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 December 31, 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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ 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 February 2, 2021, 63,044,002 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
1
Condensed Consolidated Statements of Earnings
Condensed Consolidated Statements of Comprehensive Earnings
2
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Cash Flows
4
Condensed Consolidated Statements of Stockholders’ Equity
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Forward Looking Statements
Overview
30
Results of Operations
32
Liquidity and Capital Resources
36
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 6.
Exhibits
Signatures
44
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three-Months Ended
December 31,
2020
2019
Net sales
$
537,619
720,355
Costs and expenses:
Cost of goods sold
401,640
534,917
Selling, general and administrative expenses
56,111
62,045
Research and development costs
31,996
36,846
Impairment of assets sold
—
37,902
Interest expense
8,906
9,009
Interest income
(495
)
(487
Other (income) expense, net
(8,123
(21,425
Total costs and expenses
490,035
658,807
Earnings before income taxes
47,584
61,548
Income tax expense
6,014
8,175
Net earnings
41,570
53,373
Earnings per share:
Basic earnings per share
0.66
0.86
Diluted earnings per share
0.64
0.83
Weighted Average Common Shares Outstanding:
Basic
62,812
61,991
Diluted
64,892
64,673
See accompanying Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
Other comprehensive earnings:
Foreign currency translation adjustments
21,782
11,153
Net loss on foreign currency transactions designated as hedges of net investments in foreign subsidiaries
(2,227
(1,045
Taxes on changes in foreign currency translation adjustments
1,684
(340
Foreign currency translation and transactions adjustments, net of tax
21,239
9,768
Unrealized loss on fair value adjustment of derivative instruments
(30,658
(11,294
Reclassification of net realized loss on derivatives to earnings
20,960
11,656
Taxes on changes in derivative transactions
(1,340
18
Derivative adjustments, net of tax
(11,038
380
Amortization of pension and other postretirement plan:
Net prior service cost
248
241
Net loss
370
631
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities
(1,697
(1,502
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes
356
240
Pension and other postretirement benefit plan adjustments, net of tax
(723
(390
Total comprehensive earnings
51,048
63,131
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,908 and $3,497, respectively
201,881
153,270
Accounts receivable, less allowance for uncollectible amounts of $7,499 and $8,359, respectively
509,721
537,987
Inventories
445,463
437,943
Income taxes receivable
34,092
28,879
Other current assets
55,397
52,786
Total current assets
1,246,554
1,210,865
Property, plant and equipment, net
986,030
997,415
Goodwill
821,609
808,252
Intangible assets, net
619,721
606,711
Deferred income tax assets
13,970
14,658
Other assets
271,621
265,435
Total assets
3,959,505
3,903,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
1,623
101,634
Accounts payable
158,568
134,242
Income taxes payable
11,987
4,662
Accrued liabilities
155,932
151,794
Total current liabilities
328,110
392,332
Long-term debt, less current portion
745,464
736,849
Deferred income tax liabilities
168,181
163,573
Other liabilities
654,288
617,905
Total liabilities
1,896,043
1,910,659
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
244,394
231,936
Accumulated other comprehensive losses
(80,316
(89,794
Deferred compensation
9,485
9,222
Retained earnings
2,464,373
2,427,905
2,638,042
2,579,375
Treasury stock at cost, 9,992 shares and 10,277 shares, respectively
(565,095
(577,476
Treasury stock held for deferred compensation, at cost, 201 shares and 199 shares, respectively
(9,485
(9,222
Total stockholders' equity
2,063,462
1,992,677
Total liabilities and stockholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Months Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
33,077
32,451
Net gain on sales of assets and businesses
(588
(13,547
Stock-based compensation
13,469
10,982
Deferred income taxes
1,332
(47
Changes in operating assets and liabilities:
Trade accounts receivable
57,001
37,652
Unbilled receivables (contract assets)
(17,468
(33,150
Costs to fulfill a contract
(5,321
(6,401
(2,528
(17,065
Accounts payable and accrued liabilities
22,725
(79,535
Contract liabilities
8,509
(144
Income taxes
1,795
1,001
Retirement benefit obligations
(1,317
(1,490
Other
(5,531
5,463
Net cash provided by operating activities
146,725
27,445
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment
(7,263
(17,232
Proceeds from sale of assets
48
18,809
Payments for purchases of short-term investments
(2,740
(2
Net cash (used in) provided by investing activities
(9,955
1,575
Cash flows from financing activities:
Cash dividends paid
(5,102
(10,064
Proceeds from sales of treasury stock
10,855
7,558
Borrowings on revolving lines of credit and short-term borrowings
74,400
461,633
Payments on revolving lines of credit and short-term borrowings
(74,400
(441,500
Payments of long-term debt and finance lease obligations
(100,395
(439
Net cash (used in) provided by financing activities
(94,642
17,188
Effect of exchange rate changes on cash and cash equivalents
6,483
2,727
Net change in cash and cash equivalents
48,611
48,935
Cash and cash equivalents, including restricted cash, at beginning of year
99,073
Cash and cash equivalents, including restricted cash, at end of period
148,008
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 September 30, 2019
72,960
(11,040
(211
207,120
(53,235
(4,955
(45,116
(103,306
9,382
2,224,919
(602,098
(9,382
1,726,741
Cumulative effect from adoption of ASC 842
255
Other comprehensive earnings (loss), net of tax
9,758
Cash dividends paid ($0.1625 per share)
Sales of treasury stock
226
(1,944
9,502
Purchases/transfers of stock by/to deferred compensation plan
(5
543
(543
Distribution of stock from deferred compensation plan
(14
14
Balances as of December 31, 2019
(10,814
(215
216,158
(43,467
(4,575
(45,506
(93,548
9,911
2,268,483
(592,596
(9,911
1,798,603
Balances as of September 30, 2020
(10,277
(199
(40,691
(20,457
(28,646
9,478
Cash dividends paid ($0.08125 per share)
285
(1,011
12,381
11,370
(3
276
(276
(13
13
Balances as of December 31, 2020
(9,992
(201
(19,452
(31,495
(29,369
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 December 31, 2020 and for the three-months ended December 31, 2020 and 2019, included herein, have not been audited by an independent registered public accounting firm. These unaudited Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of December 31, 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-months ended December 31, 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 unaudited 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. Accordingly, 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 unaudited Condensed Consolidated Financial Statements included herein. Significant estimates in these unaudited Condensed Consolidated Financial Statements include allowances for credit losses; 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; and the Company has likewise been significantly impacted by the global COVID-19 pandemic. The COVID-19 pandemic could continue to have a material adverse impact on economic and market conditions and presents uncertainty and risk with respect to the Company and its performance and financial results, including estimates and assