribute or store electricity, and to convert fuel to work in marine, mobile, and industrial equipment applications. Revenues from the Energy segment are generated primarily by sales, which include aftermarket or replacement sales, to OEMs, tier-one suppliers, and Sales Order Backlog Our backlog of unshipped sales orders as of October 31,
Our current estimate of the sales order backlog is based on unshipped sales orders that are open in our order entry systems. Unshipped orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production schedules. Seasonality We do not believe that our sales, in total or in either business segment, are subject to significant seasonal variation. However, our sales have generally been lower in the first quarter of our fiscal year as compared to the immediately preceding quarter due to fewer working days resulting from the observance of various holidays and scheduled plant shutdowns for annual maintenance. Customers For the fiscal year ended September 30, Sales to our largest customer, General Electric, accounted for approximately The following customers
5 Government Contracts and Regulation Portions of our business, particularly in our Aerospace segment, are heavily regulated. We contract with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, the National Aeronautics and Space Administration (“NASA”), and the Departments of Defense, Homeland Security, and Transportation. We also contract with similar government authorities outside the United The U.S. Government, and other governments, may terminate any of our government contracts, We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. Government contracts. These laws and regulations, among other things:
Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers utilizing Woodward parts and subassemblies, collectively U.S. Government related sales from our reporting segments for fiscal year
6 Manufacturing We operate manufacturing and assembly plants in the United States, Europe, and Asia. Our products consist of mechanical, electronic and electromagnetic systems and components. Aluminum, iron and steel are primary raw materials used to produce our mechanical components. Other commodities, such as gold, copper and nickel, are also used in the manufacture of our products, although in much smaller quantities. We purchase various goods, including component parts and services used in production, logistics and product development processes from third parties. Generally there are numerous sources for the raw materials and components used in our products, which we believe are sufficiently available to meet current requirements. In August of 2012, the SEC issued a final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that imposes reporting requirements on issuers who use or may use We maintain global strategic sourcing models to meet our global Our customers expect us to maintain adequate levels of certain finished goods and certain component parts to support our warranty commitments and sales to our aftermarket customers, and to deliver such parts on a timely basis to support our customers’ standard and customary needs. We carry certain finished goods and component parts in inventory to meet these rapid delivery requirements of our customers. Research and Development We finance our research and development activities primarily with our own independent research and development funds, but in some cases research and development costs are shared by the customer. Our research and development costs include basic research, applied research, development, systems and other concept formulation studies. Company funded expenditures related to new product development activities are expensed as incurred and are separately reported in the Company’s Consolidated Statements of Earnings. Across both of our segments, research and development costs totaled $130,250 in fiscal year 2013, $143,274 in fiscal year 2012, and $115,633 in fiscal year Aerospaceis focused on developing systems and components that we believe will be instrumental in helping our customers achieve their objectives of lower fuel consumption, lighter weight, more efficient performance, reduced emissions, and improved operating economics. Our development efforts support technology for a wide range of:
The aerospace industry is moving toward more electronic (“fly-by-wire”), lighter weight aircraft, while demanding increased reliability and redundancy. In response, we are developing an expanded family of intelligent 7 We collaborate closely with our customers in the early stages of a project as they develop their new product concepts. We believe this collaboration allows us to develop technology that is aligned with our customers’ needs and therefore, increases the likelihood that our systems and components will be selected for inclusion in the platforms developed by our customers. We believe our close collaboration with our customers during preliminary design stages allows us to provide products that deliver the component and system performance necessary for our customers’ Some technology development programs begin years before an expected entry to service, such as those for the next-generation of commercial aircraft engines. Other development programs result in nearer-term product launches associated with new OEM offerings, product upgrades, or product replacements on existing programs. We are currently developing the fuel system, air management, and actuation hardware for CFM International’s We are also currently developing the fuel system, air management, and actuation hardware for the Passport In addition, we are currently developing sensor solutions for the Airbus A350 high lift system, an actuation sub-system for the Boeing 787-9 that improves fuel burn, flight deck components for the Bombardier CSeries and Global 7000 and 8000 aircraft, and control and sensing solutions for the KC-46 tanker boom subsystem. Energyis focused on developing more efficient, cleaner technologies, including integrated control systems and system components that we believe will allow our OEM customers to cost-effectively meet mandated emissions regulations and fuel efficiency demands, allow for usage of a wider range of fuel sources, support global infrastructure requirements, and safely distribute and store power on the electrical grid. Our development efforts support technology for a wide range of:
Our clean technology development efforts include controls for diesel, natural gas, alternative and We believe that our technologies make marine and industrial power generation and distribution, and Competitive Environment Our products and product support services are sold worldwide into a variety of competitive markets. In all markets, we compete on the basis of differentiated technology and design, product performance and conformity with customer specifications, customer service and support, including on-time delivery and customer partnering, product quality, price, reputation and local presence. Both of our segments operate in uniquely competitive environments. We believe that new competitors face significant barriers to entry into many of our markets, including various government mandated certification requirements to compete in the aerospace markets in which we participate. 8 Aerospaceindustry safety regulations and manufacturing standards demand significant product certification requirements, which form a basis for competition as well as a barrier to entry. Technological innovation and design, product performance and conformity with customer specifications, and product quality and reliability are of significant importance in the aerospace and defense industry. In addition, on-time delivery, pricing, and joint development capabilities with customers are points of competition within this market. Our customers include airframe and aircraft engine OEM manufacturers and suppliers to these manufacturers. We supply these customers with technologically innovative Our competitors in aerospace include divisions of UTC Aerospace Systems, Honeywell, Moog and Parker Hannifin. We address competition in aftermarket service through responsiveness to our customers’ needs, providing short turnaround times and a global presence. Several competitors are also customers for our products, such as UTC Aerospace Systems, Parker Hannifin, and Honeywell. Some of our customers are affiliated with our competitors through ownership or joint venture agreements. We compete in part by establishing relationships with our customers’ engineering organizations, and by offering innovative solutions to their market requirements. Energyoperates in the global markets for industrial turbine engines, industrial reciprocating engine combustion and management systems, including emissions control, fuel and air management, combustion, electronic control products, power generation and distribution (through a global network of sales and support services), and converter technology for on-shore and off-shore wind turbines ranging in capacity from 1MW to 6MW. We compete with numerous companies who specialize in various engine management products, and our OEM customers are often capable of developing and manufacturing some of these same products internally. Many of our OEM customers are large global OEMs that require suppliers to Competitors include HeinzmannGmbH & Co., Robert Bosch AG, L’Orange GmbH, Hoerbiger, GE Multilin, ABB, Siemens, Schweitzer Electric, Areva and Ingeteam. OEM customers with internal capabilities for similar products include General Electric, Caterpillar, Wartsila and Cummins. We believe we are a market leader in providing our customers advanced technology and superior product performance at a competitive price. We focus on close relationships with our OEM customers’ engineering teams. Competitive success is based on the development of innovative components and systems that are aligned with the OEMs’ technology roadmaps to achieve future emission, efficiency, and fuel flexibility targets. The global market for renewable wind and solar energy technology is immature and changing rapidly. Delays in wind turbine installation caused by continued tight global credit availability, and uncertainty with respect to incentives and the overall economic environment, have led to over-capacity with manufacturers within the wind turbine industry. Market consolidation continues to occur and price has become an important factor within the wind turbine converter market. Employees As of October 31, Approximately All of our other employees in the United States were at-will employees as of October 31, 9 Outside of the United States, we enter into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction. Patents, Intellectual Property, and Licensing We own numerous patents and have licenses for the use of patents owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. For example, the U.S. Government has certain rights in our patents and other intellectual property developed in performance of certain government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes as allowed by law. Unpatented process technology, including research, development and engineering technical skills and know-how, as well as unpatented production software and other intellectual property rights, are important to our overall business and to the operations of each of our segments. While our intellectual property assets taken together are important, we do not believe our business or either of our segments would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property patent license agreement. As of September 30, U.S. GAAP requires that research and development costs be expensed as incurred; therefore, as we develop new intellectual property in the normal course of business, the costs of developing such assets are expensed as incurred, with no corresponding intangible asset recorded. Environmental Matters and Climate Change The Company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position. We are engaged in remedial activities, generally in coordination with other companies, pursuant to federal and state laws. When it is reasonably probable we will pay remediation costs at a site, and those costs can be reasonably estimated, we accrue a liability for such future costs with a related charge against our earnings. In formulating that estimate and recognizing those costs, we do not consider amounts expected to be recovered from insurance companies, or others, until such recovery is assured. Our accrued liability for environmental remediation costs is not significant and is included in the line item “Accrued liabilities” in the Consolidated Balance Sheets in “Item 8 – Financial Statements and Supplementary Data.” We generally cannot reasonably estimate costs at sites in the very early stages of remediation. Currently, we have one site in the later stages of remediation, and there is no more than a remote chance that remediation costs at any individual site, or at all sites in the aggregate, will be material. Our manufacturing facilities generally do not produce significant volumes or quantities of byproducts, including greenhouse gases, that would be considered hazardous waste or otherwise harmful to the environment. We do not expect legislation currently pending or expected in the next several years to have a significant negative impact on our operations in any of our segments. Domestic and foreign legislative initiatives on emissions control, renewable energy, and climate change tend to favorably impact the sale of our energy control products. For example, our Energy segment produces inverters for wind turbines and energy control products that help our customers maximize engine efficiency and minimize wasteful emissions, including greenhouse gases. Executive Officers of the Registrant Information about our executive officers is provided below. There are no family relationships between any of the executive officers listed below. Thomas A. Gendron,Age 10 Robert F. Weber, Jr.,Age Martin V. Glass, Age
Chad R. Preiss, Age James D. Rudolph, Age A. Christopher Fawzy,Age Other Corporate Officers of the Registrant Information about our other corporate officers is provided below. There are no family relationships between any of the corporate officers listed below or between any of the corporate officers listed below and the aforementioned executive officers. Harlan G. Barkley, Age Steven J. Meyer, Age Matthew F. Taylor,Age Information available on Woodward’s Website Through a link on the Investor Information section of our website, www.woodward.com, we make available the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. None of the information contained on our website is incorporated into this document by reference. 11 Stockholders may obtain, without charge, a single copy of Woodward’s Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in this section when making investment decisions regarding our securities. Important factors that could individually, or together with one or more other factors, affect our business, results of operations, financial condition, and/or cash flows include, but are not limited to, the following: Company Risks A decline in business with, or financial distress of, our significant customers could decrease our consolidated net sales or impair our ability to collect amounts due and payable and have a material adverse effect on our business, financial condition, results of operations and cash flows. We have fewer customers than many companieswith similar sales volumes. For the fiscal year ended September 30, The continued instability in the financial markets There has been widespread concern over the continued instability in the financial markets and their influence on the global economy. As a result of the extreme volatility in the credit and capital markets, sovereign credit rating downgrades and uncertainty surrounding European sovereign and other debt defaults, and In addition, the general economic environment significantly affects demand for our products and services. There can be no assurance that the We may not be able to obtain financing, on acceptable terms or at all, to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to competitive pressures. Global financial markets, including the credit and debt and equity capital markets, and economic conditions have been, and continue to be, disrupted and volatile. 12 financing. In addition, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets institutional investors have The long sales cycle, customer evaluation process and implementation period of our products and services may increase the costs of obtaining orders and reduce the predictability of sales cycles and our inventory requirements. Our products and services are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. Orders expected in one quarter may shift to another quarter or be cancelled with little advance notice as a result of customers’ budgetary constraints, internal acceptance reviews and other factors affecting the timing of customers’ purchase decisions. In addition, customers often require a significant number of product presentations and demonstrations before reaching a sufficient level of confidence in the product’s performance and compatibility with the approvals that typically accompany capital expenditure approval processes. The difficulty in forecasting demand increases the challenge in anticipating sales cycles and our inventory requirements, which may cause us to over-produce finished goods and could result in inventory write-offs, or could cause us to under-produce finished goods. Any such over-production or under-production could have a material adverse effect on our business, financial condition, results of operations, and cash flows. We have engaged in restructuring and alignment activities from time to time and may need to implement further restructurings or alignments in the future, and there can be no assurance that our restructuring or alignment efforts will have the intended effects. From time to time, we have responded to changes in our industry and the markets we serve by restructuring or aligning our operations. Our restructuring activities have included workforce management and other restructuring charges related to our recently acquired businesses, including, among others, changes associated with integrating similar operations, managing our workforce, vacating or consolidating certain facilities and cancelling certain contracts. Most recently, we made a decision during the third quarter of fiscal year 2013 to align our renewable power business appropriately to the current environment and the foreseeable future, through revaluation of its assets and liabilities, including workforce management actions. Based on cost reduction measures or changes in the industry and markets in which we compete, we may decide to implement further restructuring or alignment activities in the future, such as closing plants, moving production lines, or making additions, reductions or other changes to our management or workforce. Restructuring and/or alignment activities can create unanticipated consequences, and we cannot be sure that any restructuring or alignment efforts that we undertake will be successful. A variety of risks could cause us not to realize an expected cost savings, including, among others, the following:
If we are unable to structure our operations in the light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Suppliers may be unable to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all. We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our customers, and our raw material costs are subject to commodity market fluctuations. We may experience an increase in costs for parts or raw materials that we source from our suppliers, or we may experience a shortage of parts or raw materials for various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we use, financial distress, work stoppages, natural disasters, fluctuations in commodity prices, or production difficulties that may affect one or more of our suppliers. In particular, current or future global economic uncertainty may affect our key suppliers in terms of their operating cash flow and access to financing. This may in turn affect their ability to perform their obligations to us. Our customers rely on us to provide on-time delivery and have certain rights if our delivery standards are not 13 maintained. A significant increase in our supply costs, including for raw materials that are subject to commodity price fluctuations, or a protracted interruption of supplies for any reason, could result in the delay of one or more of our customer contracts or could damage our reputation and relationships with customers. In addition, quality and sourcing issues that our suppliers may experience can also adversely affect the quality and effectiveness of our products and services and may result in liability or reputational harm to us. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Our profitability may suffer if we are unable to manage our expenses or if we experience change in product mix as a result of sales increases or decreases. Some of our expenses are relatively fixed in relation to changes in sales volume and are difficult to adjust in the short term. Expenses such as depreciation or amortization, which are the result of past capital expenditures or business acquisitions, or expenses driven by business activity other than sales level, such as manufacturing overhead, may be difficult to reduce in a timely manner in response to a reduction in sales. Due to the nature of our sales cycle, in periods of sales increases it may be difficult to rapidly increase our production of finished goods, particularly if such sales increases are unanticipated. An increase in the production of our finished goods requires increases in both the purchases of raw materials and components and in the size of our workforce. If a sudden, unanticipated need for raw materials, components and labor should arise in order to meet unexpected sales demand, we could experience difficulties in sourcing raw materials, components and labor at a favorable cost or to meet our production needs. These factors could result in delays in fulfilling customer sales contracts, damage to our reputation and relationships with our customers, an inability to meet the demands of the Subcontractors may fail to perform contractual obligations. We frequently subcontract portions of work due under contracts with our customers and are dependent on the continued availability and satisfactory performance by these subcontractors. Nonperformance or underperformance by subcontractors could materially impact our ability to perform obligations to our customers. A subcontractor’s failure to perform could result in a customer terminating our contract for default, expose us to liability, substantially impair our ability to compete for future contracts and orders, and limit our ability to enforce fully all of our rights under these agreements, including any rights to indemnification. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Our product development activities may not be successful, Our business involves a significant level of product development activities, generally in connection with our customers’ development activities. Industry standards, customer expectations, or other products may emerge that could render one or more of our products or services less desirable or obsolete. Maintaining our market position requires continued investment in research and development. During an economic downturn or a subsequent recovery, we may need to maintain our investment in research and development, which may limit our ability to reduce these expenses in proportion to a sales shortfall. In addition, increased investments in research and development may divert resources from other potential investments in our business, such as acquisitions or investments in our facilities, processes and operations. If these activities are not as successful as currently anticipated, are not completed on a timely basis, or are more costly than currently anticipated, or if we are not able to Activities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful than anticipated. We recently completed an acquisition in fiscal year The risks associated with our past or future acquisitions also include, among others, the following: 14
Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and attention. Furthermore, we may not realize the degree or timing of benefits we anticipate when we first enter into these transactions. Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to operate our business or pursue our business strategies, and could adversely affect our business, financial condition, results of operations, and cash flows. As of September 30, Our existing These financial covenants place certain restrictions on our business that may affect our ability to execute our business strategy successfully or take other actions that we believe would be in the best interests of our Company. These restrictions include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries to:
These agreements contain certain customary events of default, including certain cross-default provisions related to other outstanding debt arrangements. Any breach of the covenants under these agreements or other event of default could cause a default under these agreements and/or a cross-default under our other debt arrangements, which could restrict our ability to borrow under our revolving credit facility. If there were an event of default under certain provisions of our debt arrangements that was not cured or waived, the holders of the defaulted debt may be able to cause all amounts outstanding with respect to the debt instrument to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. If we are unable to 15 repay, refinance, or restructure our indebtedness as required, or amend the covenants contained in these agreements, the lenders or note holders may be entitled to obtain a lien or institute foreclosure proceedings against our assets. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Our business may be affected by government contracting risks. Sales made directly to U.S. Government agencies and entities were
Changes in the estimates of fair value of reporting units or of long-lived assets may result in future impairment charges, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Over time, the fair values of long-lived assets change. At September 30, 16 of a single operating segment into a reporting unit, if appropriate. Future goodwill impairment charges may occur if estimates of fair values decrease, which would reduce future earnings. We also test property, plant, and equipment and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Future asset impairment charges may occur if asset utilization declines, if customer demand decreases, or for a number of other reasons, which would reduce future earnings. Any such impairment charges could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Impairment charges would also reduce our consolidated stockholders’ equity and increase our debt-to-total-capitalization ratio, which could negatively impact our credit rating and access to the debt and equity markets. We completed our annual goodwill impairment test during the quarter ended September 30, As part of our ongoing monitoring efforts, we will continue to consider the global economic environment and its potential impact on our businesses, as well as other factors, in assessing goodwill and long-lived assets for possible indications of impairment.
During fiscal year Manufacturing activities may result in future environmental costs or liabilities. We use hazardous materials and/or regulated materials in our manufacturing operations. We also own, Our performance depends on continued access to a stable workforce and on favorable labor relations with our employees. Certain of our operations in the United States and internationally involve different employee/employer relationships and the existence of works’ councils. In addition, a portion of our workforce is unionized and is expected to remain unionized for the foreseeable future. Competition for technical personnel in the 17 personnel, or otherwise, could have a material adverse effect on our business, our relationships with customers, and our financial condition, results of operations, and cash flows.
Our intellectual property rights may not be sufficient to protect all our products or technologies. Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets and know-how, and prevent others from infringing on our patents, trademarks, and other intellectual property rights. Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not patentable or for which we have elected not to obtain a patent, including intellectual property relating to our manufacturing processes and engineering designs. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks, or licenses. Patent protection generally involves complex legal and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that we own or license from others may not provide us with adequate protection against competitors. Moreover, the laws of certain foreign countries do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Additionally, our commercial success depends significantly on our ability to operate without infringing upon the patent and other proprietary rights of others. Our current or future technologies may, regardless of our intent, infringe upon the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face expensive litigation or indemnification obligations and may be prevented from selling existing products and pursuing product development or commercialization. If we are unable to sufficiently protect our patent and other proprietary rights or if we infringe on the patent or proprietary rights of others, our business, financial condition, results of operations, and cash flows could be materially adversely affected. Product liability claims, product recalls or other liabilities associated with the products and services we provide may force us to pay substantial damage awards and other expenses that could exceed our accruals and insurance coverage. The manufacture and sale of our products and the services we provide expose us to Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately resolved. In addition to intellectual property and product liability matters, we are currently involved or may become involved in claims, pending or threatened litigation or other legal proceedings, investigations or regulatory proceedings regarding 18 employment or other regulatory, legal, or contractual matters arising in the ordinary course of business. There is no certainty that the results of these matters will be favorable to the Company. We accrue for known individual matters
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws and regulations. The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws and regulations in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining business or securing an improper business advantage. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world and sell to industries that have experienced corruption to some degree. If we are found to be liable for FCPA or other similar anti-bribery law or regulatory violations, whether due to our or others’ actions or inadvertence, we could be subject to civil and criminal penalties or other sanctions that could have a material adverse impact on our business, financial condition, results of operations and cash flows.
In 2013, approximately 45% of our total sales were made to customers in jurisdictions outside of the United States (including products manufactured in the
We maintain acceptable operating margins. We must also comply with restrictions on exports imposed under the U.S. Export Control Laws and Sanctions Programs. These laws and regulations change from time to time and may restrict foreign sales.
19 Sales and purchases in
in foreign currencies. Foreign currency exchange rate risk is reduced through several means, including the maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system, and limited use of foreign currency denominated debt. In addition, uncertain global economic conditions arising from circumstances such as slowing growth in emerging regions and credit rating downgrades in certain European countries or speculation regarding changes to the composition or viability of the Euro zone could result in reduced customer confidence and Our net postretirement benefit obligation liabilities may grow, and the fair value of our pension plan assets may decrease, which could require us to make additional and/or unexpected cash contributions to our pension plans, increase the amount of postretirement benefit expenses, affect our liquidity or affect our ability to comply with the terms of our outstanding debt arrangements. Accounting for retirement, pension and postretirement benefit obligations and related expense requires the use of assumptions, including a weighted-average discount rate, an expected long-term rate of return on assets, and a net healthcare cost trend rate, among others. Benefit obligations and benefit costs are sensitive to changes in these assumptions. As a result, assumption changes could result in increases in our obligation amounts and expenses. If interest rates decline, the present value of our postretirement benefit plan liabilities may increase faster than the value of plan assets, resulting in significantly higher unfunded positions in some of our pension plans. As of September 30, Funding estimates are based on certain assumptions, including discount rates, interest rates, mortality, fair value of assets and expected return on plan assets and are subject to changes in government regulations in the countries in which our employees work. Volatility in the financial markets may impact future discount and interest rate assumptions. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in increases or decreases in the valuation of plan assets or in a change of the expected rate of return on plan assets. Also, new accounting standards on fair value measurement may impact the calculation of future funding levels. We periodically review our assumptions, and any such revision can significantly change the present value of future benefits, and in turn, the funded status of our pension plans and the resulting periodic pension expense. Changes in our pension benefit obligations and the related net periodic costs or credits may occur as a result of variances of actual results from our assumptions, and we may be required to make additional cash contributions in the future beyond those which have been estimated. In addition, our existing To the extent that the present values of benefits incurred for pension obligations are greater than values of the assets supporting those obligations or if we are required to make additional or unexpected contributions to our pension plans for any reason, our ability to comply with the terms of our outstanding debt arrangements, and our business, financial condition, results of operations, and cash flows may be adversely affected. Our business operations may be adversely affected by information systems interruptions or intrusion. We are dependent on various information technologies throughout our company to administer, store and support multiple business activities. If these systems are damaged, cease to function properly or are subject to cybersecurity attacks, such as unauthorized access, malicious software and other violations, we could experience production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of 20 confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. While we attempt to mitigate these risks by employing a number of measures, including technical security controls, employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, our systems, networks, products, solutions and services remain potentially vulnerable to additional known or unknown threats. Industry Risks Competitors may develop breakthrough technologies that are adopted by our customers. The markets in which we operate experience rapidly changing technologies and frequent introductions of new products and services. The technological expertise we have developed and maintained could become less valuable if a competitor were to develop a breakthrough technology that would allow it to match or exceed the performance of existing technologies at a lower cost. If we are unable to develop competitive technologies, future sales or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Industry consolidation trends could reduce our sales opportunities, decrease sales prices, and drive down demand for our products. There has been consolidation and there may be further consolidation in the aerospace, power, and process industries. The consolidation in these industries has resulted in customers with vertically integrated operations, including increased in-sourcing capabilities, which may result in economies of scale for those companies. If our customers continue to seek to control more aspects of vertically integrated projects, cost pressures resulting in further integration or industry consolidation could reduce our sales opportunities, decrease sales prices, and drive down demand for our products, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. We operate in a highly competitive industry. We face intense competition from a number of established competitors in the United States and abroad, some of which are larger in size or are divisions of large diversified companies with substantially greater financial resources. In addition, global competition continues to increase. Companies compete on the basis of providing products that meet the needs of customers, as well as on the basis of price, quality, and customer service. Changes in competitive conditions, including the availability of new products and services, the introduction of new channels of distribution, and changes in OEM and aftermarket pricing, could impact our relationships with our customers and may adversely affect future sales, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Unforeseen events may occur that significantly reduce commercial aviation. A significant portion of our business is related to commercial aviation. The recent global economic downturn and uncertainty in the marketplace led to a general reduction in demand for air transportation services, leading some airlines to withdraw aircraft from service, which negatively impacted sales of our aerospace components and services. These economic conditions similarly impacted our sales of systems and components for new business jet aircraft. Although the operating environment currently faced by commercial airlines has shown signs of improvement, uncertainty continues to exist. The commercial airline industry tends to be cyclical and capital spending by airlines and aircraft manufacturers may be influenced by a variety of factors, including current and future traffic levels, aircraft fuel pricing, labor issues, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels. In the event these or other economic indicators stagnate or worsen, market demand for our components and systems could be negatively affected by renewed reductions in demand for air transportation services or commercial airlines’ financial difficulties, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. The U.S. Government may change acquisition priorities and/or reduce spending. The U.S. Government participates in a wide variety of operations, including homeland defense, counterinsurgency, counterterrorism, and other
21 The Budget Act In years when the U.S. Government does not complete its budget process before the end of its fiscal year (September 30), government operations typically are funded through a continuing resolution that authorizes agencies of the U.S. Government to continue to operate, but does not authorize new spending initiatives. When the U.S. Government operates under a continuing resolution, delays can occur in the procurement of products and services. Historically this has not had a material effect on our business; however, should a continuing resolution be prolonged or extended through the U.S. Government’s entire fiscal year, it may cause procurement awards to be allocated into different periods, cause our revenues to vary between periods and cause an adverse effect on our backlog and revenues. In years when the U.S. Government fails to complete its budget process or to provide for a continuing resolution, a federal government shutdown may result. This could result in the incurrence of substantial costs without reimbursement under our contracts with the U.S. Government and delays or cancellations of key programs, which could have a negative effect on our business, financial condition, results of operations and cash flows. We continue to believe our programs are well aligned with national defense and other priorities, but shifts in domestic and international spending and tax policy, changes in security, defense, and intelligence priorities, the sequestration of appropriations Increasing emission standards that drive certain product sales may be eased or delayed. We sell components and systems that have been designed to meet strict emission standards, including standards that have not yet been implemented but are Natural gas prices may increase significantly and disproportionately to other sources of fuels used for power generation. Commercial producers of electricity use many of our components and systems, most predominately in their power plants that use natural gas as their fuel source. Commercial producers of electricity are often in a position to manage the use of different power plant facilities and make decisions based on operating costs. Compared to other sources of fuels used for power generation, natural gas prices have increased slower than fuel oil, but about the same as coal. This increase in natural gas prices and any future increases could decrease the use of our components and systems, which could have a material adverse affect on our business, financial condition, results of operations, and cash flows. Changes in government subsidy programs and regulatory requirements may result in decreased demand for our products. The U.S. Government, as well as various foreign governments, provide for various stimulus programs or subsidies, such as grants, loan guarantees and tax incentives, relating to renewable energy, alternative energy, energy efficiency and electric power infrastructure. Some of these programs have expired, which may affect the economic feasibility or timing of future projects. Additionally, while a significant amount of stimulus funds and subsidies are available to support various projects, we cannot predict the timing and scope of any investments to be made by our customers under stimulus funding and subsidies or whether stimulus funding and subsidies will result in increased demand for our products. Investments for renewable energy, alternative energy and electric power infrastructure under stimulus programs and subsidies may not occur, may be less than anticipated or may be delayed, any of which would negatively impact demand for our products. Other current and potential regulatory initiatives may not result in increased demand for our products. It is not certain whether existing regulatory requirements will create sufficient incentives for new projects, when or if proposed regulatory requirements will be enacted, or whether any potentially beneficial provisions will be included in the regulatory requirement. Uncertainty with respect to government subsidy programs and regulatory requirements could cause decreased demand for our products as investments are delayed or become economically unfeasible, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. 22 Investment Risks The historic market price of our common stock may not be indicative of future market prices. The market price of our common stock changes over time. Stock markets in general have experienced extreme price and volume volatility particularly over the past few years. The trading price of our common stock ranged from a high of
Fluctuations in our stock price often occur without regard to specific operating performance. The price of our common stock could fluctuate based upon the above factors or other factors, including those that have little to do with our company, and these fluctuations could be material. The typical trading volume of our common stock may affect an investor’s ability to sell significant stock holdings in the future without negatively affecting stock price. As of September 30, Certain anti-takeover provisions of our charter documents and under Delaware law could discourage or prevent others from acquiring our company. While the Company believes that these provisions are in the best interest of its stockholders, our certificate of incorporation and bylaws do contain provisions that:
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of our stock that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. Our board of directors could choose not to negotiate a potential acquisition that it Item 1B.Unresolved Staff Comments None. 23 Our principal plants are as follows: United States Duarte, California – Aerospace segment manufacturing and engineering Fort Collins, Colorado – Corporate headquarters and Energy segment manufacturing and engineering Greenville, South Carolina (leased) – Energy segment manufacturing and Aerospace and Energy segments engineering Loveland, Colorado – Energy
Rockford, Illinois – Aerospace segment manufacturing and engineering Santa Clarita, California – Aerospace segment manufacturing and engineering Skokie, Illinois (leased) – Aerospace segment manufacturing and Aerospace and Energy segments engineering Zeeland, Michigan – Aerospace segment manufacturing and engineering Other Countries Aken, Germany (leased) – Energy segment manufacturing and engineering Kempen, Germany – Energy segment manufacturing and engineering Krakow, Poland – Energy segment manufacturing and Aerospace and Energy segments engineering Stuttgart, Germany (leased) – Energy segment engineering Tianjin, Peoples’ Republic of China (leased) – Energy segment assembly Sofia, Bulgaria – Energy segment manufacturing and engineering In addition to the principal plants listed above, we own or lease other facilities used primarily for sales and service activities in Brazil, China, India, Japan, the Netherlands, In September 2013, Woodward purchased a building site in Niles, Illinois. Woodward intends to build a new facility on this site for its Aerospace business and will relocate some of its operations currently residing in Skokie, Illinois to this new facility. Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high.
We are also Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, regulatory, legal or contractual disputes, product warranty claims and alleged violations of various environmental laws and regulations. We 24 While the outcome of pending claims, legal proceedings, investigations and regulatory proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Item 4.Mine Safety Disclosures Not applicable. PART II Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed on The NASDAQ Global Select Market and is traded under the symbol “WWD.” At November The following table sets forth the high and low sales prices of our common stock and dividends paid for the periods indicated.
The information required by this item relating to securities authorized for issuance under equity plans is included under the caption “Executive Compensation – Equity Compensation Plan Information” in our Proxy Statement for the 25 Performance Graph The following graph compares the cumulative 10-year total return to stockholders on our common stock relative to the cumulative total returns of the S&P Midcap 400 index and the S&P Industrial Machinery index. The graph shows total stockholder return assuming an investment of $100 (with reinvestment of all dividends) was made on September 30,
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes which appear in “Item 8 – Financial Statements and Supplementary Data” of this Form 10-K.
27
Notes:
OVERVIEW Woodward enhances the global quality of life and sustainability by optimizing energy use through improved efficiency and lower emissions. We are an independent designer, manufacturer, and service provider of energy control and optimization solutions. We design, produce and service reliable, efficient, low-emission, and high-performance energy control products 28 for diverse applications in challenging environments. We have significant production and assembly facilities in the United States, Europe and Asia, and promote our products and services through our worldwide locations. Our strategic focus is providing control solutions for the aerospace and energy markets. The precise and efficient control of energy, including fluid and electrical energy, combustion, and motion, is a growing requirement in the markets we serve. Our customers look to us to optimize the efficiency, emissions and operation of power equipment in both commercial and Our components and integrated systems optimize performance of commercial aircraft, Management’s discussion and analysis should be read together with the Consolidated Financial Statements and Notes included in this report. Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note1,Operations and summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The estimates and assumptions described below are those that we consider to be most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. As estimates are updated or actual amounts are known, our critical accounting estimates are revised, and operating results may be affected by the revised estimates. Actual results may differ from these estimates under different assumptions or conditions. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our disclosures in this Management’s Discussion and Analysis. Revenue recognition Woodward recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists, 2) delivery of the product has occurred or services have been rendered, 3) price is fixed or determinable, and 4) collectability is reasonably assured. In implementing the four criteria stated above, we have found that determining when the risks and rewards of ownership have passed to the customer, which determines whether persuasive evidence of an arrangement exists and if delivery has occurred, may require judgment. The passage of title indicates transfer of the risks and rewards of ownership from Woodward to the customer; however, contract- and customer-specific circumstances are reviewed by management to ensure that transfer of title constitutes the transfer of the risks and rewards of ownership. Examples of situations requiring management review and judgment, with respect to the passage of the risks and rewards of ownership, include: interpretation of customer-specific contract terms, situations where substantive performance obligations exist, such as completion of product testing that remain after product delivery to the customer, situations that require customer acceptance (or in some instances regulatory acceptance) of the product, and situations in countries whose laws provide for retention of some form of title by sellers such that Woodward is able to recover goods in the event a customer defaults on payment. 29 Based on management’s determination, if the risks and rewards of ownership have not passed to the customer, revenue is deferred until this requirement is met. Purchase accounting During the first quarter of fiscal year 2013, we completed the Duarte Acquisition for an aggregate purchase price of $200,000. The acquisition was completed on December 28, 2012, and, based on preliminary purchase adjustments, we paid cash at closing in the amount of $198,900. The purchase price remains subject to certain additional customary post-closing adjustments. During the third quarter of fiscal year 2011, we completed the IDS Acquisition Assigning fair Acquired intangible assets, excluding goodwill, are valued using a discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. Management projects revenue growth rates, earnings margins and cash flows based on the historical operating results of the acquired entity adjusted for synergies anticipated to be achieved through integration, expected future performance, operational strategies, and the general macroeconomic environment. We review finite-lived intangible assets for triggering events such as significant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assets acquired. There was no impairment or change in useful lives recognized on other intangible assets acquired in fiscal years 2013, 2012 Estimated values for acquired property, plant and equipment are based on current market values and replacement costs of similar assets. Estimated values for inventory acquired is subject to reliable estimates, as of the acquisition date, of future sales volumes, replacement costs, costs of selling effort, anticipated selling prices, normal profit margins, the percent complete, and costs to complete work-in-process inventory. Estimated values for accounts receivable are subject to reliable estimates of collectability. Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including estimation of any warranty or other contractual liabilities assumed, which require the exercise of professional judgment. Valuation of postretirement benefit plan assets and liabilities is dependent on similar assumptions and estimates as those used to value our non-acquisition postretirement benefit plan assets and liabilities. Assumed contracts may have favorable or unfavorable terms that must be valued as of the acquisition date. Such valuation is subject to management judgment regarding the evaluation and interpretation of contract terms in relation to other economic circumstances, such as the market rates for office space leases. If we assume a performance obligation to customers as of the acquisition date, a deferred revenue obligation is recognized. Judgment is required to evaluate whether a future performance obligation exists and to assign a value to the performance obligation. Valuation of gain and loss contingencies, if not resolved during the purchase measurement period, requires exercise of management judgment. We measure pre-acquisition contingencies at their acquisition date fair value if their fair value can be determined during the measurement period. If we cannot determine the fair value of the pre-acquisition contingency during the measurement period, we recognize an acquired asset or assumed liability if it is probable that an asset existed or that a liability had been incurred at the acquisition date and the amount of the asset or liability can be reasonably estimated. Assumed acquired tax liabilities for uncertain tax positions are dependent on assessing the past practices of the acquisition target based on review of actual tax filings and information obtained through due diligence procedures. Evaluation of the validity of tax positions taken by the acquisition target are subject to management judgment. Inventory Inventories are valued at the lower of cost or market value. Inventory cost is determined using methods that approximate the first-in, first-out basis. We include product costs, labor and related fixed and variable overhead in the cost of inventories. Inventory market values are determined by giving substantial consideration to the expected product selling price. We estimate expected selling prices based on our historical recovery rates, general economic and market conditions, the expected 30 channel of disposition, and current customer contracts and preferences. Actual results may differ from our estimates due to changes in resale or market value and the mix of these factors. Management monitors inventory for events or circumstances, such as negative margins, recent sales history suggesting lower sales value, or changes in customer preferences, which would indicate the market value of inventory is less than the carrying value of inventory, and management records adjustments as necessary. When inventory is written down below cost, such reduced amount is considered the cost for subsequent accounting purposes. Our recording of inventory at the lower of cost or market value has not historically required material adjustments once initially established. The carrying value of inventory was Postretirement benefits The Company provides various benefits to certain employees through defined benefit pension plans and other postretirement benefit plans. A September 30 measurement date is utilized to value plan assets and obligations for all Woodward defined benefit pension and other postretirement benefit plans. For financial reporting purposes, net periodic benefits expense and related obligations are calculated using a number of significant actuarial assumptions, including anticipated discount rates, rates of compensation increases, long-term return on defined benefit plan investments, and anticipated healthcare cost increases. Based on these actuarial assumptions, at September 30, Estimates of the value of postretirement benefit obligations, and related net periodic benefits expense, are dependent on actuarial assumptions, including future interest rates, compensation rates, healthcare cost trends, and returns on defined benefit plan investments. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously, and the effects of changes in assumptions are not necessarily linear due to factors such as the 10% corridor applied to the larger of the postretirement benefit obligation or the fair market value of plan assets used to determine the amortization of actuarial net gains or losses. Primary actuarial assumptions for our defined benefit pension plans were determined as follows:
31
Primary actuarial assumptions for our other postretirement benefit plans were determined as follows:
Variances from our fiscal year end estimates for these variables could materially affect our recognized postretirement benefit obligation liabilities. On a near-term basis, such changes are unlikely to have a material impact on reported earnings, since such adjustments are recorded to other comprehensive earnings and recognized into expense over a number of years. Significant changes in estimates could, however, materially affect the carrying amounts of benefit obligation liabilities, 32 including accumulated benefit obligations, which could affect compliance with the provisions of our debt arrangements and future borrowing capacity.
Reviews for impairment of goodwill At September 30, 2013, we had $551,624 of goodwill, representing 25% of our total assets. At September 30, 2012, we had $461,374 of goodwill, representing 25% of our total assets. Woodward completed its annual goodwill impairment test as of July 31, Forecasted cash flows used in the July 31, The results of Woodward’s annual goodwill impairment test performed as of July 31, As part of the Company’s ongoing monitoring efforts, Woodward will continue to consider the global economic environment and its potential impact on Woodward’s business in assessing goodwill for possible indications of impairment. There can be no assurance that Woodward’s estimates and assumptions regarding forecasted cash flows of certain Income taxes We are subject to income taxes in During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate. As of September 30, 33 and September 30, Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. As of September 30, Our effective tax rates differ from the U.S. statutory rate primarily due to the tax impact of foreign operations, adjustments of valuation allowances, research tax credits, state taxes, and tax audit settlements. In addition to potential local country tax law and policy changes that could impact the provision for income taxes, management’s judgment about and intentions concerning the repatriation of foreign earnings could also significantly impact the provision for income taxes. Management reassesses its judgment regularly, taking into consideration the potential tax impacts of these judgments and intentions. Our provision for income taxes is subject to volatility and could be affected by earnings that are different than those anticipated in countries which have lower or higher tax rates; by In addition, we are subject to examination of our income tax returns by the BUSINESS ENVIRONMENT AND TRENDS We serve the aerospace and energy markets. Aerospace Markets Our aerospace products are primarily used to provide propulsion, actuation and motion control systems in both commercial and Commercial and Civil Aircraft – In the commercial aerospace markets, global air traffic continued to Defense – The defense industry is being negatively impacted by the sequestration of appropriations under the Budget Act, as well as the threat of additional budget cuts and related program We continue to explore opportunities on next generation smart weapon systems, including enhanced guided bomb and guided rocket programs, and turret Aftermarket – Our commercial aftermarket business has increased as our products have been selected for new aerospace platforms and our content has increased across existing platforms. We have experienced the strongest gains in commercial aftermarket sales related to programs like Airbus A320 and Boeing 777. However, some legacy programs have been 34 negatively impacted by the availability of surplus hardware from aircraft retirements (and subsequent disassembly for parts re-use) combined with increasingly tight budget control by airline maintenance departments, the result of which was somewhat slower total growth in fiscal year 2013 than had been experienced in recent years. U.S. Government sustainment funds continue to be prioritized to defense aircraft platforms that we have content on and accordingly, our defense aftermarket has remained steady throughout this cycle. While some major upgrades/overhaul programs executed in fiscal year 2013 contributed to a strong defense aftermarket performance, we expect fiscal year 2014 sales to be impacted by a “gap” in such programs before they resume in 2015. Energy Markets Our energy products are used worldwide in Industrial Turbines and Compressors – In fiscal year As power generation demand continues to improve, turbines are expected to provide a compelling solution due to their inherent low emissions and fast permitting and construction times, along with the abundant availability of reasonably priced natural gas. Further, gas turbines are expected to serve a critical market need in supporting renewable assets in providing fast start and load acceptance during times when renewable sources fluctuate. OEM turbine manufacturers have been increasingly investing in new technologies focused on emissions, part load operation, start times, and fuel In the oil and gas process industry, demand for industrial gas, steam turbines and compressors is expected to grow, primarily due to increased demand for Reciprocating Engines – The economic recovery The increasing demand
Longer term, government emissions requirements across many regions and engine applications is driving demand for higher-technology control systems, as is customer demand for improved engine efficiencies. Energy policies in some countries encourage the use of natural gas and other alternative fuels over carbon-rich petroleum fuels, thereby increasing demand for our alternative fuel clean engine control technologies. Renewable Power – The renewable power industry remains challenged as a result of concerns regarding government support, competitive pricing, and capacity and availability in the credit markets for wind and solar projects. We expect the uncertainty regarding government renewable mandates and subsidies will contribute to continued volatility in the renewable energy industry. In the longer term, we anticipate improvement in the market as demand for low emission power sources increases and technology advancements allow renewable energy to be more competitive with conventional energy sources. Electrical Power Generation and Distribution – The electrical power generation Looking forward, we anticipate that tightening emissions requirements, integration of renewable energy sources into the grid, and increased global energy demand
35 RESULTS OF OPERATIONS Non-U.S. GAAP Financial Measures EBIT, Adjusted EBIT, EBITDA, Adjusted earnings per share, and free cash flow Earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted EBIT, adjusted earnings per diluted share, Energy segment net sales without the renewable power business, Energy segment earnings without the renewable power business, and free cash flow are financial measures not prepared and presented in accordance with U.S. GAAP. Earnings based non-U.S. GAAP financial measures Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, EBIT and EBITDA for the fiscal years ended September 30, 2013, September 30, 2012 and September 30, 2011 were as follows:
Management uses adjusted EBIT to evaluate Woodward’s performance without specific charges of $15,707 related to its renewable power business. During the third quarter of fiscal year 2013, Woodward made a decision to align its renewable power business appropriately for the current environment and foreseeable future, through revaluation of its assets and liabilities, including workforce management actions, which resulted in charges to earnings totaling $15,707. Management does not consider these specific charges usual operating results and, therefore, they have been excluded for prior year comparative purposes. As management believes adjusted EBIT provides more comparable year over year information, we have included this non-U.S. GAAP measure in this “Management’s Discussion and Analysis” to provide insight to securities analysts, investors, and others into how our management views our current financial condition and results of operations. Adjusted EBIT for the fiscal years ended September 30, 2013, September 30, 2012 and September 30, 2011 were as follows:
36 Management uses adjusted earnings per diluted share to evaluate Woodward’s performance without the specific charges of $15,707, or $0.17 per diluted share, related to its renewable power business and the favorable $0.07 per diluted share impact of the fiscal year 2012 retroactive portion of the reinstatement of the U.S. research and experimentation credit under the American Taxpayer Relief Act of 2012 (the “Taxpayer Relief Act”). Management does not consider these specific charges and the favorable impact of the fiscal year 2012 portion of the reinstatement of the U.S. research and experimentation credit usual operating results and therefore they have been excluded for prior year comparative purposes. As management believes adjusted earnings per share provides more comparable year over year information, we have included this non-U.S. GAAP measure in this “Management’s Discussion and Analysis” to provide insight to securities analysts, investors, and others into how our management views our current financial condition and results of operations. Adjusted earnings per share for the fiscal years ended September 30, 2013, September 30, 2012 and September 30, 2011 were as follows:
In addition to the above non-U.S. GAAP financial measures, in the current fiscal year we are using the following financial measures: Energy segment net sales without the renewable power business and Energy segment earnings without the renewable power business, which are financial measures not prepared and presented in accordance with U.S. GAAP. Management uses these financial measures to compare the performance of its business with and without the effects of significant discrete economic events in order to analyze and understand Woodward’s Energy reportable segment results. Management has identified the changes in the market economics of its renewable power business as such a significant discrete economic event. Management used this with and without the renewable power business segment net sales and segment net earnings information in its decision to align its renewable power business appropriately for the current environment and foreseeable future. In addition, management used this with and without the renewable power business information for prior year comparative purposes for the Energy segment. As management believes Energy segment net sales without the renewable power business and Energy segment earnings without the renewable power business provide more comparable year over year information, we have included this non-U.S. GAAP measure in this “Management’s Discussion and Analysis” to provide insight to securities analysts, investors, and others into how our management views our current financial condition and results of operations. The use of any of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As EBIT, EBITDA, adjusted EBIT, adjusted earnings per share, Energy segment net sales without the renewable power business, and Energy segment earnings without the renewable power business exclude certain financial information compared with net earnings, net earnings per share, segment net sales and segment earnings, the most comparable U.S. GAAP financial measures, users of this financial information should consider the information that is excluded. Our calculations of EBIT, EBITDA, adjusted EBIT, adjusted earnings per share, Energy segment net sales without the renewable power business, and Energy segment earnings may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures. Cash flow-based non-U.S. GAAP financial measures Management uses free cash flow, which is defined as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of Woodward’s various business groups and 37 evaluating cash levels. Securities analysts, investors, and others frequently use
Free cash flow for the fiscal years ended September 30, 2013, September 30, 2012 and September 30, 2011
Operational Highlights Net sales for fiscal year EBIT increased Net earnings The third quarter of fiscal year 2013 included specific charges of $15,707, or On December 27, 2012, Woodward entered into a definitive asset purchase agreement with GE Aviation Systems LLC (the “Seller”) and General Electric Company for the acquisition of substantially all of the assets and certain liabilities related to the Seller’s thrust reverser actuation systems business located in Duarte, California (the “Duarte Business”) for an aggregate purchase price of $200,000. The sale was completed on December 28, 2012, and, based on preliminary purchase adjustments, we paid cash at closing in the amount of $198,900. The Duarte Business develops and manufactures motion control technologies and platforms, more specifically thrust reverser actuation systems. The Duarte Business serves customers such as Airbus, Boeing, General Electric, Safran and the U.S. Government. Its products are used primarily on commercial aircraft, such as the Boeing 737, 747 and 777, and the Airbus A320. The Duarte Business is being integrated into Woodward’s Aerospace segment and has been included in our operating results since the acquisition. The Duarte Business was slightly accretive to net earnings in fiscal year Liquidity Highlights Net cash provided by operating activities for fiscal year Free cash flow for fiscal year EBITDA increased by 38 On During the second quarter of fiscal year 2013, the term loan credit agreement that we entered into in October 2008, which had a balance of $40,000 at December 31, 2012, was repaid and terminated, without penalty, and the remaining balance of unamortized debt issuance costs of $128 were written off to interest expense. In connection with the acquisition of the Duarte Business on December 21, 2012, we entered into a 364 day, uncommitted line of credit with JPMorgan Chase Bank, N.A. (the “Line of Credit”). The Line of Credit provides for unsecured loans of up to $200,000 on a revolving basis. At Woodward’s option, loans made under the Line of Credit bear interest at a floating rate based on either the prime rate or an adjusted London Interbank Rate (“LIBOR”). The Line of Credit extends through December 20, 2013. There was $200,000 outstanding on the Line of Credit as of September 30, 2013. At September 30, The following
Other select financial data:
39 2013 RESULTS OF OPERATIONS
Consolidated net sales increased 2012 to $1,935,976 in fiscal year 2013. Details of the changes in consolidated net sales are as follows:
The increase in net sales Price changes:Increases in selling prices were driven primarily by Foreign currency exchange rates:During the fiscal year ended September 30, Our worldwide sales activities are primarily denominated in U.S. dollars (“USD”), European Monetary Units (the “Euro”), Great Britain pounds (“GBP”), Japanese yen (“JPY”), and Chinese yuan (“CNY”). As the USD, Euro, GBP, JPY, and CNY fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. If the CNY, which the Chinese government has not historically allowed to fluctuate significantly against USD, is allowed to fluctuate against USD in the future, we would be exposed to gains or losses on sales transactions denominated in CNY. 2013 Costs and Expenses Compared to 2012 Cost of goods soldincreased by $72,927 to $1,376,271or 71.1% of net sales, forfiscal year 2013 from $1,303,344, or 69.9% of net sales, for 2012. Gross margins (as measured by net sales less cost of goods sold, divided by net sales) were 28.9% for fiscal year 2013 and 30.1% for fiscal year 2012. The decrease in gross margin in fiscal year 2013 as compared to fiscal year 2012 is attributable to the decreased volume in our Energy segment, mostly due to reduced wind turbine converter sales volumes and the loss of related fixed cost leverage, as well as charges of $8,300 associated with a portion of the specific charges in the third quarter of fiscal year 2013 related to the renewable power business within the Energy segment, partially offset by the effects of increased volume in our Aerospace segment, favorable product mix and improved operational performance. 40 Selling, general, and administrative expenses increased by $3,585 or 2.2%, to $168,097 for fiscal year 2013 as compared to $164,512 for fiscal year 2012. Selling, general and administrative expenses increased as a percentage of net sales to 8.7% for fiscal year 2013 as compared to 8.8% for fiscal year 2012. The increase in expenses was primarily related to charges of $7,407 associated with a portion of the specific charges in the third quarter of the current fiscal year related to our renewable power business within the Energy segment. In addition, fiscal year 2013 selling, general, and administrative expenses included approximately $1,944 of transaction costs related to the Duarte Acquisition as well as a general increase in expenses related to the Duarte Business. These increases were partially offset by decreased bad debt expenses in fiscal year 2013 as compared to fiscal year 2012. Fiscal year 2012 expense included charges related to the bankruptcies of several airlines and the credit issues of some of our renewable power customers that did not recur in fiscal year 2013. We believe at this time that we have no exposure to significant future losses related to these issues. Research and development costs decreased by $13,024, or 9.1%, to $130,250 for fiscal year 2013 as compared to $143,274 for fiscal year 2012. Research and development costs decreased as a percentage of net sales to 6.7% for fiscal year 2013 as compared to 7.7% for fiscal year 2012. Research and development costs decreased primarily due to the completion of development of certain programs and related decreases of materials purchases. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development as programs continue. Amortization of intangible assets increased to $36,979 for fiscal year 2013 compared to $32,809 for fiscal year 2012. As a percentage of net sales, amortization of intangible assets increased to 1.9% for fiscal year 2013 as compared to 1.8% fiscal year 2012. Interest expense increased to $26,703, or 1.4% of net sales, for fiscal year 2013 compared to $26,003, or 1.4% of net sales, for fiscal year 2012. Income taxes were provided at an effective rate on earnings before income taxes of 26.9% for fiscal year 2013 compared to 28.4% for fiscal year 2012. The change in the effective tax rate (as a percentage of earnings before income taxes) was attributable to the following:
On January 2, 2013, the Taxpayer Relief Act was enacted, which retroactively extended the U.S. research and experimentation tax credit through December 31, 2013. As a result, income taxes for fiscal year 2013 included a net expense reduction related to the extension of the U.S. research and experimentation tax credit pursuant to the Taxpayer Relief Act, including the fiscal year 2012 retroactive portion of the extension. During the second quarter of fiscal year 2012, we re-evaluated our strategic alternatives in various international markets and determined that a portion of the undistributed earnings of certain of our foreign subsidiaries that were previously expected to be repatriated to the United States within the foreseeable future will remain indefinitely invested outside the United States to support the growth of future foreign operations. We accordingly reversed the deferred tax liability associated with repatriating those earnings, which resulted in a tax benefit of $3,326 for fiscal year 2012. This item is included in the “Taxes on international activities” line in the rate reconciliation above. The total amount of the gross liability for worldwide unrecognized tax benefits reported in other liabilities in the Consolidated Balance Sheet was $22,694 at September 30, 2013 and $18,069 at September 30, 2012. At September 30, 2013, the amount of unrecognized tax benefits that would impact Woodward’s effective tax rate, if recognized, was $17,838. At this time, we estimate it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $565 in the next twelve months due primarily to the expiration of certain statutes of limitations. We accrue for potential interest and penalties related to unrecognized tax benefits in tax expense. Woodward had accrued interest and penalties of $2,066 as of September 30, 2013 and $1,701 as of September 30, 2012. Woodward’s tax returns are audited by U.S., state, and foreign tax authorities, and these audits are at various stages of completion at any given time. With a few exceptions, Woodward’s fiscal years remaining open to examination in the U.S. 41 include fiscal years 2010 and thereafter, and fiscal years remaining open to examination in significant foreign jurisdictions include 2005 and thereafter. SEGMENT RESULTS The following table presents sales by segment:
The following table presents earnings by segment:
The following table presents earnings by segment as a percent of segment net sales:
2013 Segment Results Compared to 2012 Aerospace Aerospace segment net sales increased $165,394, or 18.5%, to $1,061,477 for fiscal year 2013 from $896,083 for fiscal year 2012. Segment net sales excluding the Duarte Business were $950,216 for fiscal year 2013. Organic segment sales for fiscal year 2013 were higher compared to fiscal year 2012, driven primarily by defense aftermarket sales and commercial OEM sales. Defense aftermarket spare parts and repair sales were up significantly, particularly due to increases related to sales for rotorcraft programs. Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft have continued to increase based on improved airline demand and new product introduction. 42 During our second quarter of fiscal year 2013, the sequestration of U.S. federal government appropriations took effect under the Budget Act. The effect on our fiscal year 2013 results was limited, as we saw strong defense aftermarket sales and slightly lower OEM defense sales. We expect that the impact of this action will take months to be clarified, as specific sequestration impacts are still undefined and the possibility of future reductions in defense spending remain. We will continue to monitor any potential long-term effects of the Budget Act on our business. Aerospace segment earningsincreased by $35,930, or 27.6%, to $166,122 for fiscal year 2013 compared to fiscal year 2012 due to the following:
Segment earnings as a percentage of sales increased to 15.7% in fiscal year 2013 compared to 14.5% for fiscal year 2012. The increase in Aerospace segment earnings in fiscal year 2013 compared to fiscal year 2012 was primarily the result of sales volume increases, the effects of increased selling prices and favorable mix, and decreased investment in research and development. Energy The following table presents the Energy segment’s external net sales and earnings excluding the results of and charges related to the renewable power business.
Uncertainty with respect to U.S. and other government renewable power incentives and economic factors associated with alternate energy sources have resulted in significant overcapacity and financial distress in the renewable power industry. As a result, in the third quarter of fiscal year 2013, we made a decision to align our renewable power business appropriately for the environment and then foreseeable future, through revaluation of its assets and liabilities, including workforce management actions. Although we have changed the alignment of our internal cost structure, including re-evaluating certain 43 markets, we will continue to support our existing customers and strategically pursue future opportunities within the renewable power business. As discussed above in “Non-U.S. GAAP Financial Measures,” Energy segment net sales without the renewable power business and Energy segment earnings without the renewable power business are financial measures not prepared and presented in accordance with U.S. GAAP. Management uses these financial measures to compare the performance of its business with and without the effects of significant discrete economic events in order to analyze and understand Woodward’s Energy reportable segment results. Management has identified the changes in the market economics of its renewable power business as such a significant discrete economic event. Management used this with and without the renewable power business segment net sales and segment net earnings information in its decision to align its renewable power business appropriately for the current environment and foreseeable future. In addition, management used this with and without the renewable power business information for prior year comparative purposes for the Energy segment. As management believes Energy segment net sales without the renewable power business and Energy segment earnings without the renewable power business provides more comparable year over year information, we have included this non-U.S. GAAP measure in this “Management’s Discussion and Analysis” to provide insight to securities analysts, investors, and others into how our management views our current financial condition and results of operations. The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As Energy segment net sales without the renewable power business and Energy segment earnings without the renewable power business exclude certain financial information compared with segment net sales and segment earnings, respectively, the most comparable U.S. GAAP financial measures, users of this financial information should consider the information that is excluded. Energy segment net sales decreased $95,045, or 9.8%, to $874,499 for fiscal year 2013 from $969,544 for fiscal year 2012. Excluding the renewable power business sales for all periods, Energy segment net sales for fiscal year 2013 would have been comparable to fiscal year 2012. Wind turbine converter sales for fiscal year 2013 declined approximately $95,000 as compared to fiscal year 2012. Wind turbine converter sales were higher in fiscal year 2012 partially due to accelerated ordering by our customers in an effort to take advantage of the then expiring government incentives and to comply with various renewable energy mandates. The balance of the decline in wind turbine converter sales in fiscal year 2013 was unanticipated and reflected general uncertainty with respect to investments in large wind projects due to the volatility of government incentives, economic uncertainty and overcapacity in the market. The Taxpayer Relief Act extends the wind tax credit for projects that begin construction in calendar year 2013. Due to the lengthy planning and ordering cycle involved in these wind turbine projects, the effect of this legislation on our sales in fiscal year 2013 was not material. Strong sales of compressed natural gas systems and aero-derivative gas turbine systems were offset by softness in other reciprocating engine and heavy-frame industrial turbine systems sales. Other reciprocating engine and heavy-frame industrial turbine systems sales were negatively impacted by weaker economic conditions, outside of the United States, in the global economy. Growth in shipbuilding, petrochemical plants and heavy frame turbines, where long lead times and significant investments are required, did not materialize as anticipated due to the continuing economic conditions. Energy segment earnings decreased by $27,501, or 21.8%, to $98,940 for fiscal year 2013 as compared to fiscal year 2012 due to the following:
44 Segment earnings as a percentage of sales decreased to 11.3% in fiscal year 2013 compared to 13.0% for fiscal year 2012. The decrease in the Energy segment earnings for fiscal year 2013 as compared to fiscal year 2012 was driven primarily by $15,707 of specific charges, as well as decreased volumes and the loss of related fixed cost leverage, related to our renewable power business. This was partially offset by the effects of selling prices and favorable product mix and reduced research and development expense. Foreign currency exchange rates had an unfavorable impact of $3,099 for fiscal year 2013 compared to fiscal year 2012. Excluding the specific charges in fiscal year 2013 and the operations of the renewable power business for all periods, segment earnings were $120,167 for fiscal year 2013 compared to $112,540 for fiscal year 2012. Excluding the specific charges in fiscal year 2013 and the operations of the renewable power business for all periods, earnings as a percentage of sales were 15.9% for fiscal year 2013 compared to 14.8% for fiscal year 2012. The increase in segment earnings excluding the specific charges and operations of the renewable power business was due to the effects of selling prices and favorable product mix and reduced research and development expense. Nonsegment expenses Nonsegment expenses for fiscal year 2013 increased to $39,061, or 2.0% of net sales, compared to $33,365, or 1.8% of net sales, for fiscal year 2012. The increase in nonsegment expenses as a percent of net sales for fiscal year 2013 is primarily attributable to costs of $1,944 associated with the acquisition of the Duarte Business. 2012 RESULTS OF OPERATIONS 2012 Sales Compared to 2011 Consolidated net sales increased 9.0% from $1,711,702 in fiscal year 2011 to $1,865,627 in fiscal year 2012. Details of the changes in consolidated net sales are as follows:
The increase in net sales in fiscal year 2012 was primarily attributable to sales volume increases in our Energy segment. Inverters for wind turbines, control systems for small and large natural gas engines, and industrial gas turbines were leading contributors to increased sales in our Energy segment. Increased sales within our Aerospace segment in fiscal year 2012 were primarily attributable to strong defense and commercial aftermarket and commercial OEM sales, along with increased OEM defense sales. Price changes: Increases in selling prices were driven primarily by price increases related to both OEM and aftermarket sales within our Aerospace segment. Selling prices in the Energy segment were relatively unchanged from the prior year, consistent with prevailing market conditions. Foreign currency exchange rates:During the fiscal year ended September 30, 2012, our net sales were negatively impacted by $20,810 due to changes in foreign currency exchange rates, compared to the same period of fiscal year 2011. 2012 Costs and Expenses Compared to 2011 Variable compensation expense, which is tied to relative financial and operating performance, can vary significantly from fiscal year-to-year. During fiscal year 2012, variable compensation expense decreased $7,776 as compared to fiscal year 2011 and has impacted cost of goods sold, selling, general and administrative expenses, and research and development Cost of goods sold increased by $105,191 to $1,303,344, or 69.9% of net sales, for fiscal year 2012 from $1,198,153, or 70.0% of net sales, for fiscal year 2011. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) of 30.1% for fiscal year 2012 was consistent with the same period of the prior fiscal year’s gross margin of 30.0%. Selling, general, and administrative expenses increased by $15,609, or 10.5%, to $164,512 for fiscal year 2012 as compared to $148,903 for fiscal year 2011 primarily as a result of increases in costs to support our current operations and 45 anticipated sales growth. In addition, bad debt expense increased by approximately $3,200 in fiscal year 2012 in response to the bankruptcies of several airlines and the issues of some of our renewable power customers. Selling, general and administrative expenses as a percentage of net sales was 8.8% for fiscal year 2012, consistent with 8.7% for fiscal year 2011. Included in selling, general and administrative Research and development costs increased by $27,641, or 23.9%, to $143,274 for fiscal year 2012 as compared to $115,633 for the same period of fiscal year 2011. Research and development costs increased as a percentage of net sales to 7.7% for fiscal year 2012 as compared to 6.8% for fiscal year 2011. The increase in research and development costs Amortization of intangible assets decreased to $32,809 for fiscal year 2012 compared to $34,993 for fiscal year 2011. As a percentage of net sales, amortization of intangible assets decreased to 1.8% for fiscal year 2012 as compared to 2.0% for the prior year. Interest expenseincreased slightly to $26,003, or 1.4% of net sales, for fiscal year 2012 compared to $25,399, or 1.5% of net sales, for the prior fiscal year. Income taxes were provided at an effective rate on earnings before income taxes of 28.4% for fiscal year 2012 compared to 29.5% for fiscal year 2011. The change in the effective tax rate (as a percentage of earnings before income taxes) was attributable to the
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During the second quarter of fiscal year 2012, we re-evaluated our strategic alternatives in various international markets and determined that a portion of the undistributed earnings of certain of our foreign subsidiaries that were previously expected to be repatriated into the United States within the foreseeable future will remain indefinitely invested outside the United States. We accordingly reversed the deferred tax liability associated with repatriating those earnings, resulting in a tax benefit of $3,326 for fiscal year 2012. This item is included in the “Foreign tax rate differences, including repatriation reserve change”“Taxes on international activities” line in the rate reconciliation above.
On December 17, 2010, legislation was enacted that retroactively extended the U.S. research tax credit, which had expired as of December 31, 2009. As a result of this extension, fiscal year 2011 included the effect of recognizing a tax benefit of $3,088 related to the retroactive impact to the prior year. The credit expired again on December 31, 2011 and has not been renewed.2011.
In determining the tax amounts in our financial statements, estimates are sometimes used that are subsequently adjusted in the actual filing of tax returns or by updated calculations. Such adjustments resulted in a net tax benefit of $2,813 and $497 in fiscal years 2012 and 2011, respectively. In addition, we occasionally have resolutions of tax issuesitems with tax authorities related to prior years due to the conclusion of audits and the lapse of applicable statutes of limitations. Such resolutions and statute lapses resulted in a net tax benefit of $1,130 and $2,063 in fiscal years 2012 and 2011, respectively. The preceding amounts are included in the “Adjustments of prior period items” lines in the above table.
The total amount of the gross liability for worldwide unrecognized tax benefits reported in other liabilities in the Consolidated Balance Sheet was $18,069 at September 30, 2012 and $16,931 at September September��30, 2011. At September 30, 2012, the amount of unrecognized tax benefits that would impact Woodward’s effective tax rate, if recognized, was $15,061. At this time, we estimate it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,190 in the next twelve months due primarily to the expiration of certain statutes of limitations. We accrue for potential interest and penalties related to unrecognized tax benefits in tax expense. Woodward had accrued interest and penalties of $1,701 as of September 30, 2012 and $1,989 as of September 30, 2011.
Woodward’s tax returns are audited by U.S., state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in significant foreign jurisdictions include 2004 and forward. Woodward has been subject to U.S. Federal income tax examinations for fiscal years through 2008. Woodward is subject to U.S. state income tax examinations for fiscal years 2007 and forward.
SEGMENT RESULTS
The following table presents sales by segment:46
Year Ended September 30, | ||||||||||||||||||||||||
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Aerospace | $ | 896,083 | 48 | % | $ | 843,032 | 49 | % | $ | 769,379 | 53 | % | ||||||||||||
Energy | 969,544 | 52 | 868,670 | 51 | 687,651 | 47 | ||||||||||||||||||
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Consolidated net sales | $ | 1,865,627 | 100 | % | $ | 1,711,702 | 100 | % | $ | 1,457,030 | 100 | % | ||||||||||||
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The following table presents earnings by segment:
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Aerospace | $ | 130,192 | $ | 129,502 | $ | 112,171 | ||||||
Energy | 126,441 | 113,872 | 94,014 | |||||||||
Total segment earnings | 256,633 | 243,374 | 206,185 | |||||||||
Nonsegment expenses | (33,365 | ) | (30,942 | ) | (22,434 | ) | ||||||
Interest expense, net | (25,461 | ) | (24,865 | ) | (28,876 | ) | ||||||
Consolidated earnings before income taxes | 197,807 | 187,567 | 154,875 | |||||||||
Income tax expense | 56,218 | 55,332 | 43,713 | |||||||||
Consolidated net earnings | $ | 141,589 | $ | 132,235 | $ | 111,162 |
The following table presents earnings by segment as a percent of segment net sales:
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Aerospace | 14.5 | % | 15.4 | % | 14.6 | % | ||||||
Energy | 13.0 | 13.1 | 13.7 |
2012 Segment Results Compared to 2011
Aerospace
Aerospace
Aerospace segment net salesincreased $53,051, or 6.3%, to $896,083 for fiscal year 2012 from $843,032 for fiscal year 2011. Increased sales during fiscal year 2012 were primarily attributable to strong aftermarket and commercial OEM sales.
Sales for the aerospace aftermarket continued to benefit from increased passenger air traffic and the roll out of new aircraft platforms on which our Aerospace products are used. Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft have increased based on improved airline demand and new product introduction. In addition, the increase in sales continuescontinued to reflect recovering demand for business jets. Military OEM defense sales for fiscal year 2012 increased on the strength of rotocraft and fixed-wing sales, when compared to the prior fiscal year.
