UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
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 ☒ 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 such files).
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 ☒ 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 ☒
As of August 6, 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
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
2
Condensed Consolidated Statements of Earnings
Condensed Consolidated Statements of Comprehensive Earnings
3
Condensed Consolidated Balance Sheets
4
Condensed Consolidated Statements of Cash Flows
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Forward Looking Statements
Overview
41
Results of Operations
43
Liquidity and Capital Resources
49
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
58
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
60
Item 6.
Exhibits
Signatures
61
1
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three-Months Ended
Nine-Months Ended
June 30,
2020
2019
Net sales
$
523,826
752,005
1,964,401
2,163,660
Costs and expenses:
Cost of goods sold
395,511
562,516
1,447,942
1,621,531
Selling, general and administrative expenses
57,361
52,980
177,035
159,764
Research and development costs
34,522
40,661
106,029
123,359
Impairment of assets sold (Note 10)
—
37,902
Restructuring charges (Note 16)
19,040
Gain on cross-currency interest rate swaps, net (Note 8)
(30,481
)
Interest expense
8,737
10,798
26,502
34,156
Interest income
(377
(348
(1,340
(1,013
Other (income) expense, net (Note 18)
(5,503
(6,916
(31,991
(18,134
Total costs and expenses
478,810
659,691
1,750,638
1,919,663
Earnings before income taxes
45,016
92,314
213,763
243,997
Income tax expense
6,551
26,207
30,607
51,191
Net earnings
38,465
66,107
183,156
192,806
Earnings per share (Note 4):
Basic earnings per share
0.62
1.07
2.95
3.11
Diluted earnings per share
0.61
1.02
2.85
2.99
Weighted Average Common Shares Outstanding (Note 4):
Basic
62,309
61,941
62,188
61,977
Diluted
63,427
64,633
64,273
64,437
See accompanying Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
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
574
490
1,685
1,122
Total comprehensive earnings
1,466
66,741
182,087
203,613
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS
Current assets:
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
505,943
516,836
Income taxes receivable
34,685
8,099
Other current assets
57,441
55,691
Total current assets
1,236,947
1,271,228
Property, plant and equipment, net
1,008,259
1,058,775
Goodwill
796,372
797,853
Intangible assets, net
595,158
611,992
Deferred income tax assets
18,315
18,161
Other assets
251,618
198,517
Total assets
3,906,669
3,956,526
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings
98,639
220,000
Current portion of long-term debt
101,643
Accounts payable
160,887
240,460
Income taxes payable
12,164
18,849
Accrued liabilities
162,295
228,127
Total current liabilities
535,628
707,436
Long-term debt, less current portion
729,165
864,899
Deferred income tax liabilities
156,583
151,362
Other liabilities
575,527
506,088
Total liabilities
1,996,903
2,229,785
Commitments and contingencies (Note 22)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued
106
Additional paid-in capital
233,294
207,120
Accumulated other comprehensive losses
(104,375
(103,306
Deferred compensation
9,760
9,382
Retained earnings
2,372,733
2,224,919
2,511,518
2,338,221
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
1,909,766
1,726,741
Total liabilities and stockholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
97,582
108,468
Impairment of assets sold
Net (gain) loss on sales of assets and businesses
(11,012
880
Net (gain) on cross-currency interest rate swaps
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
(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
(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
83,594
Cash and cash equivalents, including restricted cash, at end of period
63,302
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Number of shares
Stockholders' equity
Accumulated other comprehensive (loss) earnings
Common
stock
Treasury
stock held for
deferred
compensation
Additional
paid-in
capital
Foreign
currency
translation
adjustments
Unrealized
derivative
gains
(losses)
Minimum
retirement
benefit
liability
Total
accumulated
other
comprehensive
(loss) earnings
Deferred
Retained
earnings
stock at
cost
stockholders'
equity
Balances as of April 1, 2019
72,960
(10,757
(206
204,892
(39,573
(11,667
(13,574
(64,815
8,876
2,112,168
(549,686
(8,876
1,702,665
Other comprehensive earnings (loss), net of tax
635
Cash dividends paid ($0.1625 per share)
(10,071
Purchases of treasury stock
(645
(67,058
Sales of treasury stock
(1,656
11,221
9,565
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
(11,123
(209
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
(10,677
(216
227,494
(56,042
32,671
(44,005
(67,376
9,963
2,342,340
(594,870
(9,963
1,907,694
(36,999
Cash dividends paid ($0.08125 per share)
(5,062
67
(813
2,878
2,065
6,613
27
(27
(230
230
Business divestitures
(3,010
Balances as of June 30, 2020
(10,610
(211
(45,980
(14,964
(43,431
Total stockholders'
Balances as of September 30, 2018
(11,203
(202
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
38,745
38,700
Cumulative effect from adoption of ASU 2016-16
(1,005
10,807
Cash dividends paid ($0.4675 per share)
(1,102
1,024
(4,808
38,523
Common shares issued from treasury stock for benefit plans
158
9,173
5,673
14,846
(11
909
(909
(222
222
Balances as of September 30, 2019
(11,040
(53,235
(4,955
(45,116
Cumulative effect from adoption of ASC 842 (Note 5)
255
(1,069
Cash dividends paid ($0.52375 per share)
(124
430
(3,334
18,124
124
9,420
5,328
14,748
(6
651
(651
(273
273
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of presentation
The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of June 30, 2020 and for the three and nine-months ended June 30, 2020 and 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, 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, 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; net realizable value of inventories; variable consideration including customer rebates earned and payable and early payment discounts; warranty reserves; useful lives of property and identifiable intangible assets; the evaluation of impairments of property, intangible assets, and goodwill; the provision for income tax and related valuation reserves; the valuation of derivative instruments; assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans; the valuation of stock compensation instruments granted to employees, board members and any other eligible 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; estimates of total sales contract costs when recognizing revenue under the cost-to-cost method; and contingencies. Actual results could vary from Woodward’s estimates.
In March 2020, the 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 adversely 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 the 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 fluidity of this situation precludes any prediction as to the 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 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 is currently assessing the impact of the application of the CECL impairment model on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from 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. 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. 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.
9
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)” and has subsequently issued supplemental and/or clarifying ASUs (collectively “ASC 842”). The purpose of ASC 842 is to increase transparency and comparability among organizations by recognizing lease right-of-use (“ROU”) assets and lease liabilities for substantially 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.
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. 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 elected the "package of practical expedients," which allowed Woodward not to reassess under the new 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, 2019 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 to not record qualifying short-term leases with a term of twelve months or less (inclusive of reasonably certain renewals and termination options) at the inception of the contract 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 short-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 Note 5, Leases.
The adoption of ASC 842 resulted in recognition of additional operating ROU assets and operating lease liabilities on the Condensed Consolidated Balance Sheet as of October 1, 2019 of $18,894 and $18,851, respectively.
See Note 5, Leases, for disclosures and further information related to implementation and adoption of ASC 842.
Note 3. Revenue
Sales of Products
Revenue from manufactured products and from maintenance, repair and overhaul (“MRO”) represented 86% and 12%, respectively, of Woodward’s net sales for the three-months ended June 30, 2020, 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, 2020 and June 30, 2019.
