UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

TQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017June 30, 2019

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 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-1984010

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1081 Woodward Way, Fort Collins, Colorado

80524

(Address of principal executive offices)

(Zip Code)

(970) 482-5811

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock, par value $0.001455 per share

WWD

NASDAQ Global Select Market

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 T 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 T No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer FilerT Accelerated Filer ¨ Non-accelerated filer Filer ¨ Smaller reporting company Reporting Company ¨

Emerging growth company Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No T

As of January 18, 2018,  61,272,503August 7, 2019, 61,845,823 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.



TABLE OF CONTENTS

Page

PART I – FINANCIAL INFORMATION


Item 1.

Financial Statements

2

Condensed Consolidated Statements of Earnings

2

Condensed Consolidated Statements of Comprehensive Earnings

3

Condensed Consolidated Balance Sheets

4

Condensed Consolidated Statements of Cash Flows

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27 

46

Forward Looking Statements

27 

46

Overview

29 

49

Results of Operations

30 

53

Liquidity and Capital Resources

34 

60

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37 

67

Item 4.

Controls and Procedures

38 

67

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

38 

69

Item 1A.

Risk Factors

38 

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39 

70

Item 6.

Exhibits

39 

71

Signatures

41 

72


1

1


PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three-Months Ended

Three-Months Ended

Nine-Months Ended

December 31,

June 30,

June 30,

2017

 

2016

2019

2018

2019

2018

 

 

 

 

 

Net sales

$

470,148 

 

$

442,894 

$

752,005

$

588,117

$

2,163,660

$

1,606,514

Costs and expenses:

 

 

 

 

 

Cost of goods sold

 

346,784 

 

 

329,148 

562,516

428,673

1,621,531

1,178,459

Selling, general and administrative expenses

 

46,276 

 

 

38,300 

52,980

54,868

159,764

141,082

Research and development costs

 

34,786 

 

 

26,540 

40,661

39,470

123,359

111,425

Restructuring charges

-

-

-

17,013

Interest expense

 

6,750 

 

 

6,840 

10,798

10,056

34,156

27,751

Interest income

 

(363)

 

 

(405)

(348)

(342)

(1,013)

(1,176)

Other (income) expense, net (Note 16)

 

(1,572)

 

 

(4,588)

Other (income) expense, net (Note 17)

(6,916)

975

(18,134)

(8,591)

Total costs and expenses

 

432,661 

 

 

395,835 

659,691

533,700

1,919,663

1,465,963

Earnings before income taxes

 

37,487 

 

 

47,059 

92,314

54,417

243,997

140,551

Income tax expense

 

19,227 

 

 

511 

26,207

5,300

51,191

34,685

Net earnings

$

18,260 

 

$

46,548 

$

66,107

$

49,117

$

192,806

$

105,866

 

 

 

 

 

Earnings per share (Note 3):

 

 

 

 

 

Earnings per share (Note 4):

Basic earnings per share

$

0.30 

 

$

0.76 

$

1.07

$

0.80

$

3.11

$

1.72

Diluted earnings per share

$

0.29 

 

$

0.73 

$

1.02

$

0.77

$

2.99

$

1.66

 

 

 

 

 

Weighted Average Common Shares Outstanding (Note 3):

 

 

 

 

 

Weighted Average Common Shares Outstanding (Note 4):

Basic

 

61,246 

 

 

61,559 

61,941

61,608

61,977

61,417

Diluted

 

63,709 

 

 

63,671 

64,633

63,881

64,437

63,782

Cash dividends per share paid to Woodward common stockholders

$

0.125 

 

$

0.110 

See accompanying Notes to Condensed Consolidated Financial Statements


2

2


WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

Three-Months Ended

Three-Months Ended

Nine-Months Ended

December 31,

June 30,

June 30,

2017

 

2016

2019

2018

2019

2018

 

 

 

 

 

Net earnings

$

18,260 

 

$

46,548 

$

66,107

$

49,117

$

192,806

$

105,866

 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

Foreign currency translation adjustments

 

5,103 

 

(18,635)

819

(21,864)

(592)

(7,177)

Net (loss) gain on foreign currency transactions designated as hedges of net
investments in foreign subsidiaries (Note 6)

 

(743)

 

3,830 

Net (loss) gain on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 8)

(598)

2,559

976

548

Taxes on changes in foreign currency translation adjustments

 

187 

 

 

(306)

324

513

427

250

Foreign currency translation and transactions adjustments, net of tax

 

4,547 

 

 

(15,111)

545

(18,792)

811

(6,379)

 

 

 

 

 

Reclassification of net realized gains on derivatives to earnings (Note 6)

 

(18)

 

(18)

Unrealized (loss) gain on fair value adjustment of derivative instruments
(Note 8)

(7,305)

(23,658)

20,867

(23,658)

Reclassification of net realized gains (losses) on derivatives to earnings

(Note 8)

6,890

4,955

(11,831)

4,919

Taxes on changes in derivative transactions

 

 

 

14

8

(162)

21

Derivative adjustments, net of tax

 

(11)

 

 

(11)

(401)

(18,695)

8,874

(18,718)

 

 

 

 

Curtailment of postretirement benefit plan arising during the period

 

59 

 

 -

-

-

-

59

Amortization of pension and other postretirement plan:

 

 

 

 

Net prior service cost

 

137 

 

56 

176

137

528

413

Net loss

 

246 

 

641 

238

248

719

742

Foreign currency exchange rate changes on pension and other postretirement

benefit plan liabilities

 

(99)

 

1,255 

279

843

281

161

Taxes on changes in pension and other postretirement benefit plan liability

adjustments, net of foreign currency exchange rate changes

 

(132)

 

 

(693)

(203)

(349)

(406)

(421)

Pension and other postretirement benefit plan adjustments, net of tax

 

211 

 

 

1,259 

490

879

1,122

954

Total comprehensive earnings

$

23,007 

 

$

32,685 

$

66,741

$

12,509

$

203,613

$

81,723

See accompanying Notes to Condensed Consolidated Financial Statements

3

3


WOODWARD, INC.

CONDENSED CONSOLIDATEDCONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

June 30,

September 30,

2019

2018

ASSETS

Current assets:

Cash and cash equivalents, including restricted cash of $0 and $3,635, respectively

$

63,302 

$

83,594 

Accounts receivable, less allowance for uncollectible amounts of $3,904 and $3,938, respectively

650,777 

432,003 

Inventories

531,163 

549,596 

Income taxes receivable

8,070 

6,397 

Other current assets

44,797 

43,207 

Total current assets

1,298,109 

1,114,797 

Property, plant and equipment, net

1,063,084 

1,060,005 

Goodwill

807,868 

813,250 

Intangible assets, net

641,481 

700,883 

Deferred income tax assets

15,336 

16,570 

Other assets

189,725 

85,144 

Total assets

$

4,015,603 

$

3,790,649 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Short-term borrowings

$

180,000 

$

153,635 

Accounts payable

243,071 

226,285 

Income taxes payable

12,816 

16,745 

Accrued liabilities

206,785 

194,513 

Total current liabilities

642,672 

591,178 

Long-term debt, less current portion

1,011,147 

1,092,397 

Deferred income tax liabilities

173,289 

170,915 

Other liabilities

484,184 

398,055 

Total liabilities

2,311,292 

2,252,545 

Commitments and contingencies (Note 21)

 

 

Stockholders' equity:

Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued

-

-

Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued

106 

106 

Additional paid-in capital

205,704 

185,705 

Accumulated other comprehensive losses

(64,180)

(74,942)

Deferred compensation

9,118 

8,431 

Retained earnings

2,168,204 

1,966,643 

2,318,952 

2,085,943 

Treasury stock at cost, 11,123 shares and 11,203 shares, respectively

(605,523)

(539,408)

Treasury stock held for deferred compensation, at cost, 209 shares and 202 shares, respectively

(9,118)

(8,431)

Total stockholders' equity

1,704,311 

1,538,104 

Total liabilities and stockholders' equity

$

4,015,603 

$

3,790,649 



 

 

 

 

 



 

 

 

 

 



December 31,

 

September 30,



2017

 

2017

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

85,779 

 

$

87,552 

Accounts receivable, less allowance for uncollectible amounts of $3,793 and $3,776, respectively

 

331,438 

 

 

402,182 

Inventories

 

503,523 

 

 

473,505 

Income taxes receivable

 

18,842 

 

 

19,376 

Other current assets

 

39,660 

 

 

38,574 

Total current assets

 

979,242 

 

 

1,021,189 

Property, plant and equipment, net

 

930,158 

 

 

922,043 

Goodwill

 

556,759 

 

 

556,545 

Intangible assets, net

 

165,633 

 

 

171,882 

Deferred income tax assets

 

20,473 

 

 

19,950 

Other assets

 

72,909 

 

 

65,500 

Total assets

$

2,725,174 

 

$

2,757,109 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

$

66,300 

 

$

32,600 

Accounts payable

 

182,144 

 

 

232,788 

Income taxes payable

 

5,891 

 

 

6,774 

Accrued liabilities

 

98,785 

 

 

155,072 

Total current liabilities

 

353,120 

 

 

427,234 

Long-term debt, less current portion

 

583,339 

 

 

580,286 

Deferred income tax liabilities

 

21,901 

 

 

33,408 

Other liabilities

 

366,268 

 

 

344,798 

Total liabilities

 

1,324,628 

 

 

1,385,726 

Commitments and contingencies (Note 20)

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued

 

 -

 

 

 -

Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued

 

106 

 

 

106 

Additional paid-in capital

 

176,473 

 

 

163,836 

Accumulated other comprehensive losses

 

(48,439)

 

 

(53,186)

Deferred compensation

 

8,173 

 

 

7,135 

Retained earnings

 

1,830,872 

 

 

1,820,268 



 

1,967,185 

 

 

1,938,159 

Treasury stock at cost, 11,706  shares and 11,739 shares, respectively

 

(558,466)

 

 

(559,641)

Treasury stock held for deferred compensation, at cost, 200 shares and 186 shares, respectively

 

(8,173)

 

 

(7,135)

Total stockholders' equity

 

1,400,546 

 

 

1,371,383 

Total liabilities and stockholders' equity

$

2,725,174 

 

$

2,757,109 



 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4

4


WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Nine-Months Ended June 30,

2019

2018

Net cash provided by operating activities

$

219,202 

$

162,083 

Cash flows from investing activities:

Payments for purchase of property, plant, and equipment

(77,905)

(89,597)

Proceeds from sale of assets

809 

1,213 

Proceeds from sales of short-term investments

10,259 

8,970 

Payments for purchases of short-term investments

(12,989)

(824)

Business acquisitions, net of cash acquired

-

(771,069)

Net cash used in investing activities

(79,826)

(851,307)

Cash flows from financing activities:

Cash dividends paid

(28,985)

(25,206)

Proceeds from sales of treasury stock

33,715 

7,102 

Payments for repurchases of common stock

(110,311)

-

Borrowings on revolving lines of credit and short-term borrowings

1,286,258 

1,769,105 

Payments on revolving lines of credit and short-term borrowings

(1,194,045)

(1,422,624)

Proceeds from issuance of long-term debt

-

400,000 

Payments of long-term debt and capital lease obligations

(143,402)

(315)

Payments of debt financing costs

(2,238)

(1,325)

Payment for forward option derivative instrument

-

(5,543)

Net cash (used in) provided by financing activities

(159,008)

721,194 

Effect of exchange rate changes on cash and cash equivalents

(660)

(5,123)

Net change in cash and cash equivalents

(20,292)

26,847 

Cash and cash equivalents at beginning of year

83,594 

87,552 

Cash and cash equivalents, including restricted cash, at end of period

$

63,302 

$

114,399 



 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net earnings

$

18,260 

 

$

46,548 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

21,070 

 

 

18,913��

Gain due to curtailment of postretirement plan

 

(330)

 

 

 -

Net gain on sales of assets

 

(58)

 

 

(3,699)

Stock-based compensation

 

12,423 

 

 

1,261 

Deferred income taxes

 

(11,681)

 

 

4,777 

Gain on derivatives reclassified from accumulated comprehensive earnings into earnings

 

(18)

 

 

(18)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

72,714 

 

 

87,615 

Inventories

 

(28,796)

 

 

(37,632)

Accounts payable and accrued liabilities

 

(104,150)

 

 

(54,563)

Income taxes

 

25,597 

 

 

(5,731)

Retirement benefit obligations

 

(673)

 

 

(897)

Other

 

(6,891)

 

 

(4,223)

Net cash (used in) provided by operating activities

 

(2,533)

 

 

52,351 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property, plant, and equipment

 

(28,450)

 

 

(21,058)

Proceeds from sale of assets

 

132 

 

 

3,682 

Proceeds from sales of short-term investments

 

 -

 

 

758 

Payments for purchases of short-term investments

 

(791)

 

 

 -

Net cash used in investing activities

 

(29,109)

 

 

(16,618)

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid

 

(7,656)

 

 

(6,779)

Proceeds from sales of treasury stock

 

1,389 

 

 

4,843 

Payments for repurchases of common stock

 

 -

 

 

(24,004)

Borrowings on revolving lines of credit and short-term borrowings

 

458,950 

 

 

316,650 

Payments on revolving lines of credit and short-term borrowings

 

(425,250)

 

 

(312,800)

Payments of long-term debt and capital lease obligations

 

(106)

 

 

(102)

Net cash provided by (used in) financing activities

 

27,327 

 

 

(22,192)

Effect of exchange rate changes on cash and cash equivalents

 

2,542 

 

 

(13,746)

Net change in cash and cash equivalents

 

(1,773)

 

 

(205)

Cash and cash equivalents at beginning of year

 

87,552 

 

 

81,090 

Cash and cash equivalents at end of period

$

85,779 

 

$

80,885 



 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

5

5


WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

Stockholders' equity

Number of shares

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

Preferred
stock

 

Common
stock

 

Treasury
stock

 

Treasury
stock held for
deferred
compensation

 

Common
stock

 

Additional
 paid-in
capital

 

Foreign
currency
translation
adjustments

 

Unrealized
derivative
gains
(losses)

 

Minimum
retirement
benefit
liability
adjustments

 

Total
accumulated
other
comprehensive
(loss) earnings

 

Deferred compensation

 

Retained
earnings

 

Treasury
 stock at
cost

 

Treasury
stock held for
deferred
compensation

 

Total
 stockholders'
equity

Common
stock

Treasury
stock

Treasury
stock held for
deferred
compensation

Common
stock

Additional
paid-in
capital

Foreign
currency
translation
adjustments

Unrealized
derivative
gains
(losses)

Minimum
retirement
benefit
liability
adjustments

Total
accumulated
other
comprehensive
(loss) earnings

Deferred compensation

Retained
earnings

Treasury
stock at
cost

Treasury
stock held for
deferred
compensation

Total stockholders'
equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2016

 

 -

 

72,960 

 

(11,374)

 

(157)

 

$

106 

 

$

141,570 

 

$

(25,971)

 

$

179 

 

$

(39,913)

 

$

(65,705)

 

$

5,089 

 

$

1,649,506

 

$

(512,882)

 

$

(5,089)

 

$

1,212,595 

Balances as of April 1, 2018

72,960

(11,440)

(200)

$

106

$

185,598

$

(14,867)

$

112

$

(25,966)

$

(40,721)

$

8,222

$

1,860,595

$

(548,668)

$

(8,222)

$

1,456,910

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

46,548 

 

 

 -

 

 

 -

 

 

46,548 

-

-

-

-

-

-

-

-

-

-

49,117

-

-

49,117

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(15,111)

 

 

(11)

 

 

1,259 

 

 

(13,863)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,863)

Cash dividends paid ($0.110 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,779)

 

 

 -

 

 

 -

 

 

(6,779)

Purchases of treasury stock

 

 -

 

 -

 

(350)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(24,004)

 

 

 -

 

 

(24,004)

Sales of treasury stock

   

 -

 

 -

 

139 

 

 -

 

 

 -

 

 

(907)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

5,750 

 

 

 -

 

 

4,843 

Common shares issued from treasury stock to settle employee liabilities

 

 -

 

 -

 

26 

 

(26)

 

 

 -

 

 

740 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,767 

 

 

 -

 

 

1,027 

 

 

(1,767)

 

 

1,767 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

1,261 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,261 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

37 

 

 

 -

 

 

 -

 

 

(37)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(4)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of December 31, 2016

 

 -

 

72,960 

 

(11,559)

 

(183)

 

$

106 

 

$

142,664 

 

$

(41,082)

 

$

168 

 

$

(38,654)

 

$

(79,568)

 

$

6,889 

 

$

1,689,275

 

$

(530,109)

 

$

(6,889)

 

$

1,222,368 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2017

 

 -

 

72,960 

 

(11,739)

 

(186)

 

$

106 

 

$

163,836 

 

$

(27,280)

 

$

135 

 

$

(26,041)

 

$

(53,186)

 

$

7,135 

 

$

1,820,268

 

$

(559,641)

 

$

(7,135)

 

$

1,371,383 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,260 

 

 

 -

 

 

 -

 

 

18,260 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

4,547 

 

 

(11)

 

 

211 

 

 

4,747 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

4,747 

Cash dividends paid ($0.125 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,656)

 

 

 -

 

 

 -

 

 

(7,656)

Other comprehensive earnings (loss), net of tax

-

-

-

-

-

(18,792)

(18,695)

879

(36,608)

-

-

-

-

(36,608)

Cash dividends paid ($0.1425 per share)

-

-

-

-

-

-

-

-

-

-

(8,784)

-

-

(8,784)

Sales of treasury stock

 

 -

 

 -

 

33 

 

 -

 

 

 -

 

 

214 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,175 

 

 

 -

 

 

1,389 

-

158

-

-

(2,642)

-

-

-

-

-

-

6,184

-

3,542

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

12,423 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,423 

-

-

-

-

1,858

-

-

-

-

-

-

-

-

1,858

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

(14)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,041 

 

 

 -

 

 

 -

 

 

(1,041)

 

 

 -

-

-

(3)

-

-

-

-

-

-

174

-

-

(174)

-

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3)

 

 

 -

 

 

 -

 

 

 

 

 -

-

-

1

-

-

-

-

-

-

(3)

-

-

3

-

Balances as of December 31, 2017

 

 -

 

72,960 

 

(11,706)

 

(200)

 

$

106 

 

$

176,473 

 

$

(22,733)

 

$

124 

 

$

(25,830)

 

$

(48,439)

 

$

8,173 

 

$

1,830,872

 

$

(558,466)

 

$

(8,173)

 

$

1,400,546 

Balances as of June 30, 2018

72,960

(11,282)

(202)

$

106

$

184,814

$

(33,659)

$

(18,583)

$

(25,087)

$

(77,329)

$

8,393

$

1,900,928

$

(542,484)

$

(8,393)

$

1,466,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of April 1, 2019 (Note 3)

72,960

(10,757)

(206)

$

106

$

204,892

$

(39,573)

$

(11,667)

$

(13,574)

$

(64,815)

$

8,876

$

2,112,168

$

(549,686)

$

(8,876)

$

1,702,665

Net earnings

-

-

-

-

-

-

-

-

-

-

66,107

-

-

66,107

Other comprehensive earnings (loss), net of tax

-

-

-

-

-

545

(401)

490

635

-

-

-

-

635

Cash dividends paid ($0.1625 per share)

-

-

-

-

-

-

-

-

-

-

(10,071)

-

-

(10,071)

Purchases of treasury stock

-

(645)

-

-

-

-

-

-

-

-

-

(67,058)

-

(67,058)

Sales of treasury stock

-

279

-

-

(1,656)

-

-

-

-

-

-

11,221

-

9,565

Stock-based compensation

-

-

-

-

2,468

-

-

-

-

-

-

-

-

2,468

Purchases and transfers of stock by/to deferred compensation plan

-

-

(3)

-

-

-

-

-

-

284

-

-

(284)

-

Distribution of stock from deferred compensation plan

-

-

-

-

-

-

-

-

-

(42)

-

-

42

-

Balances as of June 30, 2019

72,960

(11,123)

(209)

$

106

$

205,704

$

(39,028)

$

(12,068)

$

(13,084)

$

(64,180)

$

9,118

$

2,168,204

$

(605,523)

$

(9,118)

$

1,704,311

See accompanying Notes to Condensed Consolidated Financial Statements


6

6


WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

Number of shares

Stockholders' equity

Accumulated other comprehensive (loss) earnings

Common
stock

Treasury
stock

Treasury
stock held for
deferred
compensation

Common
stock

Additional
paid-in
capital

Foreign
currency
translation
adjustments

Unrealized
derivative
gains
(losses)

Minimum
retirement
benefit
liability
adjustments

Total
accumulated
other
comprehensive
(loss) earnings

Deferred compensation

Retained
earnings

Treasury
stock at
cost

Treasury
stock held for
deferred
compensation

Total stockholders'
equity

Balances as of September 30, 2017

72,960

(11,739)

(186)

$

106

$

163,836

$

(27,280)

$

135

$

(26,041)

$

(53,186)

$

7,135

$

1,820,268

$

(559,641)

$

(7,135)

$

1,371,383

Net earnings

-

-

-

-

-

-

-

-

-

-

105,866

-

-

105,866

Other comprehensive earnings (loss), net of tax

-

-

-

-

-

(6,379)

(18,718)

954

(24,143)

-

-

-

-

(24,143)

Cash dividends paid ($0.410 per share)

-

-

-

-

-

-

-

-

-

-

(25,206)

-

-

(25,206)

Sales of treasury stock

-

255

-

-

(2,471)

-

-

-

-

-

-

9,573

-

7,102

Common shares issued from treasury stock for benefit plans

-

202

-

-

7,157

-

-

-

-

-

-

7,584

-

14,741

Stock-based compensation

-

-

-

-

16,292

-

-

-

-

-

-

-

-

16,292

Purchases and transfers of stock by/to deferred compensation plan

-

-

(17)

-

-

-

-

-

-

1,267

-

-

(1,267)

-

Distribution of stock from deferred compensation plan

-

-

1

-

-

-

-

-

-

(9)

-

-

9

-

Balances as of June 30, 2018

72,960

(11,282)

(202)

$

106

$

184,814

$

(33,659)

$

(18,583)

$

(25,087)

$

(77,329)

$

8,393

$

1,900,928

$

(542,484)

$

(8,393)

$

1,466,035

Balances as of September 30, 2018

72,960

(11,203)

(202)

$

106

$

185,705

$

(39,794)

$

(20,942)

$

(14,206)

$

(74,942)

$

8,431

$

1,966,643

$

(539,408)

$

(8,431)

$

1,538,104

Cumulative effect from adoption of ASC 606 (Note 3)

-

-

-

-

-

(45)

-

-

(45)

-

38,745

-

-

38,700

Cumulative effect from adoption of ASU 2016-16 (Note 2)

-

-

-

-

-

-

-

-

-

-

(1,005)

-

-

(1,005)

Net earnings

-

-

-

-

-

-

-

-

-

-

192,806

-

-

192,806

Other comprehensive earnings (loss), net of tax

-

-

-

-

-

811

8,874

1,122

10,807

-

-

-

-

10,807

Cash dividends paid ($0.4675 per share)

-

-

-

-

-

-

-

-

-

-

(28,985)

-

-

(28,985)

Purchases of treasury stock

-

(1,102)

-

-

-

-

-

-

-

-

-

(110,311)

-

(110,311)

Sales of treasury stock

-

1,024

-

-

(4,808)

-

-

-

-

-

-

38,523

-

33,715

Common shares issued from treasury stock for benefit plans

-

158

-

-

9,173

-

-

-

-

-

-

5,673

-

14,846

Stock-based compensation

-

-

-

-

15,634

-

-

-

-

-

-

-

-

15,634

Purchases and transfers of stock by/to deferred compensation plan

-

-

(11)

-

-

-

-

-

-

909

-

-

(909)

-

Distribution of stock from deferred compensation plan

-

-

4

-

-

-

-

-

-

(222)

-

-

222

-

Balances as of June 30, 2019

72,960

(11,123)

(209)

$

106

$

205,704

$

(39,028)

$

(12,068)

$

(13,084)

$

(64,180)

$

9,118

$

2,168,204

$

(605,523)

$

(9,118)

$

1,704,311

See accompanying Notes to Condensed Consolidated Financial Statements

7


WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Basis of presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of December 31, 2017June 30, 2019 and for the three monthsand nine-months ended December  31, 2017June 30, 2019 and December  31, 2016,June 30, 2018, included herein, have not been audited by an independent registered public accounting firm. These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of December  31, 2017,June 30, 2019, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The results of operations for the three monthsand nine-months ended December  31, 2017June 30, 2019 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the Condensed Consolidated Financial Statements included herein. Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, variable consideration including customer rebates earned and payable and early payment discounts, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, the provision for income tax and related valuation reserves, the valuation of assets and liabilities acquired in business combinations, the valuation of derivative instruments, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees, and board members and any other eligible recipients, estimates of total lifetime sales used in the recognition of revenue of deferred material rights and balance sheet classification of the related contract liability, estimates of total sales contract costs when recognizing revenue under the cost-to-cost method, and contingencies. Actual results could vary from Woodward’s estimates.

As disclosed in Note 1, OperationsIn the September 30, 2018 Condensed Consolidated Balance Sheet, “Accounts receivable” has increased by $183 and summary of significant accounting policies in“Other current assets” has decreased by $183, reflecting the Notes to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the condensed consolidated statement of earnings for the three-months ended December 31, 2016 to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.  The reclassification of these amounts conformscurrent unbilled receivables to “Accounts receivable” in order to conform to the current periodyear presentation.

Note 2. 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”).

In August 2017,2018, the FASB issued ASU 2017-12, “Derivatives and Hedging2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 815)715-20): Targeted ImprovementsDisclosure Framework – Changes to Accountingthe Disclosure Requirements for Hedging Activities.Defined Benefit Plans.” ASU 2017-122018-14 amends ASC 715 to add, remove, and modify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes to disclosures aim to improve the effectiveness of ASC 715’s disclosure requirements under the FASB’s disclosure framework project. ASU 2018-14 is intendedeffective for public entities for fiscal years beginning after December 15, 2020 (fiscal year 2022 for Woodward). ASU 2018-14 does not impact the interim disclosure requirements of ASC 715. Upon adoption, the amendments in ASU 2018-14 should be applied on a retrospective basis to more closely alignall periods presented. Early adoption is permitted. Woodward expects to adopt the financial statement reportingnew and modified disclosures requirements of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.  ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.  Woodward early  adopted thethis new guidance in the first quarter of fiscal year 2018.2022.

In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows a reclassification from

8


accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of tax reform under H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (also known as “The Tax Cuts and Jobs Act”), and provides guidance on the disclosure requirements regarding the stranded tax effects. The applicationamendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), and interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2018-02 may be applied retrospectively in the period of adoption to all periods in which the effect of the change in the United States (“U.S.”) federal corporate income tax rate in the Tax Act is recognized or may be applied as of the beginning of the period of adoption. Woodward is currently assessing the impact of the adoption of the new guidance didand has not have any impact on Woodward’s current hedging arrangements or onyet elected the disclosures relatedmethod of adoption it will apply. Woodward expects to such arrangements.adopt the new guidance under ASU 2018-02 in fiscal year 2020. Upon adoption, if Woodward elects to reclassify under ASU 2018-02, a portion of accumulated other comprehensive earnings would be reclassified to retained earnings.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included

7


in the same statement of earnings captions as other compensation costs arising from services rendered by the covered employees during the period. The other components of net benefit cost will beare presented in the statement of earnings separately from service costs. ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward). Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice. The amendments of ASU 2017-07 shouldmust be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories. Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adoptadopted the new guidance effective October 1, 2018 and concluded it had no impact on net earnings. As a result of the adoption of ASU 2017-07, only the service component of net periodic benefit costs from defined benefit and other postretirement benefit plans are included in fiscal year 2019,cost of goods sold and expects changesselling, general and administrative expenses. All other net periodic benefit costs, other than interest cost, are included in other expense (income), net. The interest cost component of net periodic benefit costs is included in interest expense as Woodward believes it is more similar to earnings before income taxesthe elements within interest expense than other expense (income), net, which combines several elements that are heterogeneous (see Note 17, Other (income) expense, net.), thus improving consistency for users of the financial statements.

The following table shows the impact of retrospectively applying this guidance to be insignificant in the yearCondensed Consolidated Statement of adoption.Earnings for the three and nine-months ended June 30, 2018.

