UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
T☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20192020
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 each 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 every Interactive Data File required to be submitted 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 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 Filer T☒ Accelerated Filer ¨☐ Non-accelerated Filer ¨☐ Smaller Reporting Company ¨☐
Emerging 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 August 7, 2019, 61,845,8236, 2020, 62,383,699 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.
TABLE OF CONTENTS
Page | ||||
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PART I – FINANCIAL INFORMATION | ||||
| 2 | |||
2 | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
8 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 40 | |
| 40 | |||
| 41 | |||
| 43 | |||
| 49 | |||
Item 3. |
| 58 | ||
Item 4. |
| 58 | ||
PART II – OTHER INFORMATION | ||||
Item 1. |
| 58 | ||
Item 1A. |
| 58 | ||
Item 2. |
| 60 | ||
Item 6. |
| 60 | ||
| 61 |
1
1
Item 1. | Financial Statements |
CONDENSED CONSOLIDATED ST
(In thousands, except per share amounts)
(Unaudited)
Three-Months Ended | Nine-Months Ended | ||||||||||||||||||||||||||
June 30, | June 30, |
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| June 30, |
|
| June 30, |
| ||||||||||||||||||
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||||||
Net sales | $ | 752,005 | $ | 588,117 | $ | 2,163,660 | $ | 1,606,514 |
| $ | 523,826 |
|
| $ | 752,005 |
|
| $ | 1,964,401 |
|
| $ | 2,163,660 |
| |||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
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|
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| |||||||||||
Cost of goods sold | 562,516 | 428,673 | 1,621,531 | 1,178,459 |
|
| 395,511 |
|
|
| 562,516 |
|
|
| 1,447,942 |
|
|
| 1,621,531 |
| |||||||
Selling, general and administrative expenses | 52,980 | 54,868 | 159,764 | 141,082 |
|
| 57,361 |
|
|
| 52,980 |
|
|
| 177,035 |
|
|
| 159,764 |
| |||||||
Research and development costs | 40,661 | 39,470 | 123,359 | 111,425 |
|
| 34,522 |
|
|
| 40,661 |
|
|
| 106,029 |
|
|
| 123,359 |
| |||||||
Restructuring charges | - | - | - | 17,013 | |||||||||||||||||||||||
Impairment of assets sold (Note 10) |
|
| — |
|
|
| — |
|
|
| 37,902 |
|
|
| — |
| |||||||||||
Restructuring charges (Note 16) |
|
| 19,040 |
|
|
| — |
|
|
| 19,040 |
|
|
| — |
| |||||||||||
Gain on cross-currency interest rate swaps, net (Note 8) |
|
| (30,481 | ) |
|
| — |
|
|
| (30,481 | ) |
|
| — |
| |||||||||||
Interest expense | 10,798 | 10,056 | 34,156 | 27,751 |
|
| 8,737 |
|
|
| 10,798 |
|
|
| 26,502 |
|
|
| 34,156 |
| |||||||
Interest income | (348) | (342) | (1,013) | (1,176) |
|
| (377 | ) |
|
| (348 | ) |
|
| (1,340 | ) |
|
| (1,013 | ) | |||||||
Other (income) expense, net (Note 17) | (6,916) | 975 | (18,134) | (8,591) | |||||||||||||||||||||||
Other (income) expense, net (Note 18) |
|
| (5,503 | ) |
|
| (6,916 | ) |
|
| (31,991 | ) |
|
| (18,134 | ) | |||||||||||
Total costs and expenses | 659,691 | 533,700 | 1,919,663 | 1,465,963 |
|
| 478,810 |
|
|
| 659,691 |
|
|
| 1,750,638 |
|
|
| 1,919,663 |
| |||||||
Earnings before income taxes | 92,314 | 54,417 | 243,997 | 140,551 |
|
| 45,016 |
|
|
| 92,314 |
|
|
| 213,763 |
|
|
| 243,997 |
| |||||||
Income tax expense | 26,207 | 5,300 | 51,191 | 34,685 |
|
| 6,551 |
|
|
| 26,207 |
|
|
| 30,607 |
|
|
| 51,191 |
| |||||||
Net earnings | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Earnings per share (Note 4): |
|
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|
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|
|
|
|
|
|
|
|
|
|
| |||||||||||
Basic earnings per share | $ | 1.07 | $ | 0.80 | $ | 3.11 | $ | 1.72 |
| $ | 0.62 |
|
| $ | 1.07 |
|
| $ | 2.95 |
|
| $ | 3.11 |
| |||
Diluted earnings per share | $ | 1.02 | $ | 0.77 | $ | 2.99 | $ | 1.66 |
| $ | 0.61 |
|
| $ | 1.02 |
|
| $ | 2.85 |
|
| $ | 2.99 |
| |||
|
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|
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|
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|
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|
| ||||||||||||
Weighted Average Common Shares Outstanding (Note 4): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Basic | 61,941 | 61,608 | 61,977 | 61,417 |
|
| 62,309 |
|
|
| 61,941 |
|
|
| 62,188 |
|
|
| 61,977 |
| |||||||
Diluted | 64,633 | 63,881 | 64,437 | 63,782 |
|
| 63,427 |
|
|
| 64,633 |
|
|
| 64,273 |
|
|
| 64,437 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
2
WOODWARD, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
(Unaudited)
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net earnings |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 11,067 |
|
|
| 819 |
|
|
| 8,865 |
|
|
| (592 | ) |
Net gain (loss) on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 8) |
|
| (792 | ) |
|
| (598 | ) |
|
| (1,187 | ) |
|
| 976 |
|
Taxes on changes in foreign currency translation adjustments |
|
| (213 | ) |
|
| 324 |
|
|
| (423 | ) |
|
| 427 |
|
Foreign currency translation and transactions adjustments, net of tax |
|
| 10,062 |
|
|
| 545 |
|
|
| 7,255 |
|
|
| 811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on fair value adjustment of derivative instruments (Note 8) |
|
| (26,011 | ) |
|
| (7,305 | ) |
|
| 7,993 |
|
|
| 20,867 |
|
Reclassification of net realized (gain) loss on derivatives to earnings (Note 8) |
|
| (22,649 | ) |
|
| 6,890 |
|
|
| (18,255 | ) |
|
| (11,831 | ) |
Taxes on changes in derivative transactions |
|
| 1,025 |
|
|
| 14 |
|
|
| 253 |
|
|
| (162 | ) |
Derivative adjustments, net of tax |
|
| (47,635 | ) |
|
| (401 | ) |
|
| (10,009 | ) |
|
| 8,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and other postretirement plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost |
|
| 240 |
|
|
| 176 |
|
|
| 721 |
|
|
| 528 |
|
Net loss |
|
| 627 |
|
|
| 238 |
|
|
| 1,886 |
|
|
| 719 |
|
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities |
|
| (101 | ) |
|
| 279 |
|
|
| (378 | ) |
|
| 281 |
|
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes |
|
| (192 | ) |
|
| (203 | ) |
|
| (544 | ) |
|
| (406 | ) |
Pension and other postretirement benefit plan adjustments, net of tax |
|
| 574 |
|
|
| 490 |
|
|
| 1,685 |
|
|
| 1,122 |
|
Total comprehensive earnings |
| $ | 1,466 |
|
| $ | 66,741 |
|
| $ | 182,087 |
|
| $ | 203,613 |
|
Three-Months Ended | Nine-Months Ended | ||||||||||
June 30, | June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Net earnings | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 | |||
Other comprehensive earnings: | |||||||||||
Foreign currency translation adjustments | 819 | (21,864) | (592) | (7,177) | |||||||
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 | 324 | 513 | 427 | 250 | |||||||
Foreign currency translation and transactions adjustments, net of tax | 545 | (18,792) | 811 | (6,379) | |||||||
Unrealized (loss) gain on fair value adjustment of derivative instruments | (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 | (401) | (18,695) | 8,874 | (18,718) | |||||||
Curtailment of postretirement benefit plan arising during the period | - | - | - | 59 | |||||||
Amortization of pension and other postretirement plan: | |||||||||||
Net prior service cost | 176 | 137 | 528 | 413 | |||||||
Net loss | 238 | 248 | 719 | 742 | |||||||
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities | 279 | 843 | 281 | 161 | |||||||
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes | (203) | (349) | (406) | (421) | |||||||
Pension and other postretirement benefit plan adjustments, net of tax | 490 | 879 | 1,122 | 954 | |||||||
Total comprehensive earnings | $ | 66,741 | $ | 12,509 | $ | 203,613 | $ | 81,723 |
See accompanying Notes to Condensed Consolidated Financial Statements
3
WOODWARD, INC.
CONDENSED CONSOLIDATEDCONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
June 30, | September 30, |
| June 30, |
|
| September 30, |
| ||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| ||||||
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 | |||||||||||
Cash and cash equivalents, including restricted cash of $2,880 and $1,500, respectively |
| $ | 101,363 |
|
| $ | 99,073 |
| |||||
Accounts receivable, less allowance for uncollectible amounts of $7,180 and $7,908, respectively |
|
| 537,515 |
|
|
| 591,529 |
| |||||
Inventories | 531,163 | 549,596 |
|
| 505,943 |
|
|
| 516,836 |
| |||
Income taxes receivable | 8,070 | 6,397 |
|
| 34,685 |
|
|
| 8,099 |
| |||
Other current assets | 44,797 | 43,207 |
|
| 57,441 |
|
|
| 55,691 |
| |||
Total current assets | 1,298,109 | 1,114,797 |
|
| 1,236,947 |
|
|
| 1,271,228 |
| |||
Property, plant and equipment, net | 1,063,084 | 1,060,005 |
|
| 1,008,259 |
|
|
| 1,058,775 |
| |||
Goodwill | 807,868 | 813,250 |
|
| 796,372 |
|
|
| 797,853 |
| |||
Intangible assets, net | 641,481 | 700,883 |
|
| 595,158 |
|
|
| 611,992 |
| |||
Deferred income tax assets | 15,336 | 16,570 |
|
| 18,315 |
|
|
| 18,161 |
| |||
Other assets | 189,725 | 85,144 |
|
| 251,618 |
|
|
| 198,517 |
| |||
Total assets | $ | 4,015,603 | $ | 3,790,649 |
| $ | 3,906,669 |
|
| $ | 3,956,526 |
| |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
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| |||||
Current liabilities: |
|
|
|
|
|
|
|
| |||||
Short-term borrowings | $ | 180,000 | $ | 153,635 |
| $ | 98,639 |
|
| $ | 220,000 |
| |
Current portion of long-term debt |
|
| 101,643 |
|
|
| — |
| |||||
Accounts payable | 243,071 | 226,285 |
|
| 160,887 |
|
|
| 240,460 |
| |||
Income taxes payable | 12,816 | 16,745 |
|
| 12,164 |
|
|
| 18,849 |
| |||
Accrued liabilities | 206,785 | 194,513 |
|
| 162,295 |
|
|
| 228,127 |
| |||
Total current liabilities | 642,672 | 591,178 |
|
| 535,628 |
|
|
| 707,436 |
| |||
Long-term debt, less current portion | 1,011,147 | 1,092,397 |
|
| 729,165 |
|
|
| 864,899 |
| |||
Deferred income tax liabilities | 173,289 | 170,915 |
|
| 156,583 |
|
|
| 151,362 |
| |||
Other liabilities | 484,184 | 398,055 |
|
| 575,527 |
|
|
| 506,088 |
| |||
Total liabilities | 2,311,292 | 2,252,545 |
|
| 1,996,903 |
|
|
| 2,229,785 |
| |||
Commitments and contingencies (Note 21) |
|
| |||||||||||
Commitments and contingencies (Note 22) |
|
|
|
|
|
|
|
| |||||
Stockholders' equity: |
|
|
|
|
|
|
|
| |||||
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued | - | - | |||||||||||
Preferred stock, par value $0.003 per share, 10,000 shares authorized, 0 shares issued |
|
| — |
|
|
| — |
| |||||
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued | 106 | 106 |
|
| 106 |
|
|
| 106 |
| |||
Additional paid-in capital | 205,704 | 185,705 |
|
| 233,294 |
|
|
| 207,120 |
| |||
Accumulated other comprehensive losses | (64,180) | (74,942) |
|
| (104,375 | ) |
|
| (103,306 | ) | |||
Deferred compensation | 9,118 | 8,431 |
|
| 9,760 |
|
|
| 9,382 |
| |||
Retained earnings | 2,168,204 | 1,966,643 |
|
| 2,372,733 |
|
|
| 2,224,919 |
| |||
2,318,952 | 2,085,943 |
|
| 2,511,518 |
|
|
| 2,338,221 |
| ||||
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) | |||||||||||
Treasury stock at cost, 10,610 shares and 11,040 shares, respectively |
|
| (591,992 | ) |
|
| (602,098 | ) | |||||
Treasury stock held for deferred compensation, at cost, 211 shares, respectively |
|
| (9,760 | ) |
|
| (9,382 | ) | |||||
Total stockholders' equity | 1,704,311 | 1,538,104 |
|
| 1,909,766 |
|
|
| 1,726,741 |
| |||
Total liabilities and stockholders' equity | $ | 4,015,603 | $ | 3,790,649 |
| $ | 3,906,669 |
|
| $ | 3,956,526 |
| |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
WOODWARD, INC.
CONDENSED CONSOLIDATED STATEMENTS 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 | |
See accompanying Notes to Condensed Consolidated Financial Statements
5
WOODWARD, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS
(In thousands)
(Unaudited)
|
| Nine-Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
| $ | 183,156 |
|
| $ | 192,806 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 97,582 |
|
|
| 108,468 |
|
Impairment of assets sold |
|
| 37,902 |
|
|
| — |
|
Net (gain) loss on sales of assets and businesses |
|
| (11,012 | ) |
|
| 880 |
|
Net (gain) on cross-currency interest rate swaps |
|
| (30,481 | ) |
|
| — |
|
Stock-based compensation |
|
| 20,088 |
|
|
| 15,634 |
|
Deferred income taxes |
|
| (1,756 | ) |
|
| (8,628 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| 63,253 |
|
|
| (31,240 | ) |
Unbilled receivables (contract assets) |
|
| (53,851 | ) |
|
| (52,315 | ) |
Costs to fulfill a contract |
|
| (18,044 | ) |
|
| (13,010 | ) |
Inventories |
|
| (6,402 | ) |
|
| (57,884 | ) |
Accounts payable and accrued liabilities |
|
| (124,231 | ) |
|
| 31,307 |
|
Contract liabilities |
|
| 21,491 |
|
|
| 23,045 |
|
Income taxes |
|
| (33,085 | ) |
|
| (3,862 | ) |
Retirement benefit obligations |
|
| (3,249 | ) |
|
| (2,989 | ) |
Other |
|
| 71,055 |
|
|
| 16,990 |
|
Net cash provided by operating activities |
|
| 212,416 |
|
|
| 219,202 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Payments for purchase of property, plant, and equipment |
|
| (39,072 | ) |
|
| (77,905 | ) |
Proceeds from sale of assets |
|
| 18,844 |
|
|
| 809 |
|
Proceeds from business divestiture |
|
| 10,443 |
|
|
| — |
|
Proceeds from sales of short-term investments |
|
| 12,700 |
|
|
| 10,259 |
|
Payments for purchases of short-term investments |
|
| (13,109 | ) |
|
| (12,989 | ) |
Net cash (used in) investing activities |
|
| (10,194 | ) |
|
| (79,826 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
| (32,587 | ) |
|
| (28,985 | ) |
Proceeds from sales of treasury stock |
|
| 14,790 |
|
|
| 33,715 |
|
Payments for repurchases of common stock |
|
| (13,346 | ) |
|
| (110,311 | ) |
Borrowings on revolving lines of credit and short-term borrowings |
|
| 1,027,342 |
|
|
| 1,286,258 |
|
Payments on revolving lines of credit and short-term borrowings |
|
| (1,191,319 | ) |
|
| (1,194,045 | ) |
Payments of long-term debt and finance lease obligations |
|
| (1,187 | ) |
|
| (143,402 | ) |
Payments for debt financing costs |
|
| — |
|
|
| (2,238 | ) |
Net cash (used in) financing activities |
|
| (196,307 | ) |
|
| (159,008 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (3,625 | ) |
|
| (660 | ) |
Net change in cash and cash equivalents |
|
| 2,290 |
|
|
| (20,292 | ) |
Cash and cash equivalents, including restricted cash, at beginning of year |
|
| 99,073 |
|
|
| 83,594 |
|
Cash and cash equivalents, including restricted cash, at end of period |
| $ | 101,363 |
|
| $ | 63,302 |
|
Number of shares | Stockholders' equity | ||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive (loss) earnings | |||||||||||||||||||||||||||||||||||||||
Common | Treasury | Treasury | Common | Additional | Foreign | Unrealized | Minimum | Total | Deferred compensation | Retained | Treasury | Treasury | Total stockholders' | ||||||||||||||||||||||||||
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 | - | - | - | - | - | - | - | - | - | - | 49,117 | - | - | 49,117 | |||||||||||||||||||||||||
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 | - | 158 | - | - | (2,642) | - | - | - | - | - | - | 6,184 | - | 3,542 | |||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 1,858 | - | - | - | - | - | - | - | - | 1,858 | |||||||||||||||||||||||||
Purchases and transfers of stock by/to deferred compensation plan | - | - | (3) | - | - | - | - | - | - | 174 | - | - | (174) | - | |||||||||||||||||||||||||
Distribution of stock from deferred compensation plan | - | - | 1 | - | - | - | - | - | - | (3) | - | - | 3 | - | |||||||||||||||||||||||||
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
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 April 1, 2019 |
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of April 1, 2020 |
|
| 72,960 |
|
|
| (10,677 | ) |
|
| (216 | ) |
| $ | 106 |
|
| $ | 227,494 |
|
| $ | (56,042 | ) |
| $ | 32,671 |
|
| $ | (44,005 | ) |
| $ | (67,376 | ) |
| $ | 9,963 |
|
| $ | 2,342,340 |
|
| $ | (594,870 | ) |
| $ | (9,963 | ) |
| $ | 1,907,694 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 38,465 |
|
|
| — |
|
|
| — |
|
|
| 38,465 |
|
Other comprehensive earnings (loss), net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,062 |
|
|
| (47,635 | ) |
|
| 574 |
|
|
| (36,999 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (36,999 | ) |
Cash dividends paid ($0.08125 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,062 | ) |
|
| — |
|
|
| — |
|
|
| (5,062 | ) |
Sales of treasury stock |
|
| — |
|
|
| 67 |
|
|
| — |
|
|
| — |
|
|
| (813 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,878 |
|
|
| — |
|
|
| 2,065 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,613 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,613 |
|
Purchases and transfers of stock by/to deferred compensation plan |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| — |
|
|
| (27 | ) |
|
| — |
|
Distribution of stock from deferred compensation plan |
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (230 | ) |
|
| — |
|
|
| — |
|
|
| 230 |
|
|
| — |
|
Business divestitures |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,010 | ) |
|
| — |
|
|
| — |
|
|
| (3,010 | ) |
Balances as of June 30, 2020 |
|
| 72,960 |
|
|
| (10,610 | ) |
|
| (211 | ) |
| $ | 106 |
|
| $ | 233,294 |
|
| $ | (45,980 | ) |
| $ | (14,964 | ) |
| $ | (43,431 | ) |
| $ | (104,375 | ) |
| $ | 9,760 |
|
| $ | 2,372,733 |
|
| $ | (591,992 | ) |
| $ | (9,760 | ) |
| $ | 1,909,766 |
|
Number of shares | Stockholders' equity | ||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive (loss) earnings | |||||||||||||||||||||||||||||||||||||||
Common | Treasury | Treasury | Common | Additional | Foreign | Unrealized | Minimum | Total | Deferred compensation | Retained | Treasury | Treasury | Total stockholders' | ||||||||||||||||||||||||||
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
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, 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45 | ) |
|
| — |
|
|
| — |
|
|
| (45 | ) |
|
| — |
|
|
| 38,745 |
|
|
| — |
|
|
| — |
|
|
| 38,700 |
|
Cumulative effect from adoption of ASU 2016-16 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2019 |
|
| 72,960 |
|
|
| (11,040 | ) |
|
| (211 | ) |
| $ | 106 |
|
| $ | 207,120 |
|
| $ | (53,235 | ) |
| $ | (4,955 | ) |
| $ | (45,116 | ) |
| $ | (103,306 | ) |
| $ | 9,382 |
|
| $ | 2,224,919 |
|
| $ | (602,098 | ) |
| $ | (9,382 | ) |
| $ | 1,726,741 |
|
Cumulative effect from adoption of ASC 842 (Note 5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 255 |
|
|
| — |
|
|
| — |
|
|
| 255 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 183,156 |
|
|
| — |
|
|
| — |
|
|
| 183,156 |
|
Other comprehensive earnings (loss), net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,255 |
|
|
| (10,009 | ) |
|
| 1,685 |
|
|
| (1,069 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,069 | ) |
Cash dividends paid ($0.52375 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (32,587 | ) |
|
| — |
|
|
| — |
|
|
| (32,587 | ) |
Purchases of treasury stock |
|
| — |
|
|
| (124 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,346 | ) |
|
| — |
|
|
| (13,346 | ) |
Sales of treasury stock |
|
| — |
|
|
| 430 |
|
|
| — |
|
|
| — |
|
|
| (3,334 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,124 |
|
|
| — |
|
|
| 14,790 |
|
Common shares issued from treasury stock for benefit plans |
|
| — |
|
|
| 124 |
|
|
| — |
|
|
| — |
|
|
| 9,420 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,328 |
|
|
| — |
|
|
| 14,748 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,088 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,088 |
|
Purchases and transfers of stock by/to deferred compensation plan |
|
| — |
|
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 651 |
|
|
| — |
|
|
| — |
|
|
| (651 | ) |
|
| — |
|
Distribution of stock from deferred compensation plan |
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (273 | ) |
|
| — |
|
|
| — |
|
|
| 273 |
|
|
| — |
|
Business divestitures |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,010 | ) |
|
| — |
|
|
| — |
|
|
| (3,010 | ) |
Balances as of June 30, 2020 |
|
| 72,960 |
|
|
| (10,610 | ) |
|
| (211 | ) |
| $ | 106 |
|
| $ | 233,294 |
|
| $ | (45,980 | ) |
| $ | (14,964 | ) |
| $ | (43,431 | ) |
| $ | (104,375 | ) |
| $ | 9,760 |
|
| $ | 2,372,733 |
|
| $ | (591,992 | ) |
| $ | (9,760 | ) |
| $ | 1,909,766 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
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 June 30, 20192020 and for the three and nine-months ended June 30, 20192020 and June 30, 2018,2019, 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 June 30, 2019,2020, 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 and nine-months ended June 30, 2020 and 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.amounts, unless otherwise noted.
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,amounts; net realizable value of inventories,inventories; variable consideration including customer rebates earned and payable and early payment discounts,discounts; warranty reserves,reserves; useful lives of property and identifiable intangible assets,assets; the evaluation of impairments of property, intangible assets, and goodwill; the provision for income tax and related valuation reserves, the valuation of assets and liabilities acquired in business combinations,reserves; the valuation of derivative instruments,instruments; assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans,plans; the valuation of stock compensation instruments granted to employees, board members and any other eligible recipients, recipients; estimates of incremental borrowing rates used when estimating the present value of future lease payments; assumptions used when including renewal options or non-exercise of termination options in lease terms; estimates of total lifetime sales used in the recognition of revenue of deferred material rights and balance sheet classification of the related contract liability,liability; estimates of total sales contract costs when recognizing revenue under the cost-to-cost method,method; and contingencies. Actual results could vary from Woodward’s estimates.
In March 2020, the September 30, 2018 Condensed Consolidated Balance Sheet, “Accounts receivable”World Health Organization (“WHO”) declared the novel coronavirus ("COVID-19") outbreak a global pandemic. When combined with the various measures enacted by governments and private organizations to contain COVID-19 or slow its spread, the pandemic has increasedadversely impacted global activity and contributed to significant declines and volatility in financial markets. The COVID-19 pandemic could continue to have a material adverse impact on economic and market conditions and trigger an extended period of global economic slowdown. Although the Company has already been impacted by $183the global emergence of the COVID-19 pandemic, the full extent of its impact on the Company’s future business is currently unknown. The rapid development and “Other current assets” has decreased by $183, reflecting the reclassificationfluidity of current unbilled receivables to “Accounts receivable” in order to conformthis situation precludes any prediction as to the current year presentation.ultimate material adverse impact of the COVID-19 pandemic, including impacts to estimates and assumptions used by management for the reported amounts of assets and liabilities. The pandemic presents uncertainty and risk with respect to the Company and its performance and financial results. See Note 16, Accrued liabilities, for specific restructuring actions taken by the Company related to the COVID-19 pandemic.
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 March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The purpose of ASU 2020-04 is to provide optional guidance for a limited time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, in particular, the risk of cessation of the London Interbank Offered Rate (LIBOR), reference rate reform refers to a global initiative to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU 2020-04 for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry subtopic, the amendments in ASU 2020-04 must be applied prospectively for all eligible contract modifications for that topic or industry subtopic.
An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of that interim period and recognized in accordance with the guidance in reference rate reform subtopics 848-30, 848-40, and 848-50 (as applicable). If an entity elects to apply any of the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship and recognized in accordance with the guidance in reference rate reform subtopics 848-30, 848-40, and 848-50 (as applicable).
Woodward is currently assessing the accounting and financial impact of reference rate reform, particularly the impact it may have on its hedging relationships, and will consider applying the optional guidance of ASU 2020-04 accordingly.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020 (fiscal year 2022 for Woodward). Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis to all periods presented. Early adoption is permitted. Woodward is currently assessing the impact of the adoption of the new guidance. Woodward expects to adopt the new guidance under ASU 2019-12 in fiscal year 2022.
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU 2018-14 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 effective 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 all periods presented. Early adoption is permitted. Woodward expects to adopt the new and modified disclosures requirements of this new guidance in fiscal year 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 amendments 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 and has not yet elected the method of adoption it will apply. Woodward expects to 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 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 are 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 must 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. Woodward adopted 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 cost of goods sold and selling, 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 the 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 the Condensed Consolidated Statement of 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. 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. 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
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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.
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 expects to adopt ASU 2016-13 in fiscal year 2021. Woodward does not expectis currently assessing the impact of 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.municipalities and unbilled receivables.
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.instruments. 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 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 accumulated other comprehensive income (“OCI”) 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. Woodward adopted ASU 2018-02 on October 1, 2019 and has elected not to reclassify the income tax effects of the Tax Act from accumulated OCI to retained earnings.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. In July 2018, the FASB and has subsequently issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements,”supplemental and/or clarifying ASUs (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 ASC 842 is to increase transparency and comparability among organizations by recognizing lease right-of-use (“ROU”) assets and lease liabilities except for short-termsubstantially all leases on the balance sheet, and provide additional disclosure information about leasing arrangements. ASC 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. ASC 842 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption.
Woodward will adoptadopted 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 and restate the financial statements for all periods presented. Woodward expects to elect the new transition method resulting in a 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 guidance. 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 engaged 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 necessary. 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 accounting for the Company’s loss reserve on contractual lease commitments. Rent expense for all operating leases in fiscal year 2018, none of which was recognized on the balance sheet, was $8,348. As of September 30, 2018, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $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 on October 1, 2018 and elected the modified retrospective transition method. The results formethod under which prior periods prior to fiscal year 2019 were not
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adjusted for the new standard restated and the cumulative effect of the change in accounting of $28,927, as previously reported,initial adoption was recognized as a net increase toin retained earnings aton the date of adoption.initial application, October 1, 2019. Consequently, financial information will not be updated and the disclosures required under ASC 842 will not be provided for dates and periods before October 1, 2019.
The new guidance under ASC 842 provides a number of optional practical expedients in transition. Woodward has elected the "package of practical expedients," which allowed Woodward not to applyreassess under the modified retrospective method only to contracts that were not completednew guidance our prior conclusions about lease identification, lease classification and initial direct costs. Accordingly, Woodward carried forward its existing conclusions on lease classification for leases existing as of the adoption date. Additionally, embedded lease arrangements were assessed under the prior guidance of ASC 840 lease framework for transition on October 1, 2018. As2019 in accordance with the leases policy outlined below. The new lease accounting guidance under ASC 842 has been applied for all arrangements commencing or modified on or after October 1, 2019.
Woodward also elected as a practical expedient under ASC 606, Woodward elected to reflectnot record qualifying short-term leases with a term of twelve months or less (inclusive of reasonably certain renewals and termination options) at the aggregate effect of all modifications that occurred before the beginning of fiscal year 2019 to contracts for which Woodward had not recognized all revenue as of October 1, 2018 as partinception of the adjustmentcontract on the balance sheet and instead recognizes those lease payments in the Condensed Consolidated Statements of Comprehensive Earnings on a straight-line basis over the lease term. This practical expedient may not be applied to retained earningsshort-term leases that contain a purchase option that is reasonably certain of exercise.
Woodward has also elected the practical expedient to not separate lease and non-lease components for its lease arrangements when it is the lessee. The application of this practical expedient is discussed at the date of adoption.Note 5, Leases.
Subsequent to theThe 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 inconsistency842 resulted in errors that were cumulatively not material in determining the percentagerecognition of completion calculation on over time product revenue recognition, which caused the Condensed Consolidated Financial Statements for the quarters ended December 31, 2018additional operating ROU assets and March 31, 2019, as well as the cumulative impact of the adoption of ASC 606operating lease liabilities on the Condensed Consolidated Balance Sheet as of October 1, 2018,2019 of $18,894 and $18,851, respectively.
See Note 5, Leases, for disclosures and further information related to be misstated by amounts that management concluded were not material. Woodward evaluated the errorsimplementation 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, 2019.842.
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).Note 3. Revenue
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 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
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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 manufactureRevenue from manufactured products 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 Woodwardrepresented 86% 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%12%, respectively, of Woodward’s net sales for the three-months ended June 30, 20192020, compared to 84% and 13%, respectively, for the three-months ended June 30, 2019. Revenue from manufactured products and from MRO represented 86% and 12%, respectively, of Woodward’s net sales for both 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 customer2020 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 an implicit assumption that without the customer making such advance payments to Woodward, 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 development. Material rights are recorded as contract liabilities and will be recognized when control of the related 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.2019.
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, Woodward concluded it was appropriate to defer the consideration received as a liability and recognized it as an increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the joint venture. 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 joint venture. As of the adoption of ASC 606, Woodward has classified this as a contract liability with both a current and noncurrent portion. For further discussion of Woodward’s joint venture, see Note 6, Joint venture.
Woodward does not record incremental costs of obtaining a contract, as Woodward does not pay sales commissions or incur other incremental costs related to contracts with Woodward’s customers for arrangements in which quantities and pricing are fixed and/or determinable.
Point in time and over time revenue recognition
Approximately one-half of Woodward’s customer contracts are recognized at the point in time when control of the products transfers to the customer, generally upon shipment of products, consistent with Woodward’s historical revenue recognition model. The remaining portion of Woodward’s revenues from sales of products and services to customers is recognized over time, rather than at a point in time, due primarily to the terms of certain customer 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:follows:
Three-Months Ended June 30, 2019 | Nine-Months Ended June 30, 2019 |
| Three-Months Ended June 30, 2020 |
|
| Three-Months Ended June 30, 2019 |
| ||||||||||||||||||||||||||||||||||
Aerospace | Industrial | Consolidated | Aerospace | Industrial | Consolidated |
| Aerospace |
|
| Industrial |
|
| Consolidated |
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
| ||||||||||||||||||
Point in time | $ | 191,516 | $ | 147,194 | $ | 338,710 | $ | 563,713 | $ | 482,979 | $ | 1,046,692 |
| $ | 98,228 |
|
| $ | 138,504 |
|
| $ | 236,732 |
|
| $ | 191,516 |
|
| $ | 147,194 |
|
| $ | 338,710 |
| |||||
Over time | 307,259 | 106,036 | 413,295 | 810,903 | 306,065 | 1,116,968 |
|
| 208,266 |
|
|
| 78,828 |
|
|
| 287,094 |
|
|
| 307,259 |
|
|
| 106,036 |
|
|
| 413,295 |
| |||||||||||
Total net sales | $ | 498,775 | $ | 253,230 | $ | 752,005 | $ | 1,374,616 | $ | 789,044 | $ | 2,163,660 |
| $ | 306,494 |
|
| $ | 217,332 |
|
| $ | 523,826 |
|
| $ | 498,775 |
|
| $ | 253,230 |
|
| $ | 752,005 |
| |||||
|
| Nine-Months Ended June 30, 2020 |
|
| Nine-Months Ended June 30, 2019 |
| ||||||||||||||||||
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
| ||||||
Point in time |
| $ | 464,068 |
|
| $ | 463,498 |
|
| $ | 927,566 |
|
| $ | 563,713 |
|
| $ | 482,979 |
|
| $ | 1,046,692 |
|
Over time |
|
| 790,587 |
|
|
| 246,248 |
|
|
| 1,036,835 |
|
|
| 810,903 |
|
|
| 306,065 |
|
|
| 1,116,968 |
|
Total net sales |
| $ | 1,254,655 |
|
| $ | 709,746 |
|
| $ | 1,964,401 |
|
| $ | 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.
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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 practical 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 products 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 assumptions 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 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.
Woodward’s contracts with customers generally have no financing components.
Accounts receivable consisted of the following:
June 30, 2019 | September 30, 2018 |
| June 30, 2020 |
|
| September 30, 2019 |
| |||||||
Billed receivables |
|
|
|
|
|
|
|
| ||||||
Trade accounts receivable | $ | 370,643 | $ | 403,590 |
| $ | 294,113 |
|
| $ | 381,942 |
| ||
Other (Chinese financial institutions) | 86,059 | 23,191 |
|
| 47,863 |
|
|
| 42,171 |
| ||||
Less: Allowance for uncollectible amounts | (3,904) | (3,938) |
|
| (7,180 | ) |
|
| (7,908 | ) | ||||
Net billed receivables | 452,798 | 422,843 |
|
| 334,796 |
|
|
| 416,205 |
| ||||
Current unbilled receivables (contract assets), net | 197,979 | 9,160 |
|
| 202,719 |
|
|
| 175,324 |
| ||||
Total accounts receivable, net | $ | 650,777 | $ | 432,003 |
| $ | 537,515 |
|
| $ | 591,529 |
|
As of the October 1, 2018 adoption of ASC 606, Woodward recognized 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, asAs of June 30, 20192020, “Other assets” on the Condensed Consolidated Balance Sheets includes $894$28,278 of unbilled receivables not expected to be invoiced and collected within a period of twelve months. Asmonths, compared to $1,573 as of September 30, 2018, there were no unbilled2019. Unbilled receivables not expected to be invoiced and collected within a period of twelve months.
Customer billed receivablesmonths are recorded at face amounts, less an allowanceprimarily attributable to customer delays for doubtful accounts. In establishingdeliveries on firm orders in the amountAerospace segment due to the impacts of the allowance relatedCOVID-19 pandemic.
In coordination with its customers and when terms are considered favorable, Woodward transfers ownership to collect amounts due for outstanding accounts receivable to third parties in exchange for cash. When the credit risktransfer of accounts receivable customer-specific informationmeets the criteria of FASB ASC Topic 860-10, “Transfers and Servicing”, and are without recourse, the transaction 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,recognized as a sale 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.derecognized.
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 |
| June 30, 2020 |
|
| September 30, 2019 |
| |||||||||||||||||||||
Current | Noncurrent | Current | Noncurrent |
| Current |
|
| Noncurrent |
|
| Current |
|
| Noncurrent |
| |||||||||||||
Deferred revenue from material rights from GE joint venture formation | $ | 6,806 | $ | 234,038 | $ | 7,087 | $ | 235,300 |
| $ | 3,866 |
|
| $ | 235,602 |
|
| $ | 8,317 |
|
| $ | 230,588 |
| ||||
Deferred revenue from advance invoicing and/or prepayments from customers | 3,343 | - | 2,572 | - | ||||||||||||||||||||||||
Deferred revenue from advanced invoicing and/or prepayments from customers |
|
| 6,869 |
|
|
| 106 |
|
|
| 4,554 |
|
|
| 141 |
| ||||||||||||
Liability related to customer supplied inventory | 13,021 | - | - | - |
|
| 17,799 |
|
|
| — |
|
|
| 13,396 |
|
|
| — |
| ||||||||
Deferred revenue from material rights related to engineering and development funding | 3,137 | 98,889 | - | - |
|
| 1,688 |
|
|
| 120,467 |
|
|
| 1,624 |
|
|
| 106,436 |
| ||||||||
Net contract liabilities | $ | 26,307 | $ | 332,927 | $ | 9,659 | $ | 235,300 |
| $ | 30,222 |
|
| $ | 356,175 |
|
| $ | 27,891 |
|
| $ | 337,165 |
|
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 $8,356 in the three-months ended June 30, 2020 and $28,288 in the nine-months ended June 30, 2020 from contract liabilities balances recorded as of October 1, 2019, compared to $6,147 in the three-months ended June 30, 2019 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, 20192020 was $1,659,788,$1,587,816, compared to $1,527,437 as of September 30, 2019, the majority of which in both periods relate to Woodward’s Aerospace segment. Woodward expects to recognize almost all of these remaining performance obligations within two years after June 30, 2019.2020.
Remaining performance obligations related to material rights that have not yet been recognized in revenue as of June 30, 20192020 was $436,876,$454,585, of which $2,253$1,049 is expected to be recognized in the remainder of fiscal year 2019, $11,5732020, $7,307 is expected to be recognized in fiscal year 2020,2021, 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.
16
Financial statement impact of the adoption of ASC 606
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 | Effect of ASC 606 | October 1, 2018 | Adjustments for | October 1, 2018 | ||||||||||||
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 enforceable right to payment with a profit, and MRO. The revenue related to these activities, which previously was accounted for on a 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 certain engineering and development costs, which are reflected as a reduction to inventory.
(2)
17
The value of noncash consideration in the form of exchanged products and other customer provided inventory is reflected in “Inventories,” and in contract liabilities, which are included in “Accrued liabilities.”
(3)Woodward recorded customer funding of product engineering and development identified as material rights as current and noncurrent deferred revenue contract liabilities included in “Accrued liabilities” and “Other liabilities.” The related customer funded product engineering and development costs were capitalized as costs to fulfill a contract, to the extent of the contractually committed customer funded payments, and are recorded as “Other assets.”
(4)The net book value of the backlog and customer relationships and contracts intangible assets was adjusted concurrent with the change 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 on the Condensed Consolidated Statements of Earnings for the three and nine-months ended June 30, 2019 and the 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 the error correction represent the increase (decrease) in the line 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 | Out-of-period correction | As reported | Under previous standard | Effect of | 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 cost of goods sold primarily due to the recognition of noncash consideration in the form of customer supplied inventory and the accelerated recognition of revenue and associated 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 been recognized as revenue during the periods under the previous standard.
18
The following schedule quantifies the impact of adopting ASC 606 on 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 | Effect of | June 30, 2019 | |||||||
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 from contracts with customers by primary market and by geographical area as Woodward believes 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 |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||||||
June 30, 2019 | June 30, 2019 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Commercial OEM | $ | 174,077 | $ | 488,928 |
| $ | 63,804 |
|
| $ | 174,077 |
|
| $ | 367,080 |
|
| $ | 488,928 |
| |
Commercial aftermarket | 124,863 | 375,919 |
|
| 68,332 |
|
|
| 124,863 |
|
|
| 328,302 |
|
|
| 375,919 |
| |||
Defense OEM | 147,696 | 372,538 |
|
| 111,667 |
|
|
| 147,696 |
|
|
| 392,494 |
|
|
| 372,538 |
| |||
Defense aftermarket | 52,139 | 137,231 |
|
| 62,691 |
|
|
| 52,139 |
|
|
| 166,779 |
|
|
| 137,231 |
| |||
Total Aerospace segment net sales | $ | 498,775 | $ | 1,374,616 |
| $ | 306,494 |
|
| $ | 498,775 |
|
| $ | 1,254,655 |
|
| $ | 1,374,616 |
|
Revenue by primary market for the Industrial reportable segment was as follows:
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||||||
June 30, 2019 | June 30, 2019 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Reciprocating engines | $ | 185,523 | $ | 590,910 |
| $ | 158,804 |
|
| $ | 185,523 |
|
| $ | 497,012 |
|
| $ | 590,910 |
| |
Industrial turbines | 53,740 | 155,439 |
|
| 53,486 |
|
|
| 53,740 |
|
|
| 164,663 |
|
|
| 155,439 |
| |||
Renewables | 13,967 | 42,695 | |||||||||||||||||||
Renewables1 |
|
| 5,042 |
|
|
| 13,967 |
|
|
| 48,071 |
|
|
| 42,695 |
| |||||
Total Industrial segment net sales | $ | 253,230 | $ | 789,044 |
| $ | 217,332 |
|
| $ | 253,230 |
|
| $ | 709,746 |
|
| $ | 789,044 |
|
(1) | Sales in the renewables market were discontinued as of May 1, 2020 following the closing of the divestiture of the disposal group (see Note 10, Sale of businesses). |
The customers who account for approximately 10% or more of net sales toof each of Woodward’s reportable segments for both the three and nine-months ended June 30, 2019 follow:2020 are as follows:
Customer | ||
Aerospace |
| |
| The Boeing Company, General Electric Company, | |
Industrial | Rolls-Royce PLC, Weichai Westport, General Electric Company |
Net sales by geographic area, as determined based on the location of the customer, were as follows:
Three-Months Ended June 30, 2019 | Nine-Months Ended June 30, 2019 |
| Three-Months Ended June 30, 2020 |
|
| Three-Months Ended June 30, 2019 |
| ||||||||||||||||||||||||||||||||||
Aerospace | Industrial | Consolidated | Aerospace | Industrial | Consolidated |
| Aerospace |
|
| Industrial |
|
| Consolidated |
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
| ||||||||||||||||||
United States | $ | 386,136 | $ | 53,380 | $ | 439,516 | $ | 1,024,644 | $ | 156,836 | $ | 1,181,480 |
| $ | 245,347 |
|
| $ | 48,600 |
|
| $ | 293,947 |
|
| $ | 386,136 |
|
| $ | 53,380 |
|
| $ | 439,516 |
| |||||
Germany | 18,319 | 50,943 | 69,262 | 56,136 | 178,032 | 234,168 |
|
| 5,348 |
|
|
| 40,753 |
|
|
| 46,101 |
|
|
| 18,319 |
|
|
| 50,943 |
|
|
| 69,262 |
| |||||||||||
Europe, excluding Germany | 42,849 | 66,936 | 109,785 | 131,243 | 191,415 | 322,658 |
|
| 17,675 |
|
|
| 49,500 |
|
|
| 67,175 |
|
|
| 42,849 |
|
|
| 66,936 |
|
|
| 109,785 |
| |||||||||||
Asia | 18,908 | 73,856 | 92,764 | 66,206 | 238,737 | 304,943 | |||||||||||||||||||||||||||||||||||
China |
|
| 9,018 |
|
|
| 47,592 |
|
|
| 56,610 |
|
|
| 11,506 |
|
|
| 40,119 |
|
|
| 51,625 |
| |||||||||||||||||
Asia, excluding China |
|
| 4,438 |
|
|
| 24,934 |
|
|
| 29,372 |
|
|
| 7,402 |
|
|
| 33,737 |
|
|
| 41,139 |
| |||||||||||||||||
Other countries | 32,563 | 8,115 | 40,678 | 96,387 | 24,024 | 120,411 |
|
| 24,668 |
|
|
| 5,953 |
|
|
| 30,621 |
|
|
| 32,563 |
|
|
| 8,115 |
|
|
| 40,678 |
| |||||||||||
Total net sales | $ | 498,775 | $ | 253,230 | $ | 752,005 | $ | 1,374,616 | $ | 789,044 | $ | 2,163,660 |
| $ | 306,494 |
|
| $ | 217,332 |
|
| $ | 523,826 |
|
| $ | 498,775 |
|
| $ | 253,230 |
|
| $ | 752,005 |
| |||||
20
|
| Nine-Months Ended June 30, 2020 |
|
| Nine-Months Ended June 30, 2019 |
| ||||||||||||||||||
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
|
| Aerospace |
|
| Industrial |
|
| Consolidated |
| ||||||
United States |
| $ | 965,368 |
|
| $ | 152,600 |
|
| $ | 1,117,968 |
|
| $ | 1,024,644 |
|
| $ | 156,836 |
|
| $ | 1,181,480 |
|
Germany |
|
| 43,737 |
|
|
| 145,132 |
|
|
| 188,869 |
|
|
| 56,136 |
|
|
| 178,032 |
|
|
| 234,168 |
|
Europe, excluding Germany |
|
| 97,262 |
|
|
| 165,403 |
|
|
| 262,665 |
|
|
| 131,243 |
|
|
| 191,415 |
|
|
| 322,658 |
|
China |
|
| 30,716 |
|
|
| 139,016 |
|
|
| 169,732 |
|
|
| 36,646 |
|
|
| 144,267 |
|
|
| 180,913 |
|
Asia, excluding China |
|
| 22,001 |
|
|
| 86,514 |
|
|
| 108,515 |
|
|
| 29,560 |
|
|
| 94,470 |
|
|
| 124,030 |
|
Other countries |
|
| 95,571 |
|
|
| 21,081 |
|
|
| 116,652 |
|
|
| 96,387 |
|
|
| 24,024 |
|
|
| 120,411 |
|
Total net sales |
| $ | 1,254,655 |
|
| $ | 709,746 |
|
| $ | 1,964,401 |
|
| $ | 1,374,616 |
|
| $ | 789,044 |
|
| $ | 2,163,660 |
|
Note 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 for the three and nine-months ended June 30, 2019 and 2018:share:
Three-Months Ended | Nine-Months Ended | |||||||||||||||||||||||||||
June 30, | June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net earnings | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
| ||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic shares outstanding | 61,941 | 61,608 | 61,977 | 61,417 |
|
| 62,309 |
|
|
| 61,941 |
|
|
| 62,188 |
|
|
| 61,977 |
| ||||||||
Dilutive effect of stock options and restricted stock units | 2,692 | 2,273 | 2,460 | 2,365 | ||||||||||||||||||||||||
Dilutive effect of stock options and restricted stock |
|
| 1,118 |
|
|
| 2,692 |
|
|
| 2,085 |
|
|
| 2,460 |
| ||||||||||||
Diluted shares outstanding | 64,633 | 63,881 | 64,437 | 63,782 |
|
| 63,427 |
|
|
| 64,633 |
|
|
| 64,273 |
|
|
| 64,437 |
| ||||||||
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic earnings per share | $ | 1.07 | $ | 0.80 | $ | 3.11 | $ | 1.72 |
| $ | 0.62 |
|
| $ | 1.07 |
|
| $ | 2.95 |
|
| $ | 3.11 |
| ||||
Diluted earnings per share | $ | 1.02 | $ | 0.77 | $ | 2.99 | $ | 1.66 |
| $ | 0.61 |
|
| $ | 1.02 |
|
| $ | 2.85 |
|
| $ | 2.99 |
|
The following stock option grants were outstanding during the three and nine-months ended June 30, 2019 and 2018, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
Three-Months Ended | Nine-Months Ended | |||||||||||||||||||||||||||
June 30, | June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Options | 39 | 764 | 19 | 760 |
|
| 2,357 |
|
|
| 39 |
|
|
| 670 |
|
|
| 19 |
| ||||||||
Weighted-average option price | $ | 97.13 | $ | 78.70 | $ | 97.13 | $ | 78.73 |
| $ | 83.75 |
|
| $ | 97.13 |
|
| $ | 104.48 |
|
| $ | 97.13 |
|
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 | 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 |
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Weighted-average treasury stock shares held for deferred compensation obligations |
|
| 214 |
|
|
| 208 |
|
|
| 213 |
|
|
| 207 |
|
Note 5. Business acquisitionLeases
Woodward adopted ASC 842 on October 1, 2019 using the modified retrospective transition method under which prior periods were not restated and the cumulative effect of initial adoption was recognized in retained earnings on the date of initial application, October 1, 2019.
Woodward is primarily a lessee in lease arrangements but has some embedded lessor arrangements.
Lessee arrangements
Woodward has entered into operating leases for certain facilities and equipment with terms in excess of one year under agreements that expire at various dates. Some leases require the payment of property taxes, insurance, maintenance costs, or other similar costs in addition to rental payments. Woodward has also entered into finance leases for equipment with terms in excess of one year under agreements that expire at various dates.
Woodward determines if an arrangement for the use of property, plant and equipment is a lease at inception. Under ASC 842, an arrangement contains a lease if the arrangement conveys the right to control the use of plant, property or equipment (identified asset) for a period of time in exchange for consideration. For arrangements determined to be a lease under this criteria, Woodward assesses lease classification as either an operating or finance lease whenever the new lease is executed or an existing lease requires reclassification based on changes in the lease’s terms and conditions. Lease classification impacts the treatment of the lease on the income statement and amortization of the lease ROU asset. In fiscal year 2018,determining lease classification, Woodward considers both qualitative and quantitative factors when performing the following classification tests: (i) transfer of ownership at the end of the lease term, (ii) existence of a bargain purchase option, (iii) the lease term, (iv) minimum lease payments, and (v) whether the leased asset is so customized to Woodward’s needs as to effectively have utility only to Woodward.
Woodward applies the following thresholds when performing the classification tests: (i) 75% or greater is considered to be the majority of the asset’s remaining economic life, (ii) the exercise of the renewal option or the non-exercise of a termination option is reasonably certain if it has at least a 75% likelihood of occurring (in arriving at the percentage likelihood, Woodward considers its plans as to whether to renew the lease and the economic factors that may impact the decision to renew and Woodward will include a renewal option or non-exercise of a termination option in the lease term only if the Company and its wholly-owned subsidiary, Woodward Aken GmbH (collectively,has an economic incentive to extend the “Purchasers”)lease), entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU,(iii) the “Sellers”), bothpresent value of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”). Pursuantthe future minimum lease payments is considered to the L’Orange Agreement, the Purchasers agreed to acquireexceed substantially all of the outstanding sharesfair value of stockthe underlying asset if the payments exceed 90% of L’Orange GmbH,the asset’s fair value. Woodward considers the exercise of the option to purchase a leased asset as reasonably certain if it has at least a 75% likelihood of being exercised or, among other things, a significant economic incentive exists for exercising the option.
Lease components are elements of an arrangement that provide the customer with the right to use an identified asset. The right to use an underlying asset is a separate lease component if: (i) the lessee can benefit from the right to use the underlying asset either on its own or together with its wholly-owned subsidiariesother resources that are readily available, and (ii) the right to use the underlying asset is neither highly dependent on nor highly interrelated with other rights to use other underlying assets in Chinathe arrangement. Woodward may enter into lessee arrangements that contain a lease component but also contain other non-lease components. When the non-lease component in an arrangement relates to inventory, as inventory is outside the scope of ASC 842, the payment Woodward makes for inventory is accounted for and Germany,expensed separately and apart from lease expense, rather than as a lease component. For all other classes of underlying assets in lessee arrangements, Woodward has elected to combine lease and non-lease components and to account for them as lease expense.
ROU assets represent Woodward’s right to use an underlying asset for the lease term, and lease liabilities represent Woodward’s obligation to make lease payments arising from the lease. ROU assets include any initial direct costs (incremental costs of a lease that would not have been incurred had the lease not been executed) and lease prepayments made, and are reduced by any lease incentives received. Leases with an initial term of 12 months or less and leases with only variable lease payments are not recorded on the balance sheet.
ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the remaining fixed lease payments over the lease term. In determining the estimated present value of lease payments, Woodward discounts the fixed lease payments using the rate implicit in the agreement or, if the implicit rate is not known, using the incremental borrowing rate. As of June 30, 2020, none of Woodward’s leases have been discounted using the implicit rate as it could not be readily determined. Woodward’s incremental borrowing rate is based on the information available at the lease commencement date, with consideration given to Woodward’s recent debt issuances as well as allpublicly available data for instruments with similar characteristics.
When measuring lease liabilities, Woodward only uses lease payments remaining throughout the remainder of the outstanding equity interestslease term and only includes the amount that is probable of its affiliate, Fluid Mechanics LLC,being owed under significant residual value guarantees, if any. Lease liabilities are subject to the same considerations as Woodward’s debt instruments in classifying them as current or noncurrent in the Condensed Consolidated Balance Sheets.
For operating leases, lease expense is recognized over the expected lease term and their related operations (collectively, “L’Orange”), for total consideration (including cash considerationclassified as a cost of goods sold or selling, general and the assumption of certain liabilities) of €700,000, or approximately $811,000administrative expense based on the foreign currency exchange rate asnature of the date Woodward executed cross currency swapsunderlying leased asset. For finance leases, the ROU asset is recognized over the shorter of the useful life of the asset, consistent with Woodward’s normal depreciation policy, or the lease term, and is classified as a cost of goods sold, selling, general and administrative expense, or research and development expense, based on the nature and use of the underlying leased asset. Interest expense is recorded in connection with the financingfinance lease liability using the effective interest rate method and is classified as interest expense.
Certain of Woodward’s operating lease agreements include variable payments that are passed through by the landlord, such as insurance, taxes, and common area maintenance, payments based on the usage of the transaction asasset, and rental payments adjusted periodically for inflation. Pass-through charges, payments due to changes in usage of the asset, and payments due to changes in indexation are included within variable rent expense and are recognized in the period in which the variable obligation for the payments was incurred.
None of Woodward’s lease agreements contain significant residual value guarantees, restrictions, or covenants. As of June 30, 2020, Woodward has not entered into any lease arrangements that have not yet commenced but would create significant rights and obligations. Woodward does not have any lease transactions between related parties.
Lease-related assets and liabilities follows:
|
| Classification on the Condensed Consolidated Balance Sheets |
| June 30, 2020 |
| |
Assets: |
|
|
|
|
|
|
Operating lease assets |
| Other assets |
| $ | 19,687 |
|
Finance lease assets |
| Property, plant and equipment, net |
|
| 1,338 |
|
Total lease assets |
|
|
|
| 21,025 |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Operating lease liabilities |
| Accrued liabilities |
|
| 4,648 |
|
Finance lease liabilities |
| Current portion of long-term debt |
|
| 1,643 |
|
Noncurrent liabilities: |
|
|
|
|
|
|
Operating lease liabilities |
| Other liabilities |
|
| 15,143 |
|
Finance lease liabilities |
| Long-term debt, less current portion |
|
| 1,575 |
|
Total lease liabilities |
|
|
| $ | 23,009 |
|
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the renewable power systems portfolio (as described more fully in Note 8,10, Sale of businesses Derivative instruments, and hedging activities. The transactions contemplated bydefined therein as the L’Orange Agreement were completed on June 1, 2018 (the “Closing”“disposal group”) represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and L’Orange became a subsidiarycircumstances at that time, Woodward determined that the remaining value 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 termsROU assets of the LTSA, Woodward L’Orange will continue to supply to MTUdisposal group were not recoverable 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$639 non-cash impairment charge was recorded during 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.nine-months ended June 30, 2020.