The amount of revenue recognized as point in time or over time follows:
Three-Months Ended June 30, 2020
Three-Months Ended June 30, 2019
Aerospace
Industrial
Consolidated
Point in time
98,228
138,504
236,732
191,516
147,194
338,710
Over time
208,266
78,828
287,094
307,259
106,036
413,295
Total net sales
306,494
217,332
498,775
253,230
Nine-Months Ended June 30, 2020
Nine-Months Ended June 30, 2019
464,068
463,498
927,566
563,713
482,979
1,046,692
790,587
246,248
1,036,835
810,903
306,065
1,116,968
1,254,655
709,746
1,374,616
789,044
10
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.
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, 2020
September 30, 2019
Billed receivables
294,113
381,942
Other (Chinese financial institutions)
47,863
42,171
Less: Allowance for uncollectible amounts
(7,180
(7,908
Net billed receivables
334,796
416,205
Current unbilled receivables (contract assets), net
202,719
175,324
Total accounts receivable, net
As of June 30, 2020, “Other assets” on the Condensed Consolidated Balance Sheets includes $28,278 of unbilled receivables not expected to be invoiced and collected within a period of twelve months, compared to $1,573 as of September 30, 2019. Unbilled receivables not expected to be invoiced and collected within a period of twelve months are primarily attributable to customer delays for deliveries on firm orders in the Aerospace segment due to the impacts of the COVID-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 transfer of accounts receivable meets the criteria of FASB ASC Topic 860-10, “Transfers and Servicing”, and are without recourse, the transaction is recognized as a sale and the accounts receivable is derecognized.
Contract liabilities consisted of the following:
Current
Noncurrent
Deferred revenue from material rights from GE joint venture formation
3,866
235,602
8,317
230,588
Deferred revenue from advanced invoicing and/or prepayments from customers
6,869
4,554
141
Liability related to customer supplied inventory
17,799
13,396
Deferred revenue from material rights related to engineering and development funding
1,688
120,467
1,624
106,436
Net contract liabilities
30,222
356,175
27,891
337,165
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.
11
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, 2020 was $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, 2020.
Remaining performance obligations related to material rights that have not yet been recognized in revenue as of June 30, 2020 was $454,585, of which $1,049 is expected to be recognized in the remainder of fiscal year 2020, $7,307 is expected to be recognized in fiscal year 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.
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.
Revenue by primary market for the Aerospace reportable segment was as follows:
Commercial OEM
63,804
174,077
367,080
488,928
Commercial aftermarket
68,332
124,863
328,302
375,919
Defense OEM
111,667
147,696
392,494
372,538
Defense aftermarket
62,691
52,139
166,779
137,231
Total Aerospace segment net sales
Revenue by primary market for the Industrial reportable segment was as follows:
Reciprocating engines
158,804
185,523
497,012
590,910
Industrial turbines
53,486
53,740
164,663
155,439
Renewables1
5,042
13,967
48,071
42,695
Total Industrial segment net sales
(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 of each of Woodward’s reportable segments for the three and nine-months ended June 30, 2020 are as follows:
Customer
The Boeing Company, General Electric Company, Raytheon Company
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:
United States
245,347
48,600
293,947
386,136
53,380
439,516
Germany
5,348
40,753
46,101
18,319
50,943
69,262
Europe, excluding Germany
17,675
49,500
67,175
42,849
66,936
109,785
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
24,668
5,953
30,621
32,563
8,115
40,678
12
965,368
152,600
1,117,968
1,024,644
156,836
1,181,480
43,737
145,132
188,869
56,136
178,032
234,168
97,262
165,403
262,665
131,243
191,415
322,658
30,716
139,016
169,732
36,646
144,267
180,913
22,001
86,514
108,515
29,560
94,470
124,030
95,571
21,081
116,652
96,387
24,024
120,411
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:
Numerator:
Denominator:
Basic shares outstanding
Dilutive effect of stock options and restricted stock
1,118
2,692
2,085
2,460
Diluted shares outstanding
Income per common share:
The following stock option grants were outstanding but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
Options
2,357
39
670
19
Weighted-average option price
83.75
97.13
104.48
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:
Weighted-average treasury stock shares held for deferred compensation obligations
214
208
213
207
Note 5. Leases
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.
13
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 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 has an economic incentive to extend the lease), (iii) the present value of the future minimum lease payments is considered to exceed substantially all of the fair value of the underlying asset if the payments exceed 90% of 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 other 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 the 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 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 publicly available data for instruments with similar characteristics.
When measuring lease liabilities, Woodward only uses lease payments remaining throughout the remainder of the lease term and only includes the amount that is probable of 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 classified as a cost of goods sold or selling, general and administrative expense based on the nature of the underlying 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 finance 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 asset, 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
Assets:
Operating lease assets
19,687
Finance lease assets
1,338
Total lease assets
21,025
Operating lease liabilities
4,648
Finance lease liabilities
1,643
Noncurrent liabilities:
15,143
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 10, Sale of businesses, and defined therein as the “disposal group”) 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 ROU assets of the disposal group were not recoverable and a $639 non-cash impairment charge was recorded during the nine-months ended June 30, 2020.
Supplemental lease-related information follows:
Weighted average remaining lease term
Operating leases
5.8 years
Finance leases
2.2 years
Weighted average discount rate
3.2
%
3.0
Lease-related expenses for the three and nine-months ended June 30, 2020 were as follows:
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
Relates to two separate subleases Woodward has entered into for a leased manufacturing building in Niles, Illinois.
15
Lease-related supplemental cash flow information for the nine-months ended June 30, 2020 follows:
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
Financing cash flows for finance leases
1,187
Right-of-use assets obtained in exchange for recorded lease obligations:
4,825
1,243
Maturities of lease liabilities as of June 30, 2020 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 one year as previously disclosed under ASC 840 as of September 30, 2019 follows:
2020 (full twelve months)
6,667
5,119
98
3,823
33
2,899
2,378
6,033
Total minimum lease payments under ASC 840
26,919
347
In 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 enters 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 property, plant and equipment used to manufacture the products is used only for the benefit of one 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 equipment to just one customer. Additionally, this can be driven by the set-up of the property, 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.
16
Woodward has assessed its manufacturing contracts and concluded that certain of the contracts for the manufacture of customer products met the criteria to be considered a leasing arrangement (“embedded leases”) with Woodward as the lessor. The specific manufacturing contracts that met the criteria were those that utilized Woodward property, plant and equipment and which is substantially (more than 90%) dedicated to the 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 economic 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 equipment 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 embedded operating leases, which is included in “Net sales” at the Condensed Consolidated Statements of Earnings, was $1,638 for the three-months ended June 30, 2020 and $4,763 for the nine-months ended June 30, 2020.
Other than the embedded leases identified, Woodward is not the lessor in any other leasing arrangements. None of the embedded leases identified by Woodward qualify as a sales-type or direct finance lease. None of the operating leases for which Woodward is the lessor include options for the lessee 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 equipment leased to others through embedded leasing arrangements, included in “Property, plant and equipment, net” at the Condensed Consolidated Balance Sheets, follows:
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.
Unamortized deferred revenue from material rights in connection with the JV formation included:
17
Amortization of the deferred revenue (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.
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. In addition, GE will continue to 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. Woodward received its third and fourth annual payments of $4,894 during the three-months ended March 31, 2019 and March 31, 2020, 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.
Other income related to Woodward’s equity interest in the earnings of the JV was as follows:
Other income
931
3,290
8,824
7,761
Cash distributions to Woodward from the JV, recognized in Net cash provided by operating activities on the Consolidated Statements of Cash Flows, from the JV include:
Cash distributions
4,000
4,500
7,000
12,000
Net sales to the JV were as follows:
Net sales1
7,026
18,049
38,511
45,176
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” related to amounts the JV owed Woodward, “Accounts payable” related to amounts Woodward owed the JV, and “Other assets” related to Woodward’s net investment in the JV, as follows:
Accounts receivable
4,354
5,906
1,240
4,270
9,367
7,543
Woodward records in “Other liabilities” amounts invoiced to the JV for support of the JV’s engineering and development projects as an increase to contract liabilities, and records in “Other assets” related incurred expenditures as costs to fulfill a contract. Woodward’s contract liabilities classified as “Other liabilities” included amounts invoiced to the JV as of June 30, 2020 of $68,735 compared to $69,079 as of fiscal year ended September 30, 2019. Woodward’s costs to fulfill a contract included in “Other 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, 2020, Woodward recognized a $6,207 reduction in both the contract liability in “Other liabilities” and costs to fulfill and contract in “Other assets” related to the termination of a JV engineering and development project previously recognized as a material right, compared to $2,774 in the three and nine-months ended June 30, 2019.
18
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.
The table below presents information about Woodward’s financial assets 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
Financial assets:
Cash
52,577
52,971
Investments in reverse repurchase agreements
886
Investments in term deposits with foreign banks
48,786
45,216
Equity securities
23,939
20,504
Cross-currency interest rate swaps
24,758
Total financial assets
125,302
119,577
144,335
Financial liabilities:
25,440
Total financial liabilities
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.
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-currency interest rate swaps: Woodward holds cross-currency interest rate swaps, which are accounted for at fair value. In 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”. The fair values of Woodward’s cross-currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors. 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.
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:
Fair Value
Hierarchy
Level
Estimated
Carrying
Cost
Notes receivable from municipalities
13,291
12,238
13,100
12,346
Note receivable from sale of disposal group
6,317
6,015
Investments in short-term time deposits
13,275
13,316
13,468
13,509
Liabilities:
Long-term debt
923,159
833,036
928,618
867,377
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 Woodward 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 1.2% at June 30, 2020 and 1.7% at September 30, 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 were 4.4% at June 30, 2020 and 5.7% at September 30, 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 Woodward 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 rate used to estimate the fair value of long-term debt was 1.7% at June 30, 2020 and 2.5% at September 30, 2019.
Note 8. Derivative instruments and hedging activities
Derivative instruments not designated or qualifying as hedging instruments
In May 2018, Woodward entered into cross-currency interest rate swap agreements that synthetically converted $167,420 of floating-rate debt under Woodward’s then existing revolving credit agreement to Euro denominated floating-rate debt in conjunction with the L’Orange acquisition (the “Floating-Rate Cross-Currency Swap”). Also in May 2018, Woodward entered into cross-currency interest rate swap agreements that synthetically converted an aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined in Note 15, Credit facilities short-term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross-Currency Swaps”). The cross-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 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.
20
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 five 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-Currency Swap, a corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross-currency interest rate swap, was entered into by Woodward 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.
In 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-currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated 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 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-currency basis spread. The initial cost of the cross-currency basis spread is recorded in earnings each period through the swap accrual process. There are no credit-risk-related contingent features associated with the intercompany floating-rate cross-currency interest rate swap.
21
Derivative instruments in cash flow hedging relationships
In conjunction with the entry into the Fixed-Rate Cross-Currency Swaps, five corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross-currency interest rate swaps were entered into by Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen -year period.
In 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, five 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-currency interest rate swaps.
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 exchange gains of $976 for the nine-months ended June 30, 2019.
22
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:
Derivatives in:
Location
Amount of
(Income)
Expense
Recognized in
Earnings on
Derivative
(Gain) Loss
Recognized
in Accumulated
OCI on
Reclassified
from
Accumulated
OCI into
Earnings
Cross-currency interest rate swap agreement designated as fair value hedges
2,254
718
Cross-currency interest rate swap agreements designated as cash flow hedges
(24,885
25,293
Treasury lock agreement designated as cash flow hedge
(18
26,011
June 30, 2019
in Earnings
on Derivative
1,340
2,315
1,664
5,244
4,990
6,566
7,305
2,487
2,793
3,291
(21,492
(10,786
(54
(19,059
(7,993
23
(4,082
(3,220
(3,471
(8,306
(17,647
(12,442
(20,867
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 $15,230 as of June 30, 2020 and $5,004 as of September 30, 2019.
Note 9. Supplemental statement of cash flows information
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
Impact of the adoption of ASC 842 (Note 5)
Impact of the adoption of ASU 2016-16
1,005
Common shares issued from treasury to settle benefit obligations (Note 21)
Purchases of treasury stock on account
4,204
Note 10. Sale 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.
24
In 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 were not included in the disposal group to be sold to the AURELIUS Group.
During the third quarter of 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:
17,637
441
796
51
18,925
7,633
2,998
450
11,081
Note 11. Inventories
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
On-hand inventory for which control has transferred to the customer
(144,105
(111,502
Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.
Note 12. Property, plant, and equipment
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
19,479
19,346
Construction in progress
42,449
57,624
1,663,740
1,672,227
(655,481
(613,452
Property, plant, and equipment, net
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, 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 remaining parcel of Duarte real property is $2,520 as of June 30, 2020, all of which the Company has identified as an asset held for sale and is included in “Land and land improvements”. The asset held for sale is included in unallocated corporate property, plant, and equipment. Based on an existing real property purchase agreement and current market conditions, the Company expects to record an additional gain on the subsequent sale of the remaining parcel of real property, which is expected to 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 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 plant, property and equipment of the disposal group was not recoverable and a $13,421 non-cash impairment charge was recorded during the nine-months ended June 30, 2020.
For the three and nine-months ended June 30, 2020 and 2019, Woodward had depreciation expense as follows:
Depreciation expense
22,378
21,665
68,101
62,998
Note 13. Goodwill
Impairment
Charges
Effects of Foreign
Currency
Translation
455,423
342,430
(8,640
7,159
340,949
Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, and 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 2019 impairment test resulted in no impairment.
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 the time, Woodward determined that the remaining value of the goodwill of the disposal group was not recoverable and an $8,640 non-cash impairment charge was recorded during the nine-months ended June 30, 2020.
During the second and third quarters of fiscal year 2020, Woodward determined the economic 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 is below its carrying amount as of June 30, 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.
26
Note 14. Intangible assets, net
Gross
Value
Amortization
Net
Amount
Intangible assets with finite lives:
Customer relationships and contracts:
281,683
(192,890
88,793
(181,995
99,688
412,644
(51,883
360,761
407,683
(43,986
363,697
694,327
(244,773
449,554
689,366
(225,981
463,385
Intellectual property:
15,750
(15,565
185
19,201
(18,705
496
Process technology:
76,371
(62,946
13,425
(59,913
16,458
87,733
(20,992
92,820
(24,926
67,894
164,104
(83,938
80,166
169,191
(84,839
84,352
Backlog:
41,590
(41,590
40,500
(40,500
Other intangibles:
225
(156
69
1,541
(1,249
292
Intangible asset with indefinite life:
Tradename:
65,184
63,467
Total intangibles:
358,054
(255,836
102,218
(241,908
116,146
623,126
(130,186
492,940
625,212
(129,366
495,846
Consolidated Total
981,180
(386,022
983,266
(371,274
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, 2020 and 2019, Woodward recorded amortization expense associated with intangibles of the following:
Amortization expense
9,728
11,305
29,481
45,470
Future amortization expense associated with intangibles is expected to be:
9,788
40,084
37,975
36,923
33,146
372,058
529,974
Note 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 provides for the option to increase available borrowings up to $1,500,000, subject to lenders’ participation. Borrowings under the 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 Revolving Credit Agreement, there were $98,639 in principal amount of borrowings outstanding as of June 30, 2020, at an effective interest rate of 1.28%, and $262,297 in principal amount of borrowings outstanding as of September 30, 2019, at an effective interest rate of 3.01%. As of June 30, 2020, $98,639 of 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.
Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were no borrowings outstanding on Woodward’s foreign lines of credit and foreign overdraft facilities as of both June 30, 2020 and September 30, 2019.
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.875% - 1.75%),
due June 19, 2024; unsecured
42,297
Series G notes – 3.42%, due November 15, 2020; unsecured
50,000
Series H notes – 4.03%, due November 15, 2023; unsecured
25,000
Series I notes – 4.18%, due November 15, 2025; unsecured
Series J notes – Floating rate (LIBOR plus 1.25%), due November 15, 2020; unsecured
Series K notes – 4.03%, due November 15, 2023; unsecured
Series L notes – 4.18%, due November 15, 2025; unsecured
Series M notes – 1.12% due September 23, 2026; unsecured
44,955
43,770
Series N notes – 1.31% due September 23, 2028; unsecured
86,538
84,257
Series O notes – 1.57% due September 23, 2031; unsecured
48,326
47,053
Series P notes – 4.27% due May 30, 2025; unsecured
85,000
Series Q notes – 4.35% due May 30, 2027; unsecured
Series R notes – 4.41% due May 30, 2029; unsecured
75,000
Series S notes – 4.46% due May 30, 2030; unsecured
Series T notes – 4.61% due May 30, 2033; unsecured
80,000
Finance leases (Note 5)
3,218
Unamortized debt issuance costs
(2,229
(2,478
Total long-term debt
830,808
Less: Current portion of long-term debt
28
The Notes
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 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-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 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, 2020, the Series J Notes bore interest at an effective rate of 1.63%. Interest on the 2018 Notes is payable semi-annually on May 30 and November 30 of each year until all principal is paid.
Debt Issuance Costs
Unamortized debt issuance costs associated with the Notes of $2,229 as of June 30, 2020 and $2,478 as of September 30, 2019 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets. Unamortized debt issuance costs associated with Woodward’s existing and previous revolving credit agreements of $2,392 as of June 30, 2020 and $2,840 as of September 30, 2019 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 16. Accrued liabilities
Salaries and other member benefits
53,094
115,649
Warranties
21,380
27,309
Interest payable
6,182
13,808
Accrued retirement benefits
3,617
3,587
Current portion of loss reserve on contractual lease commitments (1)
1,245
Restructuring charges
4,978
507
Taxes, other than income
16,001
15,708
Net current contract liabilities (Note 3)
26,821
22,423
See Note 17, Other liabilities, for more information on loss reserve on contractual lease commitments.
29
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:
Warranties, beginning of period
21,770
21,790
20,130
Impact from adoption of ASC 606
704
Expense, net of recoveries
2,407
4,268
6,189
10,035
Reductions for settlement of previous warranty liabilities
(2,874
(3,315
(12,328
(7,864
Foreign currency exchange rate changes
77
105
210
(157
Warranties, end of period
22,848
In the second quarter of fiscal year 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado. The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s Aerospace segment. The remaining restructuring charges recognized during the fiscal year ended September 30, 2018 consist of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the Company’s Industrial segment, with the then current market conditions. All of the restructuring charges recorded during the fiscal year ended September 30, 2018 were recorded as nonsegment expenses.
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 its impact on the Company’s business. The Termination Plan involved the termination and/or furlough of employees and contractors at certain of the Company’s operating facilities, primarily in the United States. As a result of the Termination Plan, the Company incurred $19,040 of restructuring charges related to employee severance and benefits costs as of June 30, 2020, with the 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 are as follows:
Period Activity
Balances as of October 1, 2019
(reductions)
Cash receipts
(payments)
Non-cash
activity
Workforce management costs associated with:
Duarte plant relocation
440
(440
Industrial turbomachinery business realignment
(67
COVID-19 pandemic
(14,052
(10
(14,559
Balances as of October 1, 2018
12,504
4,596
4,018
(3,251
767
16,522
(11,159
5,363
30
Note 17. Other liabilities
Net accrued retirement benefits, less amounts recognized within accrued liabilities
113,568
111,257
Total unrecognized tax benefits
12,373
10,644
Noncurrent income taxes payable
18,322
20,251
Deferred economic incentives (1)
9,352
11,535
Loss reserve on contractual lease commitments (2)
1,754
Net noncurrent contract liabilities (3)
65,737
13,482
Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.
(2)
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)
See Note 3, Revenue, for more information on net noncurrent contract liabilities.
Note 18. Other (income) expense, net
Equity interest in the earnings of the JV (Note 6)
(931
(3,290
(8,824
(7,761
Net (gain) loss on sales of assets and businesses(1)
2,545
680
Rent income
(520
(44
(1,095
(188
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
(2,911
(3,245
(8,884
(9,739
(123
(496
(505
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 $13,522 recognized 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.
31
Note 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.
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 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.
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.
The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:
Effective tax rate
14.6
28.4
14.3
21.0
The decrease in the effective tax rate for the three-months ended June 30, 2020, compared to the three-months ended June 30, 2019 is primarily attributable to (i) 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 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 certain state tax credits and a smaller favorable net excess income tax benefits from stock-based compensation.
The decrease in the effective tax rate for the nine-months ended June 30, 2020 compared to the nine-months ended June 30, 2019 is primarily attributable to (i) 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 (ii) increased foreign earnings in a lower tax jurisdiction resulting from the net gain on the termination of the cross-currency interest rate swaps, and (iii) the tax benefit associated with the impairment of assets sold. This decrease was partially offset by a smaller favorable increase in the net excess income tax benefits from stock-based compensation.
Gross unrecognized tax benefits were $11,907 as of June 30, 2020, and $10,305 as of September 30, 2019. At June 30, 2020, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax 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 $605 as of June 30, 2020 and $437 as of September 30, 2019.
32
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 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. Woodward is currently under examination by the Internal Revenue Service (“IRS”) for fiscal year 2017, which included a foreign tax credit carryback to fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.
Note 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.
The amount of expense associated with defined contribution plans was as follows:
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 concluded that Court Ruling is applicable to its defined benefit pension plan in the United Kingdom and has made the necessary plan amendments. Woodward’s current estimate of the impact of the Court Ruling in the amount of $601 has been reflected in the United Kingdom defined benefit pension plan’s obligation and assets as of September 30, 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, 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. 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,
Other Countries
Service cost
414
363
706
509
1,120
872
Interest cost
1,398
1,596
313
477
1,711
2,073
Expected return on plan assets
(3,087
(2,996
(690
(663
(3,777
(3,659
Amortization of:
Net actuarial loss
154
257
71
615
Prior service cost
234
177
239
Net periodic retirement pension (benefit) cost
(683
(706
591
394
(92
(312
Contributions paid
335
319
1,244
1,088
2,124
1,533
3,368
2,621
4,193
4,788
953
1,442
5,146
6,230
(9,260
(8,989
(2,230
(1,997
(11,490
(10,986
1,073
463
778
215
1,851
678
702
532
(2,048
(2,118
1,642
1,193
(925
2,067
1,382
34
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:
195
288
586
865
35
Prior service cost (benefit)
(1
(4
Net periodic other postretirement cost
209
301
625
906
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.
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 2020 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2020 will be as follows:
Retirement pension benefits:
United Kingdom
Japan
330
Other postretirement benefits
1,865
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:
Company contributions
127
55
193
Note 21. Stockholders’ equity
Stock repurchase program
In the first quarter of fiscal year 2017, the 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 ended 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-months of fiscal year 2020, Woodward purchased 124 shares of its common stock for $13,346 under the 2019 Authorization. Woodward repurchased 1,102 shares of common stock for $110,311 under the 2017 Authorization in the first nine-months of fiscal year 2019.
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, the Board delegated authority to administer the 2017 Plan to the compensation committee of the Board (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 29, 2020, Woodward’s stockholders approved an additional 1,000 shares of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 1,965 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.
Weighted-average exercise price per share
58.40
n/a
90.57
79.12
Weighted-average grant date market value of Woodward stock
Expected term (years)
6.5
6.4
-
8.7
Estimated volatility
33.1%
34.3%
25.7%
31.0%
Estimated dividend yield
0.5%
0.6%
0.9%
0.7%
0.8%
Risk-free interest rate
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, 2020:
Number of
options
Weighted-Average
Exercise Price
per Share
Options, beginning balance
5,623
60.50
5,387
53.73
Options granted
280
Options exercised
(66
31.15
(429
34.44
Options expired
70.89
Options forfeited
(57
103.58
(87
96.52
Options, ending balance
5,777
60.31
Changes in non-vested stock options during the three and nine-months ended June 30, 2020 were as follows:
Grant Date Fair
Value per Share
Value Per Share
Non-vested options outstanding, beginning balance
1,867
25.95
2,068
23.43
16.92
24.98
Options vested
(800
21.52
27.89
27.01
Non-vested options outstanding, ending balance
2,090
24.69
36
Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 2020 was as follows:
Number
Remaining Life in
Years
Aggregate Intrinsic
Options outstanding
6.0
118,997
Options vested and exercisable
3,686
47.95
4.6
110,112
Options vested and expected to vest
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.
A summary of the activity for restricted stock units for the three and nine-months ended June 30, 2020:
Value per Unit
Beginning balance
91.55
Units granted
Units vested
Units forfeited
97.56
Ending balance
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, 2020, there was approximately $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 the Board and 9% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.9 years.
37
Preferred stock rights
On April 5, 2020, the Board declared a dividend distribution of one 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 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.
Note 23. Segment information
Woodward serves the aerospace and industrial markets through its two reportable segments – Aerospace and Industrial. When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments. Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments.
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.
38
A summary of consolidated net sales and earnings by segment follows:
Segment external net sales:
Total consolidated net sales
Segment earnings:
41,096
103,238
251,645
277,814
27,438
26,240
81,640
82,537
Nonsegment expenses
(15,158
(26,714
(94,360
(83,211
Interest expense, net
(8,360
(10,450
(25,162
(33,143
Consolidated earnings before income taxes
Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other intangibles, net. A summary of consolidated total assets follows:
Segment assets:
1,807,013
1,900,657
1,531,655
1,561,441
Unallocated corporate property, plant and equipment, net
104,285
114,887
Other unallocated assets
463,716
379,541
Consolidated total assets
Note 24. Subsequent events
On July 29, 2020, the Board approved a cash dividend of $0.08125 per share for the quarter, payable on August 31, 2020, for stockholders of record as of August 17, 2020.
(Amounts in thousands, except per share amounts)
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”);
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;
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.
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
COVID-19 Pandemic
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 have taken steps to align our business with the unfavorable economic conditions, including the implementation of enhanced measures through our global supply chain and business 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 salaries, 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 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 our business is currently unknown. When COVID-19 is demonstrably contained, we anticipate an improvement in economic activity; however, the timing and degree of such improvement will depend on the rate 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 the 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 the date of Closing.
Operational Highlights
Quarter to Date Highlights
Net sales for the third quarter of fiscal year 2020 were $523,826, a decrease of 30.3% from $752,005 for the third quarter of the prior fiscal year. Foreign currency exchange rates had an unfavorable impact on net sales of $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 for the third quarter of 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 fiscal year 2020 were $30,654, or adjusted earnings per share of $0.48 per diluted share, compared to $83,856, or $1.30 per diluted share, for the third quarter of fiscal year 2019.
The effective tax rate in the third quarter of fiscal 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 2020 was 29.1%, compared to 17.8% for the third quarter of the prior fiscal year.
Earnings before interest and taxes (“EBIT”) for the third 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 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 up compared to adjusted Industrial segment earnings as a percent of segment net sales of 11.4% for the third quarter of fiscal year 2019.
Adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and adjusted Industrial segment earnings are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Year to Date Highlights
Net sales for the first nine-months of fiscal year 2020 were $1,964,401, a decrease of 9.2% from $2,163,660 for the first nine-months of the prior fiscal year. Foreign currency exchange rates had an unfavorable impact on net sales of $12,949 for the first nine-months of fiscal year 2020. Aerospace segment net sales for the first nine-months of 2020 were down 8.7% to $1,254,655, compared to $1,374,616 for the first nine-months of the prior fiscal year. Industrial segment net sales for the first nine-months of fiscal year 2020 were $709,746, down 10.0% compared to $789,044 for the first nine-months of fiscal year 2019. Industrial segment net sales excluding the disposal group for the first nine-months of fiscal year 2020 were $642,083, down 11.4%, compared to $724,377 for the first nine-months of fiscal year 2020.
Net earnings for the first nine-months of fiscal year 2020 were $183,156, or $2.85 per diluted share, compared to $192,806, or $2.99 diluted share, for the first nine-months of fiscal year 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 first nine-months of fiscal year 2020 were $205,920, or adjusted earnings per share of $3.20 per diluted share, compared to adjusted net earnings of $235,760, or $3.67 per diluted share, for the first nine-months of fiscal year 2019.
The effective tax rate in the first nine-months of fiscal year 2020 was 14.3%, compared to 21.0% for the first 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 the first nine-months of the prior fiscal year.
EBIT for the first nine-months of fiscal year 2020 was $238,925, down 13.8% from $277,140 in the same period of fiscal year 2019. EBITDA for the first nine-months of fiscal year 2020 was $336,507, down 12.7% from $385,608 for the same period of fiscal year 2019. Adjusted EBIT for the first nine-months of fiscal year 2020 was $278,434, down 13.4% from $321,399 for the same period of fiscal year 2019. Adjusted EBITDA for the first nine-months of fiscal year 2020 was $376,016, down 8.0% from $408,767 for the same period of fiscal year 2019.
Aerospace segment earnings as a percent of segment net sales were 20.1% in the first nine-months of fiscal year 2020, compared to 20.2% 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 2020 were 11.5%, compared to 10.5% in the first nine-months of the prior fiscal year. Industrial segment earnings as a percent 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 for the nine-months of fiscal year 2020, which were down compared to adjusted Industrial segment earnings as a percent of segment net sales of 13.1% for the first nine-months of fiscal year 2019.