Three-Months Ended June 30, 2018

Nine-Months Ended June 30, 2018

As previously reported

Adjustment

As recast

As previously reported

Adjustment

As recast

Net sales

$

588,117 

$

-

$

588,117 

$

1,606,514 

$

-

$

1,606,514 

Costs and expenses:

Cost of goods sold

427,897 

776 

428,673 

1,176,012 

2,447 

1,178,459 

Selling, general, and administrative expenses

54,600 

268 

54,868 

140,362 

720 

141,082 

Research and development costs

39,470 

-

39,470 

111,425 

-

111,425 

Restructuring charges

-

-

-

17,013 

-

17,013 

Interest expense

7,878 

2,178 

10,056 

21,315 

6,436 

27,751 

Interest income

(342)

-

(342)

(1,176)

-

(1,176)

Other (income) expense, net

4,197 

(3,222)

975 

1,012 

(9,603)

(8,591)

Total costs and expenses

533,700 

-

533,700 

1,465,963 

-

1,465,963 

Earnings before income taxes

54,417 

-

54,417 

140,551 

-

140,551 

Income tax expense

5,300 

-

5,300 

34,685 

-

34,685 

Net earnings

$

49,117 

$

-

$

49,117 

$

105,866 

$

-

$

105,866 

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use. AfterASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption. Woodward adopted the new guidance on October 1, 2018. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. The cumulative impact of the adoption of ASU 2016-16 of $1,005 was recognized at the date of

9


adoption as a decrease to both retained earnings and other current assets in the Condensed Consolidated Balance Sheet. As a result of adoption, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adopt the new guidance in fiscal year 2019.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  Woodward has not determined in which period it will adopt the new guidance.  Woodward currently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity, such adjustments are not expected to be significant.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years. Woodward has not determinedexpects to adopt ASU 2016-13 in which period it will adopt the new guidance butfiscal year 2021. Woodward does not expect the application of the CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” which provides transition relief for entities adopting ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (i) were previously recorded at amortized cost and are within the scope of the credit losses guidance in ASC 326-20, (ii) are eligible for the fair value option under ASC 825-10, and (iii) are not held-to-maturity debt securities. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date of ASU 2016-13. Woodward expects to adopt ASU 2019-05 in fiscal year 2021. Woodward does not expect to elect the fair value option for its financial instruments upon the adoption of both ASU 2016-13 and ASU 2019-05.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842). In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements, (collectively with ASU 2016-02, “ASC 842”) which amends ASU 2016-02 to provide organizations with a new (and optional) transition method permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption, rather than requiring retrospective restatement of prior periods. The purpose of ASU 2016-02ASC 842 is to increase transparency and comparability among organizations by recognizing lease right-of-use (“ROU”) assets and lease liabilities except for short-term leases on the balance sheet, and disclosing keyprovide additional disclosure information about leasing arrangements. In addition, ASU 2016-02ASC 842 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02ASC 842 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption. In transition, Woodward will beadopt ASC 842 on October 1, 2019, the first day of fiscal year 2020. Originally under ASC 842, an organization was required upon adoption to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statementsapproach and restate the financial statements for the two fiscal years prior to the year of adoption.  However, during December 2017, the FASB proposed amending ASU 2016-02 such that restatement of fiscal years 2018 and 2019 would not be required upon adoption.  Although early adoption is permitted,all periods presented. Woodward expects to adoptelect the new guidancetransition method resulting in fiscal year 2020 anda cumulative-effect adjustment to retained earnings on October 1, 2019.

Woodward is currently assessing the impact this guidance may have on its Condensed Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidanceguidance. In anticipation of adopting ASC 842 on October 1, 2019, Woodward has developed a comprehensive project plan, established a cross-functional global project team, and whether other arrangements not currently classifiedengaged third-party subject matter experts. The project plan includes reviewing various forms of leases, analyzing the optional practical expedients available in ASC 842, and updating Woodward’s business processes and controls to meet the requirements of ASU 2016-02, as leases may become subjectnecessary. Woodward expects the most significant effects of the adoption of ASC 842 will be the recognition of operating lease ROU assets and lease liabilities on its balance sheets and changes to the guidance of ASU 2016-02.accounting for the Company’s loss reserve on contractual lease commitments. Rent expense for all operating leases in fiscal year 2017,2018, none of which was recognized on the balance sheet, was $8,302.$8,348. As of September 30, 2017,2018, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.$26,020.

Note 3. Revenue

Adoption of ASC 606

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. Woodward adopted ASC 606 outlineson October 1, 2018 and elected the modified retrospective transition method. The results for periods prior to fiscal year 2019 were not

10


adjusted for the new standard and the cumulative effect of the change in accounting of $28,927, as previously reported, was recognized as a five-step model,net increase to retained earnings at the date of adoption.

Woodward has elected to apply the modified retrospective method only to contracts that were not completed as of October 1, 2018. As a practical expedient under ASC 606, Woodward elected to reflect the aggregate effect of all modifications that occurred before the beginning of fiscal year 2019 to contracts for which Woodward will recognizehad not recognized all revenue as of October 1, 2018 as part of the adjustment to retained earnings at the date of adoption.

Subsequent to the adoption of ASC 606 and the issuance of Woodward’s unaudited Condensed Consolidated Financial Statements for the three-months ended December 31, 2018 and the three and six-months ended March 31, 2019, Woodward’s management identified an inconsistency in the application of ASC 606. The inconsistency resulted in errors that were cumulatively not material in determining the percentage of completion calculation on over time product revenue recognition, which caused the Condensed Consolidated Financial Statements for the quarters ended December 31, 2018 and March 31, 2019, as well as the cumulative impact of the adoption of ASC 606 on the Condensed Consolidated Balance Sheet as of October 1, 2018, to be misstated by amounts that management concluded were not material. Woodward evaluated the errors and, based on an analysis of the relevant quantitative and qualitative factors, determined the impact was not material to Woodward’s Consolidated Financial Statements for any prior annual or interim period. Therefore, management concluded that amendments of previously filed reports are not required.

Woodward corrected the errors as of the date of adoption by revising the Condensed Consolidated Balance Sheet as of October 1, 2018 (see table in “Financial statement impact of the adoption of ASC 606” below). After revision, the cumulative effect of the change in accounting recognized as a net increase to retained earnings at the date of adoption was determined to be $38,745, an increase of $9,818 from the amount originally recorded. Retained earnings as of April 1, 2019 increased by a corresponding amount in the Condensed Consolidated Statement of Stockholders’ Equity for the three-months ended June 30, 2019.

To correct the errors for the three-months ended December 31, 2018 and for the three and six-months ended March 31, 2019, Woodward made an out-of-period correction in the three-months ended June 30, 2019. The correction resulted in increases to net sales of $13,614, earnings before income taxes of $8,041, net earnings of $6,037, and diluted earnings per share of $0.09 for the three-months ended June 30, 2019, the majority of which relates to Woodward’s Aerospace segment (see table in “Financial statement impact of the adoption of ASC 606” below).

Revenue Recognition Policy

Revenue is recognized on contracts with Woodward’s customers for arrangements in which quantities and pricing are fixed and/or determinable and are generally based on customer purchase orders, often within the framework of a long-term supply arrangement with the customer. Woodward has determined that it is the principal in its sales transactions, as Woodward is primarily responsible for fulfilling the promised performance obligations, has discretion to establish the selling price, and generally assumes the inventory risk. A performance obligation is a promise in a contract with a customer to transfer a distinct product or service to the customer. Woodward recognizes revenue for performance obligations within a customer contract when control of the associated product or service is transferred to the customer. Some of Woodward’s contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations. Each product within a contract generally represents a separate performance obligation as Woodward does not provide significant installation and integration services, the products do not customize each other, and the products can function independently of each other.

A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the customer obtains control of the associated product or service. When there are satisfied.multiple performance obligations within a contract, Woodward generally uses the observable standalone sales price for each distinct product or service within the contract to allocate the transaction price to the distinct products or services. In instances when a standalone sales price for each product or service is not observable within the contract, Woodward allocates the transaction price to each performance obligation using an estimate of the standalone selling price for each product or service, which is generally based on incurred costs plus a reasonable margin, for each distinct product or service in the contract.

When determining the transaction price of each contract, Woodward considers contractual consideration payable by the customer and variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience. Woodward’s contracts with customers generally do not include a financing component. Woodward regularly reviews its estimates of variable consideration on the transaction price and recognizes changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract. In the three and nine-months ended

11


June 30, 2019, Woodward did not recognize a significant amount of revenue due to changes in transaction price from performance obligations that were satisfied, or partially satisfied, in prior periods.

Customers sometimes trade in used products in exchange for new or refurbished products. In addition, Woodward’s customers sometimes provide inventory to Woodward which will be integrated into final products sold to those customers. Woodward obtains control of these exchanged products and customer provided inventory, and therefore, both are forms of noncash consideration. Noncash consideration paid by customers on overall sales transactions is additive to the transaction price. Woodward’s net sales and cost of goods sold include the value of such noncash consideration for the same amount, with no resulting impact to earnings before income taxes. Upon receipt of such inventory, Woodward recognizes an inventory asset and a contract liability. Woodward recognized revenue of $23,176 for the three-months and $67,938 for the nine-months ended June 30, 2019, related to noncash consideration received from customers. The Aerospace segment recognized $22,947 for the three-months and $66,961 for the nine-months ended June 30, 2019, while the Industrial segment recognized $229 for the three-months and $977 for the nine-months ended June 30, 2019.

Sales of Products

Woodward primarily generates revenue through the manufacture and sale of engineered aerospace and industrial products, including revenue derived from maintenance, repair and overhaul (“MRO”) performance obligations performed on products originally manufactured by Woodward and subsequently returned by original equipment manufacturer (“OEM”) or other end-user customers. The majority of Woodward’s costs incurred to satisfy MRO performance obligations are related to replacing and/or refurbishing component parts of the returned products to restore the units back to a condition generally comparable to that of the unit upon its initial sale to an OEM customer. Therefore, Woodward considers almost all of its revenue to be derived from product sales, including those related to MRO.

Revenue from manufactured and MRO products represented 84% and 13%, respectively, of Woodward’s net sales for the three-months ended June 30, 2019 and 86% and 12%, respectively, for the nine-months ended June 30, 2019.

Many Woodward products include embedded software or firmware that is critical to the performance of the product as designed. As the embedded software or firmware is essential to the functioning of the products sold it does not represent a distinct performance obligation separate from the related tangible product in which the software or firmware is embedded. Woodward does not generally sell or license software or firmware on a standalone basis. Software or firmware upgrades, if any, are generally paid for by the customer and treated as separate performance obligations.

The products Woodward sells generally are not subject to risk of return, refund or other similar obligations. Woodward’s sales include product warranty arrangements with customers which are generally assurance-type warranties, rather than service-type warranties. Accordingly, Woodward accounts for warranty related promises to its customers as a guarantee for which a warranty liability is recorded when the related product or service is sold, rather than as a distinct performance obligation accounted for separately from the sale of the underlying product or service. Warranty liabilities are accrued for based on specifically identified warranty issues that are probable to result in future costs, or on a non-specific basis whenever past experience indicates that a normal and predictable pattern exists.

Revenue from shipping and handling activities charged to customers are included in net sales when invoiced to the customer and the related costs are included in cost of goods sold. As a practical expedient under ASC 606, Woodward has elected to account for the costs of shipping and handling activities as a cost to fulfill a contract and not a promised product or service. Shipping and handling costs relating to the sale of products recognized at a point in time are recognized as incurred. Shipping and handling costs relating to the sale of products or services recognized over time are accrued and recognized during the earnings process.

Material Rights and Costs to Fulfill a Contract

Customers sometimes pay consideration to Woodward for product engineering and development activities that do not result in the immediate transfer of distinct products or services to the customer. There is intendedan implicit assumption that without the customer making such advance payments to provide more consistent interpretationWoodward, Woodward’s future sales of products or services to the customer would be at a higher selling price; therefore, such payments create a “material right” to the customer that effectively gives the customer an option to acquire future products or services, at a discount, that are dependent upon the product engineering and applicationdevelopment. Material rights are recorded as contract liabilities and will be recognized when control of the principles outlinedrelated products or services are transferred to the customer.

Woodward capitalizes costs of product engineering and development identified as material rights up to the amount of customer funding as costs to fulfill a contract because the costs incurred up to the amount of the customer funding commitment are recoverable. Due to the uncertainty of the product success and/or demand, fulfillment costs in excess of the

12


customer funding are expensed as incurred. As of June 30, 2019, other assets included $97,789 of capitalized costs to fulfill contracts with customers.

Woodward recognizes the deferred material rights as revenue based on a percentage of actual sales to total estimated lifetime sales of the related developed products as the customers exercise their option to acquire additional products or services at a discount. Woodward amortizes the capitalized costs to fulfill a contract as cost of goods sold proportionally to the recognition of the associated deferred material rights. Estimated total lifetime sales are reviewed at least annually and more frequently when circumstances warrant a modification to the previous estimate. For the three and nine-months ended June 30, 2019, Woodward recognized an increase in revenue of $4,482 and $6,017, respectively, and cost of goods sold of $9,255 and $9,578, respectively, related to changes in estimated total lifetime sales. Other than amounts related to changes in estimate, for both the three and nine-months ended June 30, 2019, Woodward amortized $207 of costs to fulfill contracts with customers to cost of goods sold and amortized $278 of contract liabilities to revenue.

In 2016, Woodward contributed certain contractual rights and intellectual property to a joint venture with the General Electric Company (“GE”). In exchange for a 50% ownership interest in the joint venture and future rights to purchase products from the joint venture at favorable pricing, GE agreed to pay total consideration of $323,410 to Woodward. Under previous accounting guidance, Woodward concluded that the formation of the joint venture was not the culmination of an earnings event and deferred recognition of the consideration paid until earned in the future. Under ASC 606, Woodward also concluded that the formation of the joint venture was not a culmination of an earnings event and has further concluded that the consideration paid or receivable from GE represents a material right. Accordingly, under both ASC 606 and the previous standard, across filersWoodward concluded it was appropriate to defer the consideration received as a liability and recognized it as an increase to net sales in multiple industries andproportion to revenue realized on sales of applicable fuel systems within the same industries comparedscope of the joint venture. Recognition to current practices, which should improve comparability.  Adoption of ASC 606net sales in a particular period is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period.  Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.    

8


Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a resultpercentage of applying ASC 606 (rather than previous U.S. GAAP) and include an explanationtotal revenue expected to be realized by Woodward over the estimated remaining lives of the reasons for significant changes.

Woodward is currently assessingunderlying commercial aircraft engine programs assigned to the impact that the future adoptionjoint venture. As of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606.  Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606, on October 1, 2018, the first dayWoodward has classified this as a contract liability with both a current and noncurrent portion. For further discussion of Woodward’s fiscal year 2019.  As partjoint venture, see Note 6, Joint venture.

Woodward does not record incremental costs of this review process,obtaining a contract, as Woodward is implementing new software solutionsdoes not pay sales commissions or incur other incremental costs related to supportcontracts with Woodward’s customers for arrangements in which quantities and pricing are fixed and/or determinable.

Point in time and over time revenue reporting after adoption.  recognition

Based onApproximately one-half of Woodward’s review of its customer contracts Woodward has determined that revenue on the majority of its customer contracts will continue to beare recognized at athe point in time when control of the products transfers to the customer, generally upon shipment of products, consistent with Woodward’s currenthistorical revenue recognition model. Upon adoptionThe remaining portion of ASC 606, however, Woodward also believes some of itsWoodward’s revenues from sales of products and services to customers will beis recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts.contracts and/or the type of performance obligation being satisfied, as described below.

The following table reflects the amount of revenue recognized as point in time or over time for the three and nine-months ended June 30, 2019:

Three-Months Ended June 30, 2019

Nine-Months Ended June 30, 2019

Aerospace

Industrial

Consolidated

Aerospace

Industrial

Consolidated

Point in time

$

191,516 

$

147,194 

$

338,710 

$

563,713 

$

482,979 

$

1,046,692 

Over time

307,259 

106,036 

413,295 

810,903 

306,065 

1,116,968 

Total net sales

$

498,775 

$

253,230 

$

752,005 

$

1,374,616 

$

789,044 

$

2,163,660 

Point in time

Control of the products generally transfers to the customer at a point in time, as the customer does not control the products as they are produced. Woodward exercises judgment and considers the timing of right of payment, transfer of the risk and rewards, transfers of title, transfer of physical possession, and customer acceptance when determining when control of the product transfers to the customer, generally upon shipment of products, consistent with Woodward’s historical revenue recognition model.

13


Over time

Performance obligations are satisfied and revenue is recognized over time if: (i) the customer receives the benefits as Woodward performs work, if the customer controls the asset as it is being enhanced, or if the product being produced for the customer has no alternative use to Woodward; and (ii) Woodward has an enforceable right to payment with a profit. For products being produced for the customer that have no alternative use to Woodward and Woodward has an enforceable right to payment with a profit, and where the products are substantially the same and have the same pattern of transfer to the customer, revenue is recognized as a series of distinct products. As Woodward satisfies MRO performance obligations, revenue is recognized over time, as the customer, rather than Woodward, controls the asset being enhanced. When services are provided, revenue from those services is recognized over time because control is transferred continuously to customers as Woodward performs the work. As a resultpractical expedient, revenue for services that are short-term in nature are recognized using an output method as the customer is invoiced, as the invoiced amount corresponds directly to Woodward’s performance to date on the arrangement.

For services that are not short-term in nature, MRO, and sales of recognizing someproducts that have no alternative use to Woodward and an enforceable right to payment with a profit, Woodward uses an actual cost input measure to determine the extent of progress towards completion of the performance obligation. For these revenue streams, revenue is recognized over time as work is performed based on the relationship between actual costs incurred to-date for each contract and the total estimated costs for such contract at completion of the performance obligation (the cost-to-cost method). Woodward has concluded that this measure of progress best depicts the transfer of assets to the customer, because incurred costs are integral to Woodward’s completion of the performance obligation under the specific customer contract and correlate directly to the transfer of control to the customer. Contract costs include labor, material and overhead. Contract cost estimates are based on various balance sheet line itemsassumptions to project the outcome of future events. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.

As a significant change in one or more of these estimates could affect the profitability of its contracts, Woodward reviews and updates its estimates regularly upon receipt of new contracts with customers. Due to uncertainties inherent in the estimation process, it is reasonably possible that completion costs will be impacted.  revised. Such revisions to costs and revenue are recognized in the period in which the revisions are determined as a cumulative catch-up adjustment. The impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, Woodward recognizes provisions for estimated losses on uncompleted contracts in the period in which such losses are determined. For the three and nine-months ended June 30, 2019, adjustments to revenue related to changes in estimates were immaterial.

Occasionally Woodward sells maintenance or service arrangements, extended warranties, or other stand ready services. Woodward recognizes revenue from such arrangements as a series of performance obligations over the time period in which the services are available to the customer.

Contract assets

Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (contract assets) and are included in “Accounts receivable” in Woodward’s Condensed Consolidated Balance Sheets. Amounts are billed in accordance with contractual terms, which are generally tied to shipment of the products to the customer, or as work progresses in accordance with contractual terms. Billed accounts receivable are typically due within 60 days.

Consistent with common business practice in China, Woodward’s Chinese subsidiaries accept bankers’ acceptance notes from Chinese customers in settlement of certain customer billed accounts receivable. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of Woodward’s receipt of such draft. Woodward has elected to adopt the practical expedient to not adjust the promised amounts of consideration for the effects of a significant financing component at contract inception as the financing component associated with accepting bankers’ acceptance notes has a duration of less than one year. Woodward’s contracts with customers generally have no other financing components.

14


Unbilled amounts arise when the timing of billing differs from the timing of revenue recognized, such as when contract provisions require revenue to be recognized over time rather than at a point in time. Unbilled amounts primarily relate to performance obligations satisfied over time when the cost-to-cost method is utilized and the revenue recognized exceeds the amount billed to the customer as there is not yet a right to payment in accordance with contractual terms. Unbilled amounts are recorded as a contract asset when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract.

Accounts receivable consisted of the following:

June 30, 2019

September 30, 2018

Billed receivables

Trade accounts receivable

$

370,643 

$

403,590 

Other (Chinese financial institutions)

86,059 

23,191 

Less: Allowance for uncollectible amounts

(3,904)

(3,938)

Net billed receivables

452,798 

422,843 

Current unbilled receivables (contract assets), net

197,979 

9,160 

Total accounts receivable, net

$

650,777 

$

432,003 

As such,of the October 1, 2018 adoption of ASC 606, Woodward believesrecognized unbilled receivables of $135,668, as adjusted. The remaining change in unbilled receivables was driven by the timing of revenue recognized in excess of billings, primarily in Woodward’s Aerospace segment.

In addition, as of June 30, 2019 “Other assets” on the Condensed Consolidated Balance Sheets includes $894 of unbilled receivables not expected to be invoiced and collected within a period of twelve months. As of September 30, 2018, there were no unbilled receivables not expected to be invoiced and collected within a period of twelve months.

Customer billed receivables are recorded at face amounts, less an allowance for doubtful accounts. In establishing the amount of the allowance related to the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating results or financial position, and current economic conditions. Bad debt losses are deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received. In the three and nine-months ended June 30, 2019, receivables written off were immaterial. An allowance associated with anticipated other adjustments to the selling price or cash discounts is also established and is included in the allowance for uncollectible amounts. Changes to this allowance are recorded as increases or decreases to net sales as adjustments to the transaction price related to variable consideration. In establishing this amount, both customer-specific information and historical experience are considered.

Unbilled receivables are stated net of adjustments for credit risk and the anticipated impacts of variable consideration on the transaction price, as applicable.

Billed and unbilled accounts receivable from the U.S. Government were less than 10% of total billed and unbilled accounts receivable at June 30, 2019.

Contract liabilities

Advance payments and billings in excess of revenue recognized represent contract liabilities and are recorded as deferred revenues when customers remit contractual cash payments in advance of Woodward satisfying performance obligations under contractual arrangements, including those with performance obligations satisfied over time. Woodward generally receives advance payments from customers related to maintenance or service arrangements, extended warranties, or other stand ready services, which it recognizes over the performance period. Contract liabilities are derecognized when revenue is recognized and the performance obligation is satisfied. Advance payments and billings in excess of revenue recognized are included in deferred revenue, which is classified as current or noncurrent based on the timing of when Woodward expects to recognize revenue. The current portion is included in “Accrued liabilities” and the noncurrent portion is included in “Other liabilities” at Woodward’s Condensed Consolidated Balance Sheets.

15


Contract liabilities consisted of the following:

June 30, 2019

September 30, 2018

Current

Noncurrent

Current

Noncurrent

Deferred revenue from material rights from GE joint venture formation

$

6,806 

$

234,038 

$

7,087 

$

235,300 

Deferred revenue from advance invoicing and/or prepayments from customers

3,343 

-

2,572 

-

Liability related to customer supplied inventory

13,021 

-

-

-

Deferred revenue from material rights related to engineering and development funding

3,137 

98,889 

-

-

Net contract liabilities

$

26,307 

$

332,927 

$

9,659 

$

235,300 

As of the October 1, 2018 adoption of ASC 606, Woodward recognized current liabilities for the noncash consideration provided to Woodward in the form of customer supplied inventory of $11,951, as adjusted, and current and noncurrent liabilities for deferred revenue from material rights related to engineering and development funding of $664 and $79,347, respectively. All other changes in contract liability balances were due to normal operating activities.

Woodward recognized revenue of $6,147 in the three-months and $26,459 in the nine-months ended June 30, 2019 from contract liabilities balances recorded as of October 1, 2018.

Remaining performance obligations

Remaining performance obligations related to the aggregate amount of the total contract transaction price of firm orders for which the performance obligation has not yet been recognized in revenue as of June 30, 2019 was $1,659,788, the majority of which relate to Woodward’s Aerospace segment. Woodward expects to recognize almost all of these remaining performance obligations within two years after June 30, 2019.

Remaining performance obligations related to material rights that have not yet been recognized in revenue as of June 30, 2019 was $436,876, of which $2,253 is expected to be recognized in the remainder of fiscal year 2019, $11,573 is expected to be recognized in fiscal year 2020, and the balance is expected to be recognized thereafter. Woodward expects to recognize revenue from performance obligations related to material rights over the life of the underlying programs, which may be as long as forty years.

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Financial statement impact of the adoption of ASC 606 will

The following schedule quantifies the impact of adopting ASC 606 on the Condensed Consolidated Balance Sheet as of October 1, 2018, as revised for the error correction detected in the three-months ended June 30, 2019, which was not material. The effect of the new standard represents the increase (decrease) in the line item based on the adoption of ASC 606 and the adjustment for the error subsequently corrected:

September 30, 2018
as reported

Effect of ASC 606
as previously reported

October 1, 2018
as previously reported

Adjustments for
error correction

October 1, 2018
as corrected

ASSETS

Current assets:

Cash and cash equivalents

$

83,594 

$

-

$

83,594 

$

-

$

83,594 

Accounts receivable, net (1)(2)

432,003 

104,907 

536,910 

30,761 

567,671 

Inventories (1)(2)

549,596 

(55,002)

494,594 

(18,604)

475,990 

Income taxes receivable (5)

6,397 

(959)

5,438 

(288)

5,150 

Other current assets

43,207 

(154)

43,053 

-

43,053 

Total current assets

1,114,797 

48,792 

1,163,589 

11,869 

1,175,458 

Property, plant and equipment, net

1,060,005 

-

1,060,005 

-

1,060,005 

Goodwill

813,250 

-

813,250 

-

813,250 

Intangible assets, net (4)

700,883 

(2,519)

698,364 

-

698,364 

Deferred income tax assets (5)

16,570 

(975)

15,595 

(210)

15,385 

Other assets (1)(2)(3)

85,144 

85,865 

171,009 

-

171,009 

Total assets

$

3,790,649 

$

131,163 

$

3,921,812 

$

11,659 

$

3,933,471 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Short-term borrowings

$

153,635 

$

-

$

153,635 

$

-

$

153,635 

Accounts payable

226,285 

-

226,285 

-

226,285 

Income taxes payable (5)

16,745 

4,141 

20,886 

1,211 

22,097 

Accrued liabilities (2)(3)

194,513 

15,672 

210,185 

(1,047)

209,138 

Total current liabilities

591,178 

19,813 

610,991 

164 

611,155 

Long-term debt, less current portion

1,092,397 

-

1,092,397 

-

1,092,397 

Deferred income tax liabilities (5)

170,915 

3,833 

174,748 

1,682 

176,430 

Other liabilities (3)

398,055 

78,631

476,686

(1)

476,685

Total liabilities

2,252,545 

102,277

2,354,822

1,845

2,356,667

Stockholders’ equity:

Preferred stock

-

-

-

-

-

Common stock

106 

-

106 

-

106 

Additional paid-in capital

185,705 

-

185,705 

-

185,705 

Accumulated other comprehensive losses

(74,942)

(41)

(74,983)

(4)

(74,987)

Deferred compensation

8,431 

-

8,431 

-

8,431 

Retained earnings

1,966,643 

28,927 

1,995,570 

9,818 

2,005,388 

2,085,943 

28,886

2,114,829

9,814

2,124,643

Treasury stock at cost

(539,408)

-

(539,408)

-

(539,408)

Treasury stock held for deferred compensation

(8,431)

-

(8,431)

-

(8,431)

Total stockholders’ equity

1,538,104 

28,886

1,566,990

9,814

1,576,804

Total liabilities and stockholders’ equity

$

3,790,649 

$

131,163 

$

3,921,812 

$

11,659 

$

3,933,471 

(1)The adoption of ASC 606 changed the revenue recognition practices for a number of revenue generating activities across Woodward’s businesses, although the most significant impacts are concentrated in product being produced for customers that have no alternative use to Woodward and Woodward has an impactenforceable right to payment with a profit, and MRO. The revenue related to these activities, which previously was accounted for on botha point in time basis, is now required to use an over time model because the associated contracts meet one or more of the mandatory criteria established in ASC 606, as described above, and are included as current unbilled receivables in “Accounts receivable” and noncurrent unbilled receivables in “Other assets.” The change in the timing of revenue recognized in connection with over time contracts similarly changed the timing of manufacturing cost recognition and various line items within the Consolidated Balance Sheet.

Woodward generally expenses costs as incurred for thecertain engineering and development costs, which are reflected as a reduction to inventory.

(2)

17


The value of new products.  Customer funding received for such engineeringnoncash consideration in the form of exchanged products and development effortsother customer provided inventory is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales. ASC 606 requiresreflected in “Inventories,” and in contract liabilities, which are included in “Accrued liabilities.”

(3)Woodward recorded customer funding of product engineering and development to beidentified as material rights as current and noncurrent deferred revenue contract liabilities included in “Accrued liabilities” and recognized as revenue as the“Other liabilities.” The related products are delivered to the customer.  ASC 606 also requirescustomer funded product engineering and development costs to bewere capitalized as costs to fulfill a contract, fulfillment costs, to the extent recoverable fromof the deferredcontractually committed customer funding,funded payments, and subsequently amortizedare recorded as “Other assets.”

(4)The net book value of the related products are delivered tobacklog and customer relationships and contracts intangible assets was adjusted concurrent with the customer.  Therefore, underchange in the timing of the associated revenue, resulting in a reduction in the net book value of these assets as of the date of adoption.

(5)The value of tax assets and tax liabilities was impacted by the change in timing of the recognition of assets and liabilities within tax jurisdictions.

The following schedule quantifies the impact of adopting ASC 606 Woodward expects to record both contract assetson the Condensed Consolidated Statements of Earnings for the three and contract liabilities related to such funded engineeringnine-months ended June 30, 2019 and development efforts, which are expected to become material over time.  Recognized revenuesthe impact of the out-of-period correction discussed above on the Condensed Consolidated Statements of Earnings for the three-months ended June 30, 2019. The effect of the new standard and research and development costs are both expected to decreasethe error correction represent the increase (decrease) in the yearline item based on the adoption of ASC 606.

Three-Months Ended June 30, 2019

Nine-Months Ended June 30, 2019

Under previous standard

Effect of
ASC 606

Out-of-period correction

As reported

Under previous standard

Effect of
ASC 606

As reported

Net sales

$

701,426 

$

36,965 

$

13,614 

$

752,005 

$

2,057,294 

$

106,366 

$

2,163,660 

Costs and expenses:

Cost of goods sold

520,274 

36,669 

5,573 

562,516 

1,528,328 

93,203 

1,621,531 

Selling, general, and administrative expenses

52,897 

83 

-

52,980 

159,902 

(138)

159,764 

Research and development costs

40,911 

(250)

-

40,661 

125,262 

(1,903)

123,359 

Interest expense

10,798 

-

-

10,798 

34,156 

-

34,156 

Interest income

(348)

-

-

(348)

(1,013)

-

(1,013)

Other expense (income), net

(6,916)

-

-

(6,916)

(18,134)

-

(18,134)

Total costs and expenses

617,616 

36,502 

5,573 

659,691 

1,828,501 

91,162 

1,919,663 

Earnings before income taxes

83,810 

463 

8,041 

92,314 

228,793 

15,204 

243,997 

Income tax expense

24,403 

(200)

2,004 

26,207 

47,958 

3,233 

51,191 

Net earnings

$

59,407 

$

663 

$

6,037 

$

66,107 

$

180,835 

$

11,971 

$

192,806 

Earnings per share

Basic earnings per share

$

0.96 

$

0.01 

0.10 

$

1.07 

$

2.92 

$

0.19 

$

3.11 

Diluted earnings per share

$

0.92 

$

0.01 

0.09 

$

1.02 

$

2.81 

$

0.19 

$

2.99 

Weighted Average Common Shares Outstanding (Note 4):

Basic

61,941 

61,941 

61,977 

61,977 

Diluted

64,633 

64,633 

64,437 

64,437 

The adoption of ASC 606 resulted in an increase to net sales and for at least several years thereafter,cost of goods sold primarily due to the recognition of these contract assetsnoncash consideration in the form of customer supplied inventory and liabilities.  However,the accelerated recognition of these contract assetsrevenue and liabilities are expectedassociated cost of goods sold for over time contracts, which would have been recognized at a point in time under the previous standard. The increases were offset by decreases in revenue and cost of goods sold related to the deferral of amounts due from customers recognized as material rights and over time contracts recognized as of the date of adoption, both of which would otherwise have an immaterialbeen recognized as revenue during the periods under the previous standard.