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 asSupplemental lease-related information follows:
June 30, 2020 | ||||
|
|
| ||
|
| |||
|
|
| ||
Weighted average discount rate | ||||
Operating leases | 3.2 | % | ||
Finance leases | 3.0 | % |
The
Lease-related expenses for the three and nine-months ended June 30, 2020 were as follows:
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||
|
| June 30, 2020 |
|
| June 30, 2020 |
| ||
Operating lease expense |
| $ | 1,511 |
|
| $ | 4,562 |
|
Amortization of financing lease assets |
|
| 110 |
|
|
| 358 |
|
Interest on financing lease liabilities |
|
| 25 |
|
|
| 65 |
|
Variable lease expense |
|
| 192 |
|
|
| 787 |
|
Short-term lease expense |
|
| 63 |
|
|
| 400 |
|
Sublease income1 |
|
| (236 | ) |
|
| (561 | ) |
Total lease expense |
| $ | 1,665 |
|
| $ | 5,611 |
|
(1) | Relates to two separate subleases Woodward has entered into for a leased manufacturing building in Niles, Illinois. |
Lease-related supplemental cash consideration was financed throughflow information for the usenine-months ended June 30, 2020 follows:
|
| Nine-Months Ended |
| |
|
| June 30, 2020 |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows for operating leases |
| $ | 3,622 |
|
Operating cash flows for finance leases |
|
| 65 |
|
Financing cash flows for finance leases |
|
| 1,187 |
|
Right-of-use assets obtained in exchange for recorded lease obligations: |
|
|
|
|
Operating leases |
|
| 4,825 |
|
Finance leases |
|
| 1,243 |
|
Maturities 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 andlease liabilities assumed was finalized as of June 30, 2019 using the purchase method2020 follows:
Year Ending September 30: |
| Operating Leases |
|
| Finance Leases |
| ||
2020 (remaining) |
|
| 2,239 |
|
|
| 436 |
|
2021 |
|
| 4,847 |
|
|
| 1,690 |
|
2022 |
|
| 3,733 |
|
|
| 738 |
|
2023 |
|
| 3,008 |
|
|
| 325 |
|
2024 |
|
| 2,394 |
|
|
| 137 |
|
Thereafter |
|
| 6,278 |
|
|
| — |
|
Total lease payments |
|
| 22,499 |
|
|
| 3,326 |
|
Less: imputed interest |
|
| (2,709 | ) |
|
| (107 | ) |
Total lease obligations |
| $ | 19,790 |
|
| $ | 3,219 |
|
Comparable future minimum rental payment under operating and finance leases that have initial or remaining non-cancelable lease terms in excess of accounting in accordance withone year as previously disclosed under 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 final840 as of JuneSeptember 30, 2019 summarizes the estimated fair values of the assets acquired and liabilities assumed at the Closing.follows:
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
Year Ending September 30: |
| Operating Leases |
|
| Finance Leases |
| ||
2020 (full twelve months) |
| $ | 6,667 |
|
| $ | 213 |
|
2021 |
|
| 5,119 |
|
|
| 98 |
|
2022 |
|
| 3,823 |
|
|
| 33 |
|
2023 |
|
| 2,899 |
|
|
| 3 |
|
2024 |
|
| 2,378 |
|
|
| — |
|
Thereafter |
|
| 6,033 |
|
|
| — |
|
Total minimum lease payments under ASC 840 |
| $ | 26,919 |
|
| $ | 347 |
|
(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 | 1 | year | Accelerated | |||
Other | 232 | 3 | 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, total rental payments charged to expense for operating leases under ASC 840 were $2,148 and $6,968, respectively.
Lessor arrangements
Woodward recorded amortization expense associatedenters into various customer supply agreements, customer sales agreements, and/or product development agreements (collectively, “manufacturing contracts”) with customers to provide highly specialized products. In certain of these manufacturing contracts, the acquired intangiblesproperty, plant and equipment used to manufacture the products is used only for the benefit of $5,558one customer. This is primarily driven by the demand for customer products, which can be so great that it is economically beneficial to dedicate the plant and $28,136, respectively. Future amortization expense associated withequipment to just one customer. Additionally, this can be driven by 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 allset-up of the goodwill inproperty, plant and equipment required to produce specified product and/or the specialized nature of the property, plant and equipment such that it is not economically feasible to use the plant, property and equipment to manufacture other products.
Woodward has assessed its Industrial segment. The goodwill representsmanufacturing contracts and concluded that certain of the estimated valuecontracts for the manufacture of potential expansion with new customers,customer products met the opportunity to further develop sales opportunities with new customers, other synergies including supply chain savings expectedcriteria to be achieved through the integration ofconsidered a leasing arrangement (“embedded leases”) with Woodward L’Orange with Woodward’s Industrial segment, and intangible assets that do not qualify for separate recognition, such as the value oflessor. The specific manufacturing contracts that met the assembledcriteria were those that utilized 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 adjustmentswhich is substantially (more than 90%) dedicated to interest expense. These adjustments are netthe manufacturing of the product(s) for a single customer. Woodward has dedicated manufacturing lines with three of its customers representing embedded leases, all of which qualified as operating leases with undefined quantities of future customer purchase commitments. Woodward’s customers for which embedded lessor arrangements have been identified do not have contractual long-term commitments to purchase specified quantities of related products or services from Woodward, although Woodward expects to continue selling to such customers into the future and is presently unaware of any applicable tax impacteconomic penalties, or other factors, which would further define a lease term on such arrangements. Although Woodward expects to allocate some portion of future net sales to these customers to embedded lessor arrangements, it cannot provide expected future undiscounted lease payments from property, plant and wereequipment leased to customers as of June 30, 2020. If in the future customers reduce purchases of related products from Woodward, the Company believes it will derive additional value from the underlying equipment by repurposing its use to support other customer arrangements. Woodward will continue to assess its future manufacturing contracts and monitor its current manufacturing contracts for changes which may trigger additional embedded leases under ASC 842.
A manufacturing contract with a customer that contains an embedded lease will generally include lease components, such as the equipment, and non-lease components, such as other inputs used in the manufacture of the customer’s product. In evaluating its embedded leases, Woodward first identified and separated its lease and non-lease components. Woodward has determined that for its current embedded leases, the property, plant and equipment used by Woodward represents lease components and all other inputs that Woodward uses to develop, manufacture and sell the customer product represents non-lease components. Woodward allocates revenue from contracts with customers between lease and non-lease components by imputing a reasonable rate of return based on the estimated fair value of the dedicated property, plant and equipment.
Under ASC 842, consistent with the previous guidance, Woodward will continue to recognize property, plant and equipment in embedded lessor arrangements on its Condensed Consolidated Balance Sheets in property, plant and equipment, net. The property, plant and equipment will continue to be depreciated as normal.
Woodward recognizes revenue from the embedded lessor arrangements based on the value of the underlying dedicated property, plant, and equipment. There are no fixed payments that the customers under the embedded lessor arrangements are obligated to pay. Therefore, all the customer payments under the embedded lessor arrangements are considered variable with the associated leasing revenue recognized when the revenue from underlying product sale related to variable lease payment is recognized. Revenue from contracts with customers that included to arriveembedded operating leases, which is included in “Net sales” at the pro forma results above.
The operating resultsCondensed Consolidated Statements 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 $78,517Earnings, was $1,638 for the three-months ended June 30, 2020 and $254,183$4,763 for the nine-months ended June 30, 2019, and net sales2020.
Other than the embedded leases identified, Woodward is not the lessor in any other leasing arrangements. None of $24,878the embedded leases identified by Woodward qualify as a sales-type or direct finance lease. None of the operating leases for bothwhich Woodward is the three and nine-months ended June 30, 2018. Woodward L’Orange contributed net income before income taxes of $11,495lessor include options for the three-monthslessee to purchase the underlying asset at the end of the lease term or residual value guarantees, nor are any such operating leases with related parties.
The carrying amount of property, plant 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.equipment
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 areleased to others through embedded leasing arrangements, included in “Interest expense” in“Property, plant and equipment, net” at the Condensed Consolidated Statements of Earnings.Balance Sheets, follows:
|
| June 30, 2020 |
| |
Property, plant and equipment leased to others through embedded leasing arrangements |
| $ | 69,957 |
|
Less accumulated depreciation |
|
| 27,917 |
|
Property, plant and equipment leased to others through embedded leasing arrangements, net |
| $ | 42,040 |
|
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 develop, manufacture and support 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 received its second and third annual payments of $4,894, respectively, which were recorded as deferred income and included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Neither Woodward nor GE contributed any tangible assets to the JV.
Under previous accounting guidance, Woodward concluded that the formation of the JV 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 the formation 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 as a liability and recognize it as an
24
increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JV. 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 revenue from material rights in connection with the JV formation included accrued liabilities of $6,806 as of June 30, 2019 and $7,087 as of September 30, 2018, and other liabilities of $234,038 as of June 30, 2019 and $235,300 as of September 30, 2018. included:
|
| June 30, 2020 |
|
| September 30, 2019 |
| ||
Accrued liabilities |
| $ | 3,866 |
|
| $ | 8,317 |
|
Other liabilities |
|
| 235,602 |
|
|
| 230,588 |
|
Amortization of the deferred incomerevenue (material right) recognized as an increase to sales was $802 for the three-months and $4,331 for the nine-months ended June 30, 2020, and $2,013 for the three-months and $5,712 for the nine-months ended June 30, 2019, and $1,564 for the three-months and $4,103 for the nine-months ended June 30, 2018.2019.
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 incomeIn addition, GE will continue to pay contingent consideration to Woodward consisting of $3,290 forfifteen annual payments of $4,894 per year, which began on January 4, 2017, subject to certain claw-back conditions. Woodward received its third and fourth annual payments of $4,894 during the three-months and $7,761 for the nine-months ended June 30,March 31, 2019 and income of $738 for the three-months and $2,340 for the nine-months ended June 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 $12,000March 31, 2020, respectively, which iswere recorded as deferred income and included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Neither Woodward received no cashnor GE contributed any tangible assets to the JV.
Other income related to Woodward’s equity interest in the earnings of the JV was as follows:
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Other income |
| $ | 931 |
|
| $ | 3,290 |
|
| $ | 8,824 |
|
| $ | 7,761 |
|
Cash distributions to Woodward from the JV, duringrecognized in Net cash provided by operating activities on the three and nine-months ended June 30, 2018. Woodward’s net investment inConsolidated Statements of Cash Flows, from the JV which is included in other assets, was $5,373 as of June 30, 2019 and $9,611 as of September 30, 2018.include:
Woodward’s net sales include $18,049 for the three-months and $45,176 for the nine-months ended June 30, 2019 of
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Cash distributions |
| $ | 4,000 |
|
| $ | 4,500 |
|
| $ | 7,000 |
|
| $ | 12,000 |
|
Net sales to the JV compared to $20,085 for the three-months and $50,137 for the nine-months ended June 30, 2018. Woodward recorded a reduction to sales of $6,897 for the three-months and $25,148 for the nine-months ended June 30, 2019 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $7,340 for the three-months and $19,670 for the nine-months ended June 30, 2018. were as follows:
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net sales1 |
| $ | 7,026 |
|
| $ | 18,049 |
|
| $ | 38,511 |
|
| $ | 45,176 |
|
(1) | Net sales include a reduction of $2,292 for the three-months and $19,305 for the nine-months ended June 30, 2020 related to royalties owed to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to a reduction to sales of $6,897 for the three-months and $25,148 for the nine-months ended June 30, 2019. |
The Condensed Consolidated Balance Sheets include “Accounts receivable” of $5,441 at June 30, 2019, and $10,499 at September 30, 2018, related to amounts the JV owed Woodward, and include “Accounts payable” of $2,365 at June 30, 2019, and $2,944 at September 30, 2018, related to amounts Woodward owed the JV.JV, and “Other assets” related to Woodward’s net investment in the JV, as follows:
Upon
|
| June 30, 2020 |
|
| September 30, 2019 |
| ||
Accounts receivable |
| $ | 4,354 |
|
| $ | 5,906 |
|
Accounts payable |
|
| 1,240 |
|
|
| 4,270 |
|
Other assets |
|
| 9,367 |
|
|
| 7,543 |
|
Woodward records in “Other liabilities” amounts invoiced to the October 1, 2018 adoptionJV for support 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, and records in “Other liabilities” and $57,529 of costs recognized in prior periodsassets” related incurred expenditures as costs to fulfill a contract. Woodward’s contract inliabilities classified as “Other assets.” Woodward recognized an additional $3,042 duringliabilities” included amounts invoiced to the three-months and $11,640 during the nine-months endedJV as of June 30, 20192020 of contract liabilities in “Other liabilities,” and $3,042 during the three-months and $11,640 during the nine-months$68,735 compared to $69,079 as of fiscal year ended JuneSeptember 30, 2019 of additional2019. Woodward’s costs to fulfill a contract included in “Other assets.”assets” related to JV activities were $68,735 as of June 30, 2020 and $69,079 as of fiscal year ended September 30, 2019. In the three and nine-months ended June 30, 2019,2020, Woodward recognized a $2,774$6,207 reduction in both the contract liability in “Other liabilities” and costs to fulfill aand contract in “Other assets” related to the termination of a JV engineering and development project previously recognized as a material right.right, compared to $2,774 in the three and nine-months ended June 30, 2019.
Note 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.
|
| At June 30, 2020 |
|
| At September 30, 2019 |
| ||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 52,577 |
|
| $ | — |
|
| $ | — |
|
| $ | 52,577 |
|
| $ | 52,971 |
|
| $ | — |
|
| $ | — |
|
| $ | 52,971 |
|
Investments in reverse repurchase agreements |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 886 |
|
|
| — |
|
|
| — |
|
|
| 886 |
|
Investments in term deposits with foreign banks |
|
| 48,786 |
|
|
| — |
|
|
| — |
|
|
| 48,786 |
|
|
| 45,216 |
|
|
| — |
|
|
| — |
|
|
| 45,216 |
|
Equity securities |
|
| 23,939 |
|
|
| — |
|
|
| — |
|
|
| 23,939 |
|
|
| 20,504 |
|
|
| — |
|
|
| — |
|
|
| 20,504 |
|
Cross-currency interest rate swaps |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,758 |
|
|
| — |
|
|
| 24,758 |
|
Total financial assets |
| $ | 125,302 |
|
| $ | — |
|
| $ | — |
|
| $ | 125,302 |
|
| $ | 119,577 |
|
| $ | 24,758 |
|
| $ | — |
|
| $ | 144,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency interest rate swaps |
| $ | — |
|
| $ | 25,440 |
|
| $ | — |
|
| $ | 25,440 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Total financial liabilities |
| $ | — |
|
| $ | 25,440 |
|
| $ | — |
|
| $ | 25,440 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
At June 30, 2019 | At September 30, 2018 | |||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Financial assets: | ||||||||||||||||||||||||
Cash | $ | 54,392 | $ | - | $ | - | $ | 54,392 | $ | 59,838 | $ | - | $ | - | $ | 59,838 | ||||||||
Investments in reverse repurchase agreements | 90 | - | - | 90 | 4,582 | - | - | 4,582 | ||||||||||||||||
Investments in term deposits with foreign banks | 8,820 | - | - | 8,820 | 19,174 | - | - | 19,174 | ||||||||||||||||
Equity securities | 20,787 | - | - | 20,787 | 19,730 | - | - | 19,730 | ||||||||||||||||
Cross currency interest rate swaps | - | 2,186 | - | 2,186 | - | - | - | - | ||||||||||||||||
Total financial assets | $ | 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 | ||||||||
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” 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. During the second quarter of fiscal year 2020, the Company terminated its existing investments in reverse repurchase agreements.
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” on the Condensed Consolidated Statements of Earnings. The trading securities are included in “Other 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.
Cross currencyCross-currency interest rate swaps: Woodward holds cross currencycross-currency interest rate swaps, which are accounted for at fair value. TheIn the Condensed Consolidated Balance Sheets, 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 currencycross-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. As of June 30, 2020, swaps in a liability position in the amount of $25,440 were included in “Other liabilities”, while swaps in an asset position of $24,758 were included in “Other assets” as of September 30, 2019.
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 June 30, 2020 |
|
| At September 30, 2019 |
| ||||||||||
|
| Fair Value Hierarchy Level |
| Estimated Fair Value |
|
| Carrying Cost |
|
| Estimated Fair Value |
|
| Carrying Cost |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from municipalities |
| 2 |
| $ | 13,291 |
|
| $ | 12,238 |
|
| $ | 13,100 |
|
| $ | 12,346 |
|
Note receivable from sale of disposal group |
| 2 |
|
| 6,317 |
|
|
| 6,015 |
|
|
| — |
|
|
| — |
|
Investments in short-term time deposits |
| 2 |
|
| 13,275 |
|
|
| 13,316 |
|
|
| 13,468 |
|
|
| 13,509 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
| 2 |
| $ | 923,159 |
|
| $ | 833,036 |
|
| $ | 928,618 |
|
| $ | 867,377 |
|
At June 30, 2019 | At September 30, 2018 | |||||||||||||
Fair Value Hierarchy Level | Estimated Fair Value | Carrying Cost | Estimated Fair Value | Carrying Cost | ||||||||||
Assets: | ||||||||||||||
Notes receivable from municipalities | 2 | $ | 14,037 | $ | 13,382 | $ | 13,458 | $ | 13,462 | |||||
Investments in short-term time deposits | 2 | 12,072 | 12,123 | 8,883 | 8,874 | |||||||||
Liabilities: | ||||||||||||||
Long-term debt | 2 | $ | (1,065,531) | $ | (1,013,737) | $ | (1,094,987) | $ | (1,095,292) |
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 CompanyWoodward 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 2.0%1.2% at June 30, 20192020 and 3.1%1.7% at September 30, 2018.2019.
In connection with the sale of the disposal group (See Note 10, Sale of businesses), Woodward received a long-term promissory note from the buyer for deferral of a portion of the purchase price. The fair value of the long-term note was estimated based on a model that discounted future principal and interest payments received at an interest rate available to Woodward at the end of the period for similarly rated promissory notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rate used to estimate the fair value of the long-term note was 3.1% at June 30, 2020.
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 was 6.3%were 4.4% at both June 30, 20192020 and 5.7% at September 30, 2018.2019.
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 CompanyWoodward 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 ratesrate used to estimate the fair value of long-term debt were 2.8%was 1.7% at June 30, 20192020 and 3.5%2.5% at September 30, 2018.2019.
Note 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 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 the Forward Option for trading or speculative purposes. As the spot 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 June 30, 2018. The Forward Option expired on June 1, 2018.
In May 2018, Woodward entered into cross currencycross-currency interest rate swap agreements that synthetically convertconverted $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 CurrencyCross-Currency Swap”). Also in May 2018, Woodward entered into cross currencycross-currency interest rate swap agreements that synthetically convertconverted an aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined in Note 14, 15, Credit facilities short-term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross CurrencyCross-Currency Swaps”). The cross currencycross-currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and floating-rate debt under the 2018 Notes (as defined in Note 14, 15, 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 Statements of Earnings.
In May 2020, as a result of the COVID-19 pandemic and uncertainties in future cash flows, Woodward terminated the Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps. At the date of settlement, the total notional value of the Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps was $108,823 and $400,000, respectively. Woodward received net cash proceeds of $59,571, which includes $58,191 related to the fair value of the derivative assets and $4,380 of net accrued interest, less payment of $3,000 for fees to terminate the swap agreements. The proceeds received for the fair value of the instruments is recorded in “Other”, while net accrued interest is recorded in “Other” and “Accrued liabilities”, respectively, in cash flows provided by operating activities of Woodward’s Condensed Consolidated Statements of Cash Flows. The fees to terminate the swap agreements were recorded as incurred and presented in the line item “Selling, general and administrative” expenses in Woodward’s Condensed Consolidated Statements of Earnings.
Upon termination and settlement of the instruments, Woodward entered into a new floating-rate cross-currency interest rate swap (the “2020 Floating-Rate Cross-Currency Swap”), with a notional value of $45,000, and 5 fixed-rate cross-currency interest rate swap agreements (the “2020 Fixed-Rate Cross-Currency Swaps”), with an aggregate notional value of $400,000, which effectively reduce the interest rates on the underlying fixed and floating-rate debt under the 2018 Notes and Woodward’s existing revolving credit agreement, respectively. The net interest income of the cross-currency interest rate swaps is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings. As of June 30, 2020, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and 2020 Fixed-Rate Cross-Currency Swaps was $45,000 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements, for the related fair value of the derivative instruments as of June 30, 2020.
Derivatives instruments in fair value hedging relationships
Concurrent with the entry into the Floating-Rate Cross CurrencyCross-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 currencycross-currency interest rate swap, was entered into by Woodward Barbados 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.
OnlyIn May 2020, Woodward settled the Euro denominated intercompany loan receivable with identical terms and notional value to the Floating-Rate Cross-Currency Swap and reciprocal intercompany cross-currency interest rate swap. The fair value hedge designated on these instruments was discontinued at the date of settlement and resulted in a reclassification of $1,719 of previously unrecognized losses from accumulated OCI into earnings. The loss on discontinuation of the fair value hedging relationship is recognized in “Gain on cross-currency interest rate swaps, net” in Woodward’s Condensed Consolidated Statements of Earnings.
Concurrent with settlement of the Floating-Rate Cross-Currency Swap and discontinuation of the previous fair value hedging relationship, a US dollar denominated intercompany loan payable with identical terms and notional value as the 2020 Floating-Rate Cross-Currency Swap, together with a reciprocal intercompany floating-rate cross-currency interest rate swap, was entered into by Woodward Barbados Euro Financing SRL (“Euro Barbados”), a wholly owned subsidiary of Woodward. The US dollar denominated intercompany loan and reciprocal intercompany floating-rate cross-currency interest rate swap is designated as a fair value hedge under the criteria prescribed in ASC 815. The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the US dollar denominated intercompany loan, as Euro Barbados maintains a Euro functional currency.
For each floating-rate intercompany cross-currency interest rate swap, only the change in the fair value related to the cross currencycross-currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated other comprehensive (losses) earnings (“accumulated OCI”).OCI. The remaining change in the fair value of the 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 Earnings. The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro and US dollar denominated loan.loans. Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the cross currencycross-currency basis spread. The initial cost of the cross currencycross-currency basis spread is recorded in earnings each period through the swap accrual process. There isare no credit-risk-related contingent features associated with the intercompany floating-rate cross currencycross-currency interest rate swap.
Derivative instruments in cash flow hedging relationships
In conjunction with the entry into the Fixed-Rate Cross CurrencyCross-Currency Swaps, five5 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 currencycross-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-year period.
ChangesIn May 2020, Woodward settled the Euro denominated intercompany loans receivable with identical terms and notional value to the Fixed-Rate Cross-Currency Swaps and reciprocal cross-currency interest rate swaps. The cash flow hedges designated on these instruments were discontinued at the date of settlement and resulted in a reclassification of $32,200 of previously unrecognized gains from accumulated OCI into earnings. The gain on discontinuation of the cash flow hedging relationships is recognized in “Gain on cross-currency interest rate swaps, net” in Woodward’s Condensed Consolidated Statements of Earnings.
Concurrent with settlement of the Fixed-Rate Cross-Currency Swaps and the discontinuation of the previous cash flow hedging relationships, 5 corresponding US dollar intercompany loans payable, with identical terms and notional values of each tranche of the 2020 Fixed-Rate Cross-Currency Swaps, together with reciprocal fixed-rate intercompany cross-currency interest rate swaps were entered into by Euro 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 US dollar denominated intercompany loans over a thirteen-year period, as Euro Barbados maintains a Euro functional currency.
For each of the fixed-rate intercompany cross-currency interest rate swaps, 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. Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro and US dollar denominated intercompany loans, including associated interest. Hedge effectiveness is assessed based on the fair value changes of the derivative instruments and such hedges are 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 currencycross-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 hedge 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 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 OCI 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 (the “Series M Notes”). Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. Related to the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings are net foreign exchange losses of $792 for the three-months and $1,187 for the nine-months ended June 30, 2020, compared to net foreign exchange losses of $598 for the three-months and net foreign exchangesexchange gains of $976 for the nine-months ended June 30, 2019, compared to net foreign exchange gains of $2,559 for the three-months and $548 for the nine-months ended June 30, 2018.2019.
Impact of derivative instruments designated as qualifying hedging instruments
The 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, 2020 |
| |||||||||
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 |
| $ | 2,254 |
|
| $ | 718 |
|
| $ | 2,254 |
|
Cross-currency interest rate swap agreements designated as cash flow hedges |
| Selling, general and administrative expenses |
|
| (24,885 | ) |
|
| 25,293 |
|
|
| (24,885 | ) |
Treasury lock agreement designated as cash flow hedge |
| Interest expense |
|
| (18 | ) |
|
| — |
|
|
| (18 | ) |
|
|
|
| $ | (22,649 | ) |
| $ | 26,011 |
|
| $ | (22,649 | ) |
|
|
|
| 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 |
|
|
|
|
| Nine-Months Ended |
| |||||||||
|
|
|
| June 30, 2020 |
| |||||||||
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 |
| $ | 2,487 |
|
| $ | 2,793 |
|
| $ | 3,291 |
|
Cross-currency interest rate swap agreements designated as cash flow hedges |
| Selling, general and administrative expenses |
|
| (21,492 | ) |
|
| (10,786 | ) |
|
| (21,492 | ) |
Treasury lock agreement designated as cash flow hedge |
| Interest expense |
|
| (54 | ) |
|
| — |
|
|
| (54 | ) |
|
|
|
| $ | (19,059 | ) |
| $ | (7,993 | ) |
| $ | (18,255 | ) |
|
|
|
| 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 | ) |
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 | ||||||
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$15,230 as of June 30, 20192020 and $21,315$5,004 as of September 30, 2018.2019.
Note 9. Supplemental statement of cash flows information
|
| Nine-Months Ended June 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Interest paid, net of amounts capitalized |
| $ | 24,323 |
|
| $ | 36,018 |
|
Income taxes paid |
|
| 79,353 |
|
|
| 56,210 |
|
Income tax refunds received |
|
| 15,123 |
|
|
| 1,453 |
|
Non-cash activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment on account |
|
| 2,230 |
|
|
| 4,423 |
|
Impact of the adoption of ASC 606 |
|
| — |
|
|
| 38,700 |
|
Impact of the adoption of ASC 842 (Note 5) |
|
| 255 |
|
|
| — |
|
Impact of the adoption of ASU 2016-16 |
|
| — |
|
|
| 1,005 |
|
Common shares issued from treasury to settle benefit obligations (Note 21) |
|
| 14,748 |
|
|
| 14,846 |
|
Purchases of treasury stock on account |
|
| — |
|
|
| 4,204 |
|
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. InventoriesSale of businesses
In the first quarter of fiscal year 2020, Woodward’s board of directors (“the Board”) approved a plan to divest Woodward’s renewable power systems business, protective relays business, and other businesses within the Company’s Industrial segment (collectively, the “disposal group”).
Woodward determined that the approved plan to divest the disposal group represented a triggering event requiring (i) the net assets of the disposal group to be classified as held for sale and (ii) the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the value of the long-lived assets of the disposal group, including goodwill, intangible assets, ROU assets and property, plant, and equipment, were not recoverable and a $22,900 non-cash impairment charge was recorded during the nine-months ended June 30, 2020. The non-cash impairment charge removed all the goodwill, intangible assets, ROU assets and property, plant, and equipment associated with the disposal group from the Condensed Consolidated Balance Sheets as of June 30, 2020.
Further, on the approval of the divestiture plan and subsequent marketing of the disposal group, Woodward determined that based on the current market conditions, the carrying value of the disposal group’s remaining held for sale net assets exceeded the fair value. As a result, Woodward recorded a valuation allowance to reduce the carrying value of the net assets of the disposal group to their fair value. The non-cash impairment charge associated with the long-lived assets, and related valuation allowance for the other remaining net assets attributable to the disposal group, resulted in a total impairment charge of $37,902.
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 |
(1)Component parts include itemsIn determining the amount by which the carrying value of the disposal group’s remaining net assets exceeded their fair value, Woodward considered primarily the market value of the assets held for sale based on negotiations it had entered into with affiliates of the AURELIUS Group for the sale of the majority of the disposal group. On January 31, 2020, Woodward entered into a definitive agreement to sell the majority of the disposal group to affiliates of the AURELIUS Group for $23,400, subject to customary purchase price adjustments, consisting of cash and a $6,000 promissory note. The assets were primarily located in Germany, Poland and Bulgaria and accounted for approximately $80,000 of sales in fiscal year 2019. The valuation reserve recorded to reduce the carrying value of the net assets held for sale was based on the estimated selling price pursuant to the definitive agreement reduced by the estimated working capital adjustments, transaction costs, and anticipated losses on assets held for sale that can be sold separately as finished goods orwere not included in the manufacturedisposal group to be sold to the AURELIUS Group.
During the third quarter of other products.fiscal year 2020, Woodward recognized an additional loss on sale of the disposal group of $2,540 as a result of working capital adjustments realized upon closing of the sale. The loss on sale of the disposal group is recorded in the line item “Other (income) expense, net” in the Condensed Consolidated Statements of Earnings.