Liquidity Highlights
Net cash provided by operating activities for the first nine-months of fiscal year 2020 was $212,416, compared to $219,202 for the first nine-months of fiscal year 2019. The decrease in net cash provided by operating activities in the first nine-months of fiscal year 2020 compared to the first nine-months of the prior fiscal year is primarily attributable to the timing of certain cash payments for accounts payable, annual 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-months of fiscal year 2020, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $173,344, compared to $141,297 for the first nine-months of fiscal year 2019. 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 and adjusted free cash flow, both 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.
At June 30, 2020, we held $101,363 in cash and cash equivalents, and had total outstanding debt of $929,447. We have additional borrowing availability of $889,914, net of outstanding letters of credit, under our revolving credit agreement. At June 30, 2020, we also had additional borrowing capacity of $7,523 under various foreign lines of credit and foreign overdraft facilities.
RESULTS OF OPERATIONS
The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:
% of Net
Sales
100
75.5
74.8
73.7
74.9
Selling, general, and administrative expenses
11.0
7.0
9.0
7.4
6.6
5.4
5.7
0.0
1.9
3.6
1.0
Gain on cross-currency interest rate swaps, net
(5.8
)%
(1.6
1.7
1.4
1.3
1.6
(0.1
(0.0
Other (income) expense, net
(1.1
(0.9
(0.8
91.4
87.7
89.1
88.7
8.6
12.3
10.9
11.3
3.5
2.4
7.3
8.8
9.3
8.9
Other select financial data:
Working capital
701,319
563,792
Total debt
929,447
1,084,899
Net Sales
Consolidated net sales for the third quarter of fiscal year 2020 decreased by $228,179, or 30.3%, compared to the same period of fiscal year 2019. Consolidated net sales for the first nine-months of fiscal year 2020 decreased by $199,259, or 9.2%, compared to the same period of fiscal year 2019.
Details of the changes in consolidated net sales are as follows:
Three-Month Period
Nine-Month Period
Consolidated net sales for the period ended June 30, 2019
Aerospace volume
(187,541
(129,834
Industrial volume
(20,122
(54,391
Disposal group divestiture impact
(11,700
Noncash consideration
(8,443
(5,002
Effects of changes in price and sales mix
3,770
14,617
Effects of changes in foreign currency rates
(4,143
(12,949
Consolidated net sales for the period ended June 30, 2020
The decrease in consolidated net sales for the third quarter and first nine-months of fiscal year 2020 is primarily attributable to the decline in sales volume related to the ongoing impact of the COVID-19 pandemic and extended grounding of the Boeing 737 MAX aircraft. In the Aerospace segment, the decrease in net sales volumes is primarily attributable to lower commercial sales as a result of the secular decline in global 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 the ongoing impact of the COVID-19 pandemic, and the divestiture of the disposal group. We expect the volume decreases in 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 decreased by $167,005 to $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. Cost of goods sold decreased by $173,589 to $1,447,942, or 73.7% of net sales, for the first nine-months of fiscal year 2020 from $1,621,531, or 74.9% of net sales, for the first nine-months of fiscal year 2019. The decrease in cost of goods sold in the third quarter of fiscal year 2020 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 period of the prior year, is primarily attributable to lower sales volume as 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 the backlog intangible acquired in connection with the acquisition of Woodward L’Orange which were recognized in the first nine-months of fiscal year 2019, whereas there were no such costs recognized 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 2020 compared to 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 2020, compared to $52,980 for the third quarter of fiscal year 2019. Selling, general, and administrative expenses increased by $17,271, or 10.8%, to $177,035 for the first nine-months of fiscal year 2020, compared to $159,764 for the first nine-months of fiscal year 2019. Selling, general, and administrative expenses as a percentage of net sales increased 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 7.4% for the first nine-months of fiscal year 2019.
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The increase in selling, general and administrative expenses, both in dollars and as a percentage of sales, for the third quarter of fiscal year 2020 compared to same period of the prior year is primarily due to fees incurred on termination of the cross-currency interest rate swaps and 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-months of fiscal year 2020 compared to 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-months of fiscal year 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 decreased by $6,139, or 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. Research and development costs as a percentage of net sales increased to 6.6% for the third quarter of fiscal year 2020, as compared to 5.4% for the third quarter of fiscal year 2019. Research and development costs decreased by $17,330, or 14.0%, to $106,029 for the first nine-months of fiscal year 2020, as compared to $123,359 for the first nine-months of fiscal year 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-months of fiscal year 2019. The decrease in research and development costs is primarily due to savings from cost reduction initiatives including the elimination of annual bonus for 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 sold was composed entirely of a charge of $37,902 recognized in the first nine-months of fiscal year 2020. In the first quarter of fiscal year 2020, Woodward’s board of directors approved a plan to divest Woodward’s renewable power systems, protective relay businesses, and other businesses (collectively, the “disposal group”), which resulted in the recognition of the 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 third quarter of fiscal year 2020, compared to $10,798 for the third quarter of fiscal year 2019. Interest expense increased as a percentage of net sales to 1.7% for the third quarter of fiscal year 2020, as compared to 1.4% for the third quarter of fiscal year 2019. Interest expense decreased by $7,654, or 22.4%, to $26,502 for the first nine-months of fiscal year 2020, as compared to $34,156 for the first nine-months of fiscal year 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-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 $6,916 for the third quarter of fiscal year 2019. Other income increased by $13,857 to $31,991 for the first nine-months of fiscal year 2020, compared to $18,134 for the first nine-months of fiscal year 2019. The increase in other income in the first nine-months of fiscal year 2020 compared to the first nine-months of fiscal year 2019 was primarily due to a gain on the sale 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 2020.
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-months of fiscal year 2019.
The decrease in the effective tax rate for the third quarter of fiscal year 2020, compared to the third quarter 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 quarter, and increased foreign earnings in a lower tax jurisdiction resulting from the net 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 effective tax rate for the first nine-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 the 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 compensation.
45
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 Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax 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. Woodward is currently under examination by the IRS for fiscal year 2017, which included a foreign tax credit carryback to fiscal year 2016. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.
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:
Net sales:
58.5
66.3
63.9
63.5
41.5
33.7
36.1
36.5
Consolidated net sales
The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:
(6,551
(26,207
(30,607
(51,191
Consolidated net earnings
The following table presents segment earnings as a percent of segment net sales:
13.4
20.7
20.1
20.2
12.6
10.4
11.5
10.5
Aerospace segment net sales decreased by $192,281, or 38.6%, to $306,494 for the third quarter of fiscal year 2020, compared to $498,775 for the third quarter of fiscal year 2019. Aerospace segment net sales decreased by $119,961, or 8.7%, to $1,254,655 for the first nine-months of fiscal year 2020, compared to $1,374,616 for the same period of fiscal year 2019. The decrease in segment net sales for the third quarter and first nine-months of fiscal year 2020 as compared to the same periods of fiscal year 2019 was primarily driven by lower commercial sales due to the secular decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic, partially offset by higher defense aftermarket sales.
46
Defense OEM sales decreased in the third quarter of fiscal year 2020 compared to the third quarter of fiscal year 2019, driven primarily by lower sales for guided weapons and fixed wing aircraft due to supply chain challenges as a 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. Our defense aftermarket has increased as the U.S. Government has prioritized the combat readiness of existing military programs on which we have content. Global conflicts and growing international demand for various 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 global COVID-19 pandemic and timing of continued maintenance needs and upgrade programs, we expect U.S. government funding for defense platforms on which we have content to be strong under the defense budget.
Aerospace segment earnings decreased by $62,142, or 60.2%, to $41,096 for the third quarter of fiscal year 2020, compared to $103,238 for the third quarter of fiscal year 2019. Aerospace segment earnings decreased by $26,169, or 9.4%, to $251,645 for the first nine-months of fiscal year 2020, compared to $277,814 for the first nine-months of fiscal year 2019.
The net decrease in Aerospace segment earnings for the third quarter and first nine-months of fiscal year 2020 was due to the following:
Earnings for the period ended June 30, 2019
Sales volume
(91,835
(69,740
Price, sales mix and productivity
12,039
19,144
Manufacturing expansion costs
(7,129
Savings from cost reduction initiatives
17,305
36,699
Other, net
349
(5,143
Earnings for the period ended June 30, 2020
Aerospace segment earnings as a percentage of segment net sales were 13.4% for the third quarter and 20.1% for the first nine-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 the third quarter and first nine-months of fiscal year 2020 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 cost reduction initiatives including the elimination of annual bonus for fiscal year 2020.
Industrial segment net sales decreased by $35,898, or 14.2%, to $217,332 for the third quarter of fiscal year 2020, compared to $253,230 for the third quarter of fiscal year 2019. Industrial segment net sales excluding the disposal group decreased by $20,815, or 9.0%, to $209,602 for the third quarter of fiscal year 2020, compared to $230,417 for the third quarter of fiscal year 2019. Industrial segment net sales decreased by $79,298, or 10.0%, to $709,746 for the first nine-months of fiscal year 2020, compared to $789,044 for the same period of fiscal year 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 $4,013 and $12,573 for the third quarter and first nine-months of fiscal year 2020, respectively.
The decrease in Industrial segment net sales in the third quarter and first nine-months of fiscal year 2020 was primarily attributable to lower sales volumes, the ongoing impact of the global COVID-19 pandemic across markets we serve, continued weakness in the oil and gas market, and the divestiture of the disposal group.
The demand for diesel fuel systems was negatively impacted by 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.
47
Sales of fuel systems for compressed natural gas (“CNG”) trucks in Asia were slightly up in the third quarter and first nine-months of fiscal year 2020 as production rates for China 6 compliant trucks recovered from the large pre-buy of China 5 compliant trucks, which negatively impacted sales in previous years. We anticipate the market demand for natural gas trucks to continue as the Chinese government continues to enforce China 6 regulations and continues to incentivize the use of natural gas rather than diesel. Although the industrial gas turbine market began to stabilize during the first nine-months of fiscal year 2020 as global power demand increases and 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 of fiscal year 2020 benefitted from the depletion of inventory in the market and increased Woodward content on certain newer industrial gas turbines. However, this was partially offset by the weakening demand in new turbine programs due to the economic uncertainty caused by the COVID-19 pandemic and we expect lower demand in industrial gas turbine sales until the outbreak is contained and demand stabilizes.
Industrial segment earnings increased by $1,198, or 4.6%, to $27,438 for the third quarter of fiscal year 2020, 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 $27,406 for the third quarter of fiscal year 2019. Industrial segment earnings decreased by $897, or 1.1%, to $81,640 for the first nine-months of fiscal year 2020, compared to $82,537 for the same period of fiscal year 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. Adjusted Industrial segment earnings for the third quarter of fiscal year 2019 excluding the disposal group were $30,050. There were no adjustments to Industrial segment earnings in the third quarter or the first nine-months of fiscal year 2020, which were down 4.9% and 21.2%, respectively, compared to adjusted Industrial segment earnings of $28,844 and $103,637, respectively, for the third quarter and first nine-months of fiscal year 2019.
The net increase in Industrial segment earnings for the third quarter of fiscal year 2020 and net decrease in Industrial segment earnings for the first nine-months of fiscal year 2020 was due to the following:
(9,942
(26,868
(104
(3,781
L'Orange backlog amortization
728
13,608
(128
(2,556
170
8,668
20,513
1,806
(1,983
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-months of fiscal year 2019. 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-months of fiscal year 2019.
48
Nonsegment
Nonsegment expenses decreased to $15,158 for the third quarter of fiscal year 2020, compared to $26,714 for the third quarter of fiscal year 2019. Included in nonsegment expenses for the third quarter of fiscal year 2020 was merger and divestiture transaction costs of $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 2020 compared to the third quarter of fiscal year 2019, primarily due to the elimination of annual bonus for fiscal year 2020.
Nonsegment expenses increased to $94,360 for the first nine-months of fiscal year 2020, compared to $83,211 for the first nine-months of fiscal year 2019. Included in nonsegment expenses for the first nine-months of fiscal year 2020 were the 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 $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-months of fiscal year 2019 were Duarte move-related costs in the amount of $23,159. Excluding these charges from both 2020 and 2019, nonsegment expenses decreased in the first nine-months of fiscal year 2020 compared to the first nine-months of fiscal year 2019 primarily due to savings from cost reduction initiatives, which includes the elimination of annual bonus for fiscal year 2020.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. Historically, we have also issued debt to supplement our cash needs, 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.
Our aggregate cash and cash equivalents were $101,363 at June 30, 2020 and $99,073 at September 30, 2019, and our working capital was $701,319 at June 30, 2020 and $563,792 at September 30, 2019. Of the cash and cash equivalents held at June 30, 2020, $96,972 was held by our foreign 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 Cuts 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-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 $47,863 at June 30, 2020 and $42,171 at September 30, 2019 recorded as non-customer accounts receivable in our 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.
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 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, 2020, we had total outstanding debt of $929,447 consisting of various series of unsecured notes due between 2020 and 2033, amounts borrowed under our revolving credit 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, 2020, we had additional borrowing availability of $889,914 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,523 under various foreign credit facilities.
At June 30, 2020, we had $98,639 of borrowings outstanding under our revolving credit facility, all 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, 2020, $87,400 is denominated in U.S. dollars and €10,000 is denominated in Euro. Revolving credit facility and short-term borrowing activity during the nine-months ended June 30, 2020 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, 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 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.
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-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 2022 (the “2019 Authorization”). In the first nine-months of fiscal year 2020, we repurchased 124 shares of our common stock for $13,346 under the 2019 Authorization. We purchased 456 shares of our common stock for $43,253 in the first nine-months of fiscal year 2019 under the 2017 Authorization. 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 preserve cash flow due to the economic uncertainties caused by the COVID-19 pandemic, we do not currently anticipate making significant share repurchases for the remainder of fiscal year 2020.
Associated with our decision to relocate our Duarte, California operations to the newly renovated Drake Campus in Fort Collins, 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 remaining parcel of Duarte real estate is $2,520 as of June 30, 2020, all of which we have identified as an asset held for sale as of that date. Based on an existing real property purchase agreement and current market conditions, we expect to record an additional gain on the subsequent sale of the remaining parcel of real estate, which is expected to close by September 30, 2020.
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In the third quarter of fiscal year 2020, as a result of the 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 and do not currently foresee adverse impacts to financial institutions providing our capital requirements as a result of the COVID-19 pandemic.
Cash Flows
Net cash flows provided by operating activities for the first nine-months of fiscal year 2020 was $212,416, compared to $219,202 for the same period of fiscal year 2019. The decrease in net cash provided by operating activities in the first nine-months of fiscal year 2020 compared to the first nine-months of the prior fiscal year is primarily attributable to the timing of certain cash payments for accounts payable, annual bonuses, and taxes due in the first nine-months of fiscal year 2020, partially offset by timing of cash received from customers as well as proceeds from settlement of cross-currency interest rate swaps during the third quarter of fiscal year 2020.
Net cash flows used in investing activities for the first nine-months of fiscal year 2020 was $10,194, compared to $79,826 in the first nine-months of fiscal year 2019. The decrease in cash flows used in investing activities in the first nine-months of fiscal year 2020 compared to the first nine-months of the prior fiscal year is primarily due to decreased payments for the purchase of property, plant and equipment, proceeds in the amount of $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-months of fiscal year 2020 was $196,307, compared to net cash flows used in financing activities of $159,008 in the first nine-months of fiscal year 2019. During the first nine-months of fiscal year 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 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 nine-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.
Contractual Obligations
We have various contractual obligations, including obligations related to long-term debt, operating and finance 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.
Non-U.S. GAAP Financial Measures
Adjusted 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.
Industrial segment net sales excluding the disposal group
The Company presents certain sales measures excluding the disposal group net sales, which it refers to as “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 illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing, as these sales are no longer related to the ongoing operations of the 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) 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, (iv) the purchase accounting impacts related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward L’Orange on June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the previously proposed merger with Hexcel, which merger agreement was terminated on April 5, 2020 (vi) transaction costs associated with the completed divestiture of 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. 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 to 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.
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, 2020 and 2019 is shown in the tables below.
Net Earnings
Earnings Per Share
Net earnings (U.S. GAAP)
Non-U.S. GAAP adjustments:
Duarte move related costs, net of tax
5,294
0.08
Purchase accounting impact, net of tax1
0.03
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
Acceleration of stock compensation, net of tax
1,788
Net gain on cross-currency interest rate swaps, net of tax3
(26,904
(0.42
Non-U.S. GAAP adjustments
(7,811
(0.13
7,161
0.11
Impact of December 2017 changes to U.S. tax law
10,588
0.17
Total Non-U.S. GAAP adjustments
17,749
0.28
Adjusted net earnings (Non-U.S. GAAP)
30,654
0.48
83,856
1.30
The purchase accounting impacts relate to the amortization of the backlog intangible, net of tax, acquired in connection with the L’Orange Acquisition.
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.
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.
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Per Share
Gain on sale of Duarte property, net of tax
(10,175
(0.16
Impairment from assets sold, net of tax
28,016
0.44
17,417
0.27
14,949
0.23
14,038
22,764
0.35
32,366
0.50
0.18
Total non-U.S. GAAP adjustments
42,954
0.68
205,920
3.20
235,760
3.67
Adjusted Industrial segment earnings is defined by the Company as Industrial segment earnings excluding the purchase accounting impacts related to the amortization of the backlog intangible acquired in connection with the L’Orange 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 this item illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing.
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; no such adjustments were made for the three and nine-months ended June 30, 2020.
Industrial segment earnings (U.S. GAAP)
Purchase accounting impacts1
2,604
21,100
Adjusted Industrial segment earnings (Non-U.S. GAAP)
28,844
103,637
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 Industrial 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.
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The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group for the three and nine-months ended June 30, 2020 and June 30, 2019 is shown in the table below.
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 do 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 the 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) 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, (iv) the purchase accounting impacts related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward L’Orange on June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the now-terminated merger agreement with Hexcel, (vi) transaction costs associated with the completed divestiture of 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 items that can be variable from period to period and do 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.
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EBIT and adjusted EBIT reconciled to net earnings for the three and nine-months ended June 30, 2020 and 2019 were as follows:
EBIT (Non-U.S. GAAP)
53,376
102,764
238,925
277,140
Gain on sale of Duarte property
(13,522
Impairment from assets sold
Duarte move related costs
7,035
23,159
Merger and divestiture transaction costs2
1,732
18,654
Restructuring charges related to COVID-19
Loss on sale of disposal group
2,540
Acceleration of stock compensation
2,376
Net gain on cross-currency interest rate swaps3
(27,481
(1,793
9,639
39,509
44,259
Adjusted EBIT (Non-U.S. GAAP)
51,583
112,403
278,434
321,399
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 net earnings for the three and nine-months ended June 30, 2020 and 2019 were as follows:
Amortization of intangible assets
EBITDA (Non-U.S. GAAP)
85,482
135,734
336,507
385,608
Merger and divestiture transaction costs1
Net gain on cross-currency interest rate swaps2
Adjusted EBITDA (Non-U.S. GAAP)
83,689
142,769
376,016
408,767
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 these non-U.S. GAAP financial measures 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 and 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 their 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, 2020 and 2019 were as follows:
Net cash provided by operating activities (U.S. GAAP)
Payments for property, plant and equipment
Free cash flow (Non-U.S. GAAP)
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
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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.
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 5, Leases, 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, 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.
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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. Except 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.
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 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 effective at the reasonable assurance level as of June 30, 2020.
During the quarterly period ended December 31, 2019, we 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 new guidance, provided training, and designed and applied new internal controls related to impacted accounting and disclosures. There have not been any other significant changes in our internal controls over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
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. There 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 and that, due to the termination of the Merger Agreement, the risk factors set 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 business 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 taken steps to align our business with the unfavorable economic conditions, including the implementation of enhanced measures through our operations management teams and global supply chain to ensure the Company is efficiently utilizing inventory on hand, as well as our internal processing capabilities. In addition, the Company has implemented staff reductions, reduction in employee hours, furloughs, and/or temporary layoffs, at many of its various locations. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and 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 commercial aerospace industry. Approximately 65% of Woodward’s net sales for its fiscal year ended September 30, 2019 were derived from sales to customers in the aerospace industry, with 24% of such sales from Boeing. Actions by US federal, state and foreign governments to address the pandemic, 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 commercial 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 significant effects on our liquidity, which could adversely affect our ability to remain 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 our operations and financial performance will depend on many factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the impact of the 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 market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides.
59
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)
of Shares
Purchased
Weighted
Average
Price Paid
as Part of
Publicly
Announced
Plans or
Programs (1)
Maximum
Number (or
Approximate
Dollar Value)
of Shares that
may yet be
under the
Programs at
Period End (1)
April 1, 2020 through April 30, 2020
60.56
486,654
May 1, 2020 through May 31, 2020 (2)
302
68.58
June 1, 2020 through June 30, 2020 (2)
77.55
In November 2019, our board of directors approved a stock repurchase program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 2022.
Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 63 shares of common stock were acquired in April 2020, 53 shares of common stock were acquired in May 2020, and 47 shares of common stock were acquired in June 2020 on the open market related to the deferral of compensation by certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred compensation in Woodward common stock. In addition, 249 shares of common stock were acquired in May 2020 on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.
Exhibits filed as part of this Report are listed in the Exhibit Index.
EXHIBIT INDEX
Exhibit
Description
3.1
Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock
4.1
Preferred Stock Rights Agreement, dated as of April 5, 2020, by and between Woodward, Inc. and American Stock Transfer & Trust Company, LLC, as rights agent
*
31.1
Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron
31.2
Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.
32.1
Section 1350 certifications
101
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statements of Comprehensive Earnings, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.
104
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Filed as an exhibit to this Report
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.
Date: August 10, 2020
/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)
/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)