18


The following schedule quantifies the impact on pre-tax earnings in future periods.

In addition,of adopting ASC 606 will require more comprehensive disclosures abouton the Condensed Consolidated Balance Sheet as of June 30, 2019. The effect of the new standard represents the increase (decrease) in the line item based on the adoption of ASC 606.

June 30, 2019
under previous standard

Effect of
ASC 606

June 30, 2019
as reported

ASSETS

Current assets:

Cash and cash equivalents

$

63,302 

$

-

$

63,302 

Accounts receivable, net

456,282 

194,495 

650,777 

Inventories

641,521 

(110,358)

531,163 

Income taxes receivable

17,903 

(9,833)

8,070 

Other current assets

44,866 

(69)

44,797 

Total current assets

1,223,874 

74,235 

1,298,109 

Property, plant and equipment, net

1,063,084 

-

1,063,084 

Goodwill

807,868 

-

807,868 

Intangible assets, net

641,541 

(60)

641,481 

Deferred income tax assets

16,543 

(1,207)

15,336 

Other assets

90,604 

99,121 

189,725 

Total assets

$

3,843,514 

$

172,089 

$

4,015,603 

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Short-term borrowings

$

180,000 

$

-

$

180,000 

Accounts payable

243,071 

-

243,071 

Income taxes payable

12,816 

-

12,816 

Accrued liabilities

188,942 

17,843 

206,785 

Total current liabilities

624,829 

17,843 

642,672 

Long-term debt, less current portion

1,011,147 

-

1,011,147 

Deferred income tax liabilities

167,918 

5,371 

173,289 

Other liabilities

385,994 

98,190 

484,184 

Total liabilities

2,189,888 

121,404 

2,311,292 

Stockholders' equity:

Preferred stock

-

-

-

Common stock

106 

-

106 

Additional paid-in capital

205,704 

-

205,704 

Accumulated other comprehensive losses

(64,149)

(31)

(64,180)

Deferred compensation

9,118 

-

9,118 

Retained earnings

2,117,488 

50,716 

2,168,204 

2,268,267 

50,685 

2,318,952 

Treasury stock at cost

(605,523)

-

(605,523)

Treasury stock held for deferred compensation

(9,118)

-

(9,118)

Total stockholders' equity

1,653,626 

50,685 

1,704,311 

Total liabilities and stockholders' equity

$

3,843,514 

$

172,089 

$

4,015,603 

The underlying causes of the impacts of the adoption of ASC 606 on the Condensed Consolidated Balance Sheet as of June 30, 2019 are consistent with those as of the date of adoption, October 1, 2018, as discussed above.

The adoption of ASC 606 did not impact cash provided by or used in operating, investing or financing activities in the Condensed Consolidated Statement of Cash Flows for the nine-months ended June 30, 2019.

Disaggregation of Revenue

Woodward designs, produces and services reliable, efficient, low-emission, and high-performance energy control products for diverse applications in markets throughout the world. Woodward reports financial results for each of its Aerospace and Industrial reportable segments. Woodward further disaggregates its revenue streams andfrom contracts with customers including significant judgments required.by primary market and by geographical area as Woodward is currently implementing changesbelieves this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.

19


Revenue by primary market for the Aerospace reportable segment was as follows:

Three-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2019

Commercial OEM

$

174,077 

$

488,928 

Commercial aftermarket

124,863 

375,919 

Defense OEM

147,696 

372,538 

Defense aftermarket

52,139 

137,231 

Total Aerospace segment net sales

$

498,775 

$

1,374,616 

Revenue by primary market for the Industrial reportable segment was as follows:

Three-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2019

Reciprocating engines

$

185,523 

$

590,910 

Industrial turbines

53,740 

155,439 

Renewables

13,967 

42,695 

Total Industrial segment net sales

$

253,230 

$

789,044 

The customers who account for approximately 10% or more of net sales to its processeseach of Woodward’s reportable segments for preparing required disclosuresboth the three and to information systems that support the financial reporting process. nine-months ended June 30, 2019 follow:

Woodward is also evaluating implications to the Company’s system of internal controls, relative to revenue recognition and the related revenue disclosures, which are

Customer

Aerospace

The Boeing Company, General Electric Company, United Technologies

Industrial

Rolls-Royce PLC, Weichai Westport, General Electric Company

Net sales by geographic area, as determined based on the criteria outlined in the Committee of Sponsoring Organizationslocation of the Treadway Commission’s 2013 Internal Control – Integrated Framework.customer, were as follows:

Three-Months Ended June 30, 2019

Nine-Months Ended June 30, 2019

Aerospace

Industrial

Consolidated

Aerospace

Industrial

Consolidated

United States

$

386,136 

$

53,380 

$

439,516 

$

1,024,644 

$

156,836 

$

1,181,480 

Germany

18,319 

50,943 

69,262 

56,136 

178,032 

234,168 

Europe, excluding Germany

42,849 

66,936 

109,785 

131,243 

191,415 

322,658 

Asia

18,908 

73,856 

92,764 

66,206 

238,737 

304,943 

Other countries

32,563 

8,115 

40,678 

96,387 

24,024 

120,411 

Total net sales

$

498,775 

$

253,230 

$

752,005 

$

1,374,616 

$

789,044 

$

2,163,660 

9

20


Note 3.4. Earnings per share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and restricted stock.

The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:share for the three and nine-months ended June 30, 2019 and 2018:

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Numerator:

Net earnings 

$

66,107 

$

49,117 

$

192,806 

$

105,866 

Denominator:

Basic shares outstanding

61,941 

61,608 

61,977 

61,417 

Dilutive effect of stock options and restricted stock units

2,692 

2,273 

2,460 

2,365 

Diluted shares outstanding

64,633 

63,881 

64,437 

63,782 

Income per common share:

Basic earnings per share

$

1.07 

$

0.80 

$

3.11 

$

1.72 

Diluted earnings per share

$

1.02 

$

0.77 

$

2.99 

$

1.66 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Numerator:

 

 

 

 

 

 

Net earnings 

 

$

18,260 

 

$

46,548 

Denominator:

 

 

 

 

 

 

Basic shares outstanding

 

 

61,246 

 

 

61,559 

Dilutive effect of stock options and restricted stock

 

 

2,463 

 

 

2,112 

Diluted shares outstanding

 

 

63,709 

 

 

63,671 

Income per common share:

 

 

 

 

 

 

Basic earnings per share

 

$

0.30 

 

$

0.76 

Diluted earnings per share

 

$

0.29 

 

$

0.73 

The following stock option grants were outstanding during the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 and 2016,2018, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

 

 

 

 

 

 

 

 

Three-Months Ended

Three-Months Ended

Nine-Months Ended

 

December 31,

June 30,

June 30,

 

2017

 

2016

2019

2018

2019

2018

Options

 

 

754 

 

 

 -

39 

764 

19 

760 

Weighted-average option price

 

$

78.75 

 

$

n/a

$

97.13 

$

78.70 

$

97.13 

$

78.73 

The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the weighted-average treasury stock shares held for deferred compensation obligations of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Weighted-average treasury stock shares held for

deferred compensation obligations

 

 

193 

 

 

170 

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Weighted-average treasury stock shares held for deferred compensation obligations

208 

201 

207 

197 

Note 4.5. Business acquisition

In fiscal year 2018, the Company, and its wholly-owned subsidiary, Woodward Aken GmbH (collectively, the “Purchasers”), entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”). Pursuant to the L’Orange Agreement, the Purchasers agreed to acquire all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000 based on the foreign currency exchange rate as of the date Woodward executed cross currency swaps in connection with the financing of the transaction as described in Note 8, Derivative instruments and hedging activities. The transactions contemplated by the L’Orange Agreement were completed on June 1, 2018 (the “Closing”) and L’Orange became a subsidiary of the Company. Following the Closing, L’Orange was renamed “Woodward L’Orange.”

21


Woodward L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines. Woodward L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application off road vehicles, locomotives, oil and gas processing, and power generation. Woodward L’Orange serves many large specialist diesel engine manufacturers, including Rolls-Royce Power Systems’ subsidiaries, MTU and Bergen Engines, and other low to high speed engine builders. Woodward L’Orange has been integrated into the Company’s Industrial segment.

In connection with the Closing, MTU and Woodward L’Orange entered into a long-term supply agreement, dated June 1, 2018 (the “LTSA”). Pursuant to the terms of the LTSA, Woodward L’Orange will continue to supply to MTU and its affiliates within Rolls-Royce certain liquid fuel injection systems, injectors, pumps and other associated parts and components for industrial diesel, heavy fuel oil and dual-fuel engines in a manner consistent with the supply of such products prior to the transaction. The LTSA has an initial term that extends through December 31, 2032. During the term of the LTSA, MTU will continue to purchase certain of these products exclusively from Woodward L’Orange, subject to certain limitations specified therein, at pricing negotiated at arms-length.

ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions under U.S. GAAP. The purchase price of L’Orange, prepared consistent with the required ASC 805 framework, is allocated as follows:

Cash paid to Sellers

$

780,401 

Less acquired cash and restricted cash

(9,286)

Total purchase price

$

771,115 

The cash consideration was financed through the use of cash on hand, the issuance of an aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and $167,420 borrowed under Woodward’s revolving credit agreement (see Note 14, Credit facilities, short-term borrowings and long-term debt). In connection with these borrowings, the Company entered into cross currency swap transactions, which effectively lowered the interest rate on each tranche of the senior unsecured notes and the borrowings under the Company’s revolving credit agreement (see Note 8, Derivative instruments and hedging activities).

The allocation of the purchase price to the assets acquired and liabilities assumed was finalized as of June 30, 2019 using the purchase method of accounting in accordance with ASC 805.  Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.  Woodward’s allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data.

The following table, which is final as of June 30, 2019, summarizes the estimated fair values of the assets acquired and liabilities assumed at the Closing.

Accounts receivable

$

26,538 

Inventories (1)

72,392 

Other current assets

1,385 

Property, plant, and equipment

89,772 

Goodwill

257,447 

Intangible assets

573,427 

Total assets acquired

1,020,961 

Other current liabilities

41,997 

Deferred income tax liabilities

166,927 

Other noncurrent liabilities

40,922 

Total liabilities assumed

249,846 

Net assets acquired

$

771,115 

(1)Inventories include a $16,324 adjustment to state work in progress and finished goods inventories at their fair value as of the acquisition date. The entire inventory fair value adjustment was recognized as a noncash increase to cost of goods sold ratably over the estimated inventory turnover period during the fiscal year ended September 30, 2018.

In connection with the acquisition of L’Orange, Woodward assumed the defined benefit pension obligations of the L’Orange defined benefit pension plans (the “Woodward L’Orange Pension Plans”). Woodward’s assumption of the liability associated with the Woodward L’Orange Pension Plans was part of the total consideration paid by Woodward to acquire L’Orange and thus reduced Woodward’s cash payment for the transaction. As of the Closing, the total liability recognized by the Company associated with the Woodward L’Orange Pension Plans was $39,257, of which $1,143 was considered current.

22


A summary of the intangible assets acquired, weighted-average useful lives, and amortization methods follows:

Estimated Amounts

Weighted-Average Useful Life

Amortization Method

Intangible assets with finite lives:

Customer relationships and contracts

$

388,705 

22 

years

Straight-line

Process technology

74,260 

22 

years

Straight-line

Backlog

42,932 

year

Accelerated

Other

232 

years

Straight-line

Intangible asset with indefinite life:

Trade name

67,298 

Indefinite

Not amortized

Total

$

573,427 

For the three and nine-months ended June 30, 2019, Woodward recorded amortization expense associated with the acquired intangibles of $5,558 and $28,136, respectively. Future amortization expense associated with the acquired intangibles as of June 30, 2019 is expected to be:

Year Ending September 30:

2019 (remaining)

$

4,879 

2020

19,491 

2021

22,429 

2022

22,378 

2023

22,378 

Thereafter

354,496 

$

446,051 

The final purchase price allocation resulted in the recognition of $257,447 of goodwill. Only the portion of goodwill which relates to the U.S. operations of Woodward L’Orange is deductible for tax purposes. The Company has included all of the goodwill in its Industrial segment. The goodwill represents the estimated value of potential expansion with new customers, the opportunity to further develop sales opportunities with new customers, other synergies including supply chain savings expected to be achieved through the integration of Woodward L’Orange with Woodward’s Industrial segment, and intangible assets that do not qualify for separate recognition, such as the value of the assembled Woodward L’Orange workforce that is not included within the estimated value of the acquired backlog and customer relationship intangible assets.

Pro forma results for Woodward giving effect to the L’Orange acquisition

The following unaudited pro forma financial information presents the combined results of operations of Woodward and Woodward L’Orange as if the acquisition had been completed as of the beginning of the prior fiscal year, or October 1, 2016. The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on October 1, 2016, nor are they indicative of future results.

The unaudited pro forma financial information for the three and nine-months ended June 30, 2019 includes Woodward’s results, including the post-acquisition results of Woodward L’Orange, since June 1, 2018. The unaudited pro forma financial information for the three and nine-months ended June 30, 2018 combines Woodward’s results with the pre-acquisition results of L’Orange for the period prior to June 1, 2018, and the post-acquisition results of Woodward L’Orange since June 1, 2018.

Prior to the L’Orange acquisition by Woodward, L’Orange was a wholly owned subsidiary of Rolls-Royce, and as such was not a standalone entity for financial reporting purposes. Accordingly, the historical operating results of L’Orange may not be indicative of the results that might have been achieved, historically or in the future, if L’Orange had been a standalone entity.

23


The unaudited pro forma results for the three and nine-months ended June 30, 2019 and June 30, 2018 are asfollows:

Three-Months Ended

Three-Months Ended

June 30, 2019

June 30, 2018

As reported

Pro forma

As reported

Pro forma

Net sales

$

752,005 

$

752,005 

$

588,117 

$

639,665 

Net earnings

66,107 

66,092 

49,117 

66,372 

Earnings per share:

Basic earnings per share

$

1.07 

$

1.07 

$

0.80 

$

1.08 

Diluted earnings per share

1.02 

1.02 

0.77 

1.04 

Nine-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2018

As reported

Pro forma

As reported

Pro forma

Net sales

$

2,163,660 

$

2,163,660 

$

1,606,514 

$

1,830,515 

Net earnings

192,806 

201,363 

105,866 

134,976 

Earnings per share:

Basic earnings per share

$

3.11 

$

3.25 

$

1.72 

$

2.20 

Diluted earnings per share

2.99 

3.12 

1.66 

2.12 

The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisition been completed as of October 1, 2016, including amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments for acquisition transaction costs, adjustments for depreciation expense for property, plant, and equipment, and adjustments to interest expense. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.

The operating results of Woodward L’Orange have been included in Woodward’s operating results for the periods subsequent to the completion of the acquisition on June 1, 2018. Woodward L’Orange contributed net sales of $78,517 for the three-months and $254,183 for the nine-months ended June 30, 2019, and net sales of $24,878 for both the three and nine-months ended June 30, 2018. Woodward L’Orange contributed net income before income taxes of $11,495 for the three-months and $33,995 for the nine-months ended June 30, 2019, and a net loss before income taxes of $1,215 for both the three and nine-months ended June 30, 2018.

Woodward incurred acquisition financing related costs of $3,655 for the three-months and $11,152 for the nine-months ended June 30, 2019, and $1,154 for both the three and nine-months ended June 30, 2018. The acquisition financing related costs are included in “Interest expense” in the Condensed Consolidated Statements of Earnings.

Note 6. Joint venture

On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to design, develop, manufacture and sourcesupport fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV. Woodward had no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV. GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward. In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year, which began on January 4, 2017, subject to certain claw-back conditions. During the three-months ended March 31, 2018 and March 31, 2019, Woodward recordsreceived its second and third annual payments receivedof $4,894, respectively, which were recorded as deferred income and includes themincluded in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated StatementStatements of Cash Flows. Neither Woodward nor GE contributed any tangible assets to the JV.

10


Under previous accounting guidance, Woodward determinedconcluded that the formation of the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operationsand deferred recognition of the JV.  Therefore,consideration paid until earned in the future. Under ASC 606, Woodward recordedalso concluded the $250,000formation of the JV was not a culmination of an earnings event and has further concluded that the consideration paid or receivable from GE represents a material right. Accordingly, under both ASC 606 and the previous standard, Woodward concluded it was appropriate to defer the consideration received from GE, in January of 2016, for its purchase ofas a 50% equity interest in the JVliability and recognize it as deferred income.  The $250,000 deferred income will be recognized as an

24


increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JVJV. Recognition to net sales in a particular period is determined as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV. Unamortized deferred income recordedrevenue from material rights in connection with the JV formation included accrued liabilities of $6,439$6,806 as of December 31, 2017June 30, 2019 and $6,451$7,087 as of September 30, 2017,2018, and other liabilities of $235,855$234,038 as of December 31, 2017June 30, 2019 and $236,896$235,300 as of September 30, 2017.2018. Amortization of the deferred income (material right) recognized as an increase to sales was $1,053$2,013 for the three-months and $5,712 for the nine-months ended December 31, 2017,June 30, 2019, and $1,496$1,564 for the three-months and $4,103 for the nine-months ended December  31, 2016.June 30, 2018.

Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties. Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE do have the ability to significantly influence the operating and financial decisions of the JV. Therefore, Woodward is accounting for its 50% ownership interest in the JV using the equity method of accounting. The JV is a related party to Woodward. Other income includes income of $596$3,290 for the three-months and $7,761 for the nine-months ended December  31, 2017,June 30, 2019, and income of $684$738 for the three-months and $2,340 for the nine-months ended December  31, 2016June 30, 2018 related to Woodward’s equity interest in the earnings of the JV. During the three and nine-months ended June 30, 2019, Woodward received cash distributions from the JV of $4,500 and $12,000 respectively, which is included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Woodward received no cash distributions from the JV induring the three-monthsthree and nine-months ended December  31,  2017 or 2016.June 30, 2018. Woodward’s net investment in the JV, which is included in other assets, was $6,868$5,373 as of December  31, 2017June 30, 2019 and $6,272$9,611 as of September 30, 2017.  2018.

Woodward’s net sales include $12,975$18,049 for the three-months and $45,176 for the nine-months ended December 31, 2017June 30, 2019 of sales to the JV, compared to $15,302$20,085 for the three-months and $50,137 for the nine-months ended December  31, 2016.June 30, 2018. Woodward recorded a reduction to sales of $5,408$6,897 for the three-months and $25,148 for the nine-months ended December  31, 2017June 30, 2019 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $5,403$7,340 for the three-months and $19,670 for the nine-months ended December  31, 2016.June 30, 2018. The Condensed Consolidated Balance Sheets include “Accounts receivable” of $6,728$5,441 at December 31, 2017,June 30, 2019, and $8,554$10,499 at September 30, 2017,2018, related to amounts the JV owed Woodward, and include “Accounts payable” of $3,984$2,365 at December 31, 2017,June 30, 2019, and $6,741$2,944 at September 30, 2017,2018, related to amounts Woodward owed the JV.

Upon the October 1, 2018 adoption of ASC 606, Woodward recorded $57,529 of revenue recognized in prior periods for the JV’s engineering and development projects as an increase to contract liabilities in “Other liabilities” and $57,529 of costs recognized in prior periods as costs to fulfill a contract in “Other assets.” Woodward recognized an additional $3,042 during the three-months and $11,640 during the nine-months ended June 30, 2019 of contract liabilities in “Other liabilities,” and $3,042 during the three-months and $11,640 during the nine-months ended June 30, 2019 of additional costs to fulfill a contract in “Other assets.” In the three and nine-months ended June 30, 2019, Woodward recognized a $2,774 reduction in both the contract liability in “Other liabilities” and costs to fulfill a contract in “Other assets” related to the termination of a JV engineering and development project previously recognized as a material right.

Note 5.7. Financial instruments and fair value measurements

Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3: Inputs that reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and are significant to the valuation of the instruments.

25


The table below presents information about Woodward’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value.  Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of December 31, 2017 or September 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2017

 

At September 30, 2017

At June 30, 2019

At September 30, 2018

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

77,411 

 

$

 -

 

$

 -

 

$

77,411 

 

$

79,822 

 

$

 -

 

$

 -

 

$

79,822 

$

54,392 

$

-

$

-

$

54,392 

$

59,838 

$

-

$

-

$

59,838 

Investments in reverse repurchase agreements

 

847 

 

 -

 

 -

 

847 

 

 

 -

 

 -

 

90 

-

-

90 

4,582 

-

-

4,582 

Investments in term deposits with foreign banks

 

7,521 

 

 -

 

 -

 

7,521 

 

7,729 

 

 -

 

 -

 

7,729 

8,820 

-

-

8,820 

19,174 

-

-

19,174 

Equity securities

 

 

19,133 

 

 

 -

 

 

 -

 

 

19,133 

 

 

16,600 

 

 

 -

 

 

 -

 

 

16,600 

20,787 

-

-

20,787 

19,730 

-

-

19,730 

Cross currency interest rate swaps

-

2,186 

-

2,186 

-

-

-

-

Total financial assets

 

$

104,912 

 

$

 -

 

$

 -

 

$

104,912 

 

$

104,152 

 

$

 -

 

$

 -

 

$

104,152 

$

84,089 

$

2,186 

$

-

$

86,275 

$

103,324 

$

-

$

-

$

103,324 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

Cross currency interest rate swaps

$

-

$

4,319 

$

-

$

4,319 

$

-

$

23,000 

$

-

$

23,000 

Total financial liabilities

$

-

$

4,319 

$

-

$

4,319 

$

-

$

23,000 

$

-

$

23,000 

11


Investments in reverse repurchase agreements: Woodward sometimes invests excess cash in reverse repurchase agreements. Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement. At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement. Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid. The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in “Cash and cash equivalents.”equivalents” in the Condensed Consolidated Balance Sheets. Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions. Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings. The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments. As of September 30, 2018, $3,635 of the term deposits with foreign banks were restricted in use as they were pledged collateral for short-term borrowings. The restriction lapsed during the first quarter of fiscal year 2019 when the related short-term borrowings were paid.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities. The trading securities are reported at fair value, with realized gains and losses recognized in “Other (income) expense, net.”net” on the Condensed Consolidated Statements of Earnings. The trading securities are included in “Other assets.”assets” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

AccountsCross currency interest rate swaps: Woodward holds cross currency interest rate swaps, which are accounted for at fair value. The swaps in an asset position are included in “Other assets,” and swaps in a liability position are included in “Other liabilities” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s cross currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors.

26


Trade accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value. The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2017

 

At September 30, 2017

At June 30, 2019

At September 30, 2018

 

Fair Value Hierarchy Level

 

Estimated Fair Value

 

Carrying Cost

 

Estimated Fair Value

 

Carrying Cost

Fair Value Hierarchy Level

Estimated Fair Value

Carrying Cost

Estimated Fair Value

Carrying Cost

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from municipalities

 

2

 

$

14,771 

 

$

14,217 

 

$

15,848 

 

$

14,507 

2

$

14,037

$

13,382

$

13,458

$

13,462

Investments in short-term time deposits

 

2

 

 

9,191 

 

 

9,219 

 

 

8,227 

 

 

8,223 

2

12,072

12,123

8,883

8,874

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

2

 

$

(596,136)

 

$

(585,059)

 

$

(592,317)

 

$

(582,080)

2

$

(1,065,531)

$

(1,013,737)

$

(1,094,987)

$

(1,095,292)

In fiscal years 2014 and 2013, Woodward received long-term notes from municipalities within the states of Illinois and Colorado in connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado, Woodward received long-term notes from municipalities within the states of Illinois and Colorado. The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to the Company at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the long-term notes were 2.5%2.0% at December 31, 2017June 30, 2019 and 2.6%3.1% at September 30, 2017.  2018.

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit. Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity. This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the short-term time deposits were 5.6%was 6.3% at December 31, 2017both June 30, 2019 and 5.3% at September 30, 2017. 2018.

The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest rates used to estimate the fair value of long-term debt were 2.3%2.8% at December 31, 2017June 30, 2019 and 2.4%3.5% at September 30, 2017.2018.

12


Note 6.8. Derivative instruments and hedging activities

Woodward has exposures related to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices. From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges. Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates. Woodward does not enter into or issue derivatives for trading or speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument. When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering into transactions only with only counterparties that are believed to be creditworthy. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates. Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Derivative instruments not designated or qualifying as hedging instruments

On April 18, 2018, Woodward entered into an at-the-money forward option at a cost of $5,543 (the “Forward Option”) whereby, on May 30, 2018, Woodward had the ability to exercise its option to purchase €490,000 on June 1, 2018 using U.S. dollars at a fixed exchange rate of 1.2432. The Forward Option was entered into to manage Woodward’s exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Agreement, which provided for payment in Euros. Woodward did not enter into any derivativesthe Forward Option for trading or hedging transactions duringspeculative purposes. As the three-monthsspot rate was below 1.2432 on

27


May 30, 2018, Woodward elected not to exercise the option and a loss of $5,543 was recognized on the Forward Option in “Other (income) expense, net” in the Condensed Consolidated Statements of Earnings in the three and nine-months ended December 31, 2017 or 2016.June 30, 2018.  The Forward Option expired on June 1, 2018.

In May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convert $167,420 of floating-rate debt under Woodward’s then existing revolving credit agreement to Euro denominated floating-rate debt in conjunction with the L’Orange acquisition (the “Floating-Rate Cross Currency Swap”). Also in May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convert an aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined in Note 14, Credit facilities short-term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross Currency Swaps”). The remaining unrecognized gainscross currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and lossesfloating-rate debt under the 2018 Notes (as defined in Note 14, Credit facilities short-term borrowings and long-term debt) and Woodward’s then existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Balance Sheets associatedStatements of Earnings.

Derivatives instruments in fair value hedging relationships

Concurrent with derivative instruments that were previouslythe entry into the Floating-Rate Cross Currency Swap, a corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross currency interest rate swap, was entered into by Woodward which are classifiedBarbados Financing SRL (“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge under the criteria prescribed in ASC Topic 815, “Derivatives and Hedging”(“ASC 815”). The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan.

Only the change in the fair value related to the cross currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated other comprehensive (losses) earnings (“accumulated OCI”), were net gains. The remaining change in the fair value of $200 asthe derivative instrument is recognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of December 31, 2017 and $218 asEarnings. The change in the fair value of September 30, 2017.the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro denominated loan. Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the cross currency basis spread. The initial cost of the cross currency basis spread is recorded in earnings each period through the swap accrual process. There is no credit-risk-related contingent features associated with the floating-rate cross currency interest rate swap.

The following table discloses the impact of derivativeDerivative instruments in cash flow hedging relationships on

In conjunction with the entry into the Fixed-Rate Cross Currency Swaps, five corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross currency interest rate swaps were entered into by Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen year period.

Changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings, recognizedEarnings. Reclassifications out of accumulated OCI of the change in interest expense:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended December 31,



 

2017

 

2016

Amount of (income) expense recognized in earnings on derivative

 

$

(18)

 

$

(18)

Amount of (gain) loss recognized in accumulated OCI on derivative

 

 

 -

 

 

 -

Amount of (gain) loss reclassified from accumulated OCI into earnings

 

 

(18)

 

 

(18)

Basedfair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro denominated intercompany loans, including associated interest. Hedge effectiveness is assessed based on the carryingfair value changes of the realized but unrecognized gains on terminated derivative instruments designatedand deemed to be highly effective in offsetting exposure to variability in foreign exchange rates. There are no credit-risk-related contingent features associated with these fixed-rate cross currency interest rate swaps.

In June 2013, in connection with Woodward’s expected refinancing of current maturities on its then existing long-term debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualified as a cash flow hedgeshedge under ASC 815. The objective of this derivative instrument was 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 principal and interest payments on a portion of anticipated future debt issuances. The treasury lock agreement was terminated in August 2013 and the resulting gain of $507 was recorded as a reduction to accumulated OCI, net of December 31, 2017,tax, and is being recognized as a decrease to interest expense over a seven year period. Woodward expects to reclassify $72 of net unrecognized gains on terminated derivative instruments from accumulated other comprehensive (losses) earningsOCI to earnings during the next twelve months.

28


Derivatives instruments in net investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026.2026 (the “Series M Notes”). Woodward designated the €40,000 Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. OnRelated to the Series M Notes, a foreign exchange loss of $743 for the three-months ended December 31, 2017 and a foreign exchange gain of $2,814 for the three-months ended December 31, 2016 are included in foreign currency translation adjustments within total comprehensive (losses) earnings. 

In July 2016, Woodward designated an intercompany loanearnings are net foreign exchange losses of 160,000 renminbi between two wholly owned subsidiaries as a hedge$598 for the three-months and net foreign exchanges gains of a foreign currency exposure of$976 for the nine-months ended June 30, 2019, compared to net investment of the borrower in the lender.  Unrealized foreign exchange gains on the loan of $1,016$2,559 for the three-months and $548 for the nine-months ended December 31, 2016 are included in foreign currency translation adjustments within total comprehensive (losses) earnings.  June 30, 2018.

Impact of derivative instruments designated as qualifying hedging instruments

The intercompany loan was repaid in July 2017.following table discloses the impact of derivative instruments designated as qualifying hedging instruments on Woodward’s Condensed Consolidated Statements of Earnings:

Three-Months Ended

June 30, 2019

Derivatives in:

Location

Amount of (Income) Expense Recognized in Earnings on Derivative

Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative

Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings

Cross currency interest rate swap agreement designated as fair value hedges

Selling, general and administrative expenses

$

1,340 

$

2,315 

$

1,664 

Cross currency interest rate swap agreements designated as cash flow hedges

Selling, general and administrative expenses

5,244 

4,990 

5,244 

Treasury lock agreement designated as cash flow hedge

Interest expense

(18)

-

(18)

$

6,566 

$

7,305 

$

6,890 

Three-Months Ended

June 30, 2018

Derivatives in:

Location

Amount of (Income) Expense Recognized in Earnings on Derivative

Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative

Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings

Cross currency interest rate swap agreement designated as fair value hedges

Selling, general and administrative expenses

$

1,467 

$

1,835 

$

1,467 

Cross currency interest rate swap agreements designated as cash flow hedges

Selling, general and administrative expenses

3,506 

21,823 

3,506 

Treasury lock agreement designated as cash flow hedge

Interest expense

(18)

-

(18)

$

4,955 

$

23,658 

$

4,955 

13

29


Nine-Months Ended

June 30, 2019

Derivatives in:

Location

Amount of (Income) Expense Recognized in Earnings on Derivative

Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative

Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings

Cross currency interest rate swap agreement designated as fair value hedges

Selling, general and administrative expenses

$

(4,082)

$

(3,220)

$

(3,471)

Cross currency interest rate swap agreements designated as cash flow hedges

Selling, general and administrative expenses

(8,306)

(17,647)

(8,306)

Treasury lock agreement designated as cash flow hedge

Interest expense

(54)

-

(54)

$

(12,442)

$

(20,867)

$

(11,831)

Nine-Months Ended

June 30, 2018

Derivatives in:

Location

Amount of (Income) Expense Recognized in Earnings on Derivative

Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative

Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings

Cross currency interest rate swap agreement designated as fair value hedges

Selling, general and administrative expenses

$

1,467 

$

1,835 

$

1,467 

Cross currency interest rate swap agreements designated as cash flow hedges

Selling, general and administrative expenses

3,506 

21,823 

3,506 

Treasury lock agreement designated as cash flow hedge

Interest expense

(54)

-

(54)

$

4,919 

$

23,658 

$

4,919 

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI were net losses of $12,280 as of June 30, 2019 and $21,315 as of September 30, 2018.

Note 7.9. Supplemental statement of cash flows information

Nine-Months Ended June 30,

2019

2018

Interest paid, net of amounts capitalized

$

36,018 

$

24,966 

Income taxes paid

56,210 

31,443 

Income tax refunds received

1,453 

1,760 

Non-cash activities:

Purchases of property, plant and equipment on account

4,423 

8,438 

Impact of the adoption of ASC 606 (Note 3)

38,700 

-

Common shares issued from treasury to settle benefit obligations (Note 20)

14,846 

14,741 

30


Note 10. Inventories

June 30,

September 30,

2019

2018

Raw materials

$

131,971 

$

80,999 

Work in progress

138,085 

118,010 

Component parts (1)

308,243 

298,820 

Finished goods

63,221 

51,767 

Customer supplied inventory (Note 3)

13,021 

-

On-hand inventory for which control has transferred to the customer (Note 3)

(123,378)

-

$

531,163 

$

549,596 



 

 

 

 

 

 



 

 

 



 

Three-Months Ended December 31,



 

2017

 

2016

Interest paid, net of amounts capitalized

 

$

11,302 

 

$

10,317 

Income taxes paid

 

 

7,695 

 

 

6,047 

Income tax refunds received

 

 

1,772 

 

 

59 

Non-cash activities:

 

 

 

 

 

 

Purchases of property, plant and equipment on account

 

 

10,631 

 

 

6,130 

Common shares issued from treasury to settle employee liabilities

 

 

 -

 

 

1,767 

Note 8.  Accounts receivable

Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced and are generally not collateralized.  In the normal course of business, not all accounts receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal to the amount(1)Component parts include items that Woodward believes ultimately will notcan be collected.  In establishing the amount of the allowance related to the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating resultssold separately as finished goods or financial position, and current economic conditions.  Accounts receivable losses are deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed uncollectible.  Recoveries of accounts receivable previously written off are recognized when received.  In addition, an allowance associated with anticipated future sales returns is also established and is included in the allowance for uncollectible amounts.

Consistent with common business practice in China, Woodward’s Chinese subsidiary accepts from Chinese customers, in settlementmanufacture of certain customer accounts receivable, bankers’ acceptance notes issued by Chinese banks that are believed to be creditworthy.  Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution.  Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date.  The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of Woodward’s receipt of such draft.  The issuing financial institution is the obligor, not Woodward’s customers.  Upon Woodward’s acceptance of a banker’s acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance.  Woodward only accepts bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be minimal.other products.

The composition of Woodward’s accounts receivable at December  31, 2017 and September 30, 2017 follows:



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

September 30,



 

2017

 

2017

Accounts receivable from:

 

 

 

 

 

 

Customers

 

$

275,433 

 

$

367,715 

Other (Chinese financial institutions)

 

 

59,798 

 

 

38,243 

Allowance for uncollectible customer amounts

 

 

(3,793)

 

 

(3,776)



 

$

331,438 

 

$

402,182 

14


Note 9.  Inventories



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

September 30,



 

2017

 

2017

Raw materials

 

$

60,355 

 

$

59,034 

Work in progress

 

 

106,065 

 

 

103,790 

Component parts (1)

 

 

285,674 

 

 

262,755 

Finished goods

 

 

51,429 

 

 

47,926 



 

$

503,523 

 

$

473,505 

(1)

Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

Note 10.11. Property, plant, and equipment

June 30,

September 30,

2019

2018

Land and land improvements

$

95,036 

$

94,146 

Buildings and building improvements

582,084 

565,065 

Leasehold improvements

18,042 

17,954 

Machinery and production equipment

716,791 

668,986 

Computer equipment and software

120,536 

124,788 

Office furniture and equipment

36,916 

31,533 

Other

19,337 

19,366 

Construction in progress

81,567 

103,036 

1,670,309 

1,624,874 

Less accumulated depreciation

(607,225)

(564,869)

Property, plant, and equipment, net

$

1,063,084 

$

1,060,005 



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

September 30,



 

2017

 

2017

Land and land improvements

 

$

88,536 

 

$

88,326 

Buildings and building improvements

 

 

515,338 

 

 

514,453 

Leasehold improvements

 

 

16,425 

 

 

16,142 

Machinery and production equipment

 

 

560,264 

 

 

543,641 

Computer equipment and software

 

 

125,628 

 

 

124,723 

Office furniture and equipment

 

 

24,455 

 

 

24,308 

Other

 

 

19,423 

 

 

19,393 

Construction in progress

 

 

117,085 

 

 

111,910 



 

 

1,467,154 

 

 

1,442,896 

Less accumulated depreciation

 

 

(536,996)

 

 

(520,853)

Property, plant, and equipment, net

 

$

930,158 

 

$

922,043 

IncludedIn the second quarter of fiscal year 2018, the Company announced its decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in “Office furniture and equipment” and “Other” is $1,653Fort Collins, Colorado. The carrying value of the assets at eachthe Duarte facility was $10,738 as of December  31, 2017 andJune 30, 2019, of which the Company has identified assets held for sale with a carrying value of $7,848. At September 30, 2017,2018, the Company identified assets held for sale of gross$8,306. The majority of the assets acquiredheld for sale are included in “Land and land improvements” and “Buildings and buildings improvements” which relate to the land, building and building improvements, and other assets at the Duarte facility. The assets held for sale are included in the Company’s Aerospace segment. Based on capital leases,current market conditions, the Company expects to record a gain on the eventual sale of these assets. The Company has identified approximately $377 that is planned to be disposed of as a result of the relocation.

The Company assessed whether the decision to relocate from its Duarte facility could indicate a potential impairment of the assets at the Duarte facility and accumulated depreciation included $844 at December 31, 2017 and $739 at Septemberconcluded that the assets were not impaired as of June 30, 2017 of amortization associated with the capital lease assets.2019.

In fiscal year 2015, Woodward completed and placed into service a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and has occupied the new facility for its Aerospace segment. This campus is intended to support Woodward’s expected growth in its Aerospace segment over the next ten years and beyond, required as a result of Woodward being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.

Included in “Construction in progress” are costs of $48,971$23,801 at December 31, 2017June 30, 2019 and $49,347$32,248 at September 30, 20172018 associated with new equipment purchases for the second campus. greater-Rockford, Illinois campus and costs of $5,624 at June 30, 2019 and $3,967 at September 30, 2018 associated with new equipment purchases and the renovation of the Drake Campus.

Included in “Office furniture and equipment” and “Other” is $1,627 at June 30, 2019 and $1,650 at September 30, 2018, of gross assets acquired on capital leases, and accumulated depreciation included $1,441 at June 30, 2019 and $1,158 at September 30, 2018 of amortization associated with the capital lease assets.

31


For the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 and 2016,2018, Woodward had depreciation expense as follows:

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Depreciation expense

$

21,665 

$

17,695 

$

62,998 

$

48,276 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Depreciation expense

 

$

14,827 

 

$

12,455 

For the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 and 2016,2018, Woodward capitalized interest that would have otherwise been included in interest expense of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Capitalized interest

 

$

601 

 

$

472 

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Capitalized interest

$

176 

$

607 

$

611 

$

1,841 

Note 12. Goodwill

September 30, 2018

Effects of Foreign Currency Translation

June 30, 2019

Aerospace

$

455,423 

$

-

$

455,423 

Industrial

357,827 

(5,382)

352,445 

Consolidated

$

813,250 

$

(5,382)

$

807,868 

15On June 1, 2018, Woodward completed the acquisition of L’Orange (see Note 5, Business acquisition), which resulted in the recognition of $257,447 in goodwill in the Company’s Industrial segment.


Note 11.  Goodwill



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

September 30, 2017

 

Effects of Foreign Currency Translation

 

December 31, 2017

Aerospace

 

$

455,423 

 

$

 -

 

$

455,423 

Industrial

 

 

101,122 

 

 

214 

 

 

101,336 

Consolidated

 

$

556,545 

 

$

214 

 

$

556,759 

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, or at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and Woodward’s fourth quarter of fiscal year 20172018 impairment test resulted in no impairment.impairment, and there were no triggering events in the first or second quarters of fiscal year 2019.

As discussed at Note 21, Commitments and contingencies, on April 9, 2019, German wind turbine manufacturer, Senvion GmbH (“Senvion”), a significant customer of Woodward’s renewables business, announced that it filed for self-administration insolvency proceedings. In conjunction with this, during the three-months ended June 30, 2019, Woodward determined that this action by Senvion represented a triggering event requiring an interim goodwill impairment test of its renewable power systems reporting unit. Based on the results of this interim impairment test, Woodward determined the renewable power systems reporting unit’s goodwill was not impaired as of June 30, 2019.

32


Note 12.13. Intangible assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

September 30, 2017

June 30, 2019

September 30, 2018

Gross Carrying Value

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Value

 

Accumulated Amortization

 

Net Carrying Amount

Gross Carrying Value

Accumulated Amortization

Net Carrying Amount

Gross Carrying Value

Accumulated Amortization

Net Carrying Amount

Intangible assets with finite lives:

Customer relationships and contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

282,225 

 

$

(155,183)

 

$

127,042 

 

$

282,225 

 

$

(151,155)

 

$

131,070 

$

281,683 

$

(178,177)

$

103,506 

$

281,683 

$

(166,719)

$

114,964 

Industrial

 

40,944 

 

 

(34,615)

 

 

6,329 

 

 

40,962 

 

 

(34,407)

 

 

6,555 

421,876 

(40,138)

381,738 

429,880 

(35,856)

394,024 

Total

$

323,169 

 

$

(189,798)

 

$

133,371 

 

$

323,187 

 

$

(185,562)

 

$

137,625 

$

703,559 

$

(218,315)

$

485,244 

$

711,563 

$

(202,575)

$

508,988 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intellectual property:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

$

-

$

-

$

-

$

-

$

-

$

-

Industrial

 

19,459 

 

 

(18,315)

 

 

1,144 

 

 

19,422 

 

 

(18,196)

 

 

1,226 

19,354 

(18,763)

591 

19,448 

(18,587)

861 

Total

$

19,459 

 

$

(18,315)

 

$

1,144 

 

$

19,422 

 

$

(18,196)

 

$

1,226 

$

19,354 

$

(18,763)

$

591 

$

19,448 

$

(18,587)

$

861 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Process technology:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

76,605 

 

$

(50,619)

 

$

25,986 

 

$

76,605 

 

$

(49,124)

 

$

27,481 

$

76,371 

$

(58,654)

$

17,717 

$

76,372 

$

(54,874)

$

21,498 

Industrial

 

22,910 

 

 

(18,118)

 

 

4,792 

 

 

22,950 

 

 

(17,756)

 

 

5,194 

95,645 

(23,990)

71,655 

97,154 

(20,373)

76,781 

Total

$

99,515 

 

$

(68,737)

 

$

30,778 

 

$

99,555 

 

$

(66,880)

 

$

32,675 

$

172,016 

$

(82,644)

$

89,372 

$

173,526 

$

(75,247)

$

98,279 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Backlog:

Aerospace

$

-

$

-

$

-

$

-

$

-

$

-

Industrial

42,066 

(42,066)

-

42,955 

(18,006)

24,949 

Total

$

42,066 

$

(42,066)

$

-

$

42,955 

$

(18,006)

$

24,949 

Other intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

-

$

-

$

-

$

-

$

-

$

-

Industrial

1,598 

(1,257)

341 

1,629 

(1,158)

471 

Total

$

1,598 

$

(1,257)

$

341 

$

1,629 

$

(1,158)

$

471 

Intangible asset with indefinite life:

Tradename:

Aerospace

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

$

-

$

-

$

-

$

-

$

-

$

-

Industrial

 

1,332 

 

 

(992)

 

 

340 

 

 

1,312 

 

 

(956)

 

 

356 

65,933 

-

65,933 

67,335 

-

67,335 

Total

$

1,332 

 

$

(992)

 

$

340 

 

$

1,312 

 

$

(956)

 

$

356 

$

65,933 

$

-

$

65,933 

$

67,335 

$

-

$

67,335 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

358,830 

 

$

(205,802)

 

$

153,028 

 

$

358,830 

 

$

(200,279)

 

$

158,551 

$

358,054 

$

(236,831)

$

121,223 

$

358,055 

$

(221,593)

$

136,462 

Industrial

 

84,645 

 

 

(72,040)

 

 

12,605 

 

 

84,646 

 

 

(71,315)

 

 

13,331 

646,472 

(126,214)

520,258 

658,401 

(93,980)

564,421 

Consolidated Total

$

443,475 

 

$

(277,842)

 

$

165,633 

 

$

443,476 

 

$

(271,594)

 

$

171,882 

$

1,004,526 

$

(363,045)

$

641,481 

$

1,016,456 

$

(315,573)

$

700,883 

For the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 and 2016,2018, Woodward recorded amortization expense associated with intangibles of the following:

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Amortization expense

$

11,305 

$

11,360 

$

45,470 

$

23,861 

33



 

 

 

 

 



 

 

 

 

 



Three-Months Ended



December 31,



2017

 

2016

Amortization expense

$

6,243 

 

$

6,458 

16


Future amortization expense associated with intangibles is expected to be:

 

 

 

 

 

 

 

 

Year Ending September 30:

 

 

 

 

2018 (remaining)

 

 

 

$

18,782 

2019

 

 

 

23,156 

2019 (remaining)

$

10,689 

2020

 

 

 

20,373 

39,917 

2021

 

 

 

18,404 

40,903 

2022

 

 

 

16,249 

38,700 

2023

37,642 

Thereafter

 

 

 

 

68,669 

407,697 

 

 

 

$

165,633 

$

575,548 

Note 13.14. Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent (the “Revolving Credit Agreement”). The Revolving Credit Agreement providesprovided for the option to increase available borrowings to up to $1,200,000, subject to lenders’ participation. Borrowings underOn June 19, 2019, Woodward amended the Revolving Credit Agreement (the “Amended and Restated Revolving Credit Agreement”) to, among other things, (i) increase the option to increase available borrowings from $1,200,000 to $1,500,000, (ii) continue the commitments of the lenders thereunder to make revolving loans in an aggregate principal amount of up to $1,000,000, or $1,500,000 subject to lenders’ participation, (iii) extend the termination date of the revolving loan commitments of all the lenders from April 28, 2020 to June 19, 2024, and (iv) subject to conforming changes to the Company’s existing note purchase agreements, modify the definition of “EBITDA” to add-back acquisition related transaction costs associated with permitted acquisitions and increase the minimum consolidated net worth covenant from $800,000 to $1,156,000 plus (a) 50% of Woodward’s positive net income for the prior fiscal year and (b) 50% of Woodward’s net cash proceeds resulting from certain issuances of stock, subject to certain adjustments. Borrowings under the Amended and Restated Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S. dollars or in foreign currencies other than the U.S. dollar and generally bear interest at LIBOR plus 0.85%0.875% to 1.65%1.75%.  The Revolving Credit Agreement matures in April 2020. Under the Amended and Restated Revolving Credit Agreement, there were $66,300$361,852 in principal amount of borrowings outstanding as of December 31, 2017,June 30, 2019, at an effective interest rate of 2.52%, and $32,6003.54%. Under the prior Revolving Credit Agreement, there were $266,541 in principal amount of borrowings outstanding as of September 30, 2017,2018, at an effective interest rate of 2.29%3.48%.

As of December 31, 2017June 30, 2019, $180,000 of the borrowings under the Amended and Restated Revolving Credit Agreement were classified as short-term borrowings, and as of September 30, 2017, all2018, $150,000 of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings based on Woodward’s intent and ability to pay this amount in the next twelve months.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were no borrowings outstanding as of December 31, 2017 and September 30, 2017 on Woodward’s foreign lines of credit and foreign overdraft facilities.facilities as of both June 30, 2019 and September 30, 2018. Woodward had other short-term borrowings of $3,635 as of September 30, 2018, which were repaid during the first quarter of fiscal year 2019.

34


Long-term debt



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

September 30,



 

2017

 

2017

Series D notes – 6.39%, due October 2018; unsecured

 

$

100,000 

 

$

100,000 

Series F notes – 8.24%, due April 2019; unsecured

 

 

43,000 

 

 

43,000 

Series G notes – 3.42%, due November 2020; unsecured

 

 

50,000 

 

 

50,000 

Series H notes – 4.03%, due November 2023; unsecured

 

 

25,000 

 

 

25,000 

Series I notes – 4.18%, due November 2025; unsecured

 

 

25,000 

 

 

25,000 

Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured

 

 

50,000 

 

 

50,000 

Series K notes – 4.03%, due November 2023; unsecured

 

 

50,000 

 

 

50,000 

Series L notes – 4.18%, due November 2025; unsecured

 

 

50,000 

 

 

50,000 

Series M notes – 1.12% due September 2026; unsecured

 

 

48,015 

 

 

47,270 

Series N notes – 1.31% due September 2028; unsecured

 

 

92,428 

 

 

90,995 

Series O notes – 1.57% due September 2031; unsecured

 

 

51,616 

 

 

50,815 

Unamortized debt issuance costs

 

 

(1,720)

 

 

(1,794)

Total long-term debt

 

 

583,339 

 

 

580,286 

Less: Current portion of long-term debt

 

 

 -

 

 

 -

Long-term debt, less current portion

 

$

583,339 

 

$

580,286 

June 30,

September 30,

2019

2018

Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.875% - 1.75%), due June 19, 2024; unsecured

$

181,852 

$

116,541 

Series D notes – 6.39%, due October 1, 2018; unsecured

-

100,000 

Series F notes – 8.24%, due April 3, 2019; unsecured

-

43,000 

Series G notes – 3.42%, due November 15, 2020; unsecured

50,000 

50,000 

Series H notes – 4.03%, due November 15, 2023; unsecured

25,000 

25,000 

Series I notes – 4.18%, due November 15, 2025; unsecured

25,000 

25,000 

Series J notes – Floating rate (LIBOR plus 1.25%), due November 15, 2020; unsecured

50,000 

50,000 

Series K notes – 4.03%, due November 15, 2023; unsecured

50,000 

50,000 

Series L notes – 4.18%, due November 15, 2025; unsecured

50,000 

50,000 

Series M notes – 1.12% due September 23, 2026; unsecured

45,470 

46,437 

Series N notes – 1.31% due September 23, 2028; unsecured

87,532 

89,393 

Series O notes – 1.57% due September 23, 2031; unsecured

48,882 

49,921 

Series P notes – 4.27% due May 30, 2025; unsecured

85,000 

85,000 

Series Q notes – 4.35% due May 30, 2027; unsecured

85,000 

85,000 

Series R notes – 4.41% due May 30, 2029; unsecured

75,000 

75,000 

Series S notes – 4.46% due May 30, 2030; unsecured

75,000 

75,000 

Series T notes – 4.61% due May 30, 2033; unsecured

80,000 

80,000 

Unamortized debt issuance costs

(2,589)

(2,895)

Total long-term debt

1,011,147 

1,092,397 

Less: Current portion of long-term debt

-

-

Long-term debt, less current portion

$

1,011,147 

$

1,092,397 

The Notes

In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes.  The Series D Notes, mature and are payable indue on October 1, 2018. As of December 31, 2017,On October 1, 2018, Woodward paid the entire amountprincipal balance of debt under$100,000 on the Series D Notes has

17


been classified as long-term based on Woodward’s intent and ability to refinance this debt using cash proceeds from borrowings under its existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months. facility.

In April 2009, Woodward entered into a note purchase agreement relating to the Series F Notes. Notes, which were due on April 3, 2019. On April 3, 2019, Woodward paid the entire principal balance of $43,000 on the Series F Notes using proceeds from borrowings under its revolving credit facility.

On October 1, 2013, Woodward entered into a 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. Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on October 1, 2013. Woodward issued the Series J, K and L Notes (the “Second Closing Notes,”Notes” and together with the Series D Notes, the Series F Notes and the First Closing Notes, collectively the “USD Notes”) on November 15, 2013.

On September 23, 2016, Woodward and the BV Subsidiary each entered into note purchase agreements (the “2016 Note Purchase Agreements”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes (the “Series M Notes”).Notes. The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Series N Notes, the “2016 Notes”).

On May 31, 2018, Woodward entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes comprised of (a) $85,000 aggregate principal amount of its Series P Senior Notes (the “Series P Notes”), (b) $85,000 aggregate principal amount of its Series Q Senior Notes (the “Series Q Notes”), (c) $75,000 aggregate principal amount of its Series R Senior Notes (the “Series R Notes”), (d) $75,000 aggregate principal amount of its Series S Senior Notes (the “Series S Notes”), and (e) $80,000 aggregate principal amount of its Series T Senior Notes (the “Series T Notes”, and together with the Series P Notes, the Series Q Notes, the Series R Notes, and the Series S Notes, the “2018 Notes,” and, together with the USD Notes collectively,and 2016 Notes, the “Notes”)., in a series of private placement transactions.

InterestIn connection with the issuance of the 2018 Notes, the Company entered into cross currency swap transactions in respect of each tranche of the 2018 Notes, which effectively reduced the interest rates on the Series DP Notes to 1.82% per annum, the

35


Series Q Notes to 2.15% per annum, the Series R Notes to 2.42% per annum, the Series S Notes to 2.55% per annum and the Series T Notes to 2.90% per annum (see Note 8, Derivative instruments and hedging activities).

Interest on the First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and October 1 of each year until all principal is paid. Interest on the Series F Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid. Interest on the 2016 Notes is payable semi-annually on March 23 and September 23 of each year, until all principal is paid. Interest on the Series J Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year until all principal is paid. As of December 31, 2017,June 30, 2019, the Series J Notes bore interest at an effective rate of 2.69%3.77%. Commencing on November 30, 2018, interest on the 2018 Notes is payable semi-annually on May 30 and November 30 of each year until all principal is paid.

Debt Issuance Costs

Unamortized debt issuance costs associated with the Notes of $1,720$2,589 as of December 31, 2017June 30, 2019 and $1,794$2,895 as of September 30, 20172018 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets. In connection with the Amended and Restated Revolving Credit Agreement, Woodward incurred $2,238 in debt issuance costs, which are deferred and are being amortized using the straight-line method over the life of the agreement. As of June 19, 2019, Woodward also had $802 of deferred debt issuance costs remaining that were incurred in connection with the then existing revolving credit agreement, which have been combined with the deferred debt issuance costs associated with the Amended and Restated Revolving Credit Agreement and are being amortized using the straight-line method over the life of the Amended and Restated Revolving Credit Agreement. Unamortized debt issuance costs of $2,041$2,990 associated with the Revolving Credit Agreementthese revolving credit agreements as of December 31, 2017June 30, 2019 and $2,259$1,385 as of September 30, 20172018 were recorded as “Other assets” in the Condensed Consolidated Balance Sheets. Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.

Note 14.15. Accrued liabilities

 

 

 

 

 

 

 

 

December 31,

 

September 30,

June 30,

September 30,

2017

 

2017

2019

2018

Salaries and other member benefits

$

43,844 

 

$

91,285 

$

105,988 

$

88,643 

Warranties

 

13,017 

 

13,597 

22,848 

20,130 

Interest payable

 

5,392 

 

9,626 

5,542 

18,611 

Current portion of acquired performance obligations and unfavorable contracts (1)

 

1,627 

 

1,627 

Accrued retirement benefits

 

2,379 

 

2,413 

3,574 

3,571 

Current portion of loss reserve on contractual lease commitments

 

1,244 

 

1,343 

1,245 

1,245 

Current portion of deferred income from JV formation (Note 4)

 

6,439 

 

6,451 

Deferred revenues

 

3,568 

 

4,625 

Restructuring charges

5,363 

16,522 

Taxes, other than income

 

10,934 

 

14,401 

15,729 

21,128 

Net current contract liabilities (Note 3)

26,307 

9,659 

Other

 

10,341 

 

 

9,704 

20,189 

15,004 

$

98,785 

 

$

155,072 

$

206,785 

$

194,513 

(1)

In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller.  The current portion of both obligations is included in Accrued liabilities.

Warranties

18


Warranties

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements. Accruals are established for specifically identified warranty issues that are probable to result in future costs. Warranty costs are accrued as revenue is recognized on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. Changes in accrued product warranties were as follows:

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Warranties, beginning of period

$

21,790 

$

13,283 

$

20,130 

$

13,597 

Increases due to acquisition of L'Orange

-

6,045 

-

6,045 

Impact from adoption of ASC 606 (Note 3)

-

-

704 

-

Expense, net of recoveries

4,268 

2,696 

10,035 

3,000 

Reductions for settlement of previous warranty liabilities

(3,315)

(1,838)

(7,864)

(2,670)

Foreign currency exchange rate changes 

105 

(384)

(157)

(170)

Warranties, end of period

$

22,848 

$

19,802 

$

22,848 

$

19,802 

36




 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



 

2017

 

 

2016

Warranties, beginning of period

$

13,597 

 

$

15,993 

Expense, net of recoveries

 

(2,030)

 

 

1,923 

Reductions for settling warranties

 

1,377 

 

 

(2,032)

Foreign currency exchange rate changes 

 

73 

 

 

(356)

Warranties, end of period

$

13,017 

 

$

15,528 

Loss reserve on contractual lease commitments

In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a leased facility in Skokie, Illinois and recognized a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income. Changes in the loss reserve were as follows:

 

 

 

 

 

 

 

 

Three-Months Ended December 31,

Three-Months Ended June 30,

Nine-Months Ended June 30,

 

2017

 

 

2016

2019

2018

2019

2018

Loss reserve on contractual lease commitments, beginning of period

$

5,270 

 

$

9,242 

$

3,382 

$

4,478 

$

3,931 

$

5,270 

Payments, net of sublease income

 

(553)

 

 

(402)

(269)

(267)

(818)

(1,059)

Loss reserve on contractual lease commitments, end of period

$

4,717 

 

$

8,840 

$

3,113 

$

4,211 

$

3,113 

$

4,211 

Other liabilities included $3,473$1,868 and $3,927$2,686 of accrued loss reserve on contractual lease commitments as of December 31, 2017June 30, 2019 and September 30, 2017,2018, respectively, which are not expected to be settled or paid within twelve months of the respective balance sheet date.

Restructuring charges

In the second quarter of fiscal year 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado. The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s Aerospace segment. The remaining restructuring charges recognized during the fiscal year ended September 30, 2018 consist of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the Company’s Industrial segment, with the then current market conditions. All of the restructuring charges recorded during the fiscal year ended September 30, 2018 were recorded as nonsegment expenses and are expected to be paid within one year of the balance sheet date, of which $491 was paid during fiscal year 2018 related to the Company’s industrial turbomachinery business realignment.

The summary of activity in accrued restructuring charges during the nine-months ended June 30, 2019 is as follows:

Period Activity

Balances as of October 1, 2018

Charges (gains)

Cash receipts (payments)

Non-cash activity

Balances as of June 30, 2019

Workforce management costs associated with:

Duarte plant relocation

$

12,504 

$

-

$

(7,908)

$

-

$

4,596 

Industrial turbomachinery business realignment

4,018 

-

(3,251)

-

767 

Total

$

16,522 

$

-

$

(11,159)

$

-

$

5,363 

Note 15.16. Other liabilities



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

September 30,



 

2017

 

2017

Net accrued retirement benefits, less amounts recognized within accrued liabilities

 

$

54,396 

 

$

52,211 

Noncurrent portion of deferred income from JV formation (1)

 

 

235,855 

 

 

236,896 

Total unrecognized tax benefits

 

 

20,003 

 

 

20,949 

Noncurrent income taxes payable (2)

 

 

26,000 

 

 

 -

Acquired unfavorable contracts (3)

 

 

1,562 

 

 

2,076 

Deferred economic incentives (4)

 

 

14,337 

 

 

14,574 

Loss reserve on contractual lease commitments (5)

 

 

3,473 

 

 

3,927 

Other

 

 

10,642 

 

 

14,165 



 

$

366,268 

 

$

344,798 

June 30,

September 30,

2019

2018

Net accrued retirement benefits, less amounts recognized within accrued liabilities

$

90,512 

$

90,722 

Total unrecognized tax benefits

10,447 

8,582 

Noncurrent income taxes payable

20,301 

12,494 

Deferred economic incentives (1)

11,924 

13,038 

Loss reserve on contractual lease commitments (2)

1,868 

2,686 

Cross currency swap derivative liability (3)

4,319 

23,000 

Net noncurrent contract liabilities (4)

332,927 

235,300 

Other

11,886 

12,233 

$

484,184 

$

398,055 

(1)

37

(1)

See Note 4, Joint venture for more information on the deferred income from JV formation.

(2)

See Note 17, Income taxes for more information on the noncurrent income taxes payable.

(3)

In connection with the Duarte Acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  The long-term portion of the acquired unfavorable contracts is included in Other liabilities.

(4)

Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects.  Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

(5)

See Note 14,  Accrued liabilities for more information on the loss reserve on contractual lease commitments.

19


Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

(2)See Note 16.15, Accrued liabilities for more information on the loss reserve on contractual lease commitments.

(3)See Note 7, Financial instruments and fair value measurements for more information on the cross currency swap derivative liability.

(4)See Note 3, Revenue, for more information on net noncurrent contract liabilities.

Note 17. Other (income) expense, net

 

 

 

 

 

 

 

 

 

Three-Months Ended

Three-Months Ended

Nine-Months Ended

 

December 31,

June 30,

June 30,

 

2017

 

2016

2019

2018

2019

2018

Equity interest in the earnings of the JV (Note 4)

 

$

(596)

 

$

(684)

Net gain on sales of assets

 

(58)

 

(3,699)

Equity interest in the earnings of the JV (Note 6)

$

(3,290)

$

(738)

$

(7,761)

$

(2,340)

Net loss (gain) on sales of assets

680 

50 

880 

(404)

Rent income

 

(54)

 

(73)

(44)

(28)

(188)

(99)

Net gain on investments in deferred compensation program

 

(654)

 

(24)

(894)

(257)

(821)

(957)

Loss on forward option derivative instrument (Note 8)

-

5,543 

-

5,543 

Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense

(3,245)

(3,222)

(9,739)

(9,603)

Other

 

 

(210)

 

 

(108)

(123)

(373)

(505)

(731)

 

$

(1,572)

 

$

(4,588)

$

(6,916)

$

975 

$

(18,134)

$

(8,591)

Note 17.18. Income taxes

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and  business-related exclusions. 

U.S. GAAP requires that the interim period tax provision be determined as follows:

·

At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.”  The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items. 

At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.” The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items.

The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary income in each quarter is equal to the difference between the most recent year-to-date and the prior quarter year-to-date computations.

The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the events occur.

·

The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur.  The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.  Enactment of the Tax Act during December 2017 resulted in a provisional discrete net charge to Woodward’s income tax expense in the amount of $14,778.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year.judgments. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

On December 22, 2017, the U.S. enacted significant changes to the U.S. tax law following the passage and signing of the Tax Act. The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”).  When, a U.S. federalone-time repatriation tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment.  As a resulton deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

Enactment of the Tax Act Woodward has calculatedduring December 2017 resulted in a U.S. federal statutory corporatediscrete net charge to Woodward’s income tax rateexpense in the amount of 24.5% for$14,778, which was recorded in the fiscal year ending September 30, 2018 and applied this rate in computing the first quarter ofthree-months ended December 31, 2018. After adjustments to amounts made throughout fiscal year 2018, income tax provision. The U.S. federal statutory corporate income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S.  federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter.  Woodward expects the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”).  SAB 118 expresses viewsnet impact of the SEC regarding ASC Topic 740, Income Taxes (“ASC 740”) inenactment of the reporting period that includes the enactment dateTax Act was $10,860. Woodward finalized its assessment of the

20


Tax Act.  The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC Topic 805, Business Combinations, which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs.  Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act.  If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts  during the measurement period not to extend beyond one year.  For the three-months ended December 31, 2017, Woodward has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018.  Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

Accordingly, Woodward’s income tax provision as of December 31, 2017 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail. 

Three-Months Ended

December 31, 2017

Transition Tax (provisional)

$

26,000 

Net impact on U.S. deferred tax assets and liabilities (provisional)

(16,260)

Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)

5,038 

Net discrete impacts of the enactment of the Tax Act

$

14,778 

Woodward determined that the Transition Tax is provisional because various components of the computation are unknown as of December 31, 2017, including the following significant items: the exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of September 30, 2018, the interpretation and identification of cash positions as of September 30, 2018, and incomplete computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017. Consistent with provisions allowed under the Tax Act, the $26,000 estimated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019.  The entire amount of the estimated Transition Tax liability has been included in “Other liabilities” in the Condensed Consolidated Balance Sheets.  

Woodward also determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.   

Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, Woodward is in the process of evaluating its current indefinite assertions.  As a result of the Tax Act, Woodward now expects to repatriate certain earnings which will be subject to withholding taxes.  These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions.  The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount. 

Woodward continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Woodward, which are not effective until fiscal year 2019.  Woodward has not recorded any impact associated with either GILTI or BEAT in the tax rate for the first quarter of fiscal year 2018. 2019.

38


On June 14, 2019, the Internal Revenue Service (“IRS”) issued final regulations that modified the Transition Tax computation required by the Tax Act. As a result, in the three-months ended June 30, 2019, Woodward recognized additional income tax expense related to the Transition Tax of $10,588.

Within the calculation of Woodward’s annual effective tax rate, Woodward has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service,IRS, the SEC, and the FASB and/or various other taxingtax jurisdictions. For example,Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to Woodward’s U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on Woodward’s future income tax expense. Additionally, Woodward anticipates that the state jurisdictionsIRS will continue to determine and announce their conformityissue additional regulations related to the Tax Act which couldmay have an impact on the annual effectiveWoodward’s future income tax rate.expense.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:

 

 

 

 

 

 

 

 

 

Three-Months Ended

Three-Months Ended

Nine-Months Ended

 

December 31,

June 30,

June 30,

 

2017

 

2016

2019

2018

2019

2018

Earnings before income taxes

 

$

37,487 

 

$

47,059 

$

92,314 

$

54,417 

$

243,997 

$

140,551 

Income tax expense

 

19,227 

 

511 

26,207 

5,300 

51,191 

34,685 

Effective tax rate

 

51.3% 

 

1.1% 

28.4%

9.7%

21.0%

24.7%

21


The increase in the year-over-year effective tax rate for the three-months ended December 31, 2017 is primarily attributable to the $14,778 discrete net impact resulting from the enactment of the Tax Act partially offset by benefits of the current year effect of the U.S. federal corporate tax rate reduction resulting from the enactment of the Tax Act on the estimated annual effective tax rate.  In addition, the effective tax rate for the three-months ended December 31, 2016 includesJune 30, 2019 compared to the impactthree-months ended June 30, 2018 is primarily attributable to favorable resolutions of tax matters in the prior fiscal year quarter that did not repeat in the current quarter and the additional income tax expense related to the Transition Tax resulting from final regulations issued by the IRS on June 14, 2019 that modified the Transition Tax computation required by the Tax Act. Also contributing to the increase in the three-months ended June 30, 2019 was the loss of the repatriationdomestic production activities deduction in the current quarter and the U.S. federal corporate income tax on estimated current year foreign earnings. Partially offsetting these increases were the impacts of the Tax Act on the resolution of the fiscal year 2014, 2015, and 2016 IRS audits recorded in the prior fiscal year quarter that did not repeat in the current quarter and a reduction in the U.S. federal corporate income tax rate provided by the Tax Act.

The decrease in the effective tax rate for the nine-months ended June 30, 2019, compared to the nine-months ended June 30, 2018 is primarily attributable to higher income tax expense related to the Tax Act recognized in the prior fiscal year compared to the amount recognized in the current fiscal year, the reduction in the U.S. federal corporate income tax rate provided by the Tax Act in the first nine months of certainfiscal year 2019, and an increase in the net foreign profits and losses.  The U.S. foreignexcess income tax credits available as a resultbenefits from stock-based compensation in the first nine months of fiscal year 2019. Partially offsetting this decrease were favorable resolutions of tax matters in the first nine months of the repatriationprior fiscal year that did not repeat in the first nine months of the current fiscal year, an increase in the U.S. federal corporate income tax on estimated current year foreign net earnings in the first quarternine months of lastfiscal year were greater than2019, and the U.S. taxes payable on these net foreign earnings.    loss of the domestic production activities deduction in the first nine months of fiscal year 2019.

Gross unrecognized tax benefits were $18,997$10,143 as of December 31, 2017,June 30, 2019, and $20,132$8,364 as of September 30, 2017.2018. Included in the balance of unrecognized tax benefits were $8,949$4,012 in tax benefits as of December 31, 2017June 30, 2019 and $9,677$3,288 as of September 30, 2017 of tax benefits2018 that, if recognized, would affect the effective tax rate. At this time, Woodward estimates thatdoes not believe it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $8,901 in the next twelve months due to the completion of reviews by tax authorities, lapses of statutes, and the settlement of tax positions.months. Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense. Woodward had accrued gross interest and penalties of $1,243$393 as of December 31, 2017June 30, 2019 and $1,123$279 as of September 30, 2017.2018.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitations may result in changes to tax expense. FiscalWoodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2017 and thereafter. In fiscal year 2018, Woodward concluded its U.S. federal income tax examinations through fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2014 and thereafter. Woodward closed various audits in foreign jurisdictions in the second and third quarters of fiscal year 2019. As a result, fiscal years remaining open to examination in significant foreign jurisdictions include 2008fiscal year 2016 and thereafter.  Woodward’s fiscal years remaining open to examination in the United States include fiscal years 2014 and thereafter.  Woodward is currently under examination by the Internal Revenue Service for fiscal year 2014.  Woodward has concluded U.S. federal income tax examinations through fiscal year 2012.  Woodward is generally subject to U.S. state income tax examinations for fiscal years 2012 and the periods thereafter.

39


Note 18.19. Retirement benefits

Woodward provides various retirement benefits to eligible members of the Company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and postretirement life insurance benefits. Eligibility requirements and benefit levels vary depending on employee location.

Defined contribution plans

Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan. The U.S. defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal 401(k) accounts. The Company makes matching contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes. Certain foreignnon-U.S. employees are also eligible to participate in similar foreignnon-U.S. plans.

Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 158 shares of common stock for a value of $14,846 in the second quarter of fiscal year 2019, compared to a total of 202 shares of common stock for a value of $14,741 in the second quarter of fiscal year 2018.

The amount of expense associated with defined contribution plans was as follows:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Company costs

 

$

7,879 

 

$

7,249 

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Company costs

$

8,969 

$

8,262 

$

26,426 

$

24,858 

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, Japan, and Japan.Germany. Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits. Postretirement medical benefits are provided to certain current and retired employees and their covered dependents and beneficiaries in the United States and the United Kingdom. Life insurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees. A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.

On October 26, 2018, the High Court of Justice in the United Kingdom (the “High Court”) issued a ruling (the “Court Ruling”) requiring defined benefit plan sponsors in the United Kingdom to equalize benefits payable to men and women under its United Kingdom defined benefit pension plans by amending those plans to increase the pension benefits payable to participants that accrued such benefits during the period from 1990 to 1997. In the Court Ruling, the High Court also provided details on acceptable alternative methods of amending plans to equalize the pension benefits. Woodward has initially concluded that Court Ruling is applicable to its defined benefit pension plan in the United Kingdom and will make the necessary plan amendments. Based on its initial estimates, Woodward does not believe the Court Ruling represents a significant event requiring a remeasurement of its United Kingdom defined benefit pension plan’s obligation and assets as of June 30, 2019.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2017,2018, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

40

22


During the third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window, which closed in the fourth quarter of fiscal year 2016 and was fully settled during the first quarter of fiscal year 2017, for certain former U.S. employees and/or their dependents eligible to receive postretirement defined benefit pension payments for past employment services to the Company.  Eligible pension plan participants were provided the opportunity to elect to receive a one-time lump-sum payment or an immediate annuity in lieu of future pension benefit payments.  Pension benefit payments paid from available pension plan assets under the lump-sum buy-out options were $670 during the first quarter of fiscal year 2017.  Woodward made no further pension benefit payments under the lump-sum buy-out options.

The components of the net periodic retirement pension costs recognized are as follows:

Three-Months Ended June 30,

United States

Other Countries

Total

2019

2018

2019

2018

2019

2018

Service cost

$

363 

$

410 

$

509 

$

283 

$

872 

$

693 

Interest cost

1,596 

1,501 

477 

386 

2,073 

1,887 

Expected return on plan assets

(2,996)

(2,904)

(663)

(703)

(3,659)

(3,607)

Amortization of:

Net actuarial loss

154 

150 

71 

74 

225 

224 

Prior service cost

177 

177 

-

-

177 

177 

Net periodic retirement pension (benefit) cost

$

(706)

$

(666)

$

394 

$

40 

$

(312)

$

(626)

Contributions paid

$

-

$

-

$

319 

$

227 

$

319 

$

227 

Nine-Months Ended June 30,

United States

Other Countries

Total

2019

2018

2019

2018

2019

2018

Service cost

$

1,088 

$

1,232 

$

1,533 

$

606 

$

2,621 

$

1,838 

Interest cost

4,788 

4,503 

1,442 

1,059 

6,230 

5,562 

Expected return on plan assets

(8,989)

(8,711)

(1,997)

(2,106)

(10,986)

(10,817)

Amortization of:

Net actuarial loss

463 

449 

215 

221 

678 

670 

Prior service cost

532 

532 

-

-

532 

532 

Net periodic retirement pension (benefit) cost

$

(2,118)

$

(1,995)

$

1,193 

$

(220)

$

(925)

$

(2,215)

Contributions paid

$

-

$

-

$

1,382 

$

658 

$

1,382 

$

658 

The components of net periodic retirement pension costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net” in the Condensed Consolidated Statements of Earnings. The interest cost component is include in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended December 31,



 

United States

 

Other Countries

 

Total



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Service cost

 

$

411 

 

$

419 

 

$

158 

 

$

192 

 

$

569 

 

$

611 

Interest cost

 

 

1,501 

 

 

1,439 

 

 

329 

 

 

296 

 

 

1,830 

 

 

1,735 

Expected return on plan assets

 

 

(2,904)

 

 

(2,632)

 

 

(686)

 

 

(641)

 

 

(3,590)

 

 

(3,273)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

150 

 

 

464 

 

 

72 

 

 

127 

 

 

222 

 

 

591 

Prior service cost

 

 

177 

 

 

96 

 

 

 -

 

 

 -

 

 

177 

 

 

96 

Net periodic retirement pension benefit

   

$

(665)

 

$

(214)

 

$

(127)

 

$

(26)

 

$

(792)

 

$

(240)

Contributions paid

 

$

 -

 

$

 -

 

$

312 

 

$

365 

 

$

312 

 

$

365 

The components of the net periodic other postretirement benefit costs recognized are as follows:

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Service cost

$

$

$

$

Interest cost

288 

291 

865 

874 

Amortization of:

Net actuarial loss

13 

24 

41 

72 

Prior service benefit

(1)

(40)

(4)

(119)

Curtailment gain

-

-

-

(330)

Net periodic other postretirement cost

$

301 

$

276 

$

906 

$

502 

Contributions paid

$

512 

$

595 

$

1,589 

$

1,830 

The components of net periodic other postretirement benefit costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net” in the Condensed Consolidated Statements of Earnings. The interest cost component is included in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.

41




 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Service cost

 

$

 

$

Interest cost

 

 

292 

 

 

311 

Amortization of:

 

 

 

 

 

 

Net actuarial loss

 

 

24 

 

 

50 

Prior service benefit

 

 

(40)

 

 

(40)

Curtailment gain

 

 

(330)

 

 

 -

Net periodic other postretirement (benefit) cost

 

$

(52)

 

$

325 

Contributions paid

 

$

226 

 

$

615 

The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans. As a result, the actual funding in fiscal year 20182019 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 20182019 will be as follows:

Retirement pension benefits:

United States

$

-

United Kingdom

297 

Japan

 -173 

Japan

-

Germany

271 

Other postretirement benefits

3,645 

2,026 

Multiemployer defined benefit plans

Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan. The amounts of contributions associated with the multiemployer defined benefit plans were as follows:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Company contributions

 

$

79 

 

$

68 

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Company contributions

$

55 

$

86 

$

193 

$

253 

23


Note 19.20. Stockholders’ equity

Stock repurchase program

In the first quarter of fiscal year 2017, Woodward’s board of directors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-yearthree year period that will end in November 2019 (the “2017 Authorization”). In the first quarternine months of fiscal year 2017,2019, Woodward purchased 3501,102 shares of its common stock for $24,004$110,311 under the 2017 Authorization pursuant to a 10b5-1 planplan. Woodward repurchased no common stock under the 2017 Authorization.  Woodward repurchased no stockAuthorization in the first quarternine months of fiscal year 2018.

Stock-based compensation

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan, as amended from time to time (the “2017 Plan”), and the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”).  The 2002 Plan provided that no further grants would be made after December 31, 2006.  No further grants will be made under the 2006 Plan, which expired in fiscal year 2016. , as applicable.

Woodward has reserved a total of 2,000 shares of Woodward’s common stock for issuance under theThe 2017 Plan which was approved by Woodward’s stockholders in January 2017 and is a successor plan to the 2006 Plan.

Stock options

ToAs of September 14, 2016, the effective date equity awards underof the 2017 Plan, have consistedWoodward’s board of directors delegated authority to administer the 2017 Plan to the compensation committee of the board of directors (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 30, 2019, Woodward’s stockholders approved an additional 1,400 shares of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 1,813 shares of Woodward’s common stock available for future grants as of stockJune 30, 2019.

Stock options to Woodward’s employees and directors.  

Woodward believes that these stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ten-yearten year term, and generally have a four-yearfour year vesting schedule at a rate of 25% per year.

The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation model using the assumptions in the following table. Woodward calculates the expected term, which represents the average period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants. Expected volatility is based on historical volatility using daily stock price observations. The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock. The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.


42


 

 

 

 

 

 

 

 

 

 

Three-Months Ended

Nine-Months Ended

Three-Months Ended

June 30,

June 30,

December 31, 2017

2019

2018

2019

2018

Weighted-average exercise price per share

$

78.97

 

$

n/a

$

n/a

$

79.12

$

78.91

Weighted-average grant date market value of Woodward stock

$

78.97

 

$

n/a

$

n/a

$

79.12

$

78.91

Expected term (years)

 

6.4 

-

8.7

 

n/a

n/a

6.5 

-

8.7

6.4 

-

8.7

Estimated volatility

 

30.3%

-

32.7%

 

n/a

n/a

25.7%

-

31.0%

29.1%

-

32.7%

Estimated dividend yield

 

0.6%

 

n/a

n/a

0.7%

-

0.8%

0.6%

-

0.8%

Risk-free interest rate

 

2.1%

-

2.3%

 

n/a

n/a

2.6%

-

3.1%

2.1%

-

2.8%

The following is a summary of the activity for stock option awards during the three-monthsthree and nine-months ended December  31, 2017:June 30, 2019:

Three-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2019

Number of options

Weighted-Average Exercise Price per Share

Number of options

Weighted-Average Exercise Price per Share

Options, beginning balance

5,733 

$

52.27 

5,611 

$

45.42 

Options granted

-

n/a

900 

79.12 

Options exercised

(279)

34.27 

(1,024)

32.92 

Options expired

(1)

69.13 

(2)

72.58 

Options forfeited

(12)

67.92 

(44)

68.51 

Options, ending balance

5,441 

53.16 

5,441 

53.16 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31, 2017



 

Number of options

 

Weighted-Average Exercise Price per Share

Options, beginning balance

 

 

5,236 

 

$

39.58 

Options granted

 

 

744 

 

 

78.97 

Options exercised

 

 

(34)

 

 

41.13 

Options forfeited

 

 

(9)

 

 

55.61 

Options, ending balance

 

 

5,937 

 

 

44.48 

24


Changes in non-vested stock options during the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 were as follows:

Three-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2019

Number of options

Weighted-Average Grant Date Fair Value per Share

Number of options

Weighted-Average Grant Date Fair Value Per Share

Non-vested options outstanding, beginning balance

2,058 

$

23.36 

1,988 

$

21.64 

Options granted

-

n/a

900 

23.99 

Options vested

-

n/a

(798)

19.80 

Options forfeited

(12)

22.67 

(44)

22.91 

Non-vested options outstanding, ending balance

2,046 

23.37 

2,046 

23.37 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31, 2017



 

Number of options

 

Weighted-Average Grant Date Fair Value per Share

Options outstanding, beginning balance

 

 

2,072 

 

$

18.61 

Options granted

 

 

744 

 

 

25.68 

Options vested

 

 

(787)

 

 

17.54 

Options forfeited

 

 

(9)

 

 

19.82 

Options outstanding, ending balance

 

 

2,020 

 

 

21.63 

Information about stock options that have vested, or are expected to vest, and are exercisable at December 31, 2017June 30, 2019 was as follows:

Number

Weighted- Average Exercise Price

Weighted- Average Remaining Life in Years

Aggregate Intrinsic Value

Options outstanding

5,441 

$

53.16 

6.0 

$

331,053 

Options vested and exercisable

3,395 

42.12 

4.7 

244,017 

Options vested and expected to vest

5,336 

52.70 

6.0 

327,112 

Restricted stock units

Restricted stock units have been granted to certain employees of L’Orange (at acquisition) and other current Woodward members in key management positions. Each restricted stock unit entitles the holder to one share of the Company’s common stock upon vesting. The restricted stock units were granted with a two year vesting schedule and vest on the one and two year anniversaries of the grant date at a rate of 50% per year. The restricted stock units do not participate in dividends during the vesting period. The fair value of restricted stock units granted were estimated using the closing price of Woodward common stock on the grant date.


43


A summary of the activity for restricted stock units for the three and nine-months ended June 30, 2019:



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Number

 

Weighted- Average Exercise Price

 

Weighted- Average Remaining Life in Years

 

Aggregate Intrinsic Value

Options outstanding

 

 

5,937

 

$

44.48

 

 

6.2

 

$

192,105

Options vested and exercisable

 

 

3,917

 

 

35.64

 

 

4.9

 

 

160,206

Options vested and expected to vest

 

 

5,823

 

 

44.07

 

 

6.1

 

 

190,725

Three-Months Ended

Nine-Months Ended

June 30, 2019

June 30, 2019

Number

Fair Value per Share

Number

Fair Value per Share

Beginning balance

10 

$

82.71 

10 

$

82.71 

Shares granted

97.56 

97.56 

Shares vested

-

n/a

-

n/a

Shares forfeited

-

n/a

-

n/a

Ending balance

12 

84.71 

12 

84.71 

Stock-based compensation expense

Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Pursuant to form stock option agreements used by the Company, with terms approved by the administrator of the applicable plan, the requisite service period can be less than the four-yearfour year vesting period based on grantee’s retirement eligibility. As such, the recognition of stock-based compensation expense associated with some stock option grants can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

Upon approving the 2017 Plan, Woodward’s board of directors delegated authority to administer the 2017 Plan to the compensation committee of the board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards.    The compensation committee approved issuance of options in the first quarter of fiscal year 2017 under the 2017 Plan, with an award date of October 3, 2016 conditional upon and subject to approval of the 2017 Plan by the stockholders.  The stock options conditionally awarded under the 2017 Plan were not granted or outstanding for accounting purposes prior to stockholder approval of the 2017 Plan, and as such no stock-based compensation expense related to such awards was recognized on these stock options during the three-months ended December 31, 2016, but rather the expense was recognized in the three-months ended March 31, 2017.  Options granted in the three-months ended December 31, 2017 were not conditionally granted and, therefore, stock-based compensation expense related to these awards was recognized during the three-months ended December 31, 2017.  Total stock-based compensation expense was $12,423 for the three-months ended December 31, 2017 and $1,261 for the three-months ended December 31, 2016.

At December 31, 2017,June 30, 2019, there was approximately $14,234$13,849 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements.arrangements, including both stock options and restricted stock awards. The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0% for members of Woodward’s board of directors and 9% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.42.2 years.

Note 20.21. Commitments and contingencies

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/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, contractual disputes, product warranty claims and alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable.

Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

25


Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of theserelated claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward'sWoodward’s liquidity, financial condition, or results of operations.

In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to any such officers.officer if such officer’s employment is terminated within two years following the change of control.

On April 9, 2019, Senvion, a German wind turbine manufacturer and a significant customer of Woodward’s renewables business, announced that it filed for self-administration insolvency proceedings and declared it would be exploring options for the sale or partial liquidation of the company. In parallel, Senvion announced that it has sought financing to secure the continuation of its operations, which it announced may allow the company to successfully exit the insolvency process. On April 17, 2019, Senvion announced that it signed a €100,000 bulk loan agreement with its lenders and major bondholders to enable the company to continue its business activities. Since signing the €100,000 bulk loan agreement, Senvion has entered into service contract extensions and has continued commercial operations. On July 30, 2019, Senvion announced that it has reached an agreement with its lenders which gives financial support for the continuation of its business until the end of August and potentially for a period thereafter if ongoing talks with lenders can be concluded successfully. Woodward will continue to analyze any financial and commercial impact of the Senvion insolvency proceedings, including any adverse effect the proceedings may have on its financial results. Although management believes any such effect would not be material to

44


Woodward as a whole, the impact of the potential loss of this customer would be significant to Woodward’s renewables business.

Note 21.22. Segment information

Woodward serves the aerospace and industrial markets through its two reportable segments - Aerospace and Industrial. When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments. Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments. Woodward L’Orange has been included in Woodward’s Industrial segment results since the Closing.

The accounting policies of the reportable segments are the same as those of the Company. Woodward evaluates segment profit or loss based on internal performance measures for each segment in a given period. In connection with that assessment, Woodward generally excludes matters such as certain charges for restructuring, costs, interest income and expense, certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses.

A summary of consolidated net sales and earnings by segment follows:

Three-Months Ended

Nine-Months Ended

June 30,

June 30,

2019

2018

2019

2018

Segment external net sales:

Aerospace

$

498,775 

$

404,612 

$

1,374,616 

$

1,096,860 

Industrial

253,230 

183,505 

789,044 

509,654 

Total consolidated net sales

$

752,005 

$

588,117 

$

2,163,660 

$

1,606,514 

Segment earnings:

Aerospace

$

103,238 

$

83,887 

$

277,814 

$

203,784 

Industrial

26,240 

10,943 

82,537 

41,411 

Nonsegment expenses

(26,714)

(30,699)

(83,211)

(78,069)

Interest expense, net

(10,450)

(9,714)

(33,143)

(26,575)

Consolidated earnings before income taxes

$

92,314 

$

54,417 

$

243,997 

$

140,551 



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Segment external net sales:

 

 

 

 

 

 

Aerospace

 

$

305,905 

 

$

266,680 

Industrial

 

 

164,243 

 

 

176,214 

Total consolidated net sales

 

$

470,148 

 

$

442,894 

Segment earnings:

 

 

 

 

 

 

Aerospace

 

$

43,553 

 

$

46,877 

Industrial

 

 

19,344 

 

 

17,998 

Nonsegment expenses

 

 

(19,023)

 

 

(11,381)

Interest expense, net

 

 

(6,387)

 

 

(6,435)

Consolidated earnings before income taxes

 

$

37,487 

 

$

47,059 

Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other intangibles, net. A summary of consolidated total assets by segment follows:

 

 

 

 

 

 

 

 

 

December 31, 2017

 

September 30, 2017

June 30, 2019

September 30, 2018

Segment assets:

 

 

 

 

 

 

Aerospace

 

$

1,673,675 

 

$

1,722,789 

$

1,918,353 

$

1,805,892 

Industrial

 

 

695,167 

 

 

695,264 

1,691,629 

1,642,462 

Unallocated corporate property, plant and equipment, net

 

 

113,790 

 

 

104,755 

84,321 

102,083 

Other unallocated assets

 

 

242,542 

 

 

234,301 

321,300 

240,212 

Consolidated total assets

 

$

2,725,174 

 

$

2,757,109 

$

4,015,603 

$

3,790,649 

Note 23. Subsequent event

On July 31 2019, Woodward’s board of directors declared a quarterly cash dividend of $0.1625 per share, payable on September 3, 2019, to stockholders of record as of August 20, 2019.

2645


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except per share amounts)

Forward Looking StatementsStatements

This Quarterly Report on Form 10-Q, 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:

·

future sales, earnings, cash flow, uses of cash, and other measures of financial performance;

·

trends in our business and the markets in which we operate, including expectations in those markets in future periods;

·

our expected expenses in future periods and trends in such expenses over time;

·

descriptions of our plans and expectations for future operations;

·

plans and expectations relating to the performance of our joint venture with General Electric Company;

·

investments in new campuses, business sites and related business developments;

·

the effect of economic trends or growth;

·

the expected levels of activity in particular industries or markets and the effects of changes in those levels;

·

the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;

·

the research, development, production, and support of new products and services;

·

new business opportunities;

·

restructuring and alignment costs and savings;

·

our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;

·

our liquidity, including our ability to meet capital spending requirements and operations;

·

future repurchases of common stock;

·

future levels of indebtedness and capital spending;

·

the stability of financial institutions, including those lending to us;

·

pension and other postretirement plan assumptions and future contributions; and

·

our tax rate and other effects of the changes to U.S. federal tax law.

plans and expectations related to our acquisition of L’Orange GmbH and its affiliate, Fluid Mechanics LLC, and their related operations in Germany, the United States and China;

future sales, earnings, cash flow, uses of cash, and other measures of financial performance;

trends in our business and the markets in which we operate, including expectations in those markets in future periods;

our expected expenses in future periods and trends in such expenses over time;

descriptions of our plans and expectations for future operations;

plans and expectations relating to the performance of our joint venture with General Electric Company;

investments in new campuses, business sites and related business developments;

the effect of economic trends or growth;

the expected levels of activity in particular industries or markets and the effects of changes in those levels;

the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;

the research, development, production, and support of new products and services;

new business opportunities;

restructuring and alignment costs and savings;

our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;

our liquidity, including our ability to meet capital spending requirements and operations;

future repurchases of common stock;

future levels of indebtedness and capital spending;

the stability of financial institutions, including those lending to us;

pension and other postretirement plan assumptions and future contributions; and

our tax rate and other effects of the changes in U.S. federal tax law.

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:

a decline in our customers’ business, or our business with, or financial distress, bankruptcy or insolvency of, our significant customers;

global economic uncertainty and instability in the financial markets, including as a result of any government shutdown and/or political instability;

our ability to manage product liability claims, product recalls or other liabilities associated with the products and services that we provide;

our ability 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 business pressures;

·

a decline in business with, or financial distress of, our significant customers;

·

global economic uncertainty and instability in the financial markets;

·

our ability to manage product liability claims, product recalls or other liabilities associated with the products and services that we provide;

·

our ability 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 business pressures;

·

the long sales cycle, customer evaluation process, and implementation period of some of our products and services;

·

our ability to implement and realize the intended effects of any restructuring and alignment efforts;

·

our ability to successfully manage competitive factors, including prices, promotional incentives, competitor product development, industry consolidation, and commodity and other input cost increases;

·

our ability to manage our expenses and product mix while responding to sales increases or decreases;

·

the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all;

·

our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities;

·

consolidation in the aerospace market and our participation in a strategic joint venture with General Electric Company may make it more difficult to secure long-term sales in certain aerospace markets;

2746


·

our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements;

the long sales cycle, customer evaluation process, and implementation period of some of our products and services;

our ability to implement and realize the intended effects of any restructuring and alignment efforts;

our ability to successfully manage competitive factors, including prices, promotional incentives, competitor product development, industry consolidation, and commodity and other input cost increases;

our ability to manage our expenses and product mix while responding to sales increases or decreases;

the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all;

our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities;

consolidation in the aerospace market and our participation in a strategic joint venture with General Electric Company may make it more difficult to secure long-term sales in certain aerospace markets;

our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements;

our ability to manage additional tax expense and exposures;

risks related to our U.S. Government contracting activities, including liabilities resulting from legal and regulatory proceedings, inquiries, or investigations related to such activities;

the potential of a significant reduction in defense sales due to decreases in the amount of U.S. federal defense spending or other specific budget cuts impacting defense programs in which we participate;

changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;

future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets;

future results of our subsidiaries;

environmental liabilities related to manufacturing activities and/or real estate acquisitions;

our continued access to a stable workforce and favorable labor relations with our employees;

physical and other risks related to our operations and suppliers, including natural disasters, which could disrupt production;

our ability to successfully manage regulatory, tax, and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act, international trade regulations, and product liability, patent, and intellectual property matters);

changes in accounting standards that could adversely impact our profitability or financial position;

impacts of tariff regulations;

risks related to our common stock, including changes in prices and trading volumes;

risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, tariffs, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate;

risks associated with global political and economic uncertainty in the European Union and elsewhere;

fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets;

industry risks, including changes in commodity prices for oil, natural gas, and other minerals, unforeseen events that may reduce commercial aviation, and changing emissions standards;

possible information systems interruptions or intrusions, which may adversely affect our operations;

certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company;

the identification of a material weakness in our internal controls over financial reporting; and

risks associated with integration of our acquisitions and successful completion of divestitures.

·

our ability to manage additional tax expense and exposures;

·

risks related to our U.S. Government contracting activities, including liabilities resulting from legal and regulatory proceedings, inquiries, or investigations related to such activities;

47


·

the potential of a significant reduction in defense sales due to decreases in the amount of U.S. Federal defense spending or other specific budget cuts impacting defense programs in which we participate;

·

changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;

·

future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets;

·

future results of our subsidiaries;

·

environmental liabilities related to manufacturing activities and/or real estate acquisitions;

·

our continued access to a stable workforce and favorable labor relations with our employees;

·

physical and other risks related to our operations and suppliers, including natural disasters, which could disrupt production;

·

our ability to successfully manage regulatory and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act, U.S. and other tax laws,  international trade regulations, and product liability, patent, and intellectual property matters);

·

changes in accounting standards, which could adversely impact our profitability or financial position;

·

risks related to our common stock, including changes in prices and trading volumes;

·

risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, tariffs, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate;

·

risks associated with global political and economic uncertainty in the European Union and elsewhere;

·

fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets;

·

industry risks, including changes in commodity prices for oil, natural gas, and other minerals, unforeseen events that may reduce commercial aviation, and changing emissions standards;

·

possible information systems interruptions or intrusions, which may adversely affect our operations; and

·

certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company.

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 elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”), under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) (our “Form 10-K”), as updated from time to time in our subsequent SEC filings, and other documents we have filed or will file with the SEC. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law.

Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-Q 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-Q are in thousands, except per share amounts.

This discussion should be read together

48


OVERVIEW

New Accounting Policy

We adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Management’s DiscussionCustomers, and Analysisall subsequently issued supplemental and/or clarifying ASUs related to ASU 2014-09 (collectively “ASC 606”) on October 1, 2018 and elected the modified retrospective transition method. The results for periods prior to fiscal year 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting of $28,927, as previously reported, was recognized as a net increase to retained earnings at the date of adoption.

Subsequent to the adoption of ASC 606 and the issuance of Woodward’s unaudited Condensed Consolidated Financial ConditionStatements for the three-months ended December 31, 2018 and Resultsthe three and six-months ended March 31, 2019, Woodward’s management identified an inconsistency in the application of Operations in Part II, Item 7 of our most recent Form 10-K andASC 606, which caused the Condensed Consolidated Financial Statements and Notes included therein and in this report.

28


OVERVIEW

Operational Highlights

Net sales for the first quarterquarters ended December 31, 2018 and March 31, 2019, as well as the cumulative impact of fiscal yearthe adoption of ASC 606 on the Condensed Consolidated Balance Sheet as of October 1, 2018, to be misstated by amounts that management concluded were $470,148,not material. For the three-months ended December 31, 2018, management determined that as a result of the error net sales were understated by $8,164, earnings before income taxes were understated by $4,509, net earnings were understated by $3,355, and diluted earnings per share were understated by $0.05. For the three-months ended March 31, 2019, management determined that as a result of the error net sales were understated by $5,450, earnings before income taxes were understated by $3,532, net earnings were understated by $2,682, and diluted earnings per share were understated by $0.04.

Woodward corrected the error as of the date of adoption by revising the Condensed Consolidated Balance Sheet as of October 1, 2018. After revision, the cumulative effect of the change in accounting recognized as a net increase to retained earnings at the date of adoption was determined to be $38,745, an increase of 6.2%$9,818 from $442,894the amount originally recorded. Retained earnings as of April 1, 2019 increased by a corresponding amount in the Condensed Consolidated Statement of Stockholders’ Equity for the prior year’s first quarter.three-months ended June 30, 2019.

To correct the errors for the three-months ended December 31, 2018 and for the three and six-months ended March 31, 2019, Woodward made an out-of-period correction in the three-months ended June 30, 2019. The correction resulted in increases to net sales of $13,614, earnings before income taxes of $8,041, net earnings of $6,037, and diluted earnings per share of $0.09 for the three-months ended June 30, 2019, the majority of which relates to Woodward’s Aerospace segment sales(see Note 3, Revenue, for further details).

Overall, we continue to believe the net earnings impact of the adoption of ASC 606, when compared to net earnings under the previous guidance, will not be material for the first quarter offull fiscal year 2018 were up 14.7% to $305,905,2019. However, there will be ongoing quarterly variability in both sales and net earnings resulting from the adoption of ASC 606 as compared to $266,680the prior year amounts presented under the previous guidance. The adoption of ASC 606 has no impact on our cash flows.

In the following discussion and analysis of the results of operations and liquidity, we compare the results for the first quarterthree and nine-months ended June 30, 2019, which were prepared under ASC 606, to the results for the three and nine-months ended June 30, 2018, which were prepared under the previous guidance, ASC 605. In instances where the change in accounting resulting from the adoption of ASC 606 is considered to be significant, we have identified the impact of ASC 606 on the current period results, which management believes improves comparability to the prior period results prepared under ASC 605.

The following table sets forth a comparison of select financial results as accounted for under both ASC 606 and ASC 605. The financial results for the three and nine-months ended June 30, 2019 are presented under both the current guidance of ASC 606 and as if prepared under the previous guidance of ASC 605. We believe this improves the comparability of the prior fiscal year.  Industrial segment sales forfinancial results between the first quarter of fiscal year 2018 were down 6.8% to $164,243, compared to $176,214 for the first quarter of the prior fiscal year. 

Net earnings for the first quarter of fiscal year 2018 were  $18,260, or $0.29 per diluted share, compared to $46,548, or $0.73 per diluted share, for the first quarter of fiscal year 2017.periods presented. The effective tax rateselect financial results are presented on both an as reported basis in accordance with accounting principles generally accepted in the first quarterUnited States of fiscal year 2018 was 51.3%  compared to 1.1% forAmerica (“U.S. GAAP”) and on an as adjusted basis, which represents a non-U.S. GAAP financial measure. The as adjusted non-U.S. GAAP financial measures, which differ from the first quartersimilarly named financial measure as determined under either ASC 606 or ASC 605, include adjusted net earnings, adjusted earnings per share, and adjusted industrial segment earnings. A description of the prior fiscal year, primarily due to discrete charges related to recent changes in the U.S. federal tax law.  

Earnings before interest and taxes (“EBIT”) for the first quarter of fiscal year 2018 were $43,874,these measures as well as a decrease of 18.0% from $53,494 in the first quarter of fiscal year 2017.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the first quarter of fiscal year 2018 were $64,944, down 10.3% from $72,407 for the first quarter of fiscal year 2017.  (A reconciliation of these non-U.S. GAAPnon-U.S.GAAP financial measures to the closest U.S. GAAP financial measuremeasures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

49


As reported (U.S. GAAP)

As adjusted (Non-U.S. GAAP)

Three-Months Ended June 30,

Three-Months Ended June 30,

2019

2018

2019

2018

ASC 606

ASC 605

ASC 605

ASC 606

ASC 605

ASC 605

Net Sales:

Aerospace segment

$

498,775 

$

448,215 

$

404,612 

$

498,775 

$

448,215 

$

404,612 

Industrial segment

253,230 

253,211 

183,505 

253,230 

253,211 

183,505 

Total consolidated net sales

$

752,005 

$

701,426 

$

588,117 

$

752,005 

$

701,426 

$

588,117 

Earnings:

Aerospace segment

$

103,238 

$

97,361 

$

83,887 

$

103,238 

$

97,361 

$

83,887 

Segment earnings as a percent of segment net sales

20.7%

21.7%

20.7%

20.7%

21.7%

20.7%

Industrial segment

$

26,240 

$

23,460 

$

10,943 

$

28,844 

$

28,317 

$

19,242 

Segment earnings as a percent of segment net sales

10.4%

9.3%

6.0%

11.4%

11.2%

10.5%

Consolidated net earnings

$

66,107 

$

59,407 

$

49,117 

$

83,856 

$

78,576 

$

71,445 

Consolidated diluted earnings per share

$

1.02 

$

0.92 

$

0.77 

$

1.30 

$

1.22 

$

1.12 

As reported (U.S. GAAP)

As adjusted (Non-U.S. GAAP)

Nine-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

ASC 606

ASC 605

ASC 605

ASC 606

ASC 605

ASC 605

Net Sales:

Aerospace segment

$

1,374,616 

$

1,270,647 

$

1,096,860 

$

1,374,616 

$

1,270,647 

$

1,096,860 

Industrial segment

789,044 

786,647 

509,654 

789,044 

786,647 

509,654 

Total consolidated net sales

$

2,163,660 

$

2,057,294 

$

1,606,514 

$

2,163,660 

$

2,057,294 

$

1,606,514 

Earnings:

Aerospace segment

$

277,814 

$

264,508 

$

203,784 

$

277,814 

$

264,508 

$

203,784 

Segment earnings as a percent of segment net sales

20.2%

20.8%

18.6%

20.2%

20.8%

18.6%

Industrial segment

$

82,537 

$

80,500 

$

41,411 

$

103,637 

$

103,852 

$

49,710 

Segment earnings as a percent of segment net sales

10.5%

10.2%

8.1%

13.1%

13.2%

9.8%

Consolidated net earnings

$

192,806 

$

180,835 

$

105,866 

$

235,760 

$

225,233 

$

156,634 

Consolidated diluted earnings per share

$

2.99 

$

2.81 

$

1.66 

$

3.67 

$

3.50 

$

2.46 

L’Orange Acquisition

On April 8, 2018, we entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”). Pursuant to the L’Orange Agreement, we agreed to acquire all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000 (the “L’Orange Acquisition”). The L’Orange Acquisition closed on June 1, 2018 (the “Closing”) and L’Orange became a wholly-owned subsidiary of the Company. L’Orange has been renamed Woodward L’Orange.

Woodward L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines. Woodward L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application off road vehicles, locomotives, oil and gas processing,

50


and power generation. Woodward L’Orange serves many large specialist diesel engine manufacturers, including Rolls-Royce Power Systems’ subsidiaries, MTU and Bergen Engines, and other low to high speed engine builders. Woodward L’Orange has been integrated into the Company’s Industrial segment.

Financial information for Woodward L’Orange is reflected in our financial statements from the date of the Closing. As a result of this acquisition, a comparison of results for the three and nine-months ended June 30, 2019 to the three and nine-months ended June 30, 2018 may not be particularly meaningful with regard to the performance of Woodward’s organic business. References to “organic” sales relate to net sales of Woodward businesses excluding those attributable to Woodward L’Orange.

Operational Highlights

Third Quarter Highlights

Net sales for the third quarter of fiscal year 2019 were $752,005, an increase of 27.9% from $588,117 for the third quarter of the prior year. Organic net sales for the third quarter of fiscal year 2019, which excludes $78,517 of net sales attributable to Woodward L’Orange, were $673,488, an increase of 19.6% compared to organic net sales of $563,239 for the third quarter of fiscal year 2018. Organic net sales for the third quarter of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878. Organic net sales for the third quarter of fiscal year 2019 include additional net sales of $50,338 recognized under ASC 606 that would not have been recognized under the previous guidance. Foreign currency exchange rates had an unfavorable impact on net sales of $7,195 for the third quarter of fiscal year 2019.

Aerospace segment net sales for the third quarter of fiscal year 2019 were up 23.3% to $498,775, compared to $404,612 for the third quarter of the prior fiscal year. Industrial segment net sales for the third quarter of fiscal year 2019 were up 38.0% to $253,230, compared to $183,505 for the third quarter of the prior fiscal year. Organic Industrial segment net sales, which excludes $78,517 of net sales attributable to Woodward L’Orange, were $174,713, up 10.1% compared to organic Industrial net sales of $158,627 for the third quarter of the prior year. Organic Industrial net sales for the third quarter of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878.

Net earnings for the third quarter of fiscal year 2019 were $66,107, or $1.02 per diluted share, compared to $49,117, or $0.77 per diluted share, for the third quarter of fiscal year 2018. Adjusted net earnings for the third quarter of fiscal year 2019 were $83,856, or adjusted earnings per share of $1.30 per diluted share, compared to $71,445, or $1.12 per diluted share, for the third quarter of fiscal year 2018.

The effective tax rate in the third quarter of fiscal year 2019 was 28.4%, compared to 9.7% for the third quarter of the prior fiscal year. The effective tax rate for both periods reflect the transition impacts of the changes in the U.S. federal tax law enacted in December 2017 with additional income tax expense of $10,588 recognized in the third quarter of fiscal year 2019.

Earnings before interest and taxes (“EBIT”) for the third quarter of fiscal year 2019 were $102,764, an increase of 60.2% from $64,131 in the third quarter of fiscal year 2018. EBIT for the third quarter of fiscal year 2019 includes an increase in EBIT of $8,659 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the third quarter of fiscal year 2019 were $135,734, up 45.7% from $93,186 for the third quarter of fiscal year 2018. EBITDA for the third quarter of fiscal year 2019 includes an increase in EBITDA of $6,405 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance. Adjusted EBIT and adjusted EBITDA for the third quarter of fiscal year 2019 were $112,403 and $142,769, respectively, compared to $90,785 and $115,264, respectively, for the third quarter of fiscal year 2018. Adjusted EBIT and adjusted EBITDA for the third quarter of fiscal year 2019 each include an increase of $6,405 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance.

Aerospace segment earnings as a percent of segment net sales decreased to 14.2%were 20.7% in both the firstthird quarter of fiscal year 2018 from 17.6% in2019 and the firstthird quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales increased to 11.8%were 10.4% in the firstthird quarter of fiscal year 2018 from 10.2%2019, compared to 6.0% in the firstthird quarter of the prior fiscal year. Adjusted Industrial segment earnings as a percentage of segment net sales were 11.4% for the third quarter of fiscal year 2019, compared to 10.5% for the third quarter of fiscal year 2018.

Organic net sales, organic Industrial segment net sales, constant currency organic Industrial segment net sales, adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and adjusted Industrial segment earnings are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

51


Year to Date Highlights

Net sales for the first nine months of fiscal year 2019 were $2,163,660, an increase of 34.7% from $1,606,514 for the first nine months of the prior fiscal year. Organic net sales for the first nine months of fiscal year 2019, which exclude $254,183 of net sales attributable to Woodward L’Orange, were $1,909,477, an increase of 20.7% compared to organic net sales of $1,581,636 for the first nine months of fiscal year 2018. Organic net sales for the first nine months of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878. Organic net sales for the first nine months of fiscal year 2019 include additional net sales of $105,176 recognized under ASC 606 that would not have been recognized under the previous guidance. Foreign currency exchange rates had an unfavorable impact on net sales of $21,450 for the first nine months of fiscal year 2019 as compared to the same period of the prior year. Aerospace segment net sales for the first nine months of fiscal year 2019 were up 25.3% to $1,374,616, compared to $1,096,860 for the first nine months of the prior fiscal year. Industrial segment net sales for the first nine months of fiscal year 2019 were $789,044, up 54.8% compared to $509,654 for the first nine months of fiscal year 2018. Organic Industrial segment net sales, which exclude $254,183 of net sales attributable to Woodward L’Orange, were $534,861, up 10.3% compared to organic Industrial segment net sales of $484,776. Organic Industrial net sales for the first nine months of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878.

Net earnings for the first nine months of fiscal year 2019 were $192,806, or $2.99 per diluted share, compared to $105,866, or $1.66 per diluted share, for the first nine months of fiscal year 2018. Adjusted net earnings for the first nine months of fiscal year 2019 were $235,760, or adjusted earnings per share of $3.67 per diluted share, compared to $156,634, or $2.46 per diluted share, for the first nine months of fiscal year 2018.

The effective tax rate in the first nine months of fiscal year 2019 was 21.0%, compared to 24.7% for the first nine months of the prior fiscal year. The effective tax rate for both periods reflect the transition impacts of the changes in the U.S. federal tax law enacted in December 2017 with additional income tax expense of $10,588 recognized in the first nine months of fiscal year 2019.

EBIT for the first nine months of fiscal year 2019 was $277,140, up 65.8% from $167,126 in the same period of fiscal year 2018. EBIT for the first nine months of fiscal year 2019 includes an increase in EBIT of $15,358 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance. EBITDA for the first nine months of fiscal year 2019 was $385,608, up 61.2% from $239,263 for the same period of fiscal year 2018. EBITDA for the first nine months of fiscal year 2019 includes an increase in EBITDA of $12,989 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance. Adjusted EBIT and adjusted EBITDA for the first nine months of fiscal year 2019 were $321,399 and $408,767, respectively, compared to $212,318 and $279,879, respectively, for the first nine months of fiscal year 2018. Adjusted EBIT and adjusted EBITDA for the first nine months of fiscal year 2019 each include an increase of $12,989 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance.

Aerospace segment earnings as a percent of segment net sales increased to 20.2% in the first nine months of fiscal year 2019 from 18.6% in the first nine months of the prior fiscal year. Industrial segment earnings as a percent of segment net sales in the first nine months of fiscal year 2019 increased to 10.5% from 8.1% in the first nine months of the prior fiscal year. Adjusted Industrial segment earnings as a percent of segment net sales were 13.1% for the first nine months of fiscal year 2019, compared to 9.8% for the first nine months of fiscal year 2018.

Liquidity Highlights

Net cash used inprovided by operating activities for the first quarternine months of fiscal year 20182019 was $2,533,$219,202, compared to $162,083 for the first nine months of fiscal year 2018. The increase in net cash provided by operating activities of $52,351 forin the first quarternine months of fiscal year 2017.  The increase in net cash used in operating activities in the first quarter of fiscal year 20182019 compared to the first nine months of the prior year’s first quarterfiscal year is primarily attributable to a decrease in netincreased earnings in the current fiscal quarter and higher working capital used primarily due to the timing of certain cash payments for accounts payable in the first nine months of fiscal year 2019, partially offset by the timing of cash receipts from higher sales in the period and accrued liabilities.increased investment in inventories to support an increase in sales.

For the first quarternine months of fiscal year 2018,2019, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was an outflow of $30,983,$141,297, compared to an inflow of  $31,293$72,486 for the first quarternine months of fiscal year 2017.2018. (A reconciliation of thisfree cash flow, a non-U.S. GAAP financial measure, to the closest U.S. GAAP financial measure can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

52


On June 19, 2019, we amended our revolving credit facility to, among other things, extend the termination date of the revolving loan commitments of the lenders thereunder from April 28, 2020 to June 19, 2024 and modify the option to increase available borrowings from $1,200,000 to $1,500,000, subject to lenders participation (the “Amended and Restated Revolving Credit Agreement”). The terms and conditions of the Amended and Restated Revolving Credit Agreement are similar to the prior credit agreement.

At December 31, 2017,June 30, 2019, we held $85,779$63,302 in cash and cash equivalents, and had total outstanding debt of $649,639$1,191,147 with additional borrowing availability of $922,377,$627,203, net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2017,June 30, 2019, we also had additional borrowing capacity of $7,516$7,593 under various foreign lines of credit and foreign overdraft facilities.

29


RESULTS OF OPERATIONSOPERATIONS

The following table sets forth selected consolidated statements of earnings data as a percentage of net sales for each period indicated:

Three-Months Ended

Nine-Months Ended

June 30, 2019

% of Net Sales

June 30, 2018

% of Net Sales

June 30, 2019

% of Net Sales

June 30, 2018

% of Net Sales

Net sales

$

752,005 

100 

%

$

588,117 

100 

%

$

2,163,660 

100 

%

$

1,606,514 

100 

%

Costs and expenses:

Cost of goods sold

562,516 

74.8 

428,673 

72.9 

1,621,531 

74.9 

1,178,459 

73.4 

Selling, general, and administrative expenses

52,980 

7.0 

54,868 

9.3 

159,764 

7.4 

141,082 

8.8 

Research and development costs

40,661 

5.4 

39,470 

6.7 

123,359 

5.7 

111,425 

6.9 

Restructuring charges

-

-

-

-

-

-

17,013 

1.1 

Interest expense

10,798 

1.4 

10,056 

1.7 

34,156 

1.6 

27,751 

1.7 

Interest income

(348)

(0.0)

(342)

(0.1)

(1,013)

(0.0)

(1,176)

(0.1)

Other (income) expense, net

(6,916)

(0.9)

975 

0.2 

(18,134)

(0.8)

(8,591)

(0.5)

Total costs and expenses

659,691 

87.7 

533,700 

90.7 

1,919,663 

88.7 

1,465,963 

91.3 

Earnings before income taxes

92,314 

12.3 

54,417 

9.3 

243,997 

11.3 

140,551 

8.7 

Income tax expense

26,207 

3.5 

5,300 

0.9 

51,191 

2.4 

34,685 

2.2 

Net earnings

$

66,107 

8.8 

$

49,117 

8.4 

$

192,806 

8.9 

$

105,866 

6.6 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended



 

December 31, 2017

 

% of Net Sales

 

December 31, 2016

 

% of Net Sales

Net sales

 

$

470,148 

 

100 

%

 

$

442,894 

 

100 

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

346,784 

 

73.8 

 

 

 

329,148 

 

74.3 

 

Selling, general, and administrative expenses

 

 

46,276 

 

9.8 

 

 

 

38,300 

 

8.6 

 

Research and development costs

 

 

34,786 

 

7.4 

 

 

 

26,540 

 

6.0 

 

Interest expense

 

 

6,750 

 

1.4 

 

 

 

6,840 

 

1.5 

 

Interest income

 

 

(363)

 

(0.1)

 

 

 

(405)

 

(0.1)

 

Other (income) expense, net

 

 

(1,572)

 

(0.3)

 

 

 

(4,588)

 

(1.0)

 

Total costs and expenses

 

 

432,661 

 

92.0 

 

 

 

395,835 

 

89.4 

 

Earnings before income taxes

 

 

37,487 

 

8.0 

 

 

 

47,059 

 

10.6 

 

Income tax expense

 

 

19,227 

 

4.1 

 

 

 

511 

 

0.1 

 

Net earnings

 

$

18,260 

 

3.9 

 

 

$

46,548 

 

10.5 

 

Other select financial data:

 

 

 

 

 

 

 

 

December 31,

 

September 30,

June 30,

September 30,

2017

 

2017

2019

2018

Working capital

$

626,122 

 

$

593,955 

$

655,437 

$

523,619 

Short-term borrowings

 

66,300 

 

32,600 

180,000 

153,635 

Total debt

 

649,639 

 

612,886 

1,191,147 

1,246,032 

Total stockholders' equity

 

1,400,546 

 

1,371,383 

1,704,311 

1,538,104 

Net Sales

Consolidated net sales for the firstthird quarter of fiscal year 20182019 increased by $27,254,$163,888, or 6.2%27.9%, compared to the same period of fiscal year 2017.  2018. Consolidated net sales for the first nine months of fiscal year 2019 increased by $557,146, or 34.7%, compared to the same period of fiscal year 2018. Net sales for the third quarter and first nine months of fiscal year 2019 include additional net sales of $50,579 and $106,366, respectively, recognized under ASC 606 that would not have been recognized under the previous guidance. Net sales for the third quarter and first nine months of fiscal year 2019 under ASC 606 increased primarily as a result of customer provided inventory required to be included in net sales (“noncash consideration”). Organic net sales for the third quarter of fiscal year 2019, which exclude $78,517 of net sales attributable to Woodward L’Orange, increased by 19.6%, compared to organic net sales for the same period of fiscal year 2018. Organic net

53


sales for the third quarter of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878. Organic consolidated net sales for the first nine months of fiscal year 2019, which excludes $254,183 of net sales attributable to Woodward L’Orange, increased by 20.7%, compared to organic consolidated net sales for the same period of fiscal year 2018. Organic net sales for the first nine months of fiscal year 2018 excludes one month of net sales attributable to Woodward L’Orange in the amount of $24,878. Organic consolidated net sales for the third quarter and first nine months of fiscal year 2019 include additional net sales of $50,338 and $105,176, respectively, recognized under ASC 606 that would not have been recognized under the previous guidance.

Details of the changes in consolidated net sales are as follows:

Three-Month Period

Consolidated net sales for the period ended December 31, 2016

$

442,894 

Aerospace volume

36,317 

Industrial volume

(15,615)

Effects of changes in price and sales mix

960 

Effects of changes in foreign currency rates

5,592 

Consolidated net sales for the period ended December 31, 2017

$

470,148 

Three-Month Period

Nine-Month Period

Consolidated net sales for the period ended June 30, 2018

$

588,117 

$

1,606,514 

Aerospace volume

64,897 

197,799 

Industrial volume

21,305 

68,746 

L'Orange acquisition

55,029 

230,695 

Noncash consideration

23,176 

67,938 

Effects of changes in price and sales mix

6,676 

13,418 

Effects of changes in foreign currency rates

(7,195)

(21,450)

Consolidated net sales for the period ended June 30, 2019

$

752,005 

$

2,163,660 

The increase in consolidated net sales for the third quarter and first quarternine months of fiscal year 2018 was2019 is primarily attributable to increasedcontinued strength across commercial and defense original equipment manufacturer (“OEM”) sales boosted by continued momentum in smart weapon sales and increased commercialdefense aftermarket and OEM sales in the Aerospace segment. In the Industrial segment, the increase in organic net sales volumes is primarily attributable to increased sales in our reciprocating engine business, partially offset by net sales declinescontinuing challenges in the Industrial segment. The Industrial segment experienced decreased  industrial gas turbine sales andour renewables sales, which were partially offset by increased sales of large gas engines and fuel systems for Compressed Natural Gas (“CNG”) trucks in Asia. business.