Aerospace segment earnings increased $690, or 0.5%, for fiscal year 2012 compared to fiscal year 2011 due to the following:following:
Earnings at September 30, 2011 | $ | 129,502 | ||
Sales volume | 16,678 | |||
Selling price and mix | 18,698 | |||
Research and development expense | (30,277 | ) | ||
Manufacturing costs associated with sales growth and manufacturing productivity | (7,969 | ) | ||
Increase in allowance for losses in accounts receivable | (2,114 | ) | ||
Variable compensation | 4,689 | |||
Other, net | 985 | |||
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Earnings at September 30, 2012 | $ | 130,192 | ||
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Earnings at September 30, 2011 | $ | 129,502 |
Sales volume | 16,678 | |
Price and sales mix | 18,698 | |
Research and development expense | (30,277) | |
Manufacturing costs associated with sales growth and manufacturing productivity | (7,969) | |
Increase in allowance for losses in accounts receivable | (2,114) | |
Variable compensation | 4,689 | |
Other, net | 985 | |
Earnings at September 30, 2012 | $ | 130,192 |
Segment earnings as a percentage of sales decreased to 14.5% in fiscal year 2012 compared to 15.4% for fiscal year 2011. Aerospace segment earnings in fiscal year 2012 were essentially flat when compared to fiscal year 2011 primarily due to increased sales volume, favorable price and sales mix, and reduced variable compensation expense, mostly offset by our increased investment in product development and improved production processes related to our being awarded a substantial number of significant new system programs. Many of the new system programs have expanded more than anticipated in both content and complexity, requiring increased investments in new product development and production process improvements, including programs to streamline production cell layouts and reduce waste in the manufacturing process. In addition, we increased our allowance for losses in accounts receivable in response to the bankruptcies of several airlines.
Energy
Energy segment net sales increased $100,874, or 11.6% to $969,544 for fiscal year 2012 from $868,670 for fiscal year 2011.
Net sales for fiscal year 2012 increased in nearly all of our energy markets. Wind turbine power converter sales increased primarily due to some accelerated ordering by our customers in an effort to take advantage of expiring government incentives and to comply with various renewable energy programs. Wind turbine power converter sales also increased due to market share gains. Net sales also increased in our industrial gas turbine markets and engine markets in which natural gas and other alternative fuels are used, including electric power generation and heavy-duty transportation applications.
Energy segment earnings increased by $12,569, or 11.0%, for fiscal year 2012 as compared to fiscal year 2011 due to the following:following:
Earnings at September 30, 2011 | $ | 113,872 |
Sales volume | 34,395 | |
Price and sales mix | (11,033) | |
Research and development expense | 27 | |
Costs associated with sales growth and manufacturing productivity | (5,771) | |
Warranty costs | (2,042) | |
Increase in allowance for losses in accounts receivable | (2,025) | |
Variable compensation | 3,044 | |
Effects of changes in foreign currency rates | 34 | |
Other, net | (4,060) | |
Earnings at September 30, 2012 | $ | 126,441 |
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Earnings at September 30, 2011 ..... | $ | 113,872 | ||
Sales volume | 34,395 | |||
Selling price and mix | (11,033 | ) | ||
Research and development expense | 27 | |||
Costs associated with sales growth and manufacturing productivity | (5,771 | ) | ||
Warranty costs | (2,042 | ) | ||
Increase in allowance for losses in accounts receivable | (2,025 | ) | ||
Variable compensation | 3,044 | |||
Effects of changes in foreign currency rates | 34 | |||
Other, net | (4,060 | ) | ||
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Earnings at September 30, 2012 | $ | 126,441 | ||
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The increase in the Energy segment earnings for fiscal year 2012 as compared to fiscal year 2011 was driven primarily by increased sales volume and decreased variable compensation, partially offset by unfavorable product mix and the impact of pricing pressures, increased costs to support sales growth and manufacturing productivity, increases in allowance for losses in accounts receivable, and increased warranty costs. The increases in costs to support sales growth and manufacturing productivity are in response to the Energy segment’s focus on capturing and maintaining increased market share, particularly in the developing natural gas markets. The increase in allowance for losses in accounts receivable reflects the issues of some of our renewable power customers regarding decreases in available government subsidies and the limited availability of financing in the credit markets to support renewable energy projects.
Non segment expenses
Non segment expenses
Non segment expensesfor fiscal year 2012 increased to $33,365, or 1.8% of net sales, compared to $30,942, or 1.8% of net sales, for fiscal year 2011.
2011 RESULTS OF OPERATIONS
2011 Sales Compared to 2010
Consolidated net sales increased 17.5% from $1,457,030 in fiscal year 2010 to $1,711,702 in fiscal year 2011, primarily due to volume increases in nearly all of the markets we serve.
Details of the changes in consolidated net sales are as follows:
Consolidated net external sales at September 30, 2010 | $ | 1,457,030 | ||
Aerospace segment volume | 70,869 | |||
Aerospace segment customer funded development | (9,990 | ) | ||
Energy segment volume | 165,242 | |||
Price and sales mix | 10,553 | |||
Effects of changes in foreign currency rates | 17,998 | |||
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Consolidated net external sales at September 30, 2011 | $ | 1,711,702 | ||
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The increase in net sales in fiscal year 2011 was attributable to sales volume increases across both of our segments. Customer funded development decreased slightly in the Aerospace segment. Net sales for fiscal year 2011 were also impacted by favorable price changes and foreign currency exchange rates.
Sales for fiscal year 2011 continued the growth trend we began to experience in the second half of fiscal year 2010. In addition, the global supply chain began to recover some from capacity constraints introduced as the global economy struggled in the past several years.
Price changes: The impact of increases in selling prices across several products were partially offset by decreases in selling prices for some wind related products. Selling price changes are in response to prevailing market conditions.
Foreign currency exchange rates: Our worldwide sales activities are primarily denominated in U.S. dollars (“USD”), European Monetary Units (the “Euro”), Great Britain pounds (“GBP”), Japanese yen (“JPY”), Chinese yuan (“CNY”) and Swiss Francs (“CHF”). During the fiscal year ended September 30, 2011, our net sales were positively impacted by approximately $17,998 due to changes in foreign currency exchange rates, compared to the same period of fiscal year 2010.
2011 Costs and Expenses Compared to 2010
Variable compensation expense, which is tied to relative financial and operating performance, can vary significantly from fiscal year-to-year. During fiscal year 2011, variable compensation expense increased $25,962 as compared to fiscal year 2010 and impacted cost of goods sold, selling general and administrative, and research and development expenses.
Cost of goods soldincreased by $176,637 to $1,198,153, or 70.0% of net sales, for fiscal year 2011 from $1,021,516, or 70.1% of net sales, for fiscal year 2010. Correspondingly, gross margins (as measured by net sales less cost of goods sold, divided by net sales) remained relatively flat at 30.0% for fiscal year 2011 as compared to 29.9% for the same period of the prior fiscal year.
Selling, general and administrative expenses increased by $13,023, or 9.6%, to $148,903 for fiscal year 2011 as compared to $135,880 for fiscal year 2010 primarily as a result of increased variable compensation. Selling, general and administrative expenses decreased as a percentage of net sales to 8.7% for fiscal year 2011 as compared to 9.3% for fiscal year 2010. Included in selling, general and administrative expense for fiscal year 2011 is approximately $2,396 related to the acquisition of IDS.
Research and development costs increased by $33,073, or 40.1%, to $115,633 for fiscal year 2011 as compared to $82,560 for the same period of fiscal year 2010. Research and development costs increased as a percentage of net sales to 6.8% for fiscal year 2011 as compared to 5.7% for fiscal year 2010. The increase in research and development costs was primarily due to our investment in new product platforms that were awarded and the development of next generation technology. Research and development costs in fiscal year 2011 were also impacted by increased variable compensation.
Amortization of intangible assets decreased slightly to $34,993 for fiscal year 2011 compared to $35,114 for fiscal year 2010. As a percentage of net sales, amortization of intangible assets decreased to 2.0% for fiscal year 2011 as compared to 2.4% for the prior year.
Interest expense decreased to $25,399 for fiscal year 2011 compared to $29,385 for the prior fiscal year. Interest expense as a percent of sales was 1.5% for the fiscal year ended September 30, 2011, as compared to 2.0% for the fiscal year ended 2010. The decrease in interest expense is due to related debt reductions.
Income taxes were provided at an effective rate on earnings before income taxes of 29.5% in fiscal year 2011 compared to 28.2% in fiscal year 2010. The change in the effective tax rate (as a percentage of earnings before income taxes) was attributable to the following:
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During the year ended September 30, 2010, the Internal Revenue Service concluded an examination of our U.S. Federal income tax returns for fiscal years 2007 and 2008. During the year ended September 30, 2010, we completed certain internal revaluation assessments and certain statues of limitations expired. As a result, we reduced our liability for unrecognized tax benefits by a net favorable amount of $6,416 for the period ended June 30, 2010.
On December 17, 2010, legislation was enacted that retroactively extended the U.S. research tax credit, which had expired as of December 31, 2009. As a result of this extension, fiscal year 2011 included the effect of recognizing a tax benefit of $3,088 related to recognition of the retroactive impact of the prior year.
The total amount of the gross liability for worldwide unrecognized tax benefits reported in other liabilities in the Consolidated Balance Sheet was $16,931 at September 30, 2011, and $10,586 at September 30, 2010. At September 30, 2011, the amount of unrecognized tax benefits that would impact Woodward’s effective tax rate, if recognized, was $14,078. We recognize interest and penalties related to unrecognized tax benefits in tax expense. Woodward had accrued interest and penalties of $1,989 as of September 30, 2011 and $1,431 as of September 30, 2010.
Woodward’s tax returns are audited by U.S., state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in significant foreign jurisdictions include 2003 and forward. Woodward has been subject to U.S. Federal income tax examinations for fiscal years through 2008. Woodward is subject to U.S. state income tax examinations for fiscal year 2007 and forward.
2011 Segment Results Compared to 2010
Aerospace
Aerospace segment net sales increased $73,653, or 9.5%, to $843,032 for fiscal year 2011 from $769,379 for fiscal year 2010. Sales during fiscal year 2011 were higher in nearly all markets we served. Sales for the aerospace aftermarket continued to benefit from increased passenger and cargo air traffic, and the introduction of new aircraft platforms on which Aerospace products are used.
We believe the fleet dynamics of commercial aircraft platforms on which we have content, such as the Airbus A320, the Boeing 777, the Embraer and the Bombardier 70- to 90-seat regional jets, allowed our aftermarket business to be somewhat less negatively impacted by the effects of the recent economic down-cycle than some of our competitors and supported sales growth as a result of a rebound in air traffic. Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft increased based on improved airline demand and new product introduction. The increase in sales continued to reflect recovering demand for business and regional jets and rotorcraft, partially offset by a slight decline in military sales and reduced levels of customer funded development revenue.
Aerospace segment earnings increased $17,331, or 15.5%, for fiscal year 2011 as compared to fiscal year 2010 due to the following:
Earnings at September 30, 2010 | $ | 112,171 | ||
Sales volume | 26,485 | |||
Selling price and mix | 17,542 | |||
Customer funded development | (9,990 | ) | ||
Research and development expense | (5,328 | ) | ||
Variable compensation | (12,307 | ) | ||
Worker’s compensation | (2,983 | ) | ||
Effects of changes in foreign currency rates | 336 | |||
Other, net | 3,576 | |||
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Earnings at September 30, 2011 | $ | 129,502 | ||
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The increase in Aerospace segment earnings in fiscal year 2011 compared to fiscal year 2010 was primarily the result of sales volume increases, a more favorable price and sales mix due to increased levels of aftermarket sales, partially offset by increased variable compensation and costs associated with new product development, including a reduction in customer funded development. The sales mix during fiscal year 2011 continued to include a higher proportion of aftermarket sales than in fiscal year 2010 as a result of increased air traffic. Earnings as a percentage of sales increased to 15.4% in fiscal year 2011 compared to 14.6% for fiscal year 2010.
Energy
Energy segment net sales increased $181,019, or 26.3% to $868,670 for fiscal year 2011 from $687,651 for fiscal year 2010. Sales for fiscal year 2011 increased in all of our markets and includes $13,545 in net sales associated with the IDS Acquisition. Sales were particularly strong in the large and small engine markets utilizing diesel, gas, including natural gas, and other special fuel sources, which serve primarily construction, agricultural, and on-highway natural gas vehicles.
In addition, we continued to see growth in our industrial steam turbine market, as well as increased deliveries of wind turbine power converters. Although wind turbine converter sales increased in fiscal year 2011 as compared to fiscal year 2010, wind converter demand continued to be impacted by tight lender requirements for project financing and uncertainty regarding government stimulus programs due to a lack of clear policy direction in the United States and elsewhere.
Energy segment earningsincreased by $19,858, or 21.1%, for fiscal year 2011 as compared to fiscal year 2010 due to the following:
Earnings at September 30, 2010 | $ | 94,014 | ||
Sales volume | 60,412 | |||
Selling price and mix | (7,089 | ) | ||
Research and development expense | (13,906 | ) | ||
Variable compensation | (11,415 | ) | ||
Increase in global expansion efforts | (3,625 | ) | ||
Increased costs to support sales growth | (3,222 | ) | ||
Freight and duty costs | (1,512 | ) | ||
Effects of changes in foreign currency rates | 3,923 | |||
Other, net | (3,708 | ) | ||
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Earnings at September 30, 2011 | $ | 113,872 | ||
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The increase in the Energy segment earnings for fiscal year 2011 as compared to the prior fiscal year was driven primarily by increased volume, offset partially by increases in research and development, variable compensation and unfavorable selling price and product mix.