The transactions consummating the sale of the disposal group were completed on April 30, 2020. The carrying value of the assets and liabilities sold were as follows:
|
| June 30, 2020 |
| |
Assets: |
|
|
|
|
Accounts receivable |
| $ | 17,637 |
|
Inventories |
|
| 441 |
|
Other current assets |
|
| 796 |
|
Other assets |
|
| 51 |
|
Total assets |
|
| 18,925 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable |
|
| 7,633 |
|
Accrued liabilities |
|
| 2,998 |
|
Other liabilities |
|
| 450 |
|
Total liabilities |
| $ | 11,081 |
|
Note 11. Inventories
|
| June 30, |
|
| September 30, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Raw materials |
| $ | 139,440 |
|
| $ | 134,878 |
|
Work in progress |
|
| 107,904 |
|
|
| 133,885 |
|
Component parts(1) |
|
| 297,263 |
|
|
| 287,128 |
|
Finished goods |
|
| 87,642 |
|
|
| 59,051 |
|
Customer supplied inventory |
|
| 17,799 |
|
|
| 13,396 |
|
On-hand inventory for which control has transferred to the customer |
|
| (144,105 | ) |
|
| (111,502 | ) |
|
| $ | 505,943 |
|
| $ | 516,836 |
|
(1) | Component parts include items that can be sold separately as finished goods or included in the manufacture of other products. |
Note 11.12. Property, plant, and equipment
|
| June 30, |
|
| September 30, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Land and land improvements |
| $ | 89,379 |
|
| $ | 94,976 |
|
Buildings and building improvements |
|
| 577,538 |
|
|
| 587,541 |
|
Leasehold improvements |
|
| 18,029 |
|
|
| 17,446 |
|
Machinery and production equipment |
|
| 753,709 |
|
|
| 731,159 |
|
Computer equipment and software |
|
| 122,434 |
|
|
| 124,201 |
|
Office furniture and equipment |
|
| 40,723 |
|
|
| 39,934 |
|
Other |
|
| 19,479 |
|
|
| 19,346 |
|
Construction in progress |
|
| 42,449 |
|
|
| 57,624 |
|
|
|
| 1,663,740 |
|
|
| 1,672,227 |
|
Less accumulated depreciation |
|
| (655,481 | ) |
|
| (613,452 | ) |
Property, plant, and equipment, net |
| $ | 1,008,259 |
|
| $ | 1,058,775 |
|
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 |
In 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 Fort Collins, Colorado.Colorado, and in fiscal year 2019, Woodward finalized the relocation. On December 30, 2019 the Company closed on the sale of one of two parcels of real property at Woodward’s former Duarte operations and recorded a pre-tax gain on sale of assets of $13,522 (see Note 18, Other (income) expense, net). The carrying value of the assets at theremaining parcel of Duarte facility was $10,738real property is $2,520 as of June 30, 2019,2020, all of which the Company has identified assetsas an asset held for sale with a carrying value of $7,848. At September 30, 2018, the Company identified assets held for sale of $8,306. The majority of the assets held for sale areand is 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 assetsasset held for sale areis included in the Company’s Aerospace segment.unallocated corporate property, plant, and equipment. Based on an existing real property purchase agreement and current market conditions, the Company expects to record aan additional gain on the eventualsubsequent sale of these assets. The Company has identified approximately $377 thatthe remaining parcel of real property, which is plannedexpected to be disposed of as a result of the relocation.
close by September 30, 2020. 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 concluded that the assets were not impaired as of June 30, 2020 and September 30, 2019.
In the first quarter of fiscal year 2015,2020, Woodward completeddetermined that the approved plan to divest of the disposal group (see Note 10, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and placed into servicecircumstances at that time, Woodward determined that the remaining value of the plant, property and equipment of the disposal group was not recoverable and a manufacturing and office building on a second campus in$13,421 non-cash impairment charge was recorded during 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 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 $23,801 atnine-months ended June 30, 2019 and $32,248 at September 30, 2018 associated with new equipment purchases for the 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.2020.
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 and nine-months ended June 30, 20192020 and 2018,2019, 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 |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Depreciation expense |
| $ | 22,378 |
|
| $ | 21,665 |
|
| $ | 68,101 |
|
| $ | 62,998 |
|
For the three and nine-months ended June 30, 2019 and 2018, Woodward capitalized interest that would have otherwise been included in interest expense of the following:Note 13. Goodwill
Three-Months Ended | Nine-Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Capitalized interest | $ | 176 | $ | 607 | $ | 611 | $ | 1,841 |
|
| September 30, 2019 |
|
| Impairment Charges |
|
| Effects of Foreign Currency Translation |
|
| June 30, 2020 |
| ||||
Aerospace |
| $ | 455,423 |
|
| $ | — |
|
| $ | — |
|
| $ | 455,423 |
|
Industrial |
|
| 342,430 |
|
|
| (8,640 | ) |
|
| 7,159 |
|
|
| 340,949 |
|
Consolidated |
| $ | 797,853 |
|
| $ | (8,640 | ) |
| $ | 7,159 |
|
| $ | 796,372 |
|
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 | |||
On 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.
Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, orand at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events. Woodward’s fourth quarter of fiscal year 20182019 impairment test resulted in no impairment, and there were no triggering events inimpairment.
In the first or second quartersquarter 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, 2019,2020, Woodward determined that this action by Senvionthe approved plan to divest of the disposal group (see Note 10, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at the time, Woodward determined that the remaining value of the goodwill of the disposal group was not recoverable and an interim goodwill$8,640 non-cash impairment testcharge was recorded during the nine-months ended June 30, 2020.
During the second and third quarters of its renewable power systems reporting unit. Based on the results of this interim impairment test,fiscal year 2020, Woodward determined the renewable power systemseconomic uncertainty and global disruption caused by the COVID-19 pandemic will significantly impact future sales of all business units. Management concluded the overall economic disruption triggered by the COVID-19 pandemic generated a series of factors to consider relative to possible triggering events. However, management further concluded these factors do not individually or collectively represent triggering events that would indicate it was more likely than not that the fair value of a reporting unit’s goodwill was not impairedunit is below its carrying amount as of June 30, 2019.2020. Woodward will continue to monitor the impacts of the COVID-19 pandemic on earnings that may impact the carrying value of goodwill and long-lived assets in future periods.
32
Note 13.14. Intangible assets, net
June 30, 2019 | September 30, 2018 |
| June 30, 2020 |
|
| September 30, 2019 |
| ||||||||||||||||||||||||||||||||||
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 | $ | 281,683 | $ | (178,177) | $ | 103,506 | $ | 281,683 | $ | (166,719) | $ | 114,964 |
| $ | 281,683 |
|
| $ | (192,890 | ) |
| $ | 88,793 |
|
| $ | 281,683 |
|
| $ | (181,995 | ) |
| $ | 99,688 |
| |||||
Industrial | 421,876 | (40,138) | 381,738 | 429,880 | (35,856) | 394,024 |
|
| 412,644 |
|
|
| (51,883 | ) |
|
| 360,761 |
|
|
| 407,683 |
|
|
| (43,986 | ) |
|
| 363,697 |
| |||||||||||
Total | $ | 703,559 | $ | (218,315) | $ | 485,244 | $ | 711,563 | $ | (202,575) | $ | 508,988 |
| $ | 694,327 |
|
| $ | (244,773 | ) |
| $ | 449,554 |
|
| $ | 689,366 |
|
| $ | (225,981 | ) |
| $ | 463,385 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Intellectual property: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |||||
Industrial | 19,354 | (18,763) | 591 | 19,448 | (18,587) | 861 |
|
| 15,750 |
|
|
| (15,565 | ) |
|
| 185 |
|
|
| 19,201 |
|
|
| (18,705 | ) |
|
| 496 |
| |||||||||||
Total | $ | 19,354 | $ | (18,763) | $ | 591 | $ | 19,448 | $ | (18,587) | $ | 861 |
| $ | 15,750 |
|
| $ | (15,565 | ) |
| $ | 185 |
|
| $ | 19,201 |
|
| $ | (18,705 | ) |
| $ | 496 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Process technology: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | 76,371 | $ | (58,654) | $ | 17,717 | $ | 76,372 | $ | (54,874) | $ | 21,498 |
| $ | 76,371 |
|
| $ | (62,946 | ) |
| $ | 13,425 |
|
| $ | 76,371 |
|
| $ | (59,913 | ) |
| $ | 16,458 |
| |||||
Industrial | 95,645 | (23,990) | 71,655 | 97,154 | (20,373) | 76,781 |
|
| 87,733 |
|
|
| (20,992 | ) |
|
| 66,741 |
|
|
| 92,820 |
|
|
| (24,926 | ) |
|
| 67,894 |
| |||||||||||
Total | $ | 172,016 | $ | (82,644) | $ | 89,372 | $ | 173,526 | $ | (75,247) | $ | 98,279 |
| $ | 164,104 |
|
| $ | (83,938 | ) |
| $ | 80,166 |
|
| $ | 169,191 |
|
| $ | (84,839 | ) |
| $ | 84,352 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Backlog: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |||||
Industrial | 42,066 | (42,066) | - | 42,955 | (18,006) | 24,949 |
|
| 41,590 |
|
|
| (41,590 | ) |
|
| — |
|
|
| 40,500 |
|
|
| (40,500 | ) |
|
| — |
| |||||||||||
Total | $ | 42,066 | $ | (42,066) | $ | - | $ | 42,955 | $ | (18,006) | $ | 24,949 |
| $ | 41,590 |
|
| $ | (41,590 | ) |
| $ | — |
|
| $ | 40,500 |
|
| $ | (40,500 | ) |
| $ | — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Other intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |||||
Industrial | 1,598 | (1,257) | 341 | 1,629 | (1,158) | 471 |
|
| 225 |
|
|
| (156 | ) |
|
| 69 |
|
|
| 1,541 |
|
|
| (1,249 | ) |
|
| 292 |
| |||||||||||
Total | $ | 1,598 | $ | (1,257) | $ | 341 | $ | 1,629 | $ | (1,158) | $ | 471 |
| $ | 225 |
|
| $ | (156 | ) |
| $ | 69 |
|
| $ | 1,541 |
|
| $ | (1,249 | ) |
| $ | 292 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Intangible asset with indefinite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Tradename: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |||||
Industrial | 65,933 | - | 65,933 | 67,335 | - | 67,335 |
|
| 65,184 |
|
|
| — |
|
|
| 65,184 |
|
|
| 63,467 |
|
|
| — |
|
|
| 63,467 |
| |||||||||||
Total | $ | 65,933 | $ | - | $ | 65,933 | $ | 67,335 | $ | - | $ | 67,335 |
| $ | 65,184 |
|
| $ | — |
|
| $ | 65,184 |
|
| $ | 63,467 |
|
| $ | — |
|
| $ | 63,467 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Aerospace | $ | 358,054 | $ | (236,831) | $ | 121,223 | $ | 358,055 | $ | (221,593) | $ | 136,462 |
| $ | 358,054 |
|
| $ | (255,836 | ) |
| $ | 102,218 |
|
| $ | 358,054 |
|
| $ | (241,908 | ) |
| $ | 116,146 |
| |||||
Industrial | 646,472 | (126,214) | 520,258 | 658,401 | (93,980) | 564,421 |
|
| 623,126 |
|
|
| (130,186 | ) |
|
| 492,940 |
|
|
| 625,212 |
|
|
| (129,366 | ) |
|
| 495,846 |
| |||||||||||
Consolidated Total | $ | 1,004,526 | $ | (363,045) | $ | 641,481 | $ | 1,016,456 | $ | (315,573) | $ | 700,883 |
| $ | 981,180 |
|
| $ | (386,022 | ) |
| $ | 595,158 |
|
| $ | 983,266 |
|
| $ | (371,274 | ) |
| $ | 611,992 |
|
Woodward tests the indefinite lived tradename intangible asset for impairment during the fourth quarter of each fiscal year, or at any time there is an indication the indefinite lived tradename intangible asset is more-likely-than-not impaired, commonly referred to as triggering events.
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the disposal group (see Note 10, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of the intangible assets of the disposal group was not recoverable and a $200 non-cash impairment charge was recorded for the nine-months ended June 30, 2020.
For the three and nine-months ended June 30, 20192020 and 2018,2019, 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 |
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Amortization expense |
| $ | 9,728 |
|
| $ | 11,305 |
|
| $ | 29,481 |
|
| $ | 45,470 |
|
33
Future amortization expense associated with intangibles is expected to be:
Year Ending September 30: |
|
|
|
| |||||
2019 (remaining) | $ | 10,689 | |||||||
2020 | 39,917 | ||||||||
2020 (remaining) |
| $ | 9,788 |
| |||||
2021 | 40,903 |
|
| 40,084 |
| ||||
2022 | 38,700 |
|
| 37,975 |
| ||||
2023 | 37,642 |
|
| 36,923 |
| ||||
2024 |
|
| 33,146 |
| |||||
Thereafter | 407,697 |
|
| 372,058 |
| ||||
$ | 575,548 |
| $ | 529,974 |
|
Note 14.15. 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 providedprovides for the option to increase available borrowings up to $1,200,000,$1,500,000, subject to lenders’ participation. On 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 0.875% to 1.75%. The Revolving Credit Agreement matures on June 19, 2024. Under the Amended and Restated Revolving Credit Agreement, there were $361,852$98,639 in principal amount of borrowings outstanding as of June 30, 2019,2020, at an effective interest rate of 3.54%. Under the prior Revolving Credit Agreement, there were $266,5411.28%, and $262,297 in principal amount of borrowings outstanding as of September 30, 2018,2019, at an effective interest rate of 3.48%3.01%.
As of June 30, 2019, $180,0002020, $98,639 of the borrowings under the Amended and Restated Revolving Credit Agreement were classified as short-term borrowings, and as of September 30, 2018, $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. As of September 30, 2019, $220,000 of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings.
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 no0 borrowings outstanding on Woodward’s foreign lines of credit and foreign overdraft facilities as of both June 30, 20192020 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
June 30, | September 30, |
| June 30, |
|
| September 30, |
| |||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| |||||||
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.875% - 1.75%), due June 19, 2024; unsecured | $ | 181,852 | $ | 116,541 |
| $ | — |
|
| $ | 42,297 |
| ||
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 |
|
| 50,000 |
|
|
| 50,000 |
| ||||
Series H notes – 4.03%, due November 15, 2023; unsecured | 25,000 | 25,000 |
|
| 25,000 |
|
|
| 25,000 |
| ||||
Series I notes – 4.18%, due November 15, 2025; unsecured | 25,000 | 25,000 |
|
| 25,000 |
|
|
| 25,000 |
| ||||
Series J notes – Floating rate (LIBOR plus 1.25%), due November 15, 2020; unsecured | 50,000 | 50,000 |
|
| 50,000 |
|
|
| 50,000 |
| ||||
Series K notes – 4.03%, due November 15, 2023; unsecured | 50,000 | 50,000 |
|
| 50,000 |
|
|
| 50,000 |
| ||||
Series L notes – 4.18%, due November 15, 2025; unsecured | 50,000 | 50,000 |
|
| 50,000 |
|
|
| 50,000 |
| ||||
Series M notes – 1.12% due September 23, 2026; unsecured | 45,470 | 46,437 |
|
| 44,955 |
|
|
| 43,770 |
| ||||
Series N notes – 1.31% due September 23, 2028; unsecured | 87,532 | 89,393 |
|
| 86,538 |
|
|
| 84,257 |
| ||||
Series O notes – 1.57% due September 23, 2031; unsecured | 48,882 | 49,921 |
|
| 48,326 |
|
|
| 47,053 |
| ||||
Series P notes – 4.27% due May 30, 2025; unsecured | 85,000 | 85,000 |
|
| 85,000 |
|
|
| 85,000 |
| ||||
Series Q notes – 4.35% due May 30, 2027; unsecured | 85,000 | 85,000 |
|
| 85,000 |
|
|
| 85,000 |
| ||||
Series R notes – 4.41% due May 30, 2029; unsecured | 75,000 | 75,000 |
|
| 75,000 |
|
|
| 75,000 |
| ||||
Series S notes – 4.46% due May 30, 2030; unsecured | 75,000 | 75,000 |
|
| 75,000 |
|
|
| 75,000 |
| ||||
Series T notes – 4.61% due May 30, 2033; unsecured | 80,000 | 80,000 |
|
| 80,000 |
|
|
| 80,000 |
| ||||
Finance leases (Note 5) |
|
| 3,218 |
|
|
| — |
| ||||||
Unamortized debt issuance costs | (2,589) | (2,895) |
|
| (2,229 | ) |
|
| (2,478 | ) | ||||
Total long-term debt | 1,011,147 | 1,092,397 |
|
| 830,808 |
|
|
| 864,899 |
| ||||
Less: Current portion of long-term debt | - | - |
|
| 101,643 |
|
|
| — |
| ||||
Long-term debt, less current portion | $ | 1,011,147 | $ | 1,092,397 |
| $ | 729,165 |
|
| $ | 864,899 |
|
The Notes
In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes, due on October 1, 2018. On October 1, 2018, Woodward paid the entire principal balance of $100,000 on the Series D Notes using proceeds from borrowings under its revolving credit facility.
In April 2009, Woodward entered into a note purchase agreement relating to the Series F 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” and together with the Series D Notes, the Series F Notes and the First Closing Notes, collectively the “USD Notes”) on November 15, 2013. The current portion of long-term debt as of June 30, 2020 includes the aggregate principal amount of the Series G and Series J notes, both of which mature on November 15, 2020, and the current portion of finance lease liabilities.
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 Series M 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 and 2016 Notes, the “Notes”), in a series of private placement transactions.
In connection with the issuance of the 2018 Notes, the Company entered into cross currencycross-currency swap transactions in respect of each tranche of the 2018 Notes, which effectively reduced the interest rates on the Series P 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 June 30, 2019,2020, the Series J Notes bore interest at an effective rate of 3.77%1.63%. Commencing on November 30, 2018, interestInterest 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 $2,589$2,229 as of June 30, 20192020 and $2,895$2,478 as of September 30, 20182019 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 deferredUnamortized debt issuance costs associated with the AmendedWoodward’s existing 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 $2,990 associated with theseprevious revolving credit agreements of $2,392 as of June 30, 20192020 and $1,385$2,840 as of September 30, 20182019 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 15.16. Accrued liabilities
June 30, | September 30, |
| June 30, |
|
| September 30, |
| ||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| ||||||
Salaries and other member benefits | $ | 105,988 | $ | 88,643 |
| $ | 53,094 |
|
| $ | 115,649 |
| |
Warranties | 22,848 | 20,130 |
|
| 21,380 |
|
|
| 27,309 |
| |||
Interest payable | 5,542 | 18,611 |
|
| 6,182 |
|
|
| 13,808 |
| |||
Accrued retirement benefits | 3,574 | 3,571 |
|
| 3,617 |
|
|
| 3,587 |
| |||
Current portion of loss reserve on contractual lease commitments | 1,245 | 1,245 | |||||||||||
Current portion of loss reserve on contractual lease commitments (1) |
|
| — |
|
|
| 1,245 |
| |||||
Restructuring charges | 5,363 | 16,522 |
|
| 4,978 |
|
|
| 507 |
| |||
Taxes, other than income | 15,729 | 21,128 |
|
| 16,001 |
|
|
| 15,708 |
| |||
Net current contract liabilities (Note 3) | 26,307 | 9,659 |
|
| 30,222 |
|
|
| 27,891 |
| |||
Other | 20,189 | 15,004 |
|
| 26,821 |
|
|
| 22,423 |
| |||
$ | 206,785 | $ | 194,513 |
| $ | 162,295 |
|
| $ | 228,127 |
|
(1) | See Note 17, Otherliabilities, for more information on loss reserve on contractual lease commitments. |
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, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
Warranties, beginning of period | $ | 21,790 | $ | 13,283 | $ | 20,130 | $ | 13,597 |
| $ | 21,770 |
|
| $ | 21,790 |
|
| $ | 27,309 |
|
| $ | 20,130 |
| |||
Increases due to acquisition of L'Orange | - | 6,045 | - | 6,045 | |||||||||||||||||||||||
Impact from adoption of ASC 606 (Note 3) | - | - | 704 | - | |||||||||||||||||||||||
Impact from adoption of ASC 606 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 704 |
| |||||||||||
Expense, net of recoveries | 4,268 | 2,696 | 10,035 | 3,000 |
|
| 2,407 |
|
|
| 4,268 |
|
|
| 6,189 |
|
|
| 10,035 |
| |||||||
Reductions for settlement of previous warranty liabilities | (3,315) | (1,838) | (7,864) | (2,670) |
|
| (2,874 | ) |
|
| (3,315 | ) |
|
| (12,328 | ) |
|
| (7,864 | ) | |||||||
Foreign currency exchange rate changes | 105 | (384) | (157) | (170) |
|
| 77 |
|
|
| 105 |
|
|
| 210 |
|
|
| (157 | ) | |||||||
Warranties, end of period | $ | 22,848 | $ | 19,802 | $ | 22,848 | $ | 19,802 |
| $ | 21,380 |
|
| $ | 22,848 |
|
| $ | 21,380 |
|
| $ | 22,848 |
|
36
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 June 30, | Nine-Months Ended June 30, | ||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||
Loss reserve on contractual lease commitments, beginning of period | $ | 3,382 | $ | 4,478 | $ | 3,931 | $ | 5,270 | |||
Payments, net of sublease income | (269) | (267) | (818) | (1,059) | |||||||
Loss reserve on contractual lease commitments, end of period | $ | 3,113 | $ | 4,211 | $ | 3,113 | $ | 4,211 |
Other liabilities included $1,868 and $2,686 of accrued loss reserve on contractual lease commitments as of June 30, 2019 and September 30, 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 expensesexpenses.
During the third quarter of fiscal year 2020, the Company committed to a plan of termination (the “Termination Plan”) in response to the ongoing global economic challenges resulting from the COVID-19 pandemic and are expected to be paid within one yearits impact on the Company’s business. The Termination Plan involved the termination and/or furlough of employees and contractors at certain of the balance sheet date,Company’s operating facilities, primarily in the United States. As a result of which $491 was paid during fiscal year 2018the Termination Plan, the Company incurred $19,040 of restructuring charges related to employee severance and benefits costs as of June 30, 2020, with the Company’s industrial turbomachinery business realignment.majority of the cash expenditures being paid by June 30, 2020. All of the restructuring charges recorded during the nine-months ended June 30, 2020 were recorded as nonsegment expenses.
The summary of activity in accrued restructuring charges during the nine-months ended June 30, 2020 and June 30, 2019 isare as follows:
Period Activity |
|
|
|
|
| Period Activity |
|
|
|
|
| |||||||||||||||||||||||||||
Balances as of October 1, 2018 | Charges (gains) | Cash receipts (payments) | Non-cash activity | Balances as of June 30, 2019 |
| Balances as of October 1, 2019 |
|
| Charges (reductions) |
|
| Cash receipts (payments) |
|
| Foreign currency exchange rate changes |
|
| Non-cash activity |
|
| Balances as of June 30, 2020 |
| ||||||||||||||||
Workforce management costs associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Duarte plant relocation | $ | 12,504 | $ | - | $ | (7,908) | $ | - | $ | 4,596 |
| $ | 440 |
|
| $ | — |
|
| $ | (440 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
| ||||
Industrial turbomachinery business realignment | 4,018 | - | (3,251) | - | 767 |
|
| 67 |
|
|
| — |
|
|
| (67 | ) |
|
| — |
|
|
| — |
|
|
| — |
| |||||||||
COVID-19 pandemic |
|
| — |
|
|
| 19,040 |
|
|
| (14,052 | ) |
|
| (10 | ) |
|
| — |
|
|
| 4,978 |
| ||||||||||||||
Total | $ | 16,522 | $ | - | $ | (11,159) | $ | - | $ | 5,363 |
| $ | 507 |
|
| $ | 19,040 |
|
| $ | (14,559 | ) |
| $ | (10 | ) |
| $ | — |
|
| $ | 4,978 |
|
|
|
|
|
|
| Period Activity |
|
|
|
|
| |||||||||||||
|
| Balances as of October 1, 2018 |
|
| Charges (reductions) |
|
| Cash receipts (payments) |
|
| Foreign currency exchange rate changes |
|
| 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 16.17. Other liabilities
June 30, | September 30, |
| June 30, |
|
| September 30, |
| |||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| |||||||
Net accrued retirement benefits, less amounts recognized within accrued liabilities | $ | 90,512 | $ | 90,722 |
| $ | 113,568 |
|
| $ | 111,257 |
| ||
Total unrecognized tax benefits | 10,447 | 8,582 |
|
| 12,373 |
|
|
| 10,644 |
| ||||
Noncurrent income taxes payable | 20,301 | 12,494 |
|
| 18,322 |
|
|
| 20,251 |
| ||||
Deferred economic incentives (1) | 11,924 | 13,038 |
|
| 9,352 |
|
|
| 11,535 |
| ||||
Loss reserve on contractual lease commitments (2) | 1,868 | 2,686 |
|
| — |
|
|
| 1,754 |
| ||||
Cross currency swap derivative liability (3) | 4,319 | 23,000 | ||||||||||||
Net noncurrent contract liabilities (4) | 332,927 | 235,300 | ||||||||||||
Net noncurrent contract liabilities (3) |
|
| 356,175 |
|
|
| 337,165 |
| ||||||
Other | 11,886 | 12,233 |
|
| 65,737 |
|
|
| 13,482 |
| ||||
$ | 484,184 | $ | 398,055 |
| $ | 575,527 |
|
| $ | 506,088 |
|
(1) | 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. |
37
(2) | In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a lease facility in Skokie, Illinois, and recorded a loss reserve on the estimated remaining contractual lease commitment, net of anticipated sublease income. As of September 30, 2019, the current portion of the accrued loss reserve on contractual lease commitments was included in “accrued liabilities” (see Note 16, Accrued liabilities). Woodward adopted ASC 842 on October 1, 2019, which requires that any pre-adoption liabilities related to exit or disposal cost obligations reduce the amount of the ROU asset recognized upon adoption. Accordingly, as of October 1, 2019, Woodward recognized a finance lease liability of $2,688 consisting of the future lease component payments, with no corresponding ROU asset recognized, and reduced the current and noncurrent portions of the loss reserve on contractual lease commitments to zero. The amount of the finance lease liability will be reduced in an amount equal to the lease payments made over the remaining term of the lease, which ends in 2022. Future non-lease component payments on the lease and future sublease income received will be recognized in the periods in which they are earned. |
(3) |
|
Note 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 17.18. Other (income) expense, net
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, | June 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Equity interest in the earnings of the JV (Note 6) | $ | (3,290) | $ | (738) | $ | (7,761) | $ | (2,340) |
| $ | (931 | ) |
| $ | (3,290 | ) |
| $ | (8,824 | ) |
| $ | (7,761 | ) | ||||
Net loss (gain) on sales of assets | 680 | 50 | 880 | (404) | ||||||||||||||||||||||||
Net (gain) loss on sales of assets and businesses(1) |
|
| 2,545 |
|
|
| 680 |
|
|
| (11,012 | ) |
|
| 880 |
| ||||||||||||
Rent income | (44) | (28) | (188) | (99) |
|
| (520 | ) |
|
| (44 | ) |
|
| (1,095 | ) |
|
| (188 | ) | ||||||||
Net gain on investments in deferred compensation program | (894) | (257) | (821) | (957) | ||||||||||||||||||||||||
Loss on forward option derivative instrument (Note 8) | - | 5,543 | - | 5,543 | ||||||||||||||||||||||||
Net (gain) loss on investments in deferred compensation program |
|
| (3,456 | ) |
|
| (894 | ) |
|
| (1,680 | ) |
|
| (821 | ) | ||||||||||||
Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense | (3,245) | (3,222) | (9,739) | (9,603) |
|
| (2,911 | ) |
|
| (3,245 | ) |
|
| (8,884 | ) |
|
| (9,739 | ) | ||||||||
Other | (123) | (373) | (505) | (731) |
|
| (230 | ) |
|
| (123 | ) |
|
| (496 | ) |
|
| (505 | ) | ||||||||
$ | (6,916) | $ | 975 | $ | (18,134) | $ | (8,591) |
| $ | (5,503 | ) |
| $ | (6,916 | ) |
| $ | (31,991 | ) |
| $ | (18,134 | ) |
(1) | Included in net (gain) loss on sale of assets for the nine-months ended June 30, 2020 was the pre-tax gain on sale of Duarte real property in the amount of $13,522recognized in the first quarter of fiscal year 2020 and a net loss on divestiture of the disposal group of $2,540 in the third quarter of fiscal year 2020. |
Note 18.19. Income taxes
U.S. GAAP requires the interim 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 events occur. |
The determination of the annual effective tax rate is based upon a number of significant estimates and 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%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.
Enactment of the Tax Act during December 2017 resulted in a discrete net charge to Woodward’s income tax expense in the amount of $14,778, which was recorded in the three-months ended December 31, 2018. After adjustments to amounts made throughout fiscal year 2018, the net impact of the enactment of the Tax Act was $10,860. Woodward finalized its assessment of the income tax effects of the Tax Act in the first quarter of fiscal year 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 IRS, the SEC, and the FASB and/or various other tax jurisdictions. 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 the IRS will issue additional regulations related to the Tax Act which may have an impact on Woodward’s future income tax expense.
The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, | June 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Earnings before income taxes | $ | 92,314 | $ | 54,417 | $ | 243,997 | $ | 140,551 |
| $ | 45,016 |
|
| $ | 92,314 |
|
| $ | 213,763 |
|
| $ | 243,997 |
| ||||
Income tax expense | 26,207 | 5,300 | 51,191 | 34,685 |
|
| 6,551 |
|
|
| 26,207 |
|
|
| 30,607 |
|
|
| 51,191 |
| ||||||||
Effective tax rate | 28.4% | 9.7% | 21.0% | 24.7% |
|
| 14.6 | % |
|
| 28.4 | % |
|
| 14.3 | % |
|
| 21.0 | % |
The increasedecrease in the effective tax rate for the three-months ended June 30, 20192020, compared to the three-months ended June 30, 20182019 is primarily attributable to favorable resolutions of tax matters in the prior fiscal year quarter that did not repeat in the current quarter and(i) the additional income tax expense related to theresulting from 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 domestic 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 thatwhich did not repeat in the current quarter and (ii) increased foreign earnings in a lower tax jurisdiction resulting from the net gain on the termination of the cross-currency interest rate swaps. This decrease was partially offset by a reduction in the U.S. federal corporatecertain state tax credits and a smaller favorable net excess income tax rate provided by the Tax Act.benefits from stock-based compensation.
The decrease in the effective tax rate for the nine-months ended June 30, 2019,2020 compared to the nine-months ended June 30, 20182019 is primarily attributable to higher(i) the additional income tax expense related toresulting from Transition Tax regulations issued by the Tax Act recognized in the prior fiscal year compared to the amount recognizedIRS on June 14, 2019 which did not repeat in the current fiscal year (ii) increased foreign earnings in a lower tax jurisdiction resulting from the reduction innet gain on the U.S. federal corporate incometermination of the cross-currency interest rate swaps, and (iii) the tax rate providedbenefit associated with the impairment of assets sold. This decrease was partially offset by the Tax Act in the first nine months of fiscal year 2019, and ana smaller favorable 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 earnings in the first nine months of fiscal year 2019, and the loss of the domestic production activities deduction in the first nine months of fiscal year 2019.compensation.
Gross unrecognized tax benefits were $10,143$11,907 as of June 30, 2019,2020, and $8,364$10,305 as of September 30, 2018. Included in2019. At June 30, 2020, the balanceamount of the liability for unrecognized tax benefits were $4,012 in tax benefits as of June 30, 2019 and $3,288 as of September 30, 2018 that, if recognized, would affect theimpact Woodward’s effective tax rate.rate was $5,159. At this time, Woodward does not believe it is reasonably possible that the liability for unrecognized tax benefits will decrease in the next twelve 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 $393$605 as of June 30, 20192020 and $279$437 as of September 30, 2018.2019.
In March 2020, the U.S. Congress passed the “Coronavirus Aid, Relief, and. Economic Security Act” (the “CARES Act”). The CARES Act provides relief from the certain economic impacts of COVID-19 to companies and individuals. Non-income tax impacts of the CARES Act include (i) extension of payment deadliness for certain U.S. payroll taxes and (ii) tax credits for certain qualifying costs incurred by the Company in connection with certain facility closures due to COVID-19. Non-income tax credits are generally recognized as a reduction to costs in the period in which the related costs the credits are intended to compensate are incurred. The non-income tax impacts of the CARES Act were insignificant to the results of operations for the three and nine-months ended June 30, 2020.
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 limitationslimitation may result in changes to tax expense. Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2017 and thereafter. InWoodward is currently under examination by the Internal Revenue Service (“IRS”) for fiscal year 2018, Woodward concluded its U.S. federal income2017, which included a foreign tax examinations throughcredit carryback to fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 20142016 and thereafter. Woodward closed various audits in foreign jurisdictions in the second and third quarters of fiscal year 2019. As a result,Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include fiscal year 2016 and thereafter.
39
Note 19.20. 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 non-U.S. employees are also eligible to participate in similar non-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 124 shares of common stock for a value of $14,748 in the second quarter of fiscal year 2020, compared to 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 2018.2019.
The amount of expense associated with defined contribution plans was as follows:
Three-Months Ended | Nine-Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Company costs | $ | 8,969 | $ | 8,262 | $ | 26,426 | $ | 24,858 |
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Company costs |
| $ | 8,005 |
|
| $ | 8,969 |
|
| $ | 25,619 |
|
| $ | 26,426 |
|
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 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. Although final guidance around the appropriate equalization methodology to be used has not yet been issued, Woodward has initially concluded that Court Ruling is applicable to its defined benefit pension plan in the United Kingdom and will makehas made the necessary plan amendments. Based on its initial estimates, Woodward does not believeWoodward’s current estimate of the impact of the Court Ruling represents a significant event requiring a remeasurementin the amount of its$601 has been reflected in the United Kingdom defined benefit pension plan’s obligation and assets as of JuneSeptember 30, 2019.2019 and is being amortized as a net prior service cost beginning in fiscal year 2020. Woodward does not expect that any changes to the estimate resulting from final guidance around the appropriate equalization methodology to be used will be material to the United Kingdom defined benefit pension plan’s obligation.
U.S. GAAP requires that, for obligations outstanding as of September 30, 2018,2019, 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 However, U.S. GAAP further requires an interim re-measurement of plan assets and obligations when there are substantial plan amendments, settlements, or curtailments. Many variables, such as changes in interest rates, mortality rates, health care costs, investment returns and/or the market value of plan assets, can affect the funded status of our defined benefit pension and other postretirement benefit plans and cause volatility in the net periodic benefit cost and future funding requirements of the plans. Woodward has concluded that the changes in the market conditions as a result of the COVID-19 pandemic do not require an interim re-measurement as Woodward believes that the assumptions, such as the discount rate and expected return on plan assets, used to project the plans’ assets and pension benefit liabilities are conservative, therefore resulting in a proper projection of Woodward’s benefit obligations. Woodward further believes that as a result of the known impacts of the COVID-19 pandemic there are not any significant changes in plan assets, plan amendments, settlements, or curtailments that would result in an interim re–measurement.
The components of the net periodic retirement pension costs recognized are as follows:
Three-Months Ended June 30, |
| Three-Months Ended June 30, |
| |||||||||||||||||||||||||||||||||||||||
United States | Other Countries | Total |
| United States |
|
| Other Countries |
|
| Total |
| |||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||||||||
Service cost | $ | 363 | $ | 410 | $ | 509 | $ | 283 | $ | 872 | $ | 693 |
| $ | 414 |
|
| $ | 363 |
|
| $ | 706 |
|
| $ | 509 |
|
| $ | 1,120 |
|
| $ | 872 |
| ||||||
Interest cost | 1,596 | 1,501 | 477 | 386 | 2,073 | 1,887 |
|
| 1,398 |
|
|
| 1,596 |
|
|
| 313 |
|
|
| 477 |
|
|
| 1,711 |
|
|
| 2,073 |
| ||||||||||||
Expected return on plan assets | (2,996) | (2,904) | (663) | (703) | (3,659) | (3,607) |
|
| (3,087 | ) |
|
| (2,996 | ) |
|
| (690 | ) |
|
| (663 | ) |
|
| (3,777 | ) |
|
| (3,659 | ) | ||||||||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Net actuarial loss | 154 | 150 | 71 | 74 | 225 | 224 |
|
| 358 |
|
|
| 154 |
|
|
| 257 |
|
|
| 71 |
|
|
| 615 |
|
|
| 225 |
| ||||||||||||
Prior service cost | 177 | 177 | - | - | 177 | 177 |
|
| 234 |
|
|
| 177 |
|
|
| 5 |
|
|
| — |
|
|
| 239 |
|
|
| 177 |
| ||||||||||||
Net periodic retirement pension (benefit) cost | $ | (706) | $ | (666) | $ | 394 | $ | 40 | $ | (312) | $ | (626) |
| $ | (683 | ) |
| $ | (706 | ) |
| $ | 591 |
|
| $ | 394 |
|
| $ | (92 | ) |
| $ | (312 | ) | ||||||
Contributions paid | $ | - | $ | - | $ | 319 | $ | 227 | $ | 319 | $ | 227 |
| $ | — |
|
| $ | — |
|
| $ | 335 |
|
| $ | 319 |
|
| $ | 335 |
|
| $ | 319 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| Nine-Months Ended June 30, |
| ||||||||||||||||||||||||||||||||||||||||
Nine-Months Ended June 30, |
| United States |
|
| Other Countries |
|
| Total |
| |||||||||||||||||||||||||||||||||
United States | Other Countries | Total |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
Service cost | $ | 1,088 | $ | 1,232 | $ | 1,533 | $ | 606 | $ | 2,621 | $ | 1,838 |
| $ | 1,244 |
|
| $ | 1,088 |
|
| $ | 2,124 |
|
| $ | 1,533 |
|
| $ | 3,368 |
|
| $ | 2,621 |
| ||||||
Interest cost | 4,788 | 4,503 | 1,442 | 1,059 | 6,230 | 5,562 |
|
| 4,193 |
|
|
| 4,788 |
|
|
| 953 |
|
|
| 1,442 |
|
|
| 5,146 |
|
|
| 6,230 |
| ||||||||||||
Expected return on plan assets | (8,989) | (8,711) | (1,997) | (2,106) | (10,986) | (10,817) |
|
| (9,260 | ) |
|
| (8,989 | ) |
|
| (2,230 | ) |
|
| (1,997 | ) |
|
| (11,490 | ) |
|
| (10,986 | ) | ||||||||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Net actuarial loss | 463 | 449 | 215 | 221 | 678 | 670 |
|
| 1,073 |
|
|
| 463 |
|
|
| 778 |
|
|
| 215 |
|
|
| 1,851 |
|
|
| 678 |
| ||||||||||||
Prior service cost | 532 | 532 | - | - | 532 | 532 |
|
| 702 |
|
|
| 532 |
|
|
| 17 |
|
|
| — |
|
|
| 719 |
|
|
| 532 |
| ||||||||||||
Net periodic retirement pension (benefit) cost | $ | (2,118) | $ | (1,995) | $ | 1,193 | $ | (220) | $ | (925) | $ | (2,215) |
| $ | (2,048 | ) |
| $ | (2,118 | ) |
| $ | 1,642 |
|
| $ | 1,193 |
|
| $ | (406 | ) |
| $ | (925 | ) | ||||||
Contributions paid | $ | - | $ | - | $ | 1,382 | $ | 658 | $ | 1,382 | $ | 658 |
| $ | — |
|
| $ | — |
|
| $ | 2,067 |
|
| $ | 1,382 |
|
| $ | 2,067 |
|
| $ | 1,382 |
|
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.
The components of the net periodic other postretirement benefit costs recognized are as follows:
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, | June 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 4 | $ | 5 |
| $ | 1 |
|
| $ | 1 |
|
| $ | 2 |
|
| $ | 4 |
| ||||
Interest cost | 288 | 291 | 865 | 874 |
|
| 195 |
|
|
| 288 |
|
|
| 586 |
|
|
| 865 |
| ||||||||
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net actuarial loss | 13 | 24 | 41 | 72 |
|
| 12 |
|
|
| 13 |
|
|
| 35 |
|
|
| 41 |
| ||||||||
Prior service benefit | (1) | (40) | (4) | (119) | ||||||||||||||||||||||||
Curtailment gain | - | - | - | (330) | ||||||||||||||||||||||||
Prior service cost (benefit) |
|
| 1 |
|
|
| (1 | ) |
|
| 2 |
|
|
| (4 | ) | ||||||||||||
Net periodic other postretirement cost | $ | 301 | $ | 276 | $ | 906 | $ | 502 |
| $ | 209 |
|
| $ | 301 |
|
| $ | 625 |
|
| $ | 906 |
| ||||
Contributions paid | $ | 512 | $ | 595 | $ | 1,589 | $ | 1,830 |
| $ | 851 |
|
| $ | 512 |
|
| $ | 1,372 |
|
| $ | 1,589 |
|
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
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 20192020 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 20192020 will be as follows:
Retirement pension benefits: | ||||
United States | $ | — | ||
| 34 | |||
|
|
| ||
|
| |||
|
| |||
|
| |||
Other postretirement benefits |
|
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 | Nine-Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Company contributions | $ | 55 | $ | 86 | $ | 193 | $ | 253 |
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Company contributions |
| $ | 127 |
|
| $ | 55 |
|
| $ | 325 |
|
| $ | 193 |
|
Note 20.21. Stockholders’ equity
Stock repurchase program
In the first quarter of fiscal year 2017, Woodward’s board of directorsthe Board 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 year period that will endended in November 2019 (the “2017 Authorization”). Effective upon the expiration of the 2017 Authorization in November 2019, Woodward’s board of directors approved 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 year period that will end in 2022 (the “2019 Authorization”). In the first nine monthsnine-months of fiscal year 2019,2020, Woodward purchased 124 shares of its common stock for $13,346 under the 2019 Authorization. Woodward repurchased 1,102 shares of its common stock for $110,311 under the 2017 Authorization pursuant to a 10b5-1 plan. Woodward repurchased no common stock under the 2017 Authorization in the first nine monthsnine-months of fiscal year 2018.2019.
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”), as applicable.
The 2017 Plan was approved by Woodward’s stockholders in January 2017 and is a successor plan to the 2006 Plan. As of September 14, 2016, the effective date of the 2017 Plan, Woodward’s board of directorsthe Board delegated authority to administer the 2017 Plan to the compensation committee of the board of directorsBoard (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 30, 2019,29, 2020, Woodward’s stockholders approved an additional 1,4001,000 shares of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 1,8131,965 shares of Woodward’s common stock available for future grants as of June 30, 2020 and 1,783 shares as of September 30, 2019.
Stock options
Woodward believes that 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 year term, and generally have a four 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 |
| Nine-Months Ended |
| ||||||||||||||||||||||||||||||||||||||||
June 30, | June 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
|
| 2020 |
|
| 2019 |
| 2020 |
|
| 2019 |
| |||||||||||||||||||||||||||||||
Weighted-average exercise price per share | $ | n/a | $ | n/a | $ | 79.12 | $ | 78.91 |
| $ | 58.40 |
|
| n/a |
| $ | 90.57 |
|
| $ | 79.12 |
| ||||||||||||||||||||||||
Weighted-average grant date market value of Woodward stock | $ | n/a | $ | n/a | $ | 79.12 | $ | 78.91 |
| $ | 58.40 |
|
| n/a |
| $ | 90.57 |
|
| $ | 79.12 |
| ||||||||||||||||||||||||
Expected term (years) | n/a | n/a | 6.5 | - | 8.7 | 6.4 | - | 8.7 |
| 6.5 |
|
| n/a |
|
| 6.4 |
| - | 8.7 |
|
| 6.5 |
| - | 8.7 |
| ||||||||||||||||||||
Estimated volatility | n/a | n/a | 25.7% | - | 31.0% | 29.1% | - | 32.7% |
| 33.1% |
| - | 34.3% |
|
| n/a |
|
| 25.7% |
| - | 34.3% |
|
| 25.7% |
| - | 31.0% |
| |||||||||||||||||
Estimated dividend yield | n/a | n/a | 0.7% | - | 0.8% | 0.6% | - | 0.8% |
| 0.5% |
| - | 0.6% |
|
| n/a |
|
| 0.5% |
| - | 0.9% |
|
| 0.7% |
| - | 0.8% |
| |||||||||||||||||
Risk-free interest rate | n/a | n/a | 2.6% | - | 3.1% | 2.1% | - | 2.8% |
| 0.4% |
|
| n/a |
|
| 0.4% |
| - | 1.7% |
|
| 2.6% |
| - | 3.1% |
|
The following is a summary of the activity for stock option awards during the three and nine-months ended June 30, 2019:2020:
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, 2019 | June 30, 2019 |
| June 30, 2020 |
|
| June 30, 2020 |
| |||||||||||||||||||||
Number of options | Weighted-Average Exercise Price per Share | Number of options | Weighted-Average Exercise Price per Share |
| 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 |
|
| 5,623 |
|
| $ | 60.50 |
|
|
| 5,387 |
|
| $ | 53.73 |
| ||||||
Options granted | - | n/a | 900 | 79.12 |
|
| 280 |
|
|
| 58.40 |
|
|
| 909 |
|
|
| 90.57 |
| ||||||||
Options exercised | (279) | 34.27 | (1,024) | 32.92 |
|
| (66 | ) |
|
| 31.15 |
|
|
| (429 | ) |
|
| 34.44 |
| ||||||||
Options expired | (1) | 69.13 | (2) | 72.58 |
|
| (3 | ) |
|
| 70.89 |
|
|
| (3 | ) |
|
| 70.89 |
| ||||||||
Options forfeited | (12) | 67.92 | (44) | 68.51 |
|
| (57 | ) |
|
| 103.58 |
|
|
| (87 | ) |
|
| 96.52 |
| ||||||||
Options, ending balance | 5,441 | 53.16 | 5,441 | 53.16 |
|
| 5,777 |
|
|
| 60.31 |
|
|
| 5,777 |
|
|
| 60.31 |
|
Changes in non-vested stock options during the three and nine-months ended June 30, 20192020 were as follows:
Three-Months Ended | Nine-Months Ended |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, 2019 | June 30, 2019 |
| June 30, 2020 |
|
| June 30, 2020 |
| |||||||||||||||||||||
Number of options | Weighted-Average Grant Date Fair Value per Share | Number of options | Weighted-Average Grant Date Fair Value Per Share |
| 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 |
|
| 1,867 |
|
| $ | 25.95 |
|
|
| 2,068 |
|
| $ | 23.43 |
| ||||||
Options granted | - | n/a | 900 | 23.99 |
|
| 280 |
|
|
| 16.92 |
|
|
| 909 |
|
|
| 24.98 |
| ||||||||
Options vested | - | n/a | (798) | 19.80 |
|
| — |
|
|
| — |
|
|
| (800 | ) |
|
| 21.52 |
| ||||||||
Options forfeited | (12) | 22.67 | (44) | 22.91 |
|
| (57 | ) |
|
| 27.89 |
|
|
| (87 | ) |
|
| 27.01 |
| ||||||||
Non-vested options outstanding, ending balance | 2,046 | 23.37 | 2,046 | 23.37 |
|
| 2,090 |
|
|
| 24.69 |
|
|
| 2,090 |
|
|
| 24.69 |
|
Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 20192020 was as follows:
Number | Weighted- Average Exercise Price | Weighted- Average Remaining Life in Years | Aggregate Intrinsic Value |
| Number |
|
| Weighted-Average Exercise Price |
|
| Weighted-Average Remaining Life in Years |
|
| Aggregate Intrinsic Value |
| |||||||||||||
Options outstanding | 5,441 | $ | 53.16 | 6.0 | $ | 331,053 |
|
| 5,777 |
|
| $ | 60.31 |
|
|
| 6.0 |
|
| $ | 118,997 |
| ||||||
Options vested and exercisable | 3,395 | 42.12 | 4.7 | 244,017 |
|
| 3,686 |
|
|
| 47.95 |
|
|
| 4.6 |
|
|
| 110,112 |
| ||||||||
Options vested and expected to vest | 5,336 | 52.70 | 6.0 | 327,112 |
|
| 5,678 |
|
|
| 59.95 |
|
|
| 5.9 |
|
|
| 118,261 |
|
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, 2019:2020:
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 | 2 | 97.56 | 2 | 97.56 | ||||||||
Shares vested | - | n/a | - | n/a | ||||||||
Shares forfeited | - | n/a | - | n/a | ||||||||
Ending balance | 12 | 84.71 | 12 | 84.71 |
|
| Three-Months Ended |
|
| Nine-Months Ended |
| ||||||||||
|
| June 30, 2020 |
|
| June 30, 2020 |
| ||||||||||
|
| Number |
|
| Weighted-Average Grant Date Fair Value per Unit |
|
| Number |
|
| Fair Value per Share |
| ||||
Beginning balance |
|
| 9 |
|
| $ | 91.55 |
|
|
| 9 |
|
| $ | 91.55 |
|
Units granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Units vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Units forfeited |
|
| (1 | ) |
|
| 97.56 |
|
|
| (1 | ) |
|
| 97.56 |
|
Ending balance |
|
| 8 |
|
|
| 90.98 |
|
|
| 8 |
|
|
| 90.98 |
|
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 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.
During the third quarter of fiscal year 2020, Woodward entered into a Separation and Release Agreement with Jonathan (“Jack”) W. Thayer, the Company’s former Chief Financial Officer. Under the provisions of the agreement, all stock options previously granted to Mr. Thayer, other than an award granted in October 2019, were modified to provide for continued vesting post-termination based on the original schedule and an extension of the exercise period for the remaining ten-year term of the options. As a result of the modification to these awards, Woodward recognized an additional $2,376 of stock compensation expense, before tax, during the three-months ended June 30, 2020.
At June 30, 2019,2020, there was approximately $13,849$20,088 of total unrecognized compensation expense related to non-vested stock-based compensation 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 directorsthe Board and 9% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.21.9 years.
Preferred stock rights
On April 5, 2020, the Board declared a dividend distribution of 1 right (a “Right”) for each outstanding share of common stock of the Company to stockholders of record as of the close of business on April 16, 2020 (the “Record Date”). Each Right entitles the registered holder, upon the occurrence of specified events, to purchase from the Company one one-thousandth of a share of Series B Participating Preferred Stock, par value $0.003 per share (the “Preferred Stock”), of the Company at an exercise price of $480.00 (the “Exercise Price”). In addition, each Right entitles the registered holder (other than any person or group that acquires 15% or more of the Company’s common stock without the approval of the Board), following the occurrence of other specified events, to purchase common stock of the Company or stock of any acquirer of the Company at a substantial discount. The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the “Rights Agreement”), dated as of April 5, 2020, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent.
The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 15% or more of the common stock of the Company without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by the Board.
The Rights expire on the earliest of (i) on April 5, 2021 (unless such date is extended) or (ii) the redemption or exchange of the Rights pursuant to the Rights Agreement.
Note 21.22. 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.
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 related 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’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 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 22.23. Segment information
Woodward serves the aerospace and industrial markets through its two2 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, 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 |
| Three-Months Ended |
|
| Nine-Months Ended |
| |||||||||||||||||||||
June 30, | June 30, |
| June 30, |
|
| June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Segment external net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Aerospace | $ | 498,775 | $ | 404,612 | $ | 1,374,616 | $ | 1,096,860 |
| $ | 306,494 |
|
| $ | 498,775 |
|
| $ | 1,254,655 |
|
| $ | 1,374,616 |
| ||||
Industrial | 253,230 | 183,505 | 789,044 | 509,654 |
|
| 217,332 |
|
|
| 253,230 |
|
|
| 709,746 |
|
|
| 789,044 |
| ||||||||
Total consolidated net sales | $ | 752,005 | $ | 588,117 | $ | 2,163,660 | $ | 1,606,514 |
| $ | 523,826 |
|
| $ | 752,005 |
|
| $ | 1,964,401 |
|
| $ | 2,163,660 |
| ||||
Segment earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Aerospace | $ | 103,238 | $ | 83,887 | $ | 277,814 | $ | 203,784 |
| $ | 41,096 |
|
| $ | 103,238 |
|
| $ | 251,645 |
|
| $ | 277,814 |
| ||||
Industrial | 26,240 | 10,943 | 82,537 | 41,411 |
|
| 27,438 |
|
|
| 26,240 |
|
|
| 81,640 |
|
|
| 82,537 |
| ||||||||
Nonsegment expenses | (26,714) | (30,699) | (83,211) | (78,069) |
|
| (15,158 | ) |
|
| (26,714 | ) |
|
| (94,360 | ) |
|
| (83,211 | ) | ||||||||
Interest expense, net | (10,450) | (9,714) | (33,143) | (26,575) |
|
| (8,360 | ) |
|
| (10,450 | ) |
|
| (25,162 | ) |
|
| (33,143 | ) | ||||||||
Consolidated earnings before income taxes | $ | 92,314 | $ | 54,417 | $ | 243,997 | $ | 140,551 |
| $ | 45,016 |
|
| $ | 92,314 |
|
| $ | 213,763 |
|
| $ | 243,997 |
|
Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other intangibles, net. A summary of consolidated total assets follows:
June 30, 2019 | September 30, 2018 |
| June 30, 2020 |
|
| September 30, 2019 |
| |||||||
Segment assets: |
|
|
|
|
|
|
|
| ||||||
Aerospace | $ | 1,918,353 | $ | 1,805,892 |
| $ | 1,807,013 |
|
| $ | 1,900,657 |
| ||
Industrial | 1,691,629 | 1,642,462 |
|
| 1,531,655 |
|
|
| 1,561,441 |
| ||||
Unallocated corporate property, plant and equipment, net | 84,321 | 102,083 |
|
| 104,285 |
|
|
| 114,887 |
| ||||
Other unallocated assets | 321,300 | 240,212 |
|
| 463,716 |
|
|
| 379,541 |
| ||||
Consolidated total assets | $ | 4,015,603 | $ | 3,790,649 |
| $ | 3,906,669 |
|
| $ | 3,956,526 |
|
Note 23.24. Subsequent eventevents
On July 31 2019, Woodward’s board of directors declared29, 2020, the Board approved a quarterly cash dividend of $0.1625$0.08125 per share for the quarter, payable on September 3, 2019, toAugust 31, 2020, for stockholders of record as of August 20, 2019.17, 2020.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
45
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:
•
| plans and expectations related to the now-terminated merger with Hexcel Corporation (“Hexcel”); |
46
• | the impacts on our business relating to the global COVID-19 pandemic, including the impacts thereof to supply and demand, and measures taken by governments and private industry in response; |
•
| future sales, earnings, cash flow, uses of cash, and other measures of financial performance; |
47
• | 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; |
• | our expectations with regard to the grounding of the Boeing 737 MAX aircraft, the related impact on our original equipment manufacturer and initial provision sales, and the aircraft’s return to service; |
• | 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 changes in tax law. |
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.
OVERVIEW
48COVID-19 Pandemic
OVERVIEW
New Accounting Policy
In March 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a pandemic. In an effort to contain COVID-19 or slow its spread, governments around the world have also enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. In an effort to protect the health and safety of its employees, we have implemented enhanced cleaning protocols and adopted social distancing policies at all of our locations, including working from home, reducing the number of people working in locations at any one time, and suspending employee travel. We adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contractshave taken steps to align our business with Customers,the unfavorable economic conditions, including the implementation of enhanced measures through our global supply chain and all subsequently issued supplementalbusiness unit management teams to ensure we are efficiently utilizing inventory on hand, as well as our internal processing capabilities. In addition, we have taken specific actions to reduce costs and implemented staff reductions, reduction in employee hours and/or clarifying ASUs relatedsalaries, furloughs, temporary layoffs, or a combination of these actions, at many of its locations.
These actions and the global health crisis caused by COVID-19 have negatively impacted business activity across the globe. Since the end of the second quarter of fiscal year 2020, we have experienced declining demand and both our aerospace and industrial markets have been significantly impacted economically, which resulted in a rapid decline in orders from and shipments to ASU 2014-09 (collectively “ASC 606”)customers. Outbreaks in various regions also resulted in the extended shutdown of certain businesses in these regions, which has resulted in disruptions or delays to our supply chain. Although we have experienced certain impacts from the global emergence of the COVID-19 pandemic, the full extent it will have on October 1, 2018our business is currently unknown. When COVID-19 is demonstrably contained, we anticipate an improvement in economic activity; however, the timing and electeddegree of such improvement will depend on the modified retrospective transition method. Therate and pace of reopening, and the effectiveness of the containment efforts deployed by various national, state, and local governments.
We have been deemed an essential business and therefore have continued to operate during the pandemic. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, communities, business partners, suppliers, and shareholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on the Company's customers, employees, and prospects, or on our financial results for periodsthe remainder of fiscal year 2020.
Divestiture of the Renewables business and related businesses
In the first quarter of fiscal year 2020, Woodward’s board of directors approved a plan to divest our renewable power systems business, protective relay business, and other businesses within the Industrial segment (collectively, the “disposal group”). The assets of the disposal group were primarily located in Germany, Poland and Bulgaria and accounted for approximately $80,000 of sales in fiscal year 2019. The transactions consummating the sale of the disposal group were completed on April 30, 2020 (the “Closing”).
Financial information for the disposal group is reflected in our financial statements 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.Closing.
Operational Highlights
SubsequentQuarter to the adoption of ASC 606 and the issuance of Woodward’s unaudited Condensed Consolidated Financial StatementsDate Highlights
Net sales 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 applicationthird quarter of ASC 606, which caused the Condensed Consolidated Financial Statementsfiscal year 2020 were $523,826, a decrease of 30.3% from $752,005 for the quarters ended December 31, 2018 and March 31, 2019, as well as the cumulative impactthird quarter of the adoption of ASC 606prior fiscal year. Foreign currency exchange rates had an unfavorable impact on the Condensed Consolidated Balance Sheet as of October 1, 2018, to be misstated by amounts that management concluded were 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 $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,$4,143 for the third quarter of fiscal year 2020, as compared to the same period of the prior year. Net sales excluding the disposal group for the third quarter of fiscal year 2020 were $516,096, a decrease of 29.2% from $729,192 for the third quarter of the prior fiscal year. Aerospace segment net sales for the third quarter of fiscal year 2020 were down 38.6% to $306,494, compared to $498,775 for the third quarter of the prior fiscal year. Industrial segment net sales for the third quarter of fiscal year 2020 were $217,332, down 14.2%, compared to $253,230 for the third quarter of fiscal year 2019. Industrial segment net sales for the third quarter of fiscal year 2020, excluding net sales for the disposal group, were $209,602, down 9.0%, compared to $230,417 for the third quarter of fiscal year 2019.
Net earnings before income taxesfor the third quarter of $8,041,fiscal year 2020 were $38,465, or $0.61 per diluted share, compared to $66,107, or $1.02 per diluted share, for the third quarter of fiscal year 2019. Net earnings excluding the disposal group for the third quarter of fiscal year 2020 were not materially different from reported net earnings for the same period. Adjusted net earnings for the third quarter of $6,037, and dilutedfiscal year 2020 were $30,654, or adjusted earnings per share of $0.09$0.48 per diluted share, compared to $83,856, or $1.30 per diluted share, for the three-months ended June 30, 2019, the majoritythird quarter of which relates to Woodward’s Aerospace segment (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 full fiscal year 2019. However, there will be ongoing quarterly variability
The effective tax rate in both sales and net earnings resulting from the adoptionthird quarter of ASC 606 asfiscal year 2020 was 14.6%, compared to 28.4% for the third quarter of the prior fiscal year. The adjusted effective tax rate in the third quarter of fiscal year amounts presented under2020 was 29.1%, compared to 17.8% for the previous guidance. The adoption of ASC 606 has no impact on our cash flows.
In the following discussion and analysisthird quarter of the results of operationsprior fiscal year.
Earnings before interest and liquidity, we compare the resultstaxes (“EBIT”) for the threethird quarter of fiscal year 2020 was $53,376, down 48.1% from $102,764 in the same period of fiscal year 2019. Earnings before interest, taxes, depreciation and nine-months ended June 30, 2019,amortization (“EBITDA”) for the third quarter of fiscal year 2020 was $85,482, down 37.0% from $135,734 for the same period of fiscal year 2019. Adjusted EBIT for the third quarter of fiscal year 2020 was $51,583, down 54.1% from $112,403 for the third quarter of fiscal year 2019. Adjusted EBITDA for the third quarter of fiscal year 2020 was $83,689, down 41.4% from $142,769 for the third quarter of fiscal year 2019.
Aerospace segment earnings as a percent of segment net sales were 13.4% in the third quarter of fiscal year 2020, compared to 20.7% in the third quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales in the third quarter of fiscal year 2020 were 12.6%, compared to 10.4% in the third quarter of the prior fiscal year. Excluding the disposal group, Industrial segment earnings as a percent of net sales were 13.0% in the third quarter of fiscal year 2020, compared to 11.9% in the third quarter of the prior fiscal year. There were no adjustments to Industrial segment earnings as a percent of segment net sales for the third quarter of fiscal year 2020, which were prepared under ASC 606,up compared to the resultsadjusted Industrial segment earnings as a percent of segment net sales of 11.4% 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 adoptionthird quarter 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.fiscal year 2019.
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 financial results between the periods presented. The select financial results are presented on both an as reported basis in accordance with accounting principles generally accepted in the United States of America (“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 similarly named financial measure as determined under either ASC 606 or ASC 605, include adjustedAdjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and adjusted industrialIndustrial segment earnings.earnings are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S.GAAPnon-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.
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”). PursuantYear 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.
OperationalDate Highlights
Third Quarter Highlights
Net sales for the third quarterfirst nine-months of fiscal year 20192020 were $752,005, an increase$1,964,401, a decrease of 27.9%9.2% from $588,117$2,163,660 for the third quarterfirst nine-months of the prior fiscal 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$12,949 for the third quarterfirst nine-months of fiscal year 2019.
2020. Aerospace segment net sales for the third quarterfirst nine-months of fiscal year 20192020 were up 23.3%down 8.7% to $498,775,$1,254,655, compared to $404,612$1,374,616 for the third quarterfirst nine-months of the prior fiscal year. Industrial segment net sales for the third quarterfirst nine-months of fiscal year 20192020 were up 38.0% to $253,230,$709,746, down 10.0% compared to $183,505$789,044 for the third quarterfirst nine-months of the prior fiscal year. Organicyear 2019. 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 $158,627excluding the disposal group for the third quarter of the prior year. Organic Industrial net sales for the third quarterfirst nine-months of fiscal year 2018 excludes one month2020 were $642,083, down 11.4%, compared to $724,377 for the first nine-months of net sales attributable to Woodward L’Orange in the amount of $24,878.fiscal year 2020.
Net earnings for the third quarterfirst nine-months of fiscal year 20192020 were $66,107,$183,156, or $1.02$2.85 per diluted share, compared to $49,117,$192,806, or $0.77 per$2.99 diluted share, for the third quarterfirst nine-months of fiscal year 2018.2019. Net earnings excluding the disposal group for the first nine-months of fiscal year 2020 were not materially different from reported net earnings for the same period. Adjusted net earnings for the third quarterfirst nine-months of fiscal year 20192020 were $83,856,$205,920, or adjusted earnings per share of $1.30$3.20 per diluted share, compared to $71,445,adjusted net earnings of $235,760, or $1.12$3.67 per diluted share, for the third quarterfirst nine-months of fiscal year 2018.2019.
The effective tax rate in the third quarterfirst nine-months of fiscal year 20192020 was 28.4%14.3%, compared to 9.7%21.0% for the third quarterfirst nine-months of the prior fiscal year. The adjusted effective tax rate in the first nine-months of fiscal year 2020 was 18.7%, compared to 18.2% for both periods reflect the transition impactsfirst nine-months of the changesprior fiscal year.
EBIT for the first nine-months of fiscal year 2020 was $238,925, down 13.8% from $277,140 in the U.S. federal tax law enacted in December 2017 with additional income tax expense of $10,588 recognized in the third quartersame period of fiscal year 2019.
Earnings before interest and taxes (“EBIT”) EBITDA for the third quarterfirst nine-months of fiscal year 2019 were $102,764, an increase of 60.2%2020 was $336,507, down 12.7% from $64,131 in$385,608 for the third quartersame period of fiscal year 2018.2019. Adjusted EBIT for the third quarterfirst nine-months 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”)2020 was $278,434, down 13.4% from $321,399 for the third quartersame period of fiscal year 2019 were $135,734, up 45.7% from $93,1862019. Adjusted EBITDA for the third quarterfirst nine-months of fiscal year 2018. EBITDA2020 was $376,016, down 8.0% from $408,767 for the third quartersame period 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.2019.
Aerospace segment earnings as a percent of segment net sales were 20.7%20.1% in both the third quarterfirst nine-months of fiscal year 2019 and2020, compared to 20.2% in the third quarterfirst nine-months of the prior fiscal year. Industrial segment earnings as a percent of segment net sales were 10.4% in the third quarterfirst nine-months of fiscal year 2019,2020 were 11.5%, compared to 6.0%10.5% in the third quarterfirst nine-months of the prior fiscal year. Adjusted Industrial segment earnings as a percentagepercent of net sales excluding the disposal group were 12.2% in the first nine-months of fiscal year 2020, compared to 11.9% in the first nine-months of the prior fiscal year. There were no adjustments to Industrial segment earnings as a percent of segment net sales were 11.4% for the third quarternine-months of fiscal year 2019,2020, which were down compared to 10.5%adjusted Industrial segment earnings as a percent of segment net sales of 13.1% for the third quarterfirst nine-months of fiscal year 2018.2019.
Organic net sales, organic Industrial segment net sales, constant currency organic Industrial segment net sales, adjustedAdjusted 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 provided by operating activities for the first nine monthsnine-months of fiscal year 20192020 was $219,202,$212,416, compared to $162,083$219,202 for the first nine monthsnine-months of fiscal year 2018.2019. The increasedecrease in net cash provided by operating activities in the first nine monthsnine-months of fiscal year 20192020 compared to the first nine monthsnine-months of the prior fiscal year is primarily attributable to increased earnings and the timing of certain cash payments for accounts payable, inannual bonuses, and taxes due, partially offset by timing of cash received from customers as well as proceeds from settlement of cross-currency interest rate swaps.
For the first nine monthsnine-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.
For the first nine months of fiscal year 2019,2020, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $141,297,$173,344, compared to $72,486$141,297 for the first nine monthsnine-months of fiscal year 2018. (A2019. Adjusted free cash flow, which we define as free cash flow, plus the proceeds from the sale of real property at our former Duarte, California operations, and excluding cash paid for merger and divestiture transaction costs, cash paid for restructuring charges, and cash proceeds received from settlement of our cross-currency interest rate swaps, was $168,596 for the first nine-months of fiscal year 2020. A reconciliation of free cash flow aand adjusted free cash flow, both non-U.S. GAAP financial measure,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.)
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 June 30, 2019,2020, we held $63,302$101,363 in cash and cash equivalents, and had total outstanding debt of $1,191,147 with$929,447. We have additional borrowing availability of $627,203,$889,914, net of outstanding letters of credit, under our revolving credit agreement. At June 30, 2019,2020, we also had additional borrowing capacity of $7,593$7,523 under various foreign lines of credit and foreign overdraft facilities.
RESULTS OF OPERATIONSOPERATIONS
The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:
Three-Months Ended | Nine-Months Ended |
| 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 |
| June 30, 2020 |
|
| % of Net Sales |
|
| June 30, 2019 |
|
| % of Net Sales |
|
| June 30, 2020 |
|
| % of Net Sales |
|
| June 30, 2019 |
|
| % of Net Sales |
| |||||||||||||||||||||||||
Net sales | $ | 752,005 | 100 | % | $ | 588,117 | 100 | % | $ | 2,163,660 | 100 | % | $ | 1,606,514 | 100 | % |
| $ | 523,826 |
|
|
| 100 | % |
| $ | 752,005 |
|
|
| 100 | % |
| $ | 1,964,401 |
|
|
| 100 | % |
| $ | 2,163,660 |
|
|
| 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 |
|
| 395,511 |
|
|
| 75.5 | % |
|
| 562,516 |
|
|
| 74.8 | % |
|
| 1,447,942 |
|
|
| 73.7 | % |
|
| 1,621,531 |
|
|
| 74.9 | % | ||||||||||||||||
Selling, general, and administrative expenses | 52,980 | 7.0 | 54,868 | 9.3 | 159,764 | 7.4 | 141,082 | 8.8 |
|
| 57,361 |
|
|
| 11.0 | % |
|
| 52,980 |
|
|
| 7.0 | % |
|
| 177,035 |
|
|
| 9.0 | % |
|
| 159,764 |
|
|
| 7.4 | % | ||||||||||||||||
Research and development costs | 40,661 | 5.4 | 39,470 | 6.7 | 123,359 | 5.7 | 111,425 | 6.9 |
|
| 34,522 |
|
|
| 6.6 | % |
|
| 40,661 |
|
|
| 5.4 | % |
|
| 106,029 |
|
|
| 5.4 | % |
|
| 123,359 |
|
|
| 5.7 | % | ||||||||||||||||
Impairment of assets sold |
|
| — |
|
|
| 0.0 | % |
|
| — |
|
|
| 0.0 | % |
|
| 37,902 |
|
|
| 1.9 | % |
|
| — |
|
|
| 0.0 | % | ||||||||||||||||||||||||
Restructuring charges | - | - | - | - | - | - | 17,013 | 1.1 |
|
| 19,040 |
|
|
| 3.6 | % |
|
| — |
|
|
| 0.0 | % |
|
| 19,040 |
|
|
| 1.0 | % |
|
| — |
|
|
| 0.0 | % | ||||||||||||||||
Gain on cross-currency interest rate swaps, net |
|
| (30,481 | ) |
|
| (5.8 | )% |
|
| — |
|
|
| 0.0 | % |
|
| (30,481 | ) |
|
| (1.6 | )% |
|
| — |
|
|
| 0.0 | % | ||||||||||||||||||||||||
Interest expense | 10,798 | 1.4 | 10,056 | 1.7 | 34,156 | 1.6 | 27,751 | 1.7 |
|
| 8,737 |
|
|
| 1.7 | % |
|
| 10,798 |
|
|
| 1.4 | % |
|
| 26,502 |
|
|
| 1.3 | % |
|
| 34,156 |
|
|
| 1.6 | % | ||||||||||||||||
Interest income | (348) | (0.0) | (342) | (0.1) | (1,013) | (0.0) | (1,176) | (0.1) |
|
| (377 | ) |
|
| (0.1 | )% |
|
| (348 | ) |
|
| (0.0 | )% |
|
| (1,340 | ) |
|
| (0.1 | )% |
|
| (1,013 | ) |
|
| (0.0 | )% | ||||||||||||||||
Other (income) expense, net | (6,916) | (0.9) | 975 | 0.2 | (18,134) | (0.8) | (8,591) | (0.5) |
|
| (5,503 | ) |
|
| (1.1 | )% |
|
| (6,916 | ) |
|
| (0.9 | )% |
|
| (31,991 | ) |
|
| (1.6 | )% |
|
| (18,134 | ) |
|
| (0.8 | )% | ||||||||||||||||
Total costs and expenses | 659,691 | 87.7 | 533,700 | 90.7 | 1,919,663 | 88.7 | 1,465,963 | 91.3 |
|
| 478,810 |
|
|
| 91.4 | % |
|
| 659,691 |
|
|
| 87.7 | % |
|
| 1,750,638 |
|
|
| 89.1 | % |
|
| 1,919,663 |
|
|
| 88.7 | % | ||||||||||||||||
Earnings before income taxes | 92,314 | 12.3 | 54,417 | 9.3 | 243,997 | 11.3 | 140,551 | 8.7 |
|
| 45,016 |
|
|
| 8.6 | % |
|
| 92,314 |
|
|
| 12.3 | % |
|
| 213,763 |
|
|
| 10.9 | % |
|
| 243,997 |
|
|
| 11.3 | % | ||||||||||||||||
Income tax expense | 26,207 | 3.5 | 5,300 | 0.9 | 51,191 | 2.4 | 34,685 | 2.2 |
|
| 6,551 |
|
|
| 1.3 | % |
|
| 26,207 |
|
|
| 3.5 | % |
|
| 30,607 |
|
|
| 1.6 | % |
|
| 51,191 |
|
|
| 2.4 | % | ||||||||||||||||
Net earnings | $ | 66,107 | 8.8 | $ | 49,117 | 8.4 | $ | 192,806 | 8.9 | $ | 105,866 | 6.6 |
| $ | 38,465 |
|
|
| 7.3 | % |
| $ | 66,107 |
|
|
| 8.8 | % |
| $ | 183,156 |
|
|
| 9.3 | % |
| $ | 192,806 |
|
|
| 8.9 | % |
Other select financial data:
June 30, | September 30, |
| June 30, |
|
| September 30, |
| ||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| ||||||
Working capital | $ | 655,437 | $ | 523,619 |
| $ | 701,319 |
|
| $ | 563,792 |
| |
Short-term borrowings | 180,000 | 153,635 |
|
| 98,639 |
|
|
| 220,000 |
| |||
Current portion of long-term debt |
|
| 101,643 |
|
|
| — |
| |||||
Total debt | 1,191,147 | 1,246,032 |
|
| 929,447 |
|
|
| 1,084,899 |
| |||
Total stockholders' equity | 1,704,311 | 1,538,104 |
|
| 1,909,766 |
|
|
| 1,726,741 |
|
Net Sales
Consolidated net sales for the third quarter of fiscal year 2019 increased2020 decreased by $163,888,$228,179, or 27.9%30.3%, compared to the same period of fiscal year 2018.2019. Consolidated net sales for the first nine monthsnine-months of fiscal year 2019 increased2020 decreased by $557,146,$199,259, or 34.7%9.2%, 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
532019.
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 |
|
| Nine-Month Period |
| |||||||||
Three-Month Period | Nine-Month Period | |||||||||||||
Consolidated net sales for the period ended June 30, 2018 | $ | 588,117 | $ | 1,606,514 | ||||||||||
Consolidated net sales for the period ended June 30, 2019 |
| $ | 752,005 |
|
| $ | 2,163,660 |
| ||||||
Aerospace volume | 64,897 | 197,799 |
|
| (187,541 | ) |
|
| (129,834 | ) | ||||
Industrial volume | 21,305 | 68,746 |
|
| (20,122 | ) |
|
| (54,391 | ) | ||||
L'Orange acquisition | 55,029 | 230,695 | ||||||||||||
Disposal group divestiture impact |
|
| (11,700 | ) |
|
| (11,700 | ) | ||||||
Noncash consideration | 23,176 | 67,938 |
|
| (8,443 | ) |
|
| (5,002 | ) | ||||
Effects of changes in price and sales mix | 6,676 | 13,418 |
|
| 3,770 |
|
|
| 14,617 |
| ||||
Effects of changes in foreign currency rates | (7,195) | (21,450) |
|
| (4,143 | ) |
|
| (12,949 | ) | ||||
Consolidated net sales for the period ended June 30, 2019 | $ | 752,005 | $ | 2,163,660 | ||||||||||
Consolidated net sales for the period ended June 30, 2020 |
| $ | 523,826 |
|
| $ | 1,964,401 |
|
The increasedecrease in consolidated net sales for the third quarter and first nine monthsnine-months of fiscal year 20192020 is primarily attributable to continued strength across commercialthe decline in sales volume related to the ongoing impact of the COVID-19 pandemic and defense original equipment manufacturer (“OEM”) and defense aftermarket sales inextended grounding of the Boeing 737 MAX aircraft. In the Aerospace segment. In the Industrial segment, the increasedecrease in organic net sales volumes is primarily attributable to increasedlower commercial sales as a result of the secular decline in our reciprocating engine business, partially offsetglobal passenger traffic and original equipment manufacturer (“OEM”) production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic. In the Industrial segment, the decrease in net sales volumes is primarily attributable to continued weakness in the oil and gas market and the associated aftermarket, compounded by continuing challengesthe ongoing impact of the COVID-19 pandemic, and the divestiture of the disposal group. We expect the volume decreases in our renewables business.consolidated net sales for the third quarter of fiscal year 2020 will continue until markets stabilize from the adverse impacts caused by the COVID-19 pandemic.
Costs and Expenses
Cost of goods sold increaseddecreased by $133,842$167,005 to $562,515,$395,511, or 75.5% of net sales, for the third quarter of fiscal year 2020, from $562,516, or 74.8% of net sales, for the third quarter of fiscal year 2019, from $428,673,2019. Cost of goods sold decreased by $173,589 to $1,447,942, or 72.9%73.7% of net sales, for the third quarterfirst nine-months of fiscal year 2018. Cost of goods sold increased by $443,072 to2020 from $1,621,531, or 74.9% of net sales, for the first nine monthsnine-months of fiscal year 2019 from $1,178,459, or 73.4% of net sales, for the first nine months of fiscal year 2018.2019. The increasedecrease in cost of goods sold in the third quarter and first nine months of fiscal year 20192020 is primarily attributable to lower sales volume as a result of global disruption from the COVID-19 pandemic and the elimination of annual bonus for fiscal year 2020. The decrease in cost of goods sold for the first nine-months of fiscal year 2020, as compared to the same periodsperiod of the prior year, is primarily attributable to higherlower sales volume additionalas a result of global disruption from the COVID-19 pandemic, the elimination of annual bonus for fiscal year 2020, as well as Duarte move-related costs and purchase accounting impacts related to the amortization of goods sold attributable tothe backlog intangible acquired in connection with the acquisition of Woodward L’Orange sales, additional costwhich were recognized in the first nine-months of goods sold attributable to noncash consideration from customer supplied inventoryfiscal year 2019, whereas there were no such costs recognized under ASC 606, and higher manufacturing costs related to increased capacity expansion costs to support higher production levels.in the first nine-months of fiscal year 2020.
Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 24.5% for the third quarter and 26.3% for the first nine-months of fiscal year 2020, compared to 25.2% for the third quarter and 25.1% for the first nine-months of fiscal year 2019. The decrease in gross margin for the third quarter of fiscal year 2019,2020 compared to 27.1%the same period of the prior year is primarily attributable to lower aftermarket sales volume as a result of as a result of global disruption from the COVID-19 pandemic, partially offset by the elimination of annual bonus for fiscal year 2020. The increase in gross margin for the first nine-months of fiscal year 2020 is primarily attributable to the elimination of annual bonus for fiscal year 2020, as well as Duarte move-related costs and purchase accounting impacts related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward L’Orange which were recognized in the third quarter and first nine-months of fiscal year 2019, whereas there were no such costs recognized in the third quarter and first nine-months of fiscal year 2020.
Selling, general and administrative expenses increased by $4,381, or 8.3%, to $57,361 for the third quarter of fiscal year 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 2019,2020, 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 nine months of fiscal year 2019 was further negatively impacted by noncash consideration recognized under ASC 606.
Selling, general and administrative expenses decreased by $1,888, or 3.4%, to $52,980 for the third quarter of fiscal year 2019, compared to $54,868 for the third quarter of fiscal year 2018.2019. Selling, general, and administrative expenses increased by $18,682,$17,271, or 13.2%10.8%, to $177,035 for the first nine-months of fiscal year 2020, compared to $159,764 for the first nine monthsnine-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 included 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 nine months of fiscal year 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.2019. Selling, general, and administrative expenses as a percentage of net sales decreasedincreased to 11.0% for the third quarter of fiscal year 2020, compared to 7.0% for the third quarter of fiscal year 2019 and 9.0% for the first nine-months of fiscal year 2020, compared to 9.3%7.4% for the first nine-months of fiscal year 2019.
The increase in selling, general and administrative expenses, both in dollars and as a percentage of sales, for the third quarter of fiscal year 20182020 compared to same period of the prior year is primarily due to fees incurred on termination of the cross-currency interest rate swaps and 7.4%acceleration of stock compensation expense related to restructuring activities. The increase in selling, general and administrative expenses, both in dollars and as a percentage of sales, for the first nine monthsnine-months of fiscal year 2019,2020 compared to 8.8%the same period of the prior year is primarily due to an increase in certain expenses to support strategic company initiatives related to merger and divestiture activities, fees incurred on termination of the cross-currency interest rate swaps, and acceleration of stock compensation expense related to restructuring activities. The increase for the third quarter and first nine monthsnine-months of fiscal year 2018.2020 compared to the same periods of the prior year was partially offset by savings from cost reduction initiatives including the elimination of annual bonus for fiscal year 2020.
Research and development costs increaseddecreased by $1,191,$6,139, or 3.0%15.1%, to $34,522 for the third quarter of fiscal year 2020, as compared to $40,661 for the third quarter of fiscal year 2019, as compared to $39,470 for the third quarter of fiscal year 2018.2019. Research and development costs as a percentage of net sales decreasedincreased to 6.6% for the third quarter of fiscal year 2020, as compared to 5.4% for the third quarter of fiscal year 2019, as compared to 6.7% for the third quarter of fiscal year 2018.2019. Research and development costs increaseddecreased by $11,934,$17,330, or 10.7%14.0%, to $106,029 for the first nine-months of fiscal year 2020, as compared to $123,359 for the first nine monthsnine-months of fiscal year 2019, as compared to $111,425 for the first nine months of fiscal year 2018.2019. Research and development costs decreased as a percentage of net sales to 5.4% for the first nine-months of fiscal year 2020, as compared to 5.7% for the first nine monthsnine-months of fiscal year 2019, as compared to 6.9% for the first nine months of fiscal year 2018.
Research and development costs2019. The decrease in the third quarter and first nine months of fiscal year 2019 were higher primarily due to research and development costs attributableis primarily due to Woodward L’Orange. Also contributing to higher research and developments costs insavings from cost reduction initiatives including the first nine monthselimination of annual bonus for fiscal year 2019 was an increase in variable compensation related to the strong financial performance in the first nine months of the fiscal year.2020. Our research and development activities also 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 programs.
Impairment of assets soldRestructuring chargeswas composed entirely of $17,013a charge of $37,902 recognized in the first nine monthsnine-months of fiscal year 2018 related primarily to our decision in2020. In the secondfirst quarter of fiscal year 20182020, Woodward’s board of directors approved a plan to relocate our Duarte, California operations todivest Woodward’s renewable power systems, protective relay businesses, and other businesses (collectively, the Company’s newly renovated Drake Campus in Fort Collins, Colorado (the “Duarte Relocation”“disposal group”). Also included, which resulted in the restructuring chargesrecognition of $17,013the associated assets and liabilities as held for sale. Concurrently, Woodward determined that the assets held for sale, net of any liabilities held for sale, were impaired and recognized a non-cash impairment charge of $37,902, representing the write down of the associated net assets held for sale to their fair market value as of December 31, 2019. Refer to Note 10, Sale of businesses, for further details.
Interest expense decreased by $2,061, or 19.1%, to $8,737 for the first nine monthsthird quarter 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%,2020, compared to $10,798 for the third quarter of fiscal year 2019, compared2019. Interest expense increased as a percentage of net sales to $10,0561.7% for the third quarter of fiscal year 2018. Interest expense decreased2020, as a percentage of net salescompared to 1.4% for the third quarter of fiscal year 2019, as compared2019. Interest expense decreased by $7,654, or 22.4%, to 1.7%$26,502 for the third quarterfirst nine-months of fiscal year 2018. Interest expense increased by $6,405, or 23.1%,2020, as compared to $34,156 for the first nine monthsnine-months of fiscal year 2019, as compared to $27,751 for the first nine months of fiscal year 2018.2019. Interest expense as a percentage of net sales was 1.3% for the first nine-months of fiscal year 2020, compared to 1.6% for the first nine monthsnine-months of fiscal year 2019. Since the third quarter of fiscal year 2019, we have paid the entire balance of two series of private placement notes totaling $143,000 primarily using free cash flow and proceeds from our revolving credit facility. The revolving credit facility bears interest at a substantially lower rate than the private placement notes that were paid.
Other income decreased by $1,413 to $5,503 for the third quarter of fiscal year 2020, compared to 1.7%$6,916 for the third quarter of fiscal year 2019. Other income increased by $13,857 to $31,991 for the first nine monthsnine-months of fiscal year 2018.2020, compared to $18,134 for the first nine-months of fiscal year 2019. The increase in interest expenseother income in the third quarter and first nine monthsnine-months of fiscal year 2020 compared to the first nine-months of fiscal year 2019 comparedwas primarily due to a gain on the same periodssale of a portion of our property in Duarte, California in the amount of $13,552, all of which was recognized in the first quarter of fiscal year 2018 is primarily due to the 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 agreement to fund the acquisition.
552020.
Income taxes were provided at an effective rate on earnings before income taxes of 14.6% for the third quarter and 14.3% for the first nine-months of fiscal year 2020, and 28.4% for the third quarter and 21.0% for the first nine monthsnine-months of fiscal year 2019, compared to 9.7% for the third quarter and 24.7% for the first nine months of fiscal year 2018. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:2019.
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 effective tax rate for the three-months ended June 30, 2019, compared to the three-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 income (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 Jobs Act” enacted in December 2017 (the “Tax Act”). Also contributing to the increase in the quarter was the loss of the domestic 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, 2019third quarter of fiscal year 2020, compared to the nine months ended June 30, 2018third quarter of fiscal year 2019, is primarily attributable to higherthe additional income tax expense related toresulting from Transition Tax regulations issued by the Tax Act recognized in the prior fiscal year compared to the amount recognizedIRS on June 14, 2019, which did not repeat in the current fiscal year quarter, and increased foreign earnings in a lower tax jurisdiction resulting from the reductionnet gain on cross-currency interest rate swap termination. This decrease is partially offset by decreased state tax credits and a smaller favorable net excess income tax benefits from stock-based compensation.
The decrease in the in U.S. federal corporate incomeeffective tax rate provided by the Tax Act infor the first nine monthsnine-months of fiscal year 2020 compared to the first nine-months of fiscal year 2019 is primarily attributable to the additional income tax expense resulting from Transition Tax regulations issued by the IRS on June 14, 2019 which did not repeat in the current fiscal year, increased foreign earnings taxed at a lower rate resulting from the net gain on the cross-currency interest rate swap termination, and anthe tax benefit with the impairment of assets held for sale. This decrease is partially offset by a smaller favorable increase in the net excess income tax benefits from stock-based compensationcompensation.
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 IRS, the SEC, the FASB, and/or various other taxing jurisdictions. 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 first nine months of fiscal year 2019. Partially offsetting this decrease were favorable resolutions ofTax Act or other future 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 thereform legislation could have a material impact on our future U.S. federal corporate income tax on estimated current year foreign earnings in the first nine months of fiscal year 2019, and the loss of the domestic production activities deduction in the first nine months of fiscal year 2019.expense.
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 include fiscal years 2017 and thereafter. InWoodward is currently under examination by the IRS for fiscal year 2018, Woodward concluded its U.S. federal income2017, which included a foreign tax examinations throughcredit carryback to fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 20142016 and thereafter. Woodward closed various audits in foreign jurisdictions in the second and third quarters of fiscal year 2019. As a result,Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.
56
In March 2020, the U.S. Congress passed the “Coronavirus Aid, Relief, and. Economic Security Act” (the “CARES Act”). The CARES Act provides relief from the certain economic impacts of COVID-19 to companies and individuals. Non-income tax impacts of the CARES Act include (i) extension of payment deadliness for certain U.S. payroll taxes and (ii) tax credits for certain qualifying costs incurred by the Company in connection with certain facility closures due to COVID-19. Non-income tax credits are generally recognized as a reduction to costs in the period in which the related costs the credits are intended to compensate are incurred. The non-income tax impacts of the CARES Act were insignificant to the results of operations for the third quarter and first nine-months of fiscal year 2020 and we will continue to assess the impact in future periods.
Segment Results
The following table presents sales by segment:
Three-Months Ended June 30, | Nine-Months Ended June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| |||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||||||||||||||||||||||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Aerospace | $ | 498,775 | 66.3 | % | $ | 404,612 | 68.8 | % | $ | 1,374,616 | 63.5 | % | $ | 1,096,860 | 68.3 | % |
| $ | 306,494 |
|
|
| 58.5 | % |
| $ | 498,775 |
|
|
| 66.3 | % |
| $ | 1,254,655 |
|
|
| 63.9 | % |
| $ | 1,374,616 |
|
|
| 63.5 | % | ||||||||
Industrial | 253,230 | 33.7 | 183,505 | 31.2 | 789,044 | 36.5 | 509,654 | 31.7 |
|
| 217,332 |
|
|
| 41.5 | % |
|
| 253,230 |
|
|
| 33.7 | % |
|
| 709,746 |
|
|
| 36.1 | % |
|
| 789,044 |
|
|
| 36.5 | % | ||||||||||||||||
Consolidated net sales | $ | 752,005 | 100.0 | % | $ | 588,117 | 100.0 | % | $ | 2,163,660 | 100.0 | % | $ | 1,606,514 | 100.0 | % |
| $ | 523,826 |
|
|
| 100 | % |
| $ | 752,005 |
|
|
| 100 | % |
| $ | 1,964,401 |
|
|
| 100 | % |
| $ | 2,163,660 |
|
|
| 100 | % |
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, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
Aerospace | $ | 103,238 | $ | 83,887 | $ | 277,814 | $ | 203,784 |
| $ | 41,096 |
|
| $ | 103,238 |
|
| $ | 251,645 |
|
| $ | 277,814 |
| |||
Industrial | 26,240 | 10,943 | 82,537 | 41,411 |
|
| 27,438 |
|
|
| 26,240 |
|
|
| 81,640 |
|
|
| 82,537 |
| |||||||
Nonsegment expenses | (26,714) | (30,699) | (83,211) | (78,069) |
|
| (15,158 | ) |
|
| (26,714 | ) |
|
| (94,360 | ) |
|
| (83,211 | ) | |||||||
Interest expense, net | (10,450) | (9,714) | (33,143) | (26,575) |
|
| (8,360 | ) |
|
| (10,450 | ) |
|
| (25,162 | ) |
|
| (33,143 | ) | |||||||
Consolidated earnings before income taxes | 92,314 | 54,417 | 243,997 | 140,551 |
|
| 45,016 |
|
|
| 92,314 |
|
|
| 213,763 |
|
|
| 243,997 |
| |||||||
Income tax expense | (26,207) | (5,300) | (51,191) | (34,685) |
|
| (6,551 | ) |
|
| (26,207 | ) |
|
| (30,607 | ) |
|
| (51,191 | ) | |||||||
Consolidated net earnings | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
|
The following table presents segment earnings as a percent of segment net sales:
Three-Months Ended June 30, | Nine-Months Ended June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
Aerospace | 20.7% | 20.7% | 20.2% | 18.6% |
|
| 13.4 | % |
|
| 20.7 | % |
|
| 20.1 | % |
|
| 20.2 | % | |||||||
Industrial | 10.4% | 6.0% | 10.5% | 8.1% |
|
| 12.6 | % |
|
| 10.4 | % |
|
| 11.5 | % |
|
| 10.5 | % |
Aerospace
Aerospace segment net sales decreased by $192,281, or 38.6%, to $306,494 for the third quarter of fiscal year increased by $94,163, or 23.3%2020, compared 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 increaseddecreased by $277,756,$119,961, or 25.3%8.7%, to $1,374,616$1,254,655 for the first nine monthsnine-months of fiscal year 2019,2020, compared to $1,096,860$1,374,616 for the same period of fiscal year 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.2019. The remaining increasedecrease in segment net sales for the third quarter and first nine monthsnine-months of fiscal year 2019,2020 as compared to the same periods of fiscal year 2018,2019 was primarily driven by continued strength acrosslower commercial sales due to the secular decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of continued momentum in next generation aircraft production, andthe global COVID-19 pandemic, partially offset by higher defense OEM and aftermarket programs as a result of higher military spending.sales.
CommercialDefense 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 healthydecreased in the third quarter of fiscal year 2019 and were higher in2020 compared to the first nine monthsthird quarter of fiscal year 2019, driven primarily by lower sales for guided weapons and fixed wing aircraft due to supply chain challenges as compared toa result of disruption caused by the global COVID-19 pandemic, as well as a very strong quarter in the same period of the prior fiscal year 2018year. Our defense aftermarket has increased as a result of increased utilizationthe U.S. Government has prioritized the combat readiness of existing fleetsmilitary programs on which we have content. Global conflicts and the initial provisioninggrowing international demand for new platforms. As anticipated, initial provisioning was lowervarious other military programs continue to drive demand for defense aircraft, including fighter jets, transports, and both utility and attack rotorcraft, supported by our products and systems. Although we expect some ongoing variability in defense aftermarket sales due to the groundingglobal COVID-19 pandemic and timing of the Boeing 737MAXcontinued maintenance needs and compared to a very strong third quarter in the prior year.
upgrade programs, we expect U.S. government funding for defense platforms on which we have content remains strong. Defense OEM sales increased into be strong under the defense budget.
Aerospace segment earnings decreased by $62,142, or 60.2%, to $41,096 for the third quarter and first nine months of fiscal year 20192020, compared to the same periods of fiscal year 2018, driven primarily by continued strong demand for smart weapons, as well as growing international demand for various other military programs. Defense aftermarket sales remained strong through the first nine months of fiscal year 2019, with a significant increase in defense aftermarket sales in the third quarter. We expect some ongoing variability in defense aftermarket sales due to the timing of continued maintenance needs and upgrade programs.
Aerospace segment earnings increased by $19,351, or 23.1%, to $103,238 for the third quarter of fiscal year 2019 compared. Aerospace segment earnings decreased by $26,169, or 9.4%, to $83,887$251,645 for the third quarterfirst nine-months of fiscal year 2018. Aerospace segment earnings increased by $74,030, or 36.3%,2020, compared to $277,814 for the first nine monthsnine-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 nine months of fiscal year 2019 include an increase in segment
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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 previous guidance. Fluctuations in 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.2019.
The net increasedecrease in Aerospace segment earnings for the third quarter and first nine monthsnine-months of fiscal year 20192020 was due to the following:
| Three-Month Period |
|
| Nine-Month Period |
| |||||||||
Three-Month | Nine-Month | |||||||||||||
Period | Period | |||||||||||||
Earnings for the period ended June 30, 2018 | $ | 83,887 | $ | 203,784 | ||||||||||
Earnings for the period ended June 30, 2019 |
| $ | 103,238 |
|
| $ | 277,814 |
| ||||||
Sales volume | 34,301 | 103,595 |
|
| (91,835 | ) |
|
| (69,740 | ) | ||||
Price, sales mix and productivity | 279 | 9,157 |
|
| 12,039 |
|
|
| 19,144 |
| ||||
Production capacity expansion costs | (4,479) | (11,285) | ||||||||||||
Manufacturing expansion costs |
|
| — |
|
|
| (7,129 | ) | ||||||
Savings from cost reduction initiatives |
|
| 17,305 |
|
|
| 36,699 |
| ||||||
Other, net | (10,750) | (27,437) |
|
| 349 |
|
|
| (5,143 | ) | ||||
Earnings for the period ended June 30, 2019 | $ | 103,238 | $ | 277,814 | ||||||||||
Earnings for the period ended June 30, 2020 |
| $ | 41,096 |
|
| $ | 251,645 |
|
Aerospace segment earnings as a percentage of segment net sales were 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%13.4% for the third quarter and 20.8%20.1% for the first nine monthsnine-months of fiscal year 2020, compared to 20.7% for the third quarter and 20.2% for the first nine-months of fiscal year 2019. Aerospace segment earnings in both the third quarter and first nine monthsnine-months of fiscal year 2019 benefitted2020 decreased primarily due to the global spread of the COVID-19 pandemic and extended grounding of the Boeing 737 MAX aircraft, partially offset by favorable product mix, and savings from highercost reduction initiatives including the elimination of annual bonus for fiscal year 2020.
Industrial
Industrial segment net sales volume and, in decreased by $35,898, or 14.2%, to $217,332 for the first nine monthsthird quarter 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%2020, compared to $253,230 for the third quarter of fiscal year 2019 compared. Industrial segment net sales excluding the disposal group decreased by $20,815, or 9.0%, to $183,505$209,602 for the third quarter of fiscal year 2018. 2020, compared to $230,417 for the third quarter of fiscal year 2019. Industrial segment net sales increaseddecreased by $279,390$79,298, or 54.8%10.0%, to $789,044$709,746 for the first nine monthsnine-months of fiscal year 2019,2020, compared to $509,654$789,044 for the same period of fiscal year 2018.2019. Industrial segment net sales excluding the disposal group decreased by $82,294, or 11.4%, to $642,083 for the first nine-months of fiscal year 2020, compared to $724,377 for the same period of fiscal year 2019. Foreign currency exchange rates had an unfavorable impact on segment net sales of $6,227$4,013 and $18,951$12,573 for the third quarter and first nine monthsnine-months of fiscal year 2019,2020, 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 excludes one month of net sales attributable to 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 third quarter of fiscal year 2019 compared to 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 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 excludes one month of net sales attributable to Woodward 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 nine months of fiscal year 2019 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 increasedecrease in organic Industrial segment net sales in the third quarter and first nine monthsnine-months of fiscal year 20192020 was primarily dueattributable to increased reciprocating enginelower sales volumes, the ongoing impact of the global COVID-19 pandemic across markets we serve, continued weakness in the oil and industrial gas turbine sales, partially offsetmarket, and the divestiture of the disposal group.
The demand for diesel fuel systems was negatively impacted by continuing declines in renewables sales. a softening of the oil and gas market amid a slowing global economy, pricing volatility and decreased capital investments related to reduced drilling activity, particularly within the North American fracking market.
Sales of fuel systems for compressed natural gas (“CNG”) trucks in Asia continues to drivewere slightly up in the increase in our engine business. The recent transition tothird quarter and first nine-months of fiscal year 2020 as production rates for China 6 regulations led to strong demand for China 5-compliant natural gascompliant trucks leading up to the implementation. As a result, we expect some variability in the demand for natural gas trucks in China as the market absorbsrecovered from the large pre-buy activities of China 5-compliant natural gas5 compliant trucks, and as the market transitions to the next generation China 6-complaint natural gas trucks.which negatively impacted sales in previous years. We continue to expectanticipate the market demand for natural gas trucks to remain favorablecontinue as the Chinese government continues to encourageenforce China 6 regulations and continues to incentivize the use of natural gas usage under its initiative on air quality improvement. Therather than diesel. Although the industrial gas turbine business has remained stable with some year-over-yearmarket began to stabilize during the first nine-months of fiscal year 2020 as global power demand increases and sequential quarter sales growth.domestic upgrade initiatives transition from planning to execution, we expect to see volatility in demand due to the COVID-19 pandemic. Industrial gas turbine sales in the third quarter and first nine months of fiscal year 2019 continues to benefit2020 benefitted 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-yearHowever, this was partially offset by the weakening demand in new turbine programs due to the economic uncertainty caused by the COVID-19 pandemic and sequentialwe expect lower demand in industrial gas turbine sales growthuntil the outbreak is contained and demand stabilizes.
Industrial segment earnings increased by $1,198, or 4.6%, to continue into$27,438 for the fourththird 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 business2020.
Industrial segment earnings increased by $15,297, or 139.8%, compared to $26,240 for the third quarter of fiscal year 2019. Industrial segment earnings excluding the disposal group decreased by $220, or 0.8%, to $27,186, compared to $10,943$27,406 for the third quarter of fiscal year 2018. Segment2019. Industrial segment earnings increaseddecreased by $41,126,$897, or 99.3%1.1%, to $82,537$81,640 for the first nine monthsnine-months of fiscal year 2019,2020, compared to $41,411$82,537 for the same period of fiscal year 2018. 2019. Industrial segment earnings excluding the disposal group decreased by $8,439, or 9.7%, to $78,038 for the first nine-months of fiscal year 2020, compared to $86,477 for the same period of fiscal year 2019.
Adjusted Industrial segment earnings for the third quarter of fiscal year 2019, which exclude certain purchase accounting impacts related to the L’Orange Acquisition, were $28,844$28,844. Adjusted Industrial segment earnings for the third quarter of fiscal year 2019 an increase of 49.9% comparedexcluding the disposal group were $30,050. There were no adjustments to Industrial segment earnings in the third quarter or the first nine-monthsof fiscal year 2018,2020, which were down 4.9% and 21.2%, respectively, compared to adjusted Industrial segment earnings of $28,844 and $103,637, for the first nine months of fiscal year 2019, an increase of 108.5% compared to same period of fiscal year 2018. Industrial segment earningsrespectively, for the third quarter and first nine monthsnine-months of fiscal year 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 nine months of fiscal year 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 nine months of fiscal year 20192020 and net decrease in Industrial segment earnings for the first nine-months of fiscal year 2020 was due to the following:
| Three-Month Period |
|
| Nine-Month Period |
| |||||||||
Three-Month | Nine-Month | |||||||||||||
Period | Period | |||||||||||||
Earnings for the period ended June 30, 2018 | $ | 10,943 | $ | 41,411 | ||||||||||
Earnings for the period ended June 30, 2019 |
| $ | 26,240 |
|
| $ | 82,537 |
| ||||||
Sales volume | 11,025 | 32,732 |
|
| (9,942 | ) |
|
| (26,868 | ) | ||||
Price, sales mix and productivity | (7,136) | (8,531) |
|
| (104 | ) |
|
| (3,781 | ) | ||||
Impact of L'Orange Acquisition | 12,663 | 35,162 | ||||||||||||
L'Orange backlog amortization |
|
| 728 |
|
|
| 13,608 |
| ||||||
Effects of changes in foreign currency rates | (1,630) | (3,774) |
|
| (128 | ) |
|
| (2,556 | ) | ||||
Disposal group divestiture impact |
|
| 170 |
|
|
| 170 |
| ||||||
Savings from cost reduction initiatives |
|
| 8,668 |
|
|
| 20,513 |
| ||||||
Other, net | 375 | (14,463) |
|
| 1,806 |
|
|
| (1,983 | ) | ||||
Earnings for the period ended June 30, 2019 | $ | 26,240 | $ | 82,537 | ||||||||||
Earnings for the period ended June 30, 2020 |
| $ | 27,438 |
|
| $ | 81,640 |
|
Industrial segment earnings as a percentage of segment net sales were 12.6% for the third quarter and 11.5% for the first nine-months of fiscal year 2020, compared to 10.4% for the third quarter and 10.5% for the first nine monthsnine-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, excluding the disposal group, were 13.0% for the third quarter and 12.2% for the first nine-months of fiscal year 2020, compared to 11.9% for both the third quarter and first nine-months of fiscal year 2019. The increase in Industrial segment earnings in the third quarter of fiscal year 2020 was primarily due to savings from cost reduction initiatives including the elimination of annual bonus for fiscal year 2020, partially offset by lower sales volume. The decrease in Industrial segment earnings for the first nine-months of fiscal year 2020 was primarily due to lower sales volume and product mix, partially offset by the amortization of the backlog intangible acquired in connection with the L’Orange acquisition that was recognized in both the third quarter and first nine-months of fiscal year 2019, whereas no amortization of this backlog intangible was recognized in the third quarter and first nine-months of fiscal year 2020. The decrease in the first nine-months of fiscal year 2020 was further partially offset by savings from cost reduction initiatives including the elimination of annual bonus for fiscal year 2020. There were no adjustments to Industrial segment earnings as a percentage of segment net sales for the third quarter or the first nine-months of fiscal year 2020, which were down compared to adjusted Industrial segment earnings as a percentage of segment net sales of 11.4% for the third quarter and 13.1% for the first nine monthsnine-months of fiscal year 2019. 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 Nonsegment
Nonsegment expenses11.2% and 13.2% decreased to $15,158 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.
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Nonsegment expenses
Nonsegment expenses2020 decreased, compared 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 were certain special charges related to the acquisition of Woodward L’Orange (“L’Orange Acquisition Related Charges”), as well as Duarte move related2020 was merger and divestiture transaction costs of $2,057. The L’Orange Acquisition Related Charges recognized$1,732, restructuring charges of $19,040, and acceleration of stock compensation of $2,376, offset by the net gain on settlement of cross-currency interest rate swaps of $27,481. Included in nonsegment expenses for the third quarter of fiscal year 2019 were Duarte move-related costs in the amount of $7,035. Excluding these charges from both 2020 and 2019, nonsegment expenses decreased in the third quarter of fiscal year 2018 included (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 both 2019 and 2018, nonsegment expenses increased in the third quarter of fiscal year 20192020 compared to the third quarter of fiscal year 20182019, primarily due to an increase in variable compensation relatedthe elimination of annual bonus for fiscal year 2020.
Nonsegment expenses increased to the strong financial performance in$94,360 for the first nine monthsnine-months of the fiscal year as well as an increase in certain expenses to support ongoing company growth.
Nonsegment expenses increased2020, compared to $83,211 for the first nine monthsnine-months of fiscal year 2019, compared to $78,069 for the first nine months of fiscal year 2018. 2019. Included in nonsegment expenses for the first nine monthsnine-months of fiscal year 20192020 were Duarte move relatedthe impairment charge on assets held for sale associated with the divestiture of our disposal group in the amount of $37,902, restructuring charges of $19,040, acceleration of stock compensation of $2,376, and merger and divestiture transaction costs of $23,159. In addition to L’Orange Acquisition Related Charges, included$18,654, partially offset by the net gain on settlement of our cross-currency interest rate swaps of $27,481, and a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552. Included in nonsegment expenses for the first nine monthsnine-months of fiscal year 20182019 were Duarte move relatedmove-related costs in the amount of $2,301 and restructuring charges of $17,013. $23,159. Excluding these charges from both 20192020 and 2018,2019, nonsegment expenses increaseddecreased in the first nine monthsnine-months of fiscal year 20192020 compared to the same period infirst nine-months of fiscal year 20182019 primarily due an increase in variable compensation related to savings from cost reduction initiatives, which includes the strong financial performance in the first nine monthselimination of theannual bonus for fiscal year.year 2020.
LIQUIDITYLIQUIDITY 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, repay our other indebtedness, or finance our acquisitions. We continue to 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 $63,302$101,363 at June 30, 20192020 and $83,594$99,073 at September 30, 2018,2019, and our working capital was $655,437$701,319 at June 30, 20192020 and $523,619$563,792 at September 30, 2018.2019. Of the cash and cash equivalents held at June 30, 2019, $59,3912020, $96,972 was held by our foreign locations.locations and $2,880 is restricted cash held in escrow related to the sale of property in Duarte, California. 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 “The Tax ActCuts and Jobs Act” enacted in December 2017 (the “Tax Act”) increases the impracticality of determining this income tax liability.
We do not believe the one-time repatriation tax on deferred foreign income resulting from the Tax Act, which is expected to be paid over an eight yeareight-year period that 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 subsidiaries 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 $86,059$47,863 at June 30, 20192020 and $23,191$42,171 at September 30, 20182019 recorded as non-customer accounts receivable in our
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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, as amended, provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,500,000, subject to lenders’ participation. We can borrow against our 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 facility 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 revolving credit facility and our other credit facilities, see Note 14,15, 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 June 30, 2019,2020, we had total outstanding debt of $1,191,147 $929,447 consisting of various series of unsecured notes due between 2020 and 2033, and amounts borrowed under our revolving credit facility.facility, and our finance leases. Our Series G and Series J notes, both of which have an aggregate principal amount of $50,000, mature on November 15, 2020. At June 30, 2019,2020, we had additional borrowing availability of $627,203$889,914 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,593$7,523 under various foreign credit facilities. On October 1, 2018, Woodward paid the entire principal balance of $100,000 on the Series D Notes using proceeds from borrowings under its revolving credit facility. On April 3, 2019, we paid the entire principal balance of $43,000 on our 8.24% unsecured Series F notes using proceeds from borrowings under our revolving credit facility.
At June 30, 2019,2020, we had $361,852$98,639 of borrowings outstanding under our revolving credit facility, $180,000all of which was classified as 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, $344,8002020, $87,400 is denominated in U.S. dollars and €15,000€10,000 is denominated in Euro. Revolving credit facility and short-term borrowing activity during the nine-months ended June 30, 20192020 were as follows:
|
|
|
|
|
|
|
|
Maximum daily balance during the period |
| $ | 343,255 |
|
Average daily balance during the period |
| $ | 266,853 |
|
Weighted average interest rate on average daily balance |
|
| 2.38 | % |
We believe we were in compliance with all our debt covenants as of June 30, 2019.2020. Additionally, we do not believe the current known impacts of the COVID-19 pandemic will affect our ability to remain in compliance with our debt covenants. See Note 13, 15, 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. We do not believe the current known impacts of the COVID-19 pandemic will impact our ability to satisfy our long-term debt obligations.
In the first quarter of fiscal year 2017, our board of directors terminated our 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 in November 2019 (the “2017 Authorization”). Effective upon the expiration of the 2017 Authorization in November 2019, our board of directors approved a new program for the repurchase of up to $500,000 of our outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 20192022 (the “2017
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“2019 Authorization”). In the first nine monthsnine-months of fiscal year 2019,2020, we repurchased 124 shares1,102 of our common stock for $13,346 under the 2019 Authorization. We purchased 456 shares of our common stock for $110,311$43,253 in the first nine-months of fiscal year 2019 under the 2017 Authorization pursuantAuthorization. Under the now-terminated merger agreement with Hexcel, we had been generally prohibited from repurchasing our common stock during the pendency of the Merger. With the termination of the merger agreement on April 5, 2020, share repurchases were no longer restricted. However, to a 10b5-1 plan. We purchased no stock inpreserve cash flow due to the first nine monthseconomic uncertainties caused by the COVID-19 pandemic, we do not currently anticipate making significant share repurchases for the remainder of fiscal year 2018.2020.
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 was built to support the expected growth in our Aerospace segment 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 announcedAssociated with our decision to relocate our Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.Colorado, which was finalized in fiscal year 2019, on December 30, 2019, we closed on the sale of one of two parcels of the Duarte real property and recorded a pre-tax gain on sale of assets in the amount of $13,522. The carrying value of the assets at theremaining parcel of Duarte facility in California was $10,738real estate is $2,520 as of June 30, 2019,2020, all of which we have identified assetsas an asset held for sale with a carrying valueas of $7,848. The assets held for sale relate to the land, building and building improvements, and other assets at the Duarte facility.that date. Based on an existing real property purchase agreement and current market conditions, we expect to record aan additional gain on the eventualsubsequent sale of these assets. We have identified approximately $377 thatthe remaining parcel of real estate, which is plannedexpected to be disposedclose by September 30, 2020.
In the third quarter of fiscal year 2020, as a result of the relocation.COVID-19 pandemic and future cash flow uncertainties, we elected to terminate and settle our existing cross-currency interest rate swap derivative instruments. Concurrent with settlement of the derivative instruments, we discontinued the related foreign currency hedging relationships associated with the instruments. Upon termination of the instruments, and related hedging relationships, we recognized a pre-tax gain of $30,481 and incurred a swap breakage fee of $3,000. We received net cash proceeds of $59,571 at the date of settlement, which included $58,191 of proceeds related to the fair value of the instruments and $4,380 of net accrued interest, less the $3,000 fee to terminate the cross-currency interest rate swap agreements.
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.stable and do not currently foresee adverse impacts to financial institutions providing our capital requirements as a result of the COVID-19 pandemic.
Cash Flows
Nine-Months Ended June 30, |
| Nine-Months Ended June 30, |
| ||||||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| ||||||
Net cash provided by operating activities | $ | 219,202 | $ | 162,083 |
| $ | 212,416 |
|
| $ | 219,202 |
| |
Net cash used in investing activities | (79,826) | (851,307) | |||||||||||
Net cash (used in) provided by financing activities | (159,008) | 721,194 | |||||||||||
Net cash (used in) investing activities |
|
| (10,194 | ) |
|
| (79,826 | ) | |||||
Net cash (used in) financing activities |
|
| (196,307 | ) |
|
| (159,008 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (660) | (5,123) |
|
| (3,625 | ) |
|
| (660 | ) | |||
Net change in cash and cash equivalents | (20,292) | 26,847 |
|
| 2,290 |
|
|
| (20,292 | ) | |||
Cash and cash equivalents, including restricted cash, at beginning of year | 83,594 | 87,552 |
|
| 99,073 |
|
|
| 83,594 |
| |||
Cash and cash equivalents, at end of period | $ | 63,302 | $ | 114,399 | |||||||||
Cash and cash equivalents, including restricted cash, at end of period |
| $ | 101,363 |
|
| $ | 63,302 |
|
Net cash flows provided by operating activities for the first nine monthsnine-months of fiscal year 20192020 was $219,202,$212,416, compared to $162,083$219,202 for the same period of fiscal year 2018.2019. The increasedecrease in net cash provided by operating activities in the first nine monthsnine-months of fiscal year 20192020 compared to the first nine monthsnine-months of the prior fiscal year is primarily attributable to increased earnings and the timing of certain cash payments for accounts payable, annual bonuses, and taxes due in the first nine monthsnine-months of fiscal year 2019,2020, partially offset by the timing of cash receiptsreceived from higher sales incustomers as well as proceeds from settlement of cross-currency interest rate swaps during 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 monthsthird quarter 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.2020.
Net cash flows used in investing activities for the first nine monthsnine-months of fiscal year 20192020 was $79,826,$10,194, compared to $851,307$79,826 in the first nine monthsnine-months of fiscal year 2018.2019. The decrease in cash flows used in investing activities in the first nine monthsnine-months of fiscal year 20192020 compared to the first nine monthsnine-months of the prior fiscal year is primarily due to cash useddecreased payments for the acquisitionpurchase of L’Orange on June 1, 2018 and a decrease in payments for property, plant and equipment, partially offset by an increaseproceeds in payments for purchasesthe amount of short-term investments.$18,767 from the sale of a parcel of our Duarte real property, and proceeds in the amount of $10,443 from divestiture of the disposal group.
Net cash flows used in financing activities for the first nine monthsnine-months of fiscal year 20192020 was $159,008,$196,307, compared to net cash flows providedused in financing activities of $721,194$159,008 in the first nine monthsnine-months of fiscal year 2018. In2019. During the first nine monthsnine-months of fiscal year 2019,2020, we had net debt payments in the amount of $165,163, compared to net payments in the amount of $51,189 in the first nine-months of fiscal year 2019. Also, in the first nine-months of fiscal year 2020, we repurchased 1,102 124 shares of our common stock for $$13,346, compared to the repurchase of 1,102 shares of our common stock for $110,311 in the first 110,311nine-months of fiscal year 2019. The common stock repurchases were made pursuant to a 10b-18 plan under the 2019 Authorization and a 10b5-1 plan under the 2017 Authorization. We made no stock repurchases in the first nine 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 capitalfinance 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. Other than the amended revolving credit agreement discussed above, there have been no material changes to our various contractual obligations during the 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, adjustedAdjusted net earnings, adjusted earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, free cash flow, and adjusted 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 excluding the disposal group
The Company presents certain sales measures excluding the impact of currency exchange rate fluctuations,disposal group net sales, which isit refers to as being presented on a “constant currency basis.” The Company calculates“excluding the disposal group” to show the changes to Woodward’s historical business without the businesses included in the disposal group divestitures, which occurred in April 2020. Management believes that the exclusion of the disposal group net sales measures on a constant currency basis by applyingillustrates more clearly how the foreign currency exchange rate in effect during the prior year comparative periodunderlying business of Woodward’s Industrial segment is performing, as these sales are no longer related 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 coreongoing operations of the Company.Industrial segment business.
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,the gain on sale of assets associated with the sale of the Company’s Duarte real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of its disposal group, (iii) Duarte move related costs, (iii)(iv) 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 associatedacquired in connection with the acquisition of Woodward L’Orange (vii) German real estate transfer taxon June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the acquisitionpreviously proposed merger with Hexcel, which merger agreement was terminated on April 5, 2020 (vi) transaction costs associated with the completed divestiture of Woodward L’Orange,our disposal group, (vii) restructuring charges related to the COVID-19 pandemic, (viii) acceleration of stock compensation expense related to restructuring activities, and (viii)(ix) the transition impactsnet gain on settlement of the change in U.S. federal tax legislation in December 2017.cross-currency interest rate swaps. 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 evaluatingto evaluate 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, 20192020 and June 30, 20182019 is shown in the tables below.
Three-Months Ended June 30, |
| Three-Months Ended June 30, |
| |||||||||||||||||||||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| |||||||||||||||||||||
Net Earnings | Earnings Per Share | Net Earnings | Earnings Per Share |
| Net Earnings |
|
| Earnings Per Share |
|
| Net Earnings |
|
| Earnings Per Share |
| |||||||||||||
Net earnings (U.S. GAAP) | $ | 66,107 | $ | 1.02 | $ | 49,117 | $ | 0.77 |
| $ | 38,465 |
|
| $ | 0.61 |
|
| $ | 66,107 |
|
| $ | 1.02 |
| ||||
Non-U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Duarte move related costs, net of tax | 5,294 | 0.08 | 1,440 | 0.02 |
|
| — |
|
|
| — |
|
|
| 5,294 |
|
|
| 0.08 |
| ||||||||
Purchase accounting impact, net of tax1 | 1,867 | 0.03 | 5,809 | 0.09 |
|
| — |
|
|
| — |
|
|
| 1,867 |
|
|
| 0.03 |
| ||||||||
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 | ||||||||||||||||||||||||
Merger and divestiture transaction costs, net of tax2 |
|
| 1,304 |
|
|
| 0.02 |
|
|
| — |
|
|
| — |
| ||||||||||||
Restructuring costs related to COVID-19, net of tax |
|
| 14,200 |
|
|
| 0.22 |
|
|
| — |
|
|
| — |
| ||||||||||||
Loss on sale of disposal group, net of tax |
|
| 1,801 |
|
|
| 0.02 |
|
|
| — |
|
|
| — |
| ||||||||||||
Acceleration of stock compensation, net of tax |
|
| 1,788 |
|
|
| 0.03 |
|
|
| — |
|
|
| — |
| ||||||||||||
Net gain on cross-currency interest rate swaps, net of tax3 |
|
| (26,904 | ) |
|
| (0.42 | ) |
|
| — |
|
|
| — |
| ||||||||||||
Non-U.S. GAAP adjustments | 7,161 | 0.11 | 18,657 | 0.29 |
|
| (7,811 | ) |
|
| (0.13 | ) |
|
| 7,161 |
|
|
| 0.11 |
| ||||||||
Impact of December 2017 changes to U.S. tax law | 10,588 | 0.17 | 3,671 | 0.06 |
|
| — |
|
|
| — |
|
|
| 10,588 |
|
|
| 0.17 |
| ||||||||
Total Non-U.S. GAAP adjustments | 17,749 | 0.28 | 22,328 | 0.35 |
|
| (7,811 | ) |
|
| (0.13 | ) |
|
| 17,749 |
|
|
| 0.28 |
| ||||||||
Adjusted net earnings (Non-U.S. GAAP) | $ | 83,856 | $ | 1.30 | $ | 71,445 | $ | 1.12 |
| $ | 30,654 |
|
| $ | 0.48 |
|
| $ | 83,856 |
|
| $ | 1.30 |
| ||||
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 impacts relate to the amortization of the backlog intangible, net of tax, acquired in connection with the L’Orange Acquisition. |
(2) | Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the divestiture of the disposal group. |
(3) | The net gain on cross-currency interest rate swaps, net of tax, includes (i) the net realized gains on termination of the instruments of $29,841 and (ii) the swap breakage fees associated with termination of the instruments of $2,937. |
(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.
|
| Nine-Months Ended |
| |||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
|
| Net Earnings |
|
| Earnings Per Share |
|
| Net Earnings |
|
| Earnings Per Share |
| ||||
Net earnings (U.S. GAAP) |
| $ | 183,156 |
|
| $ | 2.85 |
|
| $ | 192,806 |
|
| $ | 2.99 |
|
Non-U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Duarte property, net of tax |
|
| (10,175 | ) |
|
| (0.16 | ) |
|
| — |
|
|
| — |
|
Impairment from assets sold, net of tax |
|
| 28,016 |
|
|
| 0.44 |
|
|
| — |
|
|
| — |
|
Duarte move related costs, net of tax |
|
| — |
|
|
| — |
|
|
| 17,417 |
|
|
| 0.27 |
|
Purchase accounting impact, net of tax1 |
|
| — |
|
|
| — |
|
|
| 14,949 |
|
|
| 0.23 |
|
Merger and divestiture transaction costs, net of tax2 |
|
| 14,038 |
|
|
| 0.22 |
|
|
| — |
|
|
| — |
|
Restructuring costs related to COVID-19, net of tax |
|
| 14,200 |
|
|
| 0.22 |
|
|
| — |
|
|
| — |
|
Loss on sale of disposal group, net of tax |
|
| 1,801 |
|
|
| 0.02 |
|
|
| — |
|
|
| — |
|
Acceleration of stock compensation, net of tax |
|
| 1,788 |
|
|
| 0.03 |
|
|
| — |
|
|
| — |
|
Net gain on cross-currency interest rate swaps, net of tax3 |
|
| (26,904 | ) |
|
| (0.42 | ) |
|
| — |
|
|
| — |
|
Non-U.S. GAAP adjustments |
|
| 22,764 |
|
|
| 0.35 |
|
|
| 32,366 |
|
|
| 0.50 |
|
Impact of December 2017 changes to U.S. tax law |
|
| — |
|
|
| — |
|
|
| 10,588 |
|
|
| 0.18 |
|
Total non-U.S. GAAP adjustments |
|
| 22,764 |
|
|
| 0.35 |
|
|
| 42,954 |
|
|
| 0.68 |
|
Adjusted net earnings (Non-U.S. GAAP) |
| $ | 205,920 |
|
| $ | 3.20 |
|
| $ | 235,760 |
|
| $ | 3.67 |
|
(1) | The purchase accounting impacts relate to the amortization of the backlog intangible, net of tax, acquired in connection with the L’Orange Acquisition. |
(2) | Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the divestiture of the disposal group. |
(3) | The net gain on cross-currency interest rate swaps, net of tax, includes (i) the net realized gains on termination of the instruments of $29,841 and (ii) the swap breakage fees associated with termination of the instruments of $2,937. |
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 Woodwardbacklog intangible acquired in connection with the L’Orange backlog intangible.Acquisition. 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 themthis item 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 soldbelow; no such adjustments were made for the three and nine-months ended June 30, 2018, and2020.
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Industrial segment earnings (U.S. GAAP) |
| $ | 27,438 |
|
| $ | 26,240 |
|
| $ | 81,640 |
|
| $ | 82,537 |
|
Purchase accounting impacts1 |
|
| — |
|
|
| 2,604 |
|
|
| — |
|
|
| 21,100 |
|
Adjusted Industrial segment earnings (Non-U.S. GAAP) |
| $ | 27,438 |
|
| $ | 28,844 |
|
| $ | 81,640 |
|
| $ | 103,637 |
|
(1) | The purchase accounting impacts relate to the amortization of the backlog intangible, net of tax, acquired in connection with the L’Orange Acquisition. |
Industrial segment earnings excluding the disposal group is defined by the Company as Industrial segment earnings excluding the earnings or losses related to businesses included in the disposal group divestitures. The Company believes that these earnings or losses are no longer related to the ongoing operations of the Woodward L’Orange backlog intangibleIndustrial segment business and therefore, the exclusion of these earnings illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing. Industrial segment earnings excluding the disposal group as a percentage of Industrial segment net sales is defined by management as the percentage of segment net sales related to segment earnings excluding the earnings or losses related to businesses included in the disposal group divestitures.
The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group for the three and nine-months ended June 30, 20192020 and June 30, 2018.2019 is shown in the table below.
|
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Industrial segment earnings (U.S. GAAP) |
| $ | 27,438 |
|
| $ | 26,240 |
|
| $ | 81,640 |
|
| $ | 82,537 |
|
Disposal group earnings (losses) |
|
| 252 |
|
|
| (1,166 | ) |
|
| 3,602 |
|
|
| (3,940 | ) |
Industrial segment earnings excluding the disposal group (Non-U.S. GAAP) |
| $ | 27,186 |
|
| $ | 27,406 |
|
| $ | 78,038 |
|
| $ | 86,477 |
|
Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements maydo 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 ourthe Company’s 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,the gain on sale of assets associated with the sale of the Company’s Duarte real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of its disposal group, (iii) Duarte move related costs, (iii)(iv) 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 associatedacquired in connection with the acquisition of Woodward L’Orange and (vii) German real estate transfer taxon June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the acquisitionnow-terminated merger agreement with Hexcel, (vi) transaction costs associated with the completed divestiture of Woodward L’Orange. our disposal group, (vii) restructuring charges related to the COVID-19 pandemic, (viii) acceleration of stock compensation expense related to restructuring activities, and (ix) the net gain on settlement of cross-currency interest rate swaps.. As these gains and charges are infrequent or unusual chargesitems that can be variable from period to period and maydo not fluctuate with operating results, management believes that by removing these gains and 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 reconciled to net earnings for the three and nine-months ended June 30, 20192020 and June 30, 20182019 were as follows:
Three-Months Ended June 30, | Nine-Months Ended June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Net earnings (U.S. GAAP) | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
| ||||
Income tax expense | 26,207 | 5,300 | 51,191 | 34,685 |
|
| 6,551 |
|
|
| 26,207 |
|
|
| 30,607 |
|
|
| 51,191 |
| ||||||||
Interest expense | 10,798 | 10,056 | 34,156 | 27,751 |
|
| 8,737 |
|
|
| 10,798 |
|
|
| 26,502 |
|
|
| 34,156 |
| ||||||||
Interest income | (348) | (342) | (1,013) | (1,176) |
|
| (377 | ) |
|
| (348 | ) |
|
| (1,340 | ) |
|
| (1,013 | ) | ||||||||
EBIT (Non-U.S. GAAP) | 102,764 | 64,131 | 277,140 | 167,126 |
|
| 53,376 |
|
|
| 102,764 |
|
|
| 238,925 |
|
|
| 277,140 |
| ||||||||
Non-U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Restructuring charges | - | - | - | 17,013 | ||||||||||||||||||||||||
Gain on sale of Duarte property |
|
| — |
|
|
| — |
|
|
| (13,522 | ) |
|
| — |
| ||||||||||||
Impairment from assets sold |
|
| — |
|
|
| — |
|
|
| 37,902 |
|
|
| — |
| ||||||||||||
Duarte move related costs | 7,035 | 2,057 | 23,159 | 2,301 |
|
| — |
|
|
| 7,035 |
|
|
| — |
|
|
| 23,159 |
| ||||||||
Purchase accounting impacts1 | 2,604 | 8,299 | 21,100 | 8,299 |
|
| — |
|
|
| 2,604 |
|
|
| — |
|
|
| 21,100 |
| ||||||||
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 | ||||||||||||||||||||||||
Merger and divestiture transaction costs2 |
|
| 1,732 |
|
|
| — |
|
|
| 18,654 |
|
|
| — |
| ||||||||||||
Restructuring charges related to COVID-19 |
|
| 19,040 |
|
|
| — |
|
|
| 19,040 |
|
|
| — |
| ||||||||||||
Loss on sale of disposal group |
|
| 2,540 |
|
|
| — |
|
|
| 2,540 |
|
|
| — |
| ||||||||||||
Acceleration of stock compensation |
|
| 2,376 |
|
|
| — |
|
|
| 2,376 |
|
|
| — |
| ||||||||||||
Net gain on cross-currency interest rate swaps3 |
|
| (27,481 | ) |
|
| — |
|
|
| (27,481 | ) |
|
| — |
| ||||||||||||
Total non-U.S. GAAP adjustments | 9,639 | 26,654 | 44,259 | 45,192 |
|
| (1,793 | ) |
|
| 9,639 |
|
|
| 39,509 |
|
|
| 44,259 |
| ||||||||
Adjusted EBIT (Non-U.S. GAAP) | $ | 112,403 | $ | 90,785 | $ | 321,399 | $ | 212,318 |
| $ | 51,583 |
|
| $ | 112,403 |
|
| $ | 278,434 |
|
| $ | 321,399 |
| ||||
(1) | The purchase accounting impacts relate to the amortization of the backlog intangible, net of tax, acquired in connection with the L’Orange Acquisition. |
(2) | Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the divestiture of the disposal group. |
(3) | The net gain on cross-currency interest rate swaps includes (i) the net realized gains on termination of the instruments of $30,481 and (ii) the swap breakage fees associated with termination of the instruments of $3,000. |
EBITDA and adjusted EBITDA reconciled to the revaluation of the Woodward L’Orange inventory recognized in cost of goods soldnet earnings for the three and nine-months ended June 30, 2018,2020 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 June 30, | Nine-Months Ended June 30, |
| Three-Months Ended June 30, |
|
| Nine-Months Ended June 30, |
| |||||||||||||||||||||
2019 | 2018 | 2019 | 2018 |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| |||||||||||||
Net earnings (U.S. GAAP) | $ | 66,107 | $ | 49,117 | $ | 192,806 | $ | 105,866 |
| $ | 38,465 |
|
| $ | 66,107 |
|
| $ | 183,156 |
|
| $ | 192,806 |
| ||||
Income tax expense | 26,207 | 5,300 | 51,191 | 34,685 |
|
| 6,551 |
|
|
| 26,207 |
|
|
| 30,607 |
|
|
| 51,191 |
| ||||||||
Interest expense | 10,798 | 10,056 | 34,156 | 27,751 |
|
| 8,737 |
|
|
| 10,798 |
|
|
| 26,502 |
|
|
| 34,156 |
| ||||||||
Interest income | (348) | (342) | (1,013) | (1,176) |
|
| (377 | ) |
|
| (348 | ) |
|
| (1,340 | ) |
|
| (1,013 | ) | ||||||||
Amortization of intangible assets | 11,305 | 11,360 | 45,470 | 23,861 |
|
| 9,728 |
|
|
| 11,305 |
|
|
| 29,481 |
|
|
| 45,470 |
| ||||||||
Depreciation expense | 21,665 | 17,695 | 62,998 | 48,276 |
|
| 22,378 |
|
|
| 21,665 |
|
|
| 68,101 |
|
|
| 62,998 |
| ||||||||
EBITDA (Non-U.S. GAAP) | 135,734 | 93,186 | 385,608 | 239,263 |
|
| 85,482 |
|
|
| 135,734 |
|
|
| 336,507 |
|
|
| 385,608 |
| ||||||||
Non-U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Restructuring charges | - | - | - | 17,013 | ||||||||||||||||||||||||
Gain on sale of Duarte property |
|
| — |
|
|
| — |
|
|
| (13,522 | ) |
|
| — |
| ||||||||||||
Impairment from assets sold |
|
| — |
|
|
| — |
|
|
| 37,902 |
|
|
| — |
| ||||||||||||
Duarte move related costs | 7,035 | 2,057 | 23,159 | 2,301 |
|
| — |
|
|
| 7,035 |
|
|
| — |
|
|
| 23,159 |
| ||||||||
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 | ||||||||||||||||||||||||
Merger and divestiture transaction costs1 |
|
| 1,732 |
|
|
| — |
|
|
| 18,654 |
|
|
| — |
| ||||||||||||
Restructuring charges related to COVID-19 |
|
| 19,040 |
|
|
| — |
|
|
| 19,040 |
|
|
| — |
| ||||||||||||
Loss on sale of disposal group |
|
| 2,540 |
|
|
| — |
|
|
| 2,540 |
|
|
| — |
| ||||||||||||
Acceleration of stock compensation |
|
| 2,376 |
|
|
| — |
|
|
| 2,376 |
|
|
| — |
| ||||||||||||
Net gain on cross-currency interest rate swaps2 |
|
| (27,481 | ) |
|
| — |
|
|
| (27,481 | ) |
|
| — |
| ||||||||||||
Total non-U.S. GAAP adjustments | 7,035 | 22,078 | 23,159 | 40,616 |
|
| (1,793 | ) |
|
| 7,035 |
|
|
| 39,509 |
|
|
| 23,159 |
| ||||||||
Adjusted EBITDA (Non-U.S. GAAP) | $ | 142,769 | $ | 115,264 | $ | 408,767 | $ | 279,879 |
| $ | 83,689 |
|
| $ | 142,769 |
|
| $ | 376,016 |
|
| $ | 408,767 |
| ||||
(1) | Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the divestiture of the disposal group. |
(2) | The net gain on cross-currency interest rate swaps includes (i) the net realized gains on termination of the instruments of $30,481 and (ii) the swap breakage fees associated with termination of the instruments of $3,000. |
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 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. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to include cash proceeds from the sale of real property located at our former operations in Duarte, California, cash paid for merger and divestiture related transaction costs, cash paid for restructuring costs, and excluding cash proceeds received on settlement of our cross-currency interest rate swaps. Management believes that by including these items in free cash flow it better portrays the cash impact from our fiscal year 2018 decision to relocate our Duarte, California operations to the renovated Drake Campus in Fort Collins, Colorado and excludes the infrequent or unusual cash payments for merger and divestiture transaction costs, restructuring charges, and proceeds from settlement of certain derivative instruments, which are not indicative of the Company’s operating performance for the period.
The use of thisthese non-U.S. GAAP financial measuremeasures 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 doesand adjusted free cash flow do 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 and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting itstheir usefulness as a comparative measure.
Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities for the nine-months ended June 30, 20192020 and June 30, 20182019 were as follows:
Nine-Months Ended June 30, |
| Nine-Months Ended |
| ||||||||||
2019 | 2018 |
| 2020 |
|
| 2019 |
| ||||||
Net cash provided by operating activities (U.S. GAAP) | $ | 219,202 | $ | 162,083 |
| $ | 212,416 |
|
| $ | 219,202 |
| |
Payments for property, plant and equipment | (77,905) | (89,597) |
|
| (39,072 | ) |
|
| (77,905 | ) | |||
Free cash flow (Non-U.S. GAAP) | $ | 141,297 | $ | 72,486 |
|
| 173,344 |
|
|
| 141,297 |
| |
Cash proceeds from the sale of the Duarte facility |
|
| 18,767 |
|
|
| — |
| |||||
Cash paid for merger and divestiture transaction costs |
|
| 17,624 |
|
|
| — |
| |||||
Cash paid for restructuring charges |
|
| 14,052 |
|
|
| — |
| |||||
Net cash proceeds from cross-currency interest rate swaps |
|
| (55,191 | ) |
|
| — |
| |||||
Adjusted free cash flow (Non-U.S. GAAP) |
| $ | 168,596 |
|
| $ | 141,297 |
|
66
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 and other long-lived assets, 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, 5, LeasesRevenue, 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 June 30, 2019,2020, 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.Quantitative and Qualitative Disclosures About Market Risk
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions. 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. TheseExcept for the broad effects of the COVID-19 pandemic and the subsequent negative impact on the global economy and major financial markets, these market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.
Item 4.Controls and Procedures
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), 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 June 30, 2020.
During the quarterly period ended December 31, 2019, as a resultwe adopted the new lease guidance of ASC 842. We designed new business policies and procedures to assist in the adoption and ongoing application of the material weakness described below.
Changes in Internal Controls
Other than the remediation initiatives described belownew guidance, provided training, and the inclusion of Woodward L’Orangedesigned and applied new internal controls as further described below, thererelated to impacted accounting and disclosures. There have not been noany other significant changes in our internal controlcontrols over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Qquarter ended June 30, 2020 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
Item 1.Legal Proceedings
Item 1. | Legal 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 1A. | Risk Factors |
Investment in our securities involves risk. In 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 and our Form 10-Q for the quarter ended December 31, 2019 when making investment decisions regarding our securities. Except forThere have been no material changes in the Company’s risk factors from the aforementioned Form 10-K, except as set forth in the below risk factor identified below,and that, due to the termination of the Merger Agreement, the risk factors that were disclosedset forth in the Form 10-Q for the quarter ended December 31, 2019 under “Risks Relating to the Proposed Merger with Hexcel” are no longer applicable.
Company Risk
The recent global COVID-19 pandemic has led to significant volatility in financial, commodities (including oil and gas) and other markets and industries (including the aviation industry) and has negatively affected the business and results of operations for the Company. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our most recent Form 10-Kbusiness operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has led to significant volatility in financial, commodities (including oil and gas) and other markets and industries (including the aviation industry) and has negatively affected the business and results of operations for the Company. We have not materially changed since the datetaken steps to align our most recent Form 10-K was filedbusiness with the SEC.
Company Risks
If we fail to maintain an effective systemunfavorable economic conditions, including the implementation of internal controls over financial reporting, we may not be able to accurately reportenhanced measures through our financial results,operations management teams 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 processesglobal supply chain to ensure the financial information includedCompany is efficiently utilizing inventory on hand, as well as our internal processing capabilities. In addition, the Company has implemented staff reductions, reduction in this Form 10-Qemployee hours, furloughs, and/or temporary layoffs, at many of its various locations. Given the ongoing and dynamic nature of the circumstances, it is completedifficult to predict the impact of the COVID-19 pandemic on our business, and accurate,there is no guarantee that efforts by the Company to address the adverse impacts of COVID-19 will be effective.
We serve international markets through manufacturing facilities, sales offices and representatives located in the Americas, Asia Pacific, Europe, and India and we rely on third-party suppliers in those areas. Outbreaks of COVID-19 in various regions have resulted in the extended shutdown of certain businesses in these regions, which has resulted in disruptions or delays to our supply chain. These include disruptions from the temporary closure of third-party suppliers, interruptions in product supply and restrictions on the export or shipment of our products. Furthermore, performance delays or interruptions, payment defaults or bankruptcies of our third-party suppliers have adversely affected our business.
The significant disruption or default by our suppliers has adversely impacted our sales and operating results, and we are unable to predict the magnitude of such impact. In addition, the pandemic has resulted in a widespread health crisis which has adversely affect the global economy, resulting in an economic downturn that has impacted demand for the products and services we provide, which may continue until the COVID-19 pandemic is contained.
We are heavily dependent on net sales to customers in the processcommercial aerospace industry. Approximately 65% of remediatingWoodward’s net sales for its fiscal year ended September 30, 2019 were derived from sales to customers in the control deficiency reported above.
Although we believe that these controlsaerospace industry, with 24% of such sales from Boeing. Actions by US federal, state and processes have strengthened our internal controls over financial reporting andforeign governments to address the concern that gave risepandemic, including lockdowns, quarantines, border controls, travel restrictions and business venue closures, as well as changes in the propensity for the general public to travel by air, have had and are expected to continue to have, a significant adverse effect on the material weakness reportedcommercial aircraft markets and the demand for the products and services we provide. Furthermore, payment deferrals or defaults or bankruptcy of our customers may adversely affect our business, and may lead to additional charges, impairments and other adverse financial impacts.
In addition, the COVID-19 pandemic and resulting market volatility could result in this Form 10-Q, we cannot be certain thatsignificant effects on 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 controlsliquidity, which could adversely impactaffect our ability to reportremain in compliance with our debt covenants, satisfy our debt obligations, declare dividends or other distributions, and conduct share buybacks. Conditions in the financial and credit markets may also limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position and results of operations.
The ultimate impact of the COVID-19 pandemic on a timelyour operations and accurate basis. If our financial statementsperformance will depend on many factors that are not accurate, investors maywithin our control, including, but not limited, to: governmental, business and individuals’ actions that have a complete understandingbeen and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the impact of our operations. Likewise, if ourthe pandemic and actions taken in response on global and regional economies, travel, and economic activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial statements are not filed on a timely basis as required bymarket volatility; global economic conditions and levels of economic growth; and 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 onpace of recovery when the trading price of our stock.COVID-19 pandemic subsides.
69
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities | 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 |
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, 2020 through April 30, 2020 |
|
| 63 |
|
| $ | 60.56 |
|
|
| — |
|
| $ | 486,654 |
|
May 1, 2020 through May 31, 2020 (2) |
|
| 302 |
|
|
| 68.58 |
|
|
| — |
|
|
| 486,654 |
|
June 1, 2020 through June 30, 2020 (2) |
|
| 47 |
|
|
| 77.55 |
|
|
| — |
|
|
| 486,654 |
|
( | |||
| 1) | In November |
(2) | Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, |
70
Item 6.Exhibits
Item 6. | Exhibits |
Exhibits filed as part of this Report are listed in the Exhibit Index.
WOODWARD, INC.
EXHIBIT INDEX
Exhibit Number | Description | ||
|
| ||
| 4.1 | ||
* | 31.1 | ||
* | 31.2 | Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr. | |
* | 32.1 | ||
* |
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
| |
| |||
* | |||
104 | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed as an exhibit to this Report |
SIGNATURES
71
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: August | /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: August | /s/ Robert F. Weber, Jr. | ||
Robert F. Weber, Jr. | |||
Vice Chairman and Chief Financial Officer (on behalf of the registrant and as the registrant’s Principal Financial and Accounting Officer) |
61
72