Costs and Expenses

Cost of goods sold increased by $17,636$133,842 to $346,784,$562,515, or 73.8%74.8% of net sales, for the third quarter of fiscal year 2019, from $428,673, or 72.9% of net sales, for the third quarter of fiscal year 2018. Cost of goods sold increased by $443,072 to $1,621,531, or 74.9% of net sales, for the first quarternine months of fiscal year 20182019 from $329,148,$1,178,459, or 74.3%73.4% of net sales, for the first quarternine months of fiscal year 2017.2018. The increase in cost of goods sold in the third quarter and first nine months of fiscal year 2019 as compared to the same periods of the prior year is primarily attributable to higher sales volume, additional costs of goods sold attributable to Woodward L’Orange sales, additional cost of goods sold attributable to noncash consideration from customer supplied inventory recognized under ASC 606, and planned production facilityhigher manufacturing costs related to increased capacity expansion costs partially offset by savings from cost reduction initiatives in our Industrial segment.    to support higher production levels.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 26.2%25.2% for the firstthird quarter of fiscal year 2018,2019, compared to 25.7%27.1% for the firstthird quarter of fiscal year 2017.2018. The decrease in gross margin is primarily attributable to higher manufacturing costs related to increased capacity expansion costs to support increased production levels, an unfavorable sales mix of lower gross margin products in our Industrial segment, and the noncash consideration recognized under ASC 606. Noncash consideration negatively impacts gross margin as the inventory recognized as net sales under a noncash consideration transaction is reflected in cost of goods sold at an amount equal to the sales value.

Gross margin was 25.1% for the first nine months of fiscal year 2019, compared to 26.6% for the first nine months of fiscal year 2018. The decrease in gross margin is primarily attributable to the amortization of the acquired Woodward L’Orange backlog intangible asset, which is recognized as a noncash increase to cost of goods sold, higher manufacturing costs related to increased capacity expansion costs to support increased production levels, and an unfavorable sales mix of lower gross margin products in our Industrial segment. Gross margin for the first quarternine months of fiscal year 2019 was further negatively impacted by noncash consideration recognized under ASC 606.

30


2018 was higher comparedSelling, general and administrative expenses decreased by $1,888, or 3.4%, to $52,980 for the firstthird quarter of fiscal year 2017, primarily related2019, compared to increased sales volume partially offset by planned production facility capacity expansion costs and unfavorable product mix.

$54,868 for the third quarter of fiscal year 2018. Selling, general, and administrative expenses increased by $7,976,$18,682, or 20.8%13.2%, to $46,276$159,764 for the first nine months of fiscal year 2019, compared to $141,082 for the first nine months of fiscal year 2018. The third quarter and first nine months of fiscal year 2018 as compared to $38,300 forincluded special charges associated with the L’Orange Acquisition. These special charges consisted of transaction and integration costs of $3,077 and $4,358 in the third quarter and first quarternine months of fiscal year 2017.2018, respectively, warranty and indemnity insurance costs of $4,293 in both the third quarter and first nine months of fiscal year 2018, and German real estate transfer tax charges of $3,385 in both the third quarter and first nine months of fiscal year 2018. Excluding these special charges in both the third

54


quarter and first nine months of fiscal year 2018, selling, general and administrative expenses increased 20.1% in the third quarter and 23.8% in the first nine months of fiscal year 2019 primarily due to an increase in certain expenses to support ongoing company growth and the inclusion of a full three-months and nine-months, respectively, of selling, general and administrative expenses attributable to Woodward L’Orange. Also contributing the increase in the nine-months ended June 30, 2019 was an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year. Selling, general, and administrative expenses as a percentage of net sales was 9.8%decreased to 7.0% for the firstthird quarter of fiscal year 2019, compared to 9.3% for the third quarter of fiscal year 2018 asand 7.4% for the first nine months of fiscal year 2019, compared to 8.6%8.8% for the first nine months of fiscal year 2018.

Research and development costs increased by $1,191, or 3.0%, to $40,661 for the third quarter of fiscal year 2017.  The increase in selling, general and administrative expenses2019, as compared to $39,470 for the firstthird quarter of fiscal year 2018 was primarily due to the timing of the recognition of stock-based compensation expense.  We recognized the majority of our annual stock-based compensation expense in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarter of the fiscal year.

Research and development costs increased by $8,246, or 31.1%, to $34,786 for the first quarter of fiscal year 2018, as compared to $26,540 for the first quarter of fiscal year 2017.2018. Research and development costs as a percentage of net sales increaseddecreased to 7.4%5.4% for the firstthird quarter of fiscal year 20182019, as compared to 6.0%6.7% for the firstthird quarter of fiscal year 2017.  2018. Research and development costs increased by $11,934, or 10.7%, to $123,359 for the first nine months of fiscal year 2019, as compared to $111,425 for the first nine months of fiscal year 2018. Research and development costs decreased as a percentage of net sales to 5.7% for the first nine months of fiscal year 2019, as compared to 6.9% for the first nine months of fiscal year 2018.

Research and development costs in the third quarter and first quarternine months of fiscal year 20182019 were higher primarily due to increased spending on new awardsresearch and opportunities being pursued within both of our business segments as well as variabilitydevelopment costs attributable to Woodward L’Orange. Also contributing to higher research and developments costs in the timingfirst nine months of projects and expenses.fiscal year 2019 was an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development due to the timing of customer business needs on current and future programsprograms.

Interest expense was$6,750, or 1.4%Restructuring charges of net sales, for$17,013 recognized in the first nine months of fiscal year 2018 related primarily to our decision in the second quarter of fiscal year 2018 compared to $6,840, or 1.5%relocate our Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado (the “Duarte Relocation”). Also included in the restructuring charges of net sales,$17,013 for the first nine months of fiscal year 2018 were workforce management costs related to our ongoing effort to align our industrial turbomachinery business, which is part of our Industrial segment, with the then current market conditions. All of the restructuring charges recorded in the first nine months of fiscal 2018 were recorded as nonsegment expenses. There were no restructuring charges recorded in the third quarter or first nine months of fiscal year 2019.

Interest expense increased by $742, or 7.4%, to $10,798, for the third quarter of fiscal year 2017.2019, compared to $10,056 for the third quarter of fiscal year 2018. Interest expense decreased as a percentage of net sales to 1.4% for the third quarter of fiscal year 2019, as compared to 1.7% for the third quarter of fiscal year 2018. Interest expense increased by $6,405, or 23.1%, to $34,156 for the first nine months of fiscal year 2019, as compared to $27,751 for the first nine months of fiscal year 2018. Interest expense as a percentage of net sales was 1.6% for the first nine months of fiscal year 2019, compared to 1.7% for the first nine months of fiscal year 2018. The slight decreaseincrease in interest expense wasin the third quarter and first nine months of fiscal year 2019 compared to the same periods of fiscal year 2018 is primarily attributabledue to lower average borrowingsthe additional interest expense associated with the financing of the L’Orange Acquisition. Related to the L’Orange Acquisition, on May 31, 2018 we issued an aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and borrowed $167,420 under our revolving credit facility inagreement to fund the first quarter of fiscal year 2018 compared to the first quarter of fiscal year 2017.acquisition.

55


Income taxes were provided at an effective rate on earnings before income taxes of 51.3%28.4% for the third quarter and 21.0% for the first quarternine months of fiscal year 2018,2019, compared to 1.1%9.7% for the third quarter and 24.7% for the first quarternine months of fiscal year 2017.2018. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:

Three-Month

Period

Effective tax rate for the period ended December 31, 2016

1.1 

%

Current year effect of U.S. federal corporate rate reduction

(9.3)

Discrete impact of the Tax Act:

Effect of U.S. federal corporate rate reduction on net U.S. deferred tax liability

(43.8)

Transition Tax

69.4 

Increased deferred tax liability associated with anticipated repatriation taxes

13.0 

Net discrete impact of enactment of the Tax Act

38.6 

Taxes on international activities

22.9 

Research and experimentation credit

(0.1)

State and local taxes

(0.1)

Adjustment of prior period tax items

(3.1)

Net excess income tax benefit from stock-based compensation

1.3 

Effective tax rate for the period ended December 31, 2017

51.3 

%

Three-Month

Nine-Month

Period

Period

Effective tax rate for the period ended June 30, 2018

9.7 

%

24.7 

%

Current year effect of U.S. federal corporate rate reduction

(3.5)

(3.5)

Impact of the Tax Act:

Effect of U.S. federal corporate rate reduction on net U.S. deferred tax liability

(8.4)

7.3 

Transition Tax

11.5 

(14.2)

Increased deferred tax liability associated with anticipated repatriation taxes

-

(3.6)

Net impact of enactment of the Tax Act

3.1 

(10.5)

Taxes on international activities

2.0 

3.7 

Research and experimentation credit

0.8 

0.8 

State and local taxes

0.4 

0.4 

Adjustment of prior period tax items

14.0 

6.7 

Net excess income tax benefit from stock-based compensation

(0.9)

(3.1)

Domestic production activities deduction

2.8 

2.1 

Other

-

(0.3)

Effective tax rate for the period ended June 30, 2019

28.4 

%

21.0 

%

The increase in the year-over-year effective tax rate for the three-months ended December 31, 2017 is primarily attributable to the $14,778 discrete net impact resulting from the enactment of  “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) partially offset by benefits of the current year effect of the U.S. federal corporate rate reduction resulting from the enactment of the Tax Act on the estimated annual effective tax rate. In addition, the effective tax rate for the three-months ended December 31, 2016 includesJune 30, 2019, compared to the impactthree-months ended June 30, 2018 is primarily attributable to favorable resolutions of tax matters in the prior fiscal year quarter that did not repeat in the current quarter and an unfavorable adjustment related to the one-time repatriation tax on deferred foreign profitsincome (the “Transition Tax”) resulting from final regulations issued by the Internal Revenue Service (“IRS”) on June 14, 2019 that modified the Transition Tax computation required by “The Tax Cuts and losses.   The U.S. foreign tax credits available as a resultJobs Act” enacted in December 2017 (the “Tax Act”). Also contributing to the increase in the quarter was the loss of the repatriationdomestic production activities deduction in the current quarter and the increase in the U.S. federal corporate income tax on estimated current year foreign earnings. Partially offsetting these increases were the impacts of the Tax Act on the resolution of the fiscal year 2014, 2015, and 2016 IRS audits recorded in the prior fiscal year quarter that did not repeat in the current quarter and the reduction in the U.S. federal corporate income tax rate provided by the Tax Act.

The decrease in the effective tax rate for the nine-months ended June 30, 2019 compared to the nine months ended June 30, 2018 is primarily attributable to higher income tax expense related to the Tax Act recognized in the prior fiscal year compared to the amount recognized in the current fiscal year, the reduction in the in U.S. federal corporate income tax rate provided by the Tax Act in the first nine months of fiscal year 2019, and an increase in the net excess income tax benefits from stock-based compensation in the first nine months of fiscal year 2019. Partially offsetting this decrease were favorable resolutions of tax matters in the first nine months of the prior fiscal year that did not repeat in the first nine months of the current fiscal year, an increase in the U.S. federal corporate income tax on estimated current year foreign net earnings in the first quarternine months of lastfiscal year were greater than2019, and the loss of the domestic production activities deduction in the first nine months of fiscal year 2019.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitation may result in changes to tax expense. Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes payable on these netinclude fiscal years 2017 and thereafter. In fiscal year 2018, Woodward concluded its U.S. federal income tax examinations through fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2014 and thereafter. Woodward closed various audits in foreign earnings.    

jurisdictions in the second and third quarters of fiscal year 2019. As a result, of the Tax Act, we have calculated  a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and we expect the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.  Overall, we anticipate the decreaseremaining open to examination in the U.S. federal statutory rate resulting from the enactment of the Tax Act will have favorable impact on our future U.S. tax expensesignificant foreign jurisdictions include 2016 and operating cash flows. thereafter.

56

Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial

31


Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions.  The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined.  Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense.

Segment Results

The following table presents sales by segment:

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Net sales:

Aerospace

$

498,775 

66.3

%

$

404,612 

68.8 

%

$

1,374,616 

63.5 

%

$

1,096,860 

68.3 

%

Industrial

253,230 

33.7

183,505 

31.2 

789,044 

36.5 

509,654 

31.7 

Consolidated net sales

$

752,005 

100.0 

%

$

588,117 

100.0 

%

$

2,163,660 

100.0 

%

$

1,606,514 

100.0 

%



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended December 31,



 

2017

 

2016

Net sales:

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

305,905 

 

65.1 

%

 

$

266,680 

 

60.2 

%

Industrial

 

 

164,243 

 

34.9 

 

 

 

176,214 

 

39.8 

 

Consolidated net sales

 

$

470,148 

 

100.0 

%

 

$

442,894 

 

100.0 

%

The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Aerospace

$

103,238 

$

83,887 

$

277,814 

$

203,784 

Industrial

26,240 

10,943 

82,537 

41,411 

Nonsegment expenses

(26,714)

(30,699)

(83,211)

(78,069)

Interest expense, net

(10,450)

(9,714)

(33,143)

(26,575)

Consolidated earnings before income taxes

92,314 

54,417 

243,997 

140,551 

Income tax expense

(26,207)

(5,300)

(51,191)

(34,685)

Consolidated net earnings

$

66,107 

$

49,117 

$

192,806 

$

105,866 



 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



2017

 

2016

Aerospace

$

43,553 

 

$

46,877 

Industrial

 

19,344 

 

 

17,998 

Nonsegment expenses

 

(19,023)

 

 

(11,381)

Interest expense, net

 

(6,387)

 

 

(6,435)

Consolidated earnings before income taxes

 

37,487 

 

 

47,059 

Income tax expense

 

(19,227)

 

 

(511)

Consolidated net earnings

$

18,260 

 

$

46,548 

The following table presents segment earnings by segment as a percent of segment net sales:

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Aerospace

20.7%

20.7%

20.2%

18.6%

Industrial

10.4%

6.0%

10.5%

8.1%



 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



 

2017

 

 

2016

Aerospace

 

14.2% 

 

 

17.6% 

Industrial

 

11.8% 

 

 

10.2% 

Aerospace

Aerospace segment net sales increased by $94,163, or 23.3% to $498,775 for the third quarter of fiscal year 2019, compared to $404,612 for the third quarter of fiscal year 2018. Aerospace segment net sales were $305,905increased by $277,756, or 25.3%, to $1,374,616 for the first quarternine months of fiscal year 2018,  up 14.7%2019, compared to $266,680$1,096,860 for the first quartersame period of fiscal year 2017.  2018. Aerospace segment net sales for the third quarter and first nine months of fiscal year 2019 include additional net sales of $50,560 and $103,969, respectively, recognized under ASC 606 that would not have been recognized under the previous guidance. The remaining increase in segment net sales for the third quarter and first nine months of fiscal year 2019, as compared to the same periods of fiscal year 2018, was driven by continued strength across commercial OEM as a result of continued momentum in next generation aircraft production, and defense OEM and aftermarket programs as a result of higher military spending.

Commercial OEM sales increased in the third quarter and first nine months of fiscal year 2019 as compared to the same periods of fiscal year 2018, driven by production of next generation narrowbody commercial aircraft on which we have increased content. Commercial aftermarket sales remained healthy in the third quarter of fiscal year 2018 as compared to2019 and were higher in the first quarternine months of fiscal year 2017 was driven primarily by increased commercial OEM and aftermarket sales and increased defense OEM sales in the first quarter of fiscal year 2018.  Defense aftermarket sales were down in the first quarter of fiscal year 20182019 as compared to the same period of fiscal year 2017.  

Commercial OEM sales were up for the first quarter of fiscal year 2018 as compared to the first quartera result of fiscal year 2017.  The strong commercial OEM sales in the quarter benefitted from the accelerating deliveriesincreased utilization of certain key next generation aircraft on which we have increased content, as well as some improvement in business jets as compared to a weak first quarter of fiscal year 2017.

Commercial aftermarket sales increased significantly in the first quarter of fiscal year 2018 as compared to the first quarter of fiscal year 2017, benefitting from bothexisting fleets and the initial provisioning for new platforms platforms. As anticipated, initial provisioning was lower due to the grounding of the Boeing 737MAXand increased utilization of existing fleets. compared to a very strong third quarter in the prior year.

U.S. government funds continue to be prioritizedfunding for defense platforms on which we have content.content remains strong. Defense OEM sales increased in the third quarter and first quarternine months of fiscal year 20182019 compared to the first quartersame periods of fiscal year 2017,2018, driven primarily by continued strong demand for smart weapons, as well as growing international demand for various other military programs.

32


Defense aftermarket sales decreased inremained strong through the first quarternine months of fiscal year 2018 as compared to2019, with a significant increase in defense aftermarket sales in the first quarter of fiscal year 2017, reflectingthird quarter. We expect some ongoing variability in defense aftermarket sales due to the timing of continued maintenance needs and upgrade programs.

Aerospace segment earnings decreasedincreased by $3,324,$19,351, or 7.1%23.1%, to $43,553$103,238 for the firstthird quarter of fiscal year 2018,2019, compared to $46,877$83,887 for the firstthird quarter of fiscal year 2017.  The net decrease in 2018. Aerospace segment earnings increased by $74,030, or 36.3%, to $277,814 for the first nine months of fiscal year 2019, compared to $203,784 for the first nine months of fiscal year 2018. Aerospace segment earnings for the third quarter and first quarternine months of fiscal year 2018 was due to2019 include an increase in segment

57


earnings of $5,877 and $13,306, respectively, as a result of revenue recognized under ASC 606 that would not have been recognized under the following:

Three-Month

Period

Earnings for the period ended December 31, 2016

$

46,877 

Sales volume

18,207 

Price, sales mix and productivity

(4,952)

Production capacity expansion costs

(5,138)

Increasesprevious guidance. Fluctuations in research and development expenses

(5,876)

Other, net 

(5,565)

Earnings for the period ended December 31, 2017

$

43,553 

Aerospace segment earnings as a percentage of additional revenue recognized under ASC 606 are a result of gross margin differences associated with the timing of sales under ASC 606 compared to those under the previous guidance.

The net increase in Aerospace segment earnings for the third quarter and first nine months of fiscal year 2019 was due to the following:

Three-Month

Nine-Month

Period

Period

Earnings for the period ended June 30, 2018

$

83,887 

$

203,784 

Sales volume

34,301 

103,595 

Price, sales mix and productivity

279 

9,157 

Production capacity expansion costs

(4,479)

(11,285)

Other, net 

(10,750)

(27,437)

Earnings for the period ended June 30, 2019

$

103,238 

$

277,814 

Aerospace segment earnings as a percentage of segment net sales were 14.2%20.7% for both the third quarter of fiscal year 2019 and fiscal year 2018. Aerospace segment earnings as a percentage of segment net sales were 20.2% for the first nine months of fiscal year 2019, compared to 18.6% for the first nine months of fiscal year 2018. Excluding the impact of the change in accounting following the adoption of ASC 606, Aerospace segment earnings as a percent of net sales were 21.7% for the third quarter and 20.8% for the first nine months of fiscal year 2019. Aerospace segment earnings in both the third quarter and first nine months of fiscal year 2019 benefitted from higher sales volume and, in the first nine months of fiscal year 2019, a favorable product sales mix. Partially offsetting these in both the third quarter and first nine months of fiscal year 2019 were higher manufacturing costs related to increased capacity expansion costs to support higher production levels, and other costs primarily including an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year.

Industrial

Industrial segment net sales increased by $69,725, or 38.0%, to $253,230 for the third quarter of fiscal year 2019, compared to $183,505 for the third quarter of fiscal year 2018. Industrial segment net sales increased by $279,390 or 54.8%, to $789,044 for the first nine months of fiscal year 2019, compared to $509,654 for the same period of fiscal year 2018. Foreign currency exchange rates had an unfavorable impact on segment net sales of $6,227 and $18,951 for the third quarter and first nine months of fiscal year 2019, respectively. Organic Industrial segment net salesfor the third quarter of fiscal year 2019, which excludes $78,517 of net sales attributable to Woodward L’Orange, were $174,713, an increase of 10.1% compared to organic Industrial segment net sales of $158,627 for the third quarter of fiscal year 2018. Organic Industrial net sales for the third quarter of fiscal year 2018 comparedexcludes one month of net sales attributable to 17.6%Woodward L’Orange in the amount of $24,878. On a constant currency basis, organic Industrial segment net sales would have increased approximately 14.1% for the firstthird quarter of fiscal year 2017.  Aerospace segment earnings benefitted from higher sales volume which was partially offset by unfavorable product sales mix and higher production capacity expansion costs2019 compared to support new program awards.   Aerospace segment earnings were also negatively impacted by increased investment in research and development for new program awards and opportunities being pursued.   

Industrial

the same quarter of the prior fiscal year. The adoption of ASC 606 did not have a significant impact on the organic Industrial segment net sales decreased by 6.8% to $164,243 recognized for the third quarter of fiscal year 2019. Organic Industrial segment net salesfor the first nine months of fiscal year 2019, which exclude $254,183 of net sales attributable to Woodward L’Orange, were $534,861, an increase of 10.3% compared to organic Industrial segment net sales of $484,776 for the first nine months of fiscal year 2018.Organic Industrial net sales for the third quarter of fiscal year 2018 comparedexcludes one month of net sales attributable to $176,214Woodward L’Orange in the amount of $24,878. On a constant currency basis, organic Industrial segment net sales would have increased approximately 14.2% for the first quarternine months of fiscal year 20172019 compared to the first nine months of the prior fiscal year. Organic Industrial segment net sales for the first nine months of fiscal year 2019 include additional net sales of $1,207 as a result of revenue recognized under ASC 606 that would not have been recognized under the previous guidance.

The increase in organic Industrial segment net sales in the third quarter and first nine months of fiscal year 2019 was primarily due primarily to declines in industrial gas turbineincreased reciprocating engine sales and renewables sales.  The decline in industrial gas turbine sales, was the result of increased efficiency leading to lower overall demand for electricity, the increased utilization of renewable power sources, and excess inventorypartially offset by continuing declines in the channel.  The sales decline in our renewables business was due to the short-term unfavorable impact of platform transitions by some of our customers.sales. Sales of fuel systems for CNGcompressed natural gas (“CNG”) trucks in Asia increasedcontinues to drive the increase in our engine business. The recent transition to China 6 regulations led to strong demand for China 5-compliant natural gas trucks leading up to the implementation. As a result, we expect some variability in the first quarterdemand for natural gas trucks in China as the market absorbs the large pre-buy activities of fiscal year 2018China 5-compliant natural gas trucks and as comparedthe market transitions to the first quarter of fiscal year 2017next generation China 6-complaint natural gas trucks. We continue to expect the market demand for natural gas trucks to remain favorable as the Chinese government continues to encourage natural gas usage.  In addition,usage under its initiative on air quality improvement. The industrial gas turbine business has remained stable with some year-over-year and sequential quarter sales of reciprocating engines used in both power generation and oil andgrowth. Industrial gas applications were upturbine sales in the third quarter and first nine months of fiscal year 2019 continues to benefit from the

58


depletion of inventory levels in the market and increased Woodward content on certain newer industrial gas turbines. Woodward expects modest year-over-year and sequential industrial gas turbine sales growth to continue into the fourth quarter of fiscal year 2019.

Our renewables business has been unfavorably impacted by both platform transitions by some of our customers to wind turbines with less Woodward content and the shift from government subsidies to auction-based schemes, which have driven down market pricing and intensified competition.

On April 9, 2019, Senvion, a German wind turbine manufacturer and a significant customer of Woodward’s renewables business, announced that it filed for self-administration insolvency proceedings and declared it would be exploring options for the sale or partial liquidation of the company. In parallel, Senvion announced that it has sought financing to secure the continuation of its operations, which it announced may allow the company to successfully exit the insolvency process. On April 17, 2019, Senvion announced that it signed a €100,000 bulk loan agreement with its lenders and major bondholders to enable the company to continue its business activities. Since signing the €100,000 bulk loan agreement, Senvion has entered into service contract extensions and has continued commercial operations. On July 30, 2019, Senvion announced that it has reached an agreement with its lenders which gives financial support for the continuation of its business until the end of August and potentially for a period thereafter if ongoing talks with lenders can be concluded successfully. Woodward will continue to analyze any financial and commercial impact of the Senvion insolvency proceedings, including any adverse effect the proceedings may have on its financial results. Although management believes it would not be material to Woodward as a whole, the impact of the potential loss of this customer would be significant to Woodward’s renewables business.

Industrial segment earnings increased by $15,297, or 139.8%, to $26,240 for the third quarter of fiscal year 2019, compared to $10,943 for the third quarter of fiscal year 2018. Segment earnings increased by $41,126, or 99.3%, to $82,537 for the first nine months of fiscal year 2019, compared to $41,411 for the same period of fiscal year 2018. Adjusted Industrial segment earnings, which exclude certain purchase accounting impacts related to the L’Orange Acquisition, were $28,844for the third quarter of fiscal year 2019, an increase of 49.9% compared to the third quarter of fiscal year 2018, asand $103,637 for the first nine months of fiscal year 2019, an increase of 108.5% compared to the same period of the prior fiscal year.

year 2018. Industrial segment earnings increased by $1,346, or 7.5%, to $19,344 for the third quarter and first quarternine months of fiscal year 2018, compared to $17,998 2019 include an increase in segment earnings of $2,780 and $2,037, respectively, as a result of the adoption of ASC 606 that would not have been recognized under the previous guidance. The adoption of ASC 606 did not have a significant impact on adjusted Industrial segment earnings for the third quarter or first quarternine months of fiscal year 2017.  2019.Fluctuations in Industrial segment earnings and adjusted Industrial segment earnings as a percentage of additional revenue recognized under ASC 606 are a result of gross margin differences associated with the timing of sales under ASC 606 compared to those under the previous guidance.

The net increase in Industrial segment earnings for the third quarter and first quarternine months of fiscal year 20182019 was due to the following:

Three-Month

Period

Earnings for the period ended December 31, 2016

$

17,998 

Sales volume

(7,319)

Price, sales mix and productivity

166 

Savings from cost reduction initiatives

3,765 

Effects of changes in foreign currency rates

754 

Other, net 

3,980 

Earnings for the period ended December 31, 2017

$

19,344 

Three-Month

Nine-Month

Period

Period

Earnings for the period ended June 30, 2018

$

10,943 

$

41,411 

Sales volume

11,025 

32,732 

Price, sales mix and productivity

(7,136)

(8,531)

Impact of L'Orange Acquisition

12,663 

35,162 

Effects of changes in foreign currency rates

(1,630)

(3,774)

Other, net 

375 

(14,463)

Earnings for the period ended June 30, 2019

$

26,240 

$

82,537 

Industrial segment earnings as a percentage of segment net sales were 11.8%10.4% for the third quarter and 10.5% for the first nine months of fiscal year 2019, compared to 6.0% for the third quarter and 8.1% for the first nine months of fiscal year 2018. Excluding the impact of the change in accounting following the adoption of ASC 606, Industrial segment earnings as a percent of net sales were 9.3% and 10.2% for the third quarter and first nine months of fiscal year 2019, respectively. Adjusted Industrial segment earnings as a percentage of segment net sales were 11.4% for the third quarter and 13.1% for the first nine months of fiscal year 2019. Excluding the impact of the change in accounting following the adoption of ASC 606, adjusted Industrial segment earnings as a percent of segment net sales were 11.2% and 13.2% for the third quarter and first nine months of fiscal year 2019, respectively. The increase in Industrial segment earnings in the third quarter and first nine months of fiscal year 2019 was primarily due to earnings attributable to Woodward L’Orange and higher organic sales volume, partially offset by unfavorable sales mix and higher other costs primarily including an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year.

59


Nonsegment expenses

Nonsegment expenses decreased to $26,714 for the third quarter of fiscal year 2019, compared to $30,699 for the third quarter of fiscal year 2018. Included in nonsegment expenses for the third quarter of fiscal year 2019 were charges in the amount of $7,035 related to the relocation of our Duarte, California operations to our newly renovated Drake campus in Fort Collins, Colorado (“Duarte move related costs”). Included in nonsegment expenses for the third quarter of fiscal year 2018 comparedwere certain special charges related to 10.2% for the first quarteracquisition of fiscal year 2017.Woodward L’Orange (“L’Orange Acquisition Related Charges”), as well as Duarte move related costs of $2,057. The increaseL’Orange Acquisition Related Charges recognized in segment earnings for the firstthird quarter of fiscal year 2018 was largely driven by savingsincluded (i) merger and acquisition transaction and integration costs, (ii) costs associated with an at-the-money-forward option (the “Forward Option”), (iii) warranty and indemnity insurance costs associated with the L’Orange Acquisition, and (iv) German real estate transfer tax costs associated with the L’Orange Acquisition. Excluding these charges from priorboth 2019 and 2018, nonsegment expenses increased in the third quarter of fiscal year cost reduction initiatives.

Nonsegment expenses

Nonsegment expenses increased2019 compared to $19,023 for the firstthird quarter of fiscal year 2018 comparedprimarily due to $11,381an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year, as well as an increase in certain expenses to support ongoing company growth.

Nonsegment expenses increased to $83,211 for the first quarternine months of fiscal year 2017.  As a percent of sales, nonsegment expenses increased2019, compared to 4.0% of net sales$78,069 for the first quarternine months of fiscal year 2018. Included in nonsegment expenses for the first nine months of fiscal year 2019 were Duarte move related costs of $23,159. In addition to L’Orange Acquisition Related Charges, included in nonsegment expenses for the first nine months of fiscal year 2018 compared to 2.6%were Duarte move related costs of net sales for$2,301 and restructuring charges of $17,013. Excluding these charges from both 2019 and 2018, nonsegment expenses increased in the first quarternine months of fiscal year 2017.  The2019 compared to the same period in fiscal year 2018 primarily due an increase in nonsegment expensesvariable compensation related to the strong financial performance in the first quarter of fiscal year 2018 as compared to the first quarter of fiscal year 2017 is due to the recognition of the

33


majority of our annual stock-based compensation expense in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarternine months of the fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have satisfied 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 and borrowings under our credit facilities. Historically, we have also issued debt to supplement our cash needs, or repay our other indebtedness.indebtedness, or finance our acquisitions. We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs, including capital expansion funding for the foreseeable future. The adoption of ASC 606 does not impact cash flow from operations nor free cash flow.

Our aggregate cash and cash equivalents were $85,779$63,302 at December 31, 2017June 30, 2019 and 87,552$83,594 at September 30, 2017,2018, and our working capital was $626,122$655,437 at December 31, 2017June 30, 2019 and $593,955$523,619 at September 30, 2017.2018. Of the $85,779 of cash and cash equivalents held at December 31, 2017, $82,024June 30, 2019, $59,391 was held by our foreign locations. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then 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 U.S. 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 impractical to determine the income tax liability that might be incurred if these funds were to be repatriated. The additional uncertainty associated with the Tax Act increases the impracticality of determining this income tax liability.

We do not believe the Transitionone-time repatriation tax on deferred foreign income resulting from the Tax Act, which is expected to be paid over andan eight year period beginningthat began in January 2019, will have a significant impact on our cash flows in any individual fiscal year.

Consistent with common business practice in China, our Chinese subsidiary acceptssubsidiaries accept bankers’ acceptance notes from Chinese customers, in settlement of certain customer accounts receivable. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft. The issuing financial institution is the obligor, not our customers. Upon our acceptance of a bankers’ acceptance note from a customer, such customer has no further obligation to pay us for the related accounts receivable balance. We had bankers’ acceptance notes of $59,798$86,059 at December 31, 2017June 30, 2019 and $38,243$23,191 at September 30, 20172018 recorded as non-customer accounts receivable onin our condensed consolidated balance sheets.  The increase in the amount of bankers’ acceptance notes is due to the higher sales of natural gas truck and bus systems in China.

60


Condensed Consolidated Balance Sheets. We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.

On June 19, 2019, we amended our revolving credit agreement to, among other things, extend the termination date of the revolving loan commitments of the lenders thereunder from April 28, 2020 to June 19, 2024. Our revolving credit facility, matures in April 2020 andas amended, provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,200,000,$1,500,000, subject to lenders’ participation. We can borrow against our $1,000,000 revolving credit facility as long as we are in compliance with all of our debt covenants. Borrowings under the revolving credit facility can be made in U.S. dollars or in foreign currencies other than the U.S. dollar provided that the U.S. dollar equivalent of any foreign currency borrowings and U.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility. 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 common stock, payments of dividends, acquisitions, and facilitiesfacility expansions.

In addition to our revolving credit facility, 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 reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our $1,000,000 revolving credit facility and our other credit facilities, see Note 13,  14, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.

At December 31, 2017,June 30, 2019, we had total outstanding debt of $649,639 $1,191,147 consisting of amounts borrowed under our revolving credit facility and various series of unsecured notes due between 20182020 and 2031, with2033, and amounts borrowed under our revolving credit facility. At June 30, 2019, we had additional borrowing availability of $922,377$627,203 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,516$7,593 under various foreign credit facilities. AsOn October 1, 2018, Woodward paid the entire principal balance of December 31, 2017,$100,000 on the $100,000 in debt related to our Series D Notes which mature and are payable in October 2018, has been classified as long-term basedusing proceeds from borrowings under its revolving credit facility. On April 3, 2019, we paid the entire principal balance of $43,000 on our intent and ability to refinance this debt8.24% unsecured Series F notes using cash proceeds from borrowings under our existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months.   For further discussion of our notes, see Note 13,  Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q. facility.

34


At December 31, 2017,June 30, 2019, we had $66,300$361,852 of borrowings outstanding under our revolving credit facility, all$180,000 of which was classified as short-term.short-term borrowings based on our intent and ability to pay this amount in the next twelve months. Of these borrowings, as of June 30, 2019, $344,800 is denominated in U.S. dollars and €15,000 is denominated in Euro. Revolving credit facility and short-term borrowing activity during the three-monthsnine-months ended December 31, 2017June 30, 2019 were as follows:

Maximum daily balance during the period

$

194,950 

449,802 

Average daily balance during the period

$

163,406 

366,630 

Weighted average interest rate on average daily balance

2.29% 

3.61%

We believe we were in compliance with all our debt covenants as of December 31, 2017.June 30, 2019. See Note 12,  13, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our most recent Form 10-K, for more information about our covenants.

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 common stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash.

In fiscal year 2018, we entered into the L’Orange Agreement. Pursuant to the L’Orange Agreement, we agreed to acquire all of the outstanding shares of stock of L’Orange. We completed the acquisition of L’Orange on June 1, 2018, for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000. The cash consideration was financed through the use of cash on hand, the issuance of senior unsecured notes and $167,420 borrowed under our revolving credit facility. In connection with these borrowings, we entered into cross currency swap transactions, which effectively lowered the interest rate on each tranche of the senior unsecured notes, and the borrowings under our revolving credit agreement (see Note 8, Derivative instruments and hedging activities in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q for more information).

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.

In the first quarter of fiscal year 2017, our board of directors terminated the Company’sour prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-yearthree year period that will end in November 2019 (the “2017

61


Authorization”). In the three-months ended December 31, 2016,first nine months of fiscal year 2019, we purchased 350repurchased 1,102 shares of our common stock for $24,004,$110,311 under the 2017 Authorization pursuant to a 10b5-1 plan. We repurchasedpurchased no stock in the three-months ended December 31, 2017.first nine months of fiscal year 2018.

For our Aerospace segment, we have been purchasing production equipment for our second campus in the greater-Rockford, Illinois area and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes. The second campus completed in 2015, was built to support the expected growth in our Aerospace segment over the next ten years and beyond, as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.

In the third quarter of fiscal year 2018, we announced our decision to relocate our Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado. The carrying value of the assets at the Duarte facility in California was $10,738 as of June 30, 2019, of which we have identified assets held for sale with a carrying value of $7,848. The assets held for sale relate to the land, building and building improvements, and other assets at the Duarte facility. Based on current market conditions, we expect to record a gain on the eventual sale of these assets. We have identified approximately $377 that is planned to be disposed of as a result of the relocation.

We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable.

Cash Flows



 

 

 

 

 



Three-Months Ended



December 31,



2017

 

2016

Net cash (used in) provided by operating activities

$

(2,533)

 

$

52,351 

Net cash used in investing activities

 

(29,109)

 

 

(16,618)

Net cash provided by (used in) financing activities

 

27,327 

 

 

(22,192)

Effect of exchange rate changes on cash and cash equivalents

 

2,542 

 

 

(13,746)

Net change in cash and cash equivalents

 

(1,773)

 

 

(205)

Cash and cash equivalents at beginning of year

 

87,552 

 

 

81,090 

Cash and cash equivalents at end of period

$

85,779 

 

$

80,885 

Nine-Months Ended June 30,

2019

2018

Net cash provided by operating activities

$

219,202 

$

162,083 

Net cash used in investing activities

(79,826)

(851,307)

Net cash (used in) provided by financing activities

(159,008)

721,194 

Effect of exchange rate changes on cash and cash equivalents

(660)

(5,123)

Net change in cash and cash equivalents

(20,292)

26,847 

Cash and cash equivalents, including restricted cash, at beginning of year

83,594 

87,552 

Cash and cash equivalents, at end of period

$

63,302 

$

114,399 

Net cash flows used inprovided by operating activities for the first quarternine months of fiscal year 20182019 was $2,533,$219,202, compared to $162,083 for the same period of fiscal year 2018. The increase in net cash provided by operating activities in the first nine months of fiscal year 2019 compared to the first nine months of the prior fiscal year is primarily attributable to increased earnings and the timing of certain cash payments for accounts payable in the first nine months of fiscal year 2019, partially offset by the timing of cash receipts from higher sales in the period and increased investment in inventories to support an increase in sales. In addition to cash flows from net earnings in the first nine months of fiscal year 2019, increased accounts payable and accrued liabilities provided $32,104 in cash flow, while increased accounts receivable and inventory used cash of $25,582 and $93,681, respectively, and income taxes used cash of $7,096. Depreciation and amortization in the first nine months of fiscal year 2019 was $110,837. Increases in both current unbilled receivables (contract assets) and contract liabilities had an insignificant net impact. Although the balance of current unbilled receivables (contract assets) and contract liabilities is expected to remain variable, the adoption of ASC 606 has no net impact on our net cash flows provided by operating activities of $52,351 in the first quarter of fiscal year 2017.  The change in cash flows from operating activities is primarily attributable to a decrease in net earnings in the first quarter of fiscal year 2018 compared to the prior fiscal year and working capital changes which had an increase in cash use in the first quarter of 2018 due mainly to increased payments of accounts payable and accrued liabilities compared to the first quarter of last year.activities.

35


Net cash flows used in investing activities for the first quarternine months of fiscal year 20182019 was $29,109,$79,826, compared to $16,618$851,307 in the first quarternine months of fiscal year 2017.2018. The increasedecrease in cash used in investing activities in the first quarternine months of fiscal year 20182019 compared to the first quarternine months of the prior fiscal year is primarily due to increasedcash used for the acquisition of L’Orange on June 1, 2018 and a decrease in payments for capital expenditures.  Payments for property plant and equipment, increasedpartially offset by $7,392 from $21,058an increase in the first quarterpayments for purchases of fiscal year 2017 to $28,450 in the first quarter of this year.  In addition, the first quarter of fiscal year 2018 had lower cash proceeds from the sale of assets compared to the first quarter of fiscal year 2017.short-term investments.

Net cash flows provided by financing activities for the first quarter of fiscal year 2018 was $27,327, compared to cash flows used in financing activities for the first nine months of $22,192fiscal year 2019 was $159,008, compared to net cash flows provided of $721,194 in the first quarternine months of fiscal year 2017.  During2018. In the first quarternine months of fiscal year 2018,2019, we had net debt borrowings of $33,594 compared to net debt borrowings of $3,748 in the first quarter of fiscal year 2017.  We utilized $24,004 to repurchase 350 repurchased 1,102 shares of our common stock in the first quarter of fiscal year 2017for $110,311 pursuant to a 10b5-1 plan under the 2017 Authorization. We made no stock repurchases in the first quarternine months of fiscal year 2018. Also during the first nine months of fiscal year 2019, we had net debt payments of $51,189 and had cash dividends paid of $28,985. The net cash flows provided by financing activities in the first nine months of fiscal year 2018 is primarily the result of the issuance of an aggregate principal amount of $400,000 of long-term debt in May 2018 and borrowings of $167,420 under our revolving credit facility, both of which were used primarily to finance the acquisition of L’Orange. Also during the first nine months of fiscal year 2018, we had net

62


debt borrowings unrelated to the acquisition of L’Orange in the amount of $178,746, partially offset by cash dividends paid of $25,206 and payments of $5,543 for the settlement of the Forward Option.

Contractual Obligations

We have various contractual obligations, including obligations related to long-term debt, operating and capital leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K. ThereOther than the amended revolving credit agreement discussed above, there have been no material changes to our various contractual obligations during the three-months ended December 31, 2017.first nine months of fiscal year 2019.

Non-U.S. GAAP Financial Measures

Organic net sales, organic Industrial segment net sales, constant currency organic Industrial segment net sales, adjusted net earnings, adjusted earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and free cash flow are financial measures not prepared and presented in accordance with U.S. GAAP. However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.

Organic net sales and organic Industrial net sales

The Company presents certain sales measures excluding Woodward L’Orange net sales, which it refers to as “organic,” to show the changes to Woodward’s historical business. Management believes this improves comparability to the Company’s performance prior to the L’Orange Acquisition, which occurred in June 2018.

Constant currency organic Industrial segment net sales

The Company presents certain sales measures excluding the impact of currency exchange rate fluctuations, which is refers to as being presented on a “constant currency basis.” The Company calculates sales measures on a constant currency basis by applying the foreign currency exchange rate in effect during the prior year comparative period to the current year sales measure in its local currency. The sales measures, when calculated on a constant currency basis, are intended to supplement our reported operating results and, when considered in conjunction with the corresponding U.S. GAAP measures, facilitate a better understanding of changes in the metrics from period to period and the core operations of the Company.

Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) restructuring charges, (ii) Duarte move related costs, (iii) the purchase accounting impacts related to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible, (iv) the L’Orange Acquisition transaction and integration costs, (v) cost associated with the Forward Option, (vi) warranty and indemnity insurance costs associated with the acquisition of Woodward L’Orange, (vii) German real estate transfer tax costs associated with the acquisition of Woodward L’Orange, and (viii) the transition impacts of the change in U.S. federal tax legislation in December 2017. The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings in evaluating the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period. Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar infrequent or unusual charges.

63


The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, for the three and nine-months ended June 30, 2019 and June 30, 2018 is shown in the tables below.

Three-Months Ended June 30,

2019

2018

Net Earnings

Earnings Per Share

Net Earnings

Earnings Per Share

Net earnings (U.S. GAAP)

$

66,107 

$

1.02 

$

49,117 

$

0.77 

Non-U.S. GAAP adjustments:

Duarte move related costs, net of tax

5,294 

0.08 

1,440 

0.02 

Purchase accounting impact, net of tax1

1,867 

0.03 

5,809 

0.09 

L'Orange Acquisition transaction and integration costs, net of tax

-

-

2,153 

0.03 

Costs associated with the Forward Option, net of tax

-

-

3,880 

0.06 

Warranty and indemnity insurance costs associated with the acquisition of Woodward L'Orange, net of tax

-

-

3,005 

0.05 

German real estate transfer costs associated with the acquisition of Woodward L'Orange, net of tax

-

-

2,370 

0.04 

Non-U.S. GAAP adjustments

7,161 

0.11 

18,657 

0.29 

Impact of December 2017 changes to U.S. tax law

10,588 

0.17 

3,671 

0.06 

Total Non-U.S. GAAP adjustments

17,749 

0.28 

22,328 

0.35 

Adjusted net earnings (Non-U.S. GAAP)

$

83,856 

$

1.30 

$

71,445 

$

1.12 

Nine-Months Ended June 30,

2019

2018

Net Earnings

Earnings Per Share

Net Earnings

Earnings Per Share

Net earnings (U.S. GAAP)

$

192,806 

$

2.99

$

105,866 

$

1.66 

Non-U.S. GAAP adjustments:

Restructuring charges, net of tax

-

-

12,674 

0.20 

Duarte move related costs, net of tax

17,417 

0.27 

1,733 

0.03 

Purchase accounting impact, net of tax1

14,949 

0.23 

5,809 

0.09 

L'Orange Acquisition transaction and integration costs, net of tax

-

-

2,848 

0.04 

Costs associated with the Forward Option, net of tax

-

-

3,880 

0.06 

Warranty and indemnity insurance costs associated with the acquisition of Woodward L'Orange, net of tax

-

-

3,005 

0.05 

German real estate transfer costs associated with the acquisition of Woodward L'Orange, net of tax

-

-

2,370 

0.04 

Sub-total non-U.S. GAAP adjustments

32,366 

0.50 

32,319 

0.51 

Impact of December 2017 changes to U.S. tax law

10,588 

0.18 

18,449 

0.29 

Total non-U.S. GAAP adjustments

42,954 

0.68 

50,768 

0.80 

Adjusted net earnings (Non-U.S. GAAP)

$

235,760 

$

3.67 

$

156,634 

$

2.46 

(1)The purchase accounting impact related to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold for the three and nine-months ended June 30, 2018, and the amortization of the Woodward L’Orange backlog intangible, net of tax, for the three and nine-months ended June 30, 2019 and June 30, 2018.

Adjusted Industrial segment earnings is defined by the Company as Industrial segment earnings excluding the purchase accounting impacts related to, as applicable, the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold, and the amortization of the Woodward L’Orange backlog intangible. The Company believes that these purchase accounting impacts are short-term in nature, not related to the ongoing operations of the Industrial segment business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing.

64


The reconciliation of Industrial segment earnings to adjusted Industrial segment earnings for the three and nine-months ended June 30, 2019 is shown in the table below.

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Industrial segment earnings (U.S. GAAP)

$

26,240 

$

10,943 

$

82,537 

$

41,411 

Purchase accounting impacts1

2,604 

8,299 

21,100 

8,299 

Adjusted Industrial segment earnings (Non-U.S. GAAP)

$

28,844 

$

19,242 

$

103,637 

$

49,710 

(1)The purchase accounting impact related to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold for the three and nine-months ended June 30, 2018, and the amortization of the Woodward L’Orange backlog intangible for the three and nine-months ended June 30, 2019 and June 30, 2018.

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, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization.

The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of our operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization. Further, as interest from financing, income taxes, depreciation and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability.

Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) restructuring charges, (ii) Duarte move related costs, (iii) the purchase accounting impacts related to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible, (iv) the Woodward L’Orange acquisition transaction and integration costs, (v) cost associated with the Forward Option, (vi) warranty and indemnity insurance costs associated with the acquisition of Woodward L’Orange, and (vii) German real estate transfer tax costs associated with the acquisition of Woodward L’Orange. As these charges are infrequent or unusual charges that can be variable from period to period and may not fluctuate with operating results, management believes that by removing these charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

EBIT and adjusted EBIT for the three-monthsthree and nine-months ended December 31, 2017June 30, 2019 and December 31, 2016June 30, 2018 were as follows:

Three-Months Ended June 30,

Nine-Months Ended June 30,

2019

2018

2019

2018

Net earnings (U.S. GAAP)

$

66,107 

$

49,117 

$

192,806 

$

105,866 

Income tax expense

26,207 

5,300 

51,191 

34,685 

Interest expense

10,798 

10,056 

34,156 

27,751 

Interest income

(348)

(342)

(1,013)

(1,176)

EBIT (Non-U.S. GAAP)

102,764 

64,131 

277,140 

167,126 

Non-U.S. GAAP adjustments:

Restructuring charges

-

-

-

17,013 

Duarte move related costs

7,035 

2,057 

23,159 

2,301 

Purchase accounting impacts1

2,604 

8,299 

21,100 

8,299 

L'Orange Acquisition transaction and integration costs

-

3,077 

-

4,358 

Costs associated with the Forward Option

-

5,543 

-

5,543 

Warranty and indemnity insurance costs associated with the acquisition of Woodward L'Orange

-

4,293 

-

4,293 

German real estate transfer costs associated with the acquisition of Woodward L'Orange

-

3,385 

-

3,385 

Total non-U.S. GAAP adjustments

9,639 

26,654 

44,259 

45,192 

Adjusted EBIT (Non-U.S. GAAP)

$

112,403 

$

90,785 

$

321,399 

$

212,318 

(1)The purchase accounting impacts relate to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold for the three and nine-months ended June 30, 2018, and the amortization of the Woodward L’Orange backlog intangible for the three and nine-months ended June 30, 2019 and June 30, 2018.

65


EBITDA and adjusted EBITDA for the three and nine-months ended June 30, 2019 and June 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended December 31,

Three-Months Ended June 30,

Nine-Months Ended June 30,

 

2017

 

2016

2019

2018

2019

2018

Net earnings (U.S. GAAP)

 

$

18,260 

 

$

46,548 

$

66,107 

$

49,117 

$

192,806 

$

105,866 

Income tax expense

 

 

19,227 

 

 

511 

26,207 

5,300 

51,191 

34,685 

Interest expense

 

 

6,750 

 

 

6,840 

10,798 

10,056 

34,156 

27,751 

Interest income

 

 

(363)

 

 

(405)

(348)

(342)

(1,013)

(1,176)

EBIT (Non-U.S. GAAP)

 

 

43,874 

 

 

53,494 

Amortization of intangible assets

 

 

6,243 

 

 

6,458 

11,305 

11,360 

45,470 

23,861 

Depreciation expense

 

 

14,827 

 

 

12,455 

21,665 

17,695 

62,998 

48,276 

EBITDA (Non-U.S. GAAP)

 

$

64,944 

 

$

72,407 

135,734 

93,186 

385,608 

239,263 

Non-U.S. GAAP adjustments:

Restructuring charges

-

-

-

17,013 

Duarte move related costs

7,035 

2,057 

23,159 

2,301 

Purchase accounting impacts1

-

3,723 

-

3,723 

L'Orange Acquisition transaction and integration costs

-

3,077 

-

4,358 

Costs associated with the Forward Option

-

5,543 

-

5,543 

Warranty and indemnity insurance costs associated with the acquisition of Woodward L'Orange

-

4,293 

-

4,293 

German real estate transfer costs associated with the acquisition of Woodward L'Orange

-

3,385 

-

3,385 

Total non-U.S. GAAP adjustments

7,035 

22,078 

23,159 

40,616 

Adjusted EBITDA (Non-U.S. GAAP)

$

142,769 

$

115,264 

$

408,767 

$

279,879 

(1)The purchase account impacts relate to the revaluation of the Woodward L’Orange inventory recognized in cost of goods sold for the three and nine-months ended June 30, 2018.

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 adjusted net earnings, adjusted net earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of adjusted net earnings, adjusted net earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA 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 by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability

36


to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. The use of this non-U.S. GAAP financial measure is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow does not necessarily represent funds available for discretionary use, and is not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure.

Free cash flow for the three-monthsnine-months ended December 31, 2017June 30, 2019 and December 31, 2016June 30, 2018 were as follows:

Nine-Months Ended June 30,

2019

2018

Net cash provided by operating activities (U.S. GAAP)

$

219,202 

$

162,083 

Payments for property, plant and equipment

(77,905)

(89,597)

Free cash flow (Non-U.S. GAAP)

$

141,297 

$

72,486 

66




 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



2017

 

2016

Net cash (used in) provided by operating activities (U.S. GAAP)

$

(2,533)

 

$

52,351 

Payments for property, plant and equipment

 

(28,450)

 

 

(21,058)

Free cash flow (Non-U.S. GAAP)

$

(30,983)

 

$

31,293 

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 Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K, include the discussion of estimates used for revenue recognition, purchase accounting, inventory valuation, depreciation and amortization, reviews for impairment of goodwill, postretirement benefit obligations, and our provision for income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.

Effective October 1, 2018, Woodward adopted the new revenue recognition guidance of ASC 606. For discussion of the impacts of the adoption of ASC 606 on our revenue recognition policy and related critical accounting estimates, see Note 3, Revenue, to the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q. Other than the changes to our revenue recognition policy and related critical accounting estimates, the critical accounting policies and estimates that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

New Accounting Standards

From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards and Note 3, Revenue, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. 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 Condensed Consolidated Financial Statements upon adoption.

Off-Balance Sheet Arrangements

As of December 31, 2017,June 30, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.

Item 3.Quantitativeitative and QualitativeQualitative 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. We are also exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation. Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and foreign currency exchange rate changes that arise from normal purchasing and normal sales activities.

These market risks are discussed more fully in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our most recent Form 10-K. These market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.

37


Item 4.Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and

67


Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman and Chief Financial Officer and Treasurer)Officer), as appropriate, to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr., evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluations, they concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2017.June 30, 2019 as a result of the material weakness described below.

Furthermore,Changes in Internal Controls

Other than the remediation initiatives described below and the inclusion of Woodward L’Orange internal controls as further described below, there have been no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fiscal quarterperiod covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In connection with management’s assessment of the Company’s internal control over financial reporting during the third quarter of fiscal year 2019, management concluded a material weakness existed in the operating effectiveness of internal controls related to the adoption of and subsequent reporting under ASU 2014-09 “Revenue from Contracts with Customers” (ASC 606), which the Company adopted on October 1, 2018.

Background

In the third quarter of the Company’s fiscal year 2019, management identified immaterial accounting errors in the Company’s Condensed Consolidated Balance Sheet as of October 1, 2018 related to the adoption of ASC 606 under the modified retrospective adoption method, as well as amounts subsequently reported in the Condensed Consolidated Financial Statements for the quarters ended December 31, 2018 and March 31, 2019. As a result, Woodward made an immaterial out-of-period correction during the three-months ended June 30, 2019, as more fully described in Note 3, Revenue, to the Condensed Consolidated Financial Statements as of and for the period ended June 30, 2019.

This error was the result of a deficiency in the Information and Communication and Control Activities components of internal control. Specifically, a control did not operate effectively at certain operational locations within one enterprise resource planning system, including a control activity over the completeness of the underlying information specific to deriving the revenue related accounting entries for the adoption and application of ASC 606. This deficiency was determined to be a material weakness in internal control over financial reporting, as it resulted in a reasonable possibility that a material misstatement of the interim financial statements would not have been prevented or detected on a timely basis.

Management’s Remediation Efforts

Management is actively engaged in the implementation of remediation efforts to address the material weakness. The remediation plan includes: (i) improving the design and implementation of our controls around the application of ASC 606, particularly those areas subject to interpretation or technical application, to include more detailed reviews of underlying data and calculations used to derive the revenue related accounting entries, (ii) enhancing communication between management at various operational locations to emphasize the importance of validation of underlying data and calculations used, and (iii) improving our monitoring of these activities. Management believes the measures described above and others that may be implemented will remediate the material weakness. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the planned remediation measures. Subsequent testing of the operational effectiveness of any modified or new controls will be necessary to validate that the material weakness has been fully remediated.

Inclusion of Woodward L’Orange Internal Controls

Beginning with the third quarter of fiscal year 2019, we included the internal controls of Woodward L’Orange in our assessment of the effectiveness of Woodward’s internal controls over financial reporting. We acquired L’Orange on June 1, 2018 as discussed in Note 5, Business acquisition, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Woodward L’Orange was excluded from Woodward’s annual report on internal control over financial reporting for the fiscal year ended September 30, 2018 in accordance with the general guidance issued by the SEC regarding exclusion of certain acquired businesses. Woodward L’Orange will be included in the assessment of Woodward’s internal controls over financial reporting as of September 30, 2019.

68


PART II – OTHEROTHER INFORMATION

Item 1.LegalLegal Proceedings

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/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, contractual disputes, product warranty claims and alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable.

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

Item

Item 1A.Risk Factors

Investment in our securities involves risk. AnIn addition to the risk factor identified below, an investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K when making investment decisions regarding our securities. TheExcept for the risk factor identified below, the risk factors that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

Company Risks

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, and current and potential stockholders may lose confidence in our financial reporting.

We are required by the United States Securities and Exchange Commission (“SEC”) to establish and maintain adequate internal controls over financial reporting that provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.

In Part I, Item 4 of this Form 10-Q, we reported that a particular control deficiency constituted a material weakness in internal controls over financial reporting. We have implemented controls and processes to ensure the financial information included in this Form 10-Q is complete and accurate, and we are in the process of remediating the control deficiency reported above.

Although we believe that these controls and processes have strengthened our internal controls over financial reporting and address the concern that gave rise to the material weakness reported in this Form 10-Q, we cannot be certain that our revised internal control practices will ensure that we maintain adequate internal controls over our financial reporting in future periods. Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and NASDAQ, we could face severe consequences from those authorities. In either case, there could result a material adverse effect on our business. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

3869


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)

 

Total Number of Shares Purchased

 

Weighted Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)

October 1, 2017 through October 31, 2017 (2)

 

258 

 

$

77.33 

 

 -

 

$

428,803 

November 1, 2017 through November 30, 2017 (2)

 

1,805 

 

 

77.35 

 

 -

 

 

428,803 

December 1, 2017 through December 31, 2017 (2)

 

11,520 

 

 

76.54 

 

 -

 

 

428,803 

Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)

Total Number of Shares Purchased

Weighted Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)

April 1, 2019 through April 30, 2019

281,432 

$

96.14 

281,432 

$

358,492 

May 1, 2019 through May 31, 2019 (2)

365,937 

109.99 

363,642 

318,492 

June 1, 2019 through June 30, 2019 (2)

298 

113.16 

-

318,492 

(1)

(1)

In November 2016, our board of directors approved a stock repurchase program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-yearthree year period that will end in November 2019.

(2)

(2)

Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 2582,295 shares of common stock were acquired in October 2017, 1,505 shares of common stock were acquired in November 2017 and 11,520 shares of common stock were acquired in December 2017, eachMay 2019 on the open market related to the deferral of compensation by certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred compensation in Woodward common stock. In addition, 300298 shares of common stock were acquired in November 2017June 2019 on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.


70


Item 6.Exhibits

Exhibits filed as part of this Report are listed in the Exhibit Index.

39


WOODWARD, INC.

EXHIBIT INDEX

Exhibit Number

Description

*

31.110.1

Amended and Restated Credit Agreement dated June 19, 2019, by and among the Company, certain foreign subsidiary borrowers of the Company from time to time parties thereto, the institutions from time to time parties thereto, as lenders, Wells Fargo Bank, National Association, as administrative agent.

*

31.1

Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron

*

31.2

Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.

*

32.1

Section 1350 certifications

*

101.INS

XBRL Instance Document.Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*

101.SCH

XBRL Taxonomy Extension Schema Document

*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Attached as Exhibit 101 to this report are the following materials from Woodward, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017June 30, 2019 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Earnings, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to the Condensed Consolidated Financial Statements.

*

Filed as an exhibit to this Report


71

40


SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

WOODWARD, INC.

Date: January 23, 2018August 9, 2019

/s/ Thomas A. Gendron

Thomas A. Gendron

Chairman of the Board, Chief Executive Officer, and President

(on behalf of the registrant and as the registrant’s Principal Executive Officer)

Date: January 23, 2018August 9, 2019

/s/ Robert F. Weber, Jr.

Robert F. Weber, Jr.

Vice Chairman and Chief Financial Officer

(on behalf of the registrant and Treasurer

(as the registrant’s Principal Financial and Accounting Officer)

4172