Non segment expenses
Non segment expenses for fiscal year 2011 increased to $30,942, or 1.8% of net sales, compared to $22,434, or 1.5% of net sales, for fiscal year 2010. The increase in non segment expenses for fiscal year 2011 is primarily due to increased variable compensation and costs associated with the acquisition of IDS.
LIQUIDITY AND CAPITAL RESOURCES
We believe liquidity and cash generation are important to our strategy of self-funding our ongoing operating needs. Historically, we have been able to satisfy our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities. We expect that cash generated from our operating activities, together with borrowings under our Amended Revolver,Revolving Credit Agreement, will be sufficient to fund our continuing operating needs.needs, including capital expansion funding.
As of September 30, 2012,2013, we do not believe that any potential European sovereign debt defaults would have a material adverse affecteffect on our liquidity. We do not have any significant direct exposure to European government receivables, and our customers do not rely heavily on European government subsidies or other government support. We will continue to monitor our exposure to risks relating to European sovereign debt.
Our aggregate cash and cash equivalents were $61,829$48,556 and $74,539,$61,829, and our working capital was $623,609$544,017 and $536,936$623,609 at September 30, 20122013 and September 30, 2011,2012, respectively. Of the $61,829$48,556 of cash and cash equivalents held at September 30, 2012, $39,120 is2013, $42,558 was held by our foreign subsidiaries. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered permanently investedindefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these funds were to be repatriated.
Consistent with business practice common in China, Woodward’s Chinese subsidiary has accepted, in settlement of certain customer accounts receivable from Chinese customers, bank drafts authorized by large, creditworthy Chinese banks. These bank drafts represent a promise to pay the balance of the receivable at a future date, albeit under payment terms that can be longer than traditional payment terms. At September 30, 2013 and September 30, 2012, Woodward had bank drafts of $72,954 and $40,312, respectively, recorded as accounts receivable on its consolidated balance sheets. The increase in bank drafts is due to increased sales in our Energy segment with respect to sales of compressed natural gas systems and aero-derivative gas turbine systems in China. Woodward only accepts bank drafts authorized by large, creditworthy banks where the credit risk associated with the bank draft is assessed to be minimal.
On October 1, 2013, we entered into a note purchase agreement (the “2013 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions. We issued the Series G, H and I Notes on October 1, 2013 for an aggregate principal amount of
48
$100,000 and used the proceeds to repay all of the outstanding balance on the Series B Notes due October 1, 2013. Under the terms of the 2013 Note Purchase Agreement, we intend to issue the Series J, K and L Notes for an additional $150,000 aggregate principal amount on November 15, 2013. The series of notes issued under the 2013 Note Purchase Agreement have not been and will not be registered under the Securities Act of 1933 and they may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Holders of the notes under the 2013 Note Purchase Agreement are not entitled to any registration rights. For further discussion of the 2013 Note Purchase Agreement, see Note 13, Long-term debt to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data.”
Our Amended Revolver,Revolving Credit Agreement, which we entered into on January 4, 2012, extends the maturity date of our revolving credit facility to January 2017July 10, 2013, matures in July 2018 and provides a borrowing capacity of up to $400,000$600,000 with the option to increase total borrowing capacityavailable borrowings to up to $600,000,$800,000, subject to lenders’ participation. In the event we are unable to generate sufficient cash flows from operating activities, we can borrow against our Amended Revolver$600,000 revolving credit facility as long as we are in compliance with all of our debt covenants. Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our stock, payments of dividends, and acquisitions. In addition, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are generally reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis.
At September 30, 2012, we had no For further discussion of the Revolving Credit Agreement and our other credit facilities, see Note 12, Credit facilities and short-term borrowings outstanding from our $400,000 Amended Revolver, to the Consolidated Financial Statements in “Item 8 – Financial Statements and we had $329 of borrowings outstanding from our foreign credit facilities.Short-term borrowing activity during the fiscal year ended September 30, 2012 were as follows:
Maximum daily balance during the period .. | $ | 61,576 | ||
Average daily balance during the period | $ | 31,874 | ||
Weighted average interest rate on average daily balance | 1.69 | % |
At September 30, 2012, we had total outstanding debt of $392,204 with additional borrowing availability of $394,080 under our $400,000 Amended Revolver, net of outstanding letters of credit, and additional borrowing availability of $20,587 under various foreign credit facilities. Our Series B notes mature in October 2013 and require a balloon payment of $100,000.Supplementary Data.”
On October 31, 2012, a Chinese subsidiary of Woodward increased its local credit facility with Hong Kong and Shanghai Banking Company by $17,700 to total availability of $22,700, or the local currency equivalent of $22,700. Any cash borrowings under the local Chinese credit facility are secured by a parent guarantee from Woodward. The Chinese subsidiary may utilize the local facility for cash borrowings to support its local cash operating needs.
At September 30, 2013, we had total outstanding debt of $550,000, including $200,000 borrowed under the Line of Credit as discussed below, with additional borrowing availability of $595,486 under our Revolving Credit Agreement, net of outstanding letters of credit, and additional borrowing availability of $28,227 under various foreign credit facilities.
Our 2008 Term Loan, which had a balance of $40,000 at December 31, 2012, was repaid and terminated, without penalty, during the second quarter of fiscal year 2013, and the remaining balance of unamortized debt issuance costs of $128 was written off to interest expense during the quarter.
In connection with the acquisition of the Duarte Business on December 21, 2012, we entered into the Line of Credit. The Line of Credit provides for unsecured loans to the Company of up to $200,000 on a revolving basis. Loans made under the Line of Credit bear interest at a floating rate based, at the Company’s option, on either the prime rate or an adjusted LIBOR. There was $200,000 outstanding on the Line of Credit as of September 30, 2013, which consisted of an adjusted LIBOR loan bearing interest at 1.06% and maturing on October 31, 2013. Subsequently, the Company renewed the loan to extend the maturity to November 15, 2013. Subject to lender participation, the Company may renew the loan for one additional period prior to its termination on December 20, 2013.
We have classified the $200,000 outstanding on the Line of Credit as long-term debt as of September 30, 2013 based on our intention to refinance the $200,000 using new long-term debt facilities and/or our revolving credit facility. We currently have the ability to utilize our revolving credit facility under the Revolving Credit Agreement to finance the entire $200,000 outstanding balance, if necessary.
At September 30, 2013, we had no borrowings outstanding on our revolving credit facility under our Revolving Credit Agreement and no borrowings outstanding on our foreign credit facilities.Short-term borrowing activity during the fiscal year ended September 30, 2013 was as follows:
Maximum daily balance during the period | $ | 62,154 | |
Average daily balance during the period | $ | 27,810 | |
Weighted average interest rate on average daily balance | 2.11% |
We believe we were in compliance with all our debt covenants at September 30, 2012.2013.
In addition to utilizing our cash resources to fund the working capital needs of our business, we evaluate additional strategic uses of our funds, including the repurchase of our stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash.
49
We intend to establishare currently developing a second campus in the greater-Rockford, Illinois area for our Aircraft Turbine Systems business within our Aerospace reporting segment,business. This campus is intended to addresssupport the growth expected over the next ten years and beyond stimulated by our being awarded a substantial number of new system platforms.platforms, particularly on narrow-body aircraft. We anticipate investing approximately $200,000$275,000 over the next tenfive years in land, buildings and equipment between our two Rockford area campusescampuses. These investments are expected to result in Illinoisfuture productivity gains for our existing and approximately doublingnew business. However, given the significance of the anticipated volumes associated with the new system platforms, we still expect our Rockford area workforce in that locationto increase substantially, by as much as 70%-90% from current levels, by the end of 2021. We expectare also developing a new campus at our corporate headquarters in Fort Collins, Colorado to fundsupport the cost of these Illinois capacity expansions through our cash generated from operations, with potential usecontinued growth of our Amended Revolver as well. In addition, to assist with the funding of this project we expect to receive certain corporate income tax credits that are tied to our employment levels and our Illinois income tax liabilities over approximately the next 20 years, plus certain grants and incentives from Illinois state and local governments.
We are also considering similar undertakings to support continued growth with regard toenergy business by supplementing our existing Colorado manufacturing facilities and corporate headquarters. We anticipate investing approximately $150,000 over the next five years in land, buildings and equipment for this new campus in Colorado.
We believe we have adequate access to several sources of contractually committed borrowings and other available credit facilities. However, we could be adversely affected if the banks supplying our borrowing requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. While we believe the lending institutions participating in our credit arrangements are financially capable,stable, recent events in the global credit markets, including the failure, takeover or rescue by various government entities of major financial institutions, have created uncertainty with respect to credit availability.
Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements, and to fund working capital, capital expenditures and product development efforts will depend on our ability to generate cash from operating activities, which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control.
Cash Flows
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| Year Ended | |||||||
| September 30, | |||||||
| 2013 |
| 2012 |
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| 2011 | ||
Net cash provided by operating activities | $ | 222,592 |
| $ | 144,113 |
| $ | 114,623 |
Net cash used in investing activities |
| (340,042) |
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| (64,617) |
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| (87,140) |
Net cash provided by (used in) financing activities |
| 102,473 |
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| (90,461) |
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| (55,979) |
Effect of exchange rate changes on cash and cash equivalents |
| 1,704 |
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| (1,745) |
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| (2,544) |
Net change in cash and cash equivalents |
| (13,273) |
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| (12,710) |
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| (31,040) |
Cash and cash equivalents at beginning of period |
| 61,829 |
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| 74,539 |
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| 105,579 |
Cash and cash equivalents at end of period | $ | 48,556 |
| $ | 61,829 |
| $ | 74,539 |
Year Ended September 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net cash provided by operating activities | $ | 144,113 | $ | 114,623 | $ | 184,572 | ||||||
Net cash used in investing activities | (64,617 | ) | (87,140 | ) | (52,132 | ) | ||||||
Net cash used in financing activities | (90,461 | ) | (55,979 | ) | (128,985 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,745 | ) | (2,544 | ) | 1,261 | |||||||
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Net change in cash and cash equivalents | (12,710 | ) | (31,040 | ) | 4,716 | |||||||
Cash and cash equivalents at beginning of period | 74,539 | 105,579 | 100,863 | |||||||||
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Cash and cash equivalents at end of period | $ | 61,829 | $ | 74,539 | $ | 105,579 | ||||||
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20122013 Cash Flows Compared to 20112012
Net cash flows provided by operating activitiesfor fiscal year 2013 was $222,592 compared to $144,113 in fiscal year 2012. Accounts receivable utilized $9,774 of cash in fiscal year 2013 compared to $59,061 of cash utilized in fiscal year 2012, accounting for the majority of the change. The amount of cash utilized for accounts receivable in fiscal year 2013 reflects a slight increase in accounts receivable in fiscal year 2013 as compared to fiscal year 2012. The higher utilization in fiscal year 2012 reflects the significant increase in accounts receivable in fiscal year 2012 when compared to fiscal year 2011 due to higher sales in fiscal year 2012 as compared to fiscal year 2011. The increase in operating cash flows was also attributable to operational improvements, which lowered inventory requirements in fiscal year 2013. Inventory utilized $1,485 of cash in fiscal year 2013 compared to $18,702 of cash utilized in fiscal year 2012.
Net cash flows used in investing activities for fiscal year 2013 was $340,042 compared to $64,617 in fiscal year 2012. The increase in cash used compared to the same period of the last fiscal year is due primarily to the acquisition of the Duarte Business in the first quarter of fiscal year 2013 which utilized $198,860 of cash. In addition, payments for property, plant and equipment increased by $76,700 to $141,600 in fiscal year 2013 as compared to $64,900 in fiscal year 2012 related mainly to the devlopment of a second campus in the greater-Rockford, Illinois area, a new campus at our headquarters in Fort Collins, Colorado and the purchase of a building site in Niles, Illinois.
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Net cash flows provided by financing activities for fiscal year 2013 was $102,473 compared to net cash flows used for financing activities of $90,461 for fiscal year 2012. During fiscal year 2013, we had net short and long-term borrowings of $157,713 compared to net debt repayments of $33,091 in the prior year. The higher borrowings in fiscal year 2013 were primarily attributable to the acquisition of the Duarte Business. We utilized $45,754 to repurchase 1,233 shares of our common stock in fiscal year 2013, compared to $44,110 to repurchase 1,132 shares of our common stock in fiscal year 2012, under our $200,000 stock repurchase program authorized by our Board of Directors in July 2010 (the “2010 Authorization”). In July 2013, our Board of Directors approved a new stock purchase plan, which replaces the 2010 Authorization, that authorizes the repurchase of up to $200,000 of our outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in July 2016 (the “2013 Authorization”). We did not repurchase any shares of commons stock in the fourth quarter of fiscal year 2013 under with the 2010 Authorization or the 2013 Authorization.
2012 Cash Flows Compared to 2011
Net cash flows provided by operating activities for fiscal year 2012 was $144,113 compared to $114,623 in fiscal year 2011. The increase of $29,490 iswas primarily attributable to changes in inventory, which utilized $18,702 of cash in fiscal year 2012 compared to $76,643 of cash utilized in fiscal year 2011, partially offset by a decrease in accrued variable compensation in fiscal year 2012 and an increase in accounts receivable due to higher sales.
Net cash flows used in investing activities for fiscal year 2012 was $64,617 compared to $87,140 in fiscal year 2011. The decrease of $22,523 compared to the same period of the last fiscal year is2011 was due primarily to the IDS Acquisition completed in the third quarter of fiscal 2011 utilizing net cash of $38,944. Cash paid for capital expenditures was $64,900 during fiscal year 2012, compared to $48,255 for fiscal year 2011. Cash from operations funded capital expenditures in both fiscal years.
Net cash flows used in financing activities for fiscal year 2012 was $90,461 compared to $55,979 in net cash flows used for fiscal year 2011. We utilized $44,110 to repurchase 1,132 shares of our common stock in fiscal year 2012, compared to $6,837 to repurchase 208 shares of our common stock in fiscal year 2011. In addition, during fiscal year 2012, we had net debt repayments of $33,091 compared to net debt repayments of $36,601 in the prior fiscal year.year 2011. The average daily balance of borrowings in fiscal year 2012 was $31,874, which was consistent with the prior year’sfiscal year 2011’s average daily balance of $32,762.
2011 Cash Flows Compared to 2010
Net cash flows provided by operating activitiesdecreased by $69,949 compared to the fiscal year ended September 30, 2010. The decrease in operating cash flows during fiscal year 2011 was attributable to the utilization of working capital primarily associated with increased investment in inventory levels and accounts receivable. The increase in inventory was due to anticipated deliveries scheduled for coming quarters as well as the effect of carrying higher levels of certain parts and raw materials as a result of some sourcing inefficiencies. Sourcing inefficiencies resulted from long lead times, long shipping requirements of product between manufacturing locations, and volatility in the demand of our customers. While our responses to these conditions led to an increase in inventory, we have not experienced continued sourcing inefficiencies and these sourcing inefficiencies have not had a continuing material adverse impact on our inventory levels.
Net cash flows used in investing activities increased by $35,008 compared to the fiscal year ended September 30, 2010. The increase was due primarily to the IDS Acquisition completed in the third quarter of fiscal 2011 utilizing net cash of $38,944. Cash paid for capital expenditures was $48,255 during fiscal year 2011, compared to $28,104 for fiscal year 2010. The increase in fiscal year 2011 investment in capital equipment reflected an increase of $15,254 related to the construction of a new aircraft turbine test facility in Rockford, IL. Cash flows used in investing activities for fiscal year 2010 included a $25,000 settlement with the DOJ associated with a liability assumed in the acquisition of MPC. The purchase price we paid in connection with the acquisition of MPC was reduced by a corresponding amount and the payment was recognized as cash used for business acquisition.
Net cash flows used in financing activities decreased by $73,006 compared to the fiscal year ended September 30, 2010. During fiscal year 2011, we had net reduction in short-term borrowings of $18,171, repaid $18,430 in scheduled long-term debt reductions, and paid stockholder dividends of $18,581. In addition, during this same period, we utilized $6,837 to repurchase 208 shares of our common stock in the open market.
During fiscal year 2010, we repaid $128,420 of outstanding long-term debt, including unscheduled prepayments of $98,000, paid stockholders dividends of $17,085, and purchased the remaining 26% non-controlling interest in Woodward India Private Limited, a Woodward consolidated subsidiary (“Woodward India”) for $8,120. As a result of this transaction, Woodward owns 100% of Woodward India. In addition, during the fiscal year 2010, we utilized $4,513 to repurchase 163 shares of our common stock in the open market.
Off-Balance Sheet Arrangements and Contractual Obligations
Contractual Obligations
A summary of our consolidated contractual obligations and commitments as of September 30, 20122013 is as follows:
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| Year Ending September 30, | ||||||||||||||||
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| Thereafter | ||||||
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| (in thousands) | |||||||||||||||
Long-term debt principal | $ | 100,000 |
| $ | - |
| $ | 107,000 |
| $ | - |
| $ | 200,000 |
| $ | 143,000 |
Interest on debt obligations (1) |
| 17,345 |
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| 17,345 |
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| 12,196 |
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| 9,933 |
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| 9,933 |
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| 1,801 |
Operating leases |
| 8,447 |
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| 6,660 |
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| 4,801 |
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| 4,019 |
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| 2,057 |
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| 4,047 |
Purchase obligations (2) |
| 287,187 |
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| 20,587 |
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| 150 |
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| 1 |
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| - |
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| 40 |
Construction contractual obligation (3) |
| 42,880 |
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| 951 |
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| 49 |
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| - |
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| - |
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| - |
Other (4) |
| 30 |
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| 297 |
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| - |
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| - |
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| - |
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| 22,694 |
Total | $ | 455,889 |
| $ | 45,840 |
| $ | 124,196 |
| $ | 13,953 |
| $ | 211,990 |
| $ | 171,582 |
(1) | Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect as of September 30, 2013. See Note 13, Long-term debt, to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” for further details on our long-term debt. |
On October 1, 2013, we entered into the 2013 Note Purchase Agreement relating to the sale by Woodward of an aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions.
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Year Ending September 30, | ||||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Long-term debt principal | $ | 7,500 | $ | 134,375 | $ | — | $ | 107,000 | $ | — | $ | 143,000 | ||||||||||||
Interest on debt obligations | 23,559 | 17,346 | 17,345 | 12,196 | 9,933 | 11,734 | ||||||||||||||||||
Operating leases | 7,578 | 6,014 | 4,278 | 3,219 | 2,805 | 5,730 | ||||||||||||||||||
Purchase obligations | 153,599 | 4,754 | 96 | — | — | — | ||||||||||||||||||
Other | 30 | 30 | 30 | — | — | 18,069 | ||||||||||||||||||
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Total | $ | 192,266 | $ | 162,519 | $ | 21,749 | $ | 122,415 | $ | 12,738 | $ | 178,533 | ||||||||||||
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Purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity, delivery, and termination liability.
Interest obligationsWe issued the Series G, H and I Notes on floating rate debt instrumentsOctober 1, 2013 for an aggregate principal amount of $100,000 and intend to issue the Series J, K, and L Notes in an additional aggregate principal amount of $150,000 on November 15, 2013. As we did not enter into the 2013 Note Purchase Agreement until after our fiscal year end, the aggregate principal amount issued and related interest payments are calculated for future periods using interest ratesnot included in effect asthe above table. The principal amounts on the Series G, H, I, J, K and L Notes mature between November 15, 2020 and November 15, 2025. For further discussion of September 30, 2012. Seethe 2013 Note Purchase Agreement, see Note 13,Long-term debt, to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” for further details on our long-term debt.Data.”
The $18,069
(2) | Purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity, delivery, and termination liability. |
(3) | Construction contractual commitments represent estimated amounts to be paid under contracts to construct a second campus in the greater-Rockford, Illinois area, a new campus at our corporate headquarters in Fort Collins, Colorado and a new facility in Niles, Illinois. We anticipate investing approximately $275,000, $150,000 and $50,000 over the next five years in land, buildings and equipment between our two Rockford area campuses, our new campus in Colorado and the new facility in Niles, Illinois, respectively. |
(4) | The $22,694 included in other obligations in the “Thereafter” column represents our best reasonable estimate for uncertain tax positions at this time and may change in future periods, as the timing of the payments and whether such payments will actually be required cannot be reasonably estimated. |
The above table does not reflect the following items:
Contributions to our retirement pension benefit plans, which we estimate will total approximately $9,430 in 2013. As of September 30, 2012 our pension plans were underfunded by $36,973
· | Contributions to our retirement pension benefit plans, which we estimate will total approximately $3,662 in 2014. As of September 30, 2013 our pension plans were underfunded by $248 based on projected benefit obligations. Statutory pension contributions in future fiscal years will vary as a result of a number of factors, including actual plan asset returns and interest rates. |
Contributions to our other postretirement benefit plans, which we estimate will total $4,943 in 2013. Other postretirement contributions are made on a “pay-as-you-go” basis as payments are made to healthcare providers, and such contributions will vary as a result of changes in the future cost of postretirement healthcare benefits provided for covered retirees. As of September 30, 2012, our other postretirement benefit plans were underfunded by $37,550
· | Contributions to our other postretirement benefit plans, which we estimate will total $3,954 in 2014. Other postretirement contributions are made on a “pay-as-you-go” basis as payments are made to healthcare providers, and such contributions will vary as a result of changes in the future cost of postretirement healthcare benefits provided for covered retirees. As of September 30, 2013, our other postretirement benefit plans were underfunded by $28,996 based on projected benefit obligations. |
· | Business commitments made to certain customers to perform under long-term product development projects, some of which may result in near-term financial losses. Such losses, if any, are recognized when they become likely to occur. |
In connection with the sale of the F&P product line during fiscal year 2009, Woodward assigned to a subsidiary of the purchaser its rights and responsibilities related to certain customerscontracts with the U.S. Government. Woodward provided to performthe U.S. Government a customary guarantee of the purchaser’s subsidiary’s obligations under long-term product development projects, some of which may result in near-term financial losses. Such losses, ifthe contracts. The purchaser and its affiliates have agreed to indemnify Woodward for any are recognized when they become likelyliability incurred with respect to occur.the guarantee.
Guarantees and letters of credit totaling approximately $6,390$5,061 were outstanding as of September 30, 2012,2013, some of which were secured by parent guarantees from Woodward or by Woodward line of credit facilities.
In the event of a change in control of Woodward, as defined in change-in-control agreements with our current corporate officers, we may be required to pay termination benefits to such officers.
New Accounting Standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in our Note 2,New accounting standards, to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data.”
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Item 7A.Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt, and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions.
Interest Rate Risk
Derivative instruments utilized by us are viewed as risk management tools, involve little complexity, and are not used for trading or speculative purposes. In June 2013, in connection with Woodward’s expected refinancing of current maturities on its existing long-term debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualifies as a cash flow hedge under ASC Topic 815, “Derivatives and Hedging.” The objective of this derivative instrument is to hedge the risk of variability in cash flows attributable to changes in the designated benchmark interest rate over a seven-year period related to the future interest payments on a portion of anticipated future debt issuances. To manage interest rate risk related to the $400,000 of long-term debt issued in October 2008, we used a treasury lock, which locked in interest rates on the then future debt. The treasury lock agreement was designated as a cash flow hedge against interest rate risk on a portion of the debt issued in October 2008. Similarly, we used a LIBOR lock agreement with a notional amount of $50,000, which hedged the risk of variability in cash flows over a seven-year period related to future interest payments of a portion of the anticipated long-term debt issued in April of 2009 in connection with the acquisition of HRT.
A portion of our long and short-term debt is sensitive to changes in interest rates. Our term loan of $41,875 at September 30, 2012 and advancesAdvances on our Amended Revolver, ofrevolving credit facility under our Revolving Credit Agreement, which there were none at September 30, 2012, include2013, and the $200,000 outstanding on our Line of Credit, are at interest rates that fluctuate with market rates. A hypothetical 1% increase in the assumed effective interest rates that apply to the variable rate loan outstanding on September 30, 2012 and the average borrowings on our Amended Revolverrevolving credit facility in fiscal year 20122013 and the $200,000 outstanding on our Line of Credit would cause our annual interest expense to increase approximately $710.$2,234. A hypothetical 0.32%0.25% decrease in interest rates that apply to our variable loan outstanding on September 30, 2012 and the average borrowings on our Amended Revolver,revolving credit facility and the $200,000 outstanding on our Line of Credit, which would effectively reduce the variable component of the applicable interest rates to 0%, would decrease our annual interest expense by approximately $230.$562.
The discount rate and future return on plan asset assumptions used to calculate the funding status of our retirement benefit plans are also sensitive to changes in interest rates. The discount rate assumption used to value the defined benefit pension plans as of September 30, 20122013 was 4.10%5.15% in the United States, 4.60%4.50% in the United Kingdom, 1.50%1.25% in Japan and 1.75%2.25% in Switzerland. The discount rate assumption used to value the other postretirement benefit plans was 4.11%5.14%.
The following information illustrates the sensitivity of the net periodic benefit cost and the projected accumulated benefit obligation to a change in the discount rate assumed. Amounts relating to foreign plans are translated at the spot rate on September 30, 2012.2013. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in assumptions are not necessarily linear due to factors such as the 10% corridor applied to the larger of the postretirement benefit obligation or the fair market value of plan assets when determining amortization of actuarial net gains or losses.
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Assumption |
| Change |
| 2014 Net Periodic Benefit Cost |
| 2014 Projected Service and Interest Costs |
| Accumulated Post Retirement Benefit Obligation as of Sept. 30, 2013 | |||
Defined benefit pension benefits: |
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Change in discount rate |
| 1% increase |
| $ | (1,136) |
| $ | (260) |
| $ | (25,230) |
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| 1% decrease |
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| 1,933 |
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| 138 |
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| 30,991 |
Other postretirement benefits: |
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Change in discount rate |
| 1% increase |
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| (83) |
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| 134 |
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| (2,266) |
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| 1% decrease |
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| 96 |
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| (164) |
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| 2,625 |
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Increase/(Decrease) In | ||||||||||||||
2013 | Post Retirement | |||||||||||||
2013 Net | Projected | Benefit | ||||||||||||
Periodic | Service and | Obligation as of | ||||||||||||
Assumption | Change | Benefit Cost | Interest Costs | Sept. 30, 2012 | ||||||||||
Defined benefit pension benefits: | ||||||||||||||
Change in discount rate | 1% increase | $ | (1,795 | ) | $ | (333 | ) | $ | (27,147 | ) | ||||
1% decrease | 2,876 | 246 | 33,569 | |||||||||||
Other postretirement benefits: | ||||||||||||||
Change in discount rate | 1% increase | 154 | 193 | (3,169 | ) | |||||||||
1% decrease | (163 | ) | (238 | ) | 3,712 |
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the currency in which product and manufacturing costs were incurred. The functional currencies and our purchasing and sales activities primarily include USD, Euro, CNY, JPY and GBP. We may also be impacted by changes in the relative buying power of our customers, which may impact sales volumes either positively or negatively. As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor. Foreign currency exchange rate risk is reduced through the maintenance of local production facilities in the markets we serve, which we believe creates a natural hedge to our foreign currency exchange rate exposure. For the year ended September 30, 2012,2013, the percentages of our net sales denominated in a currency other than the USD were as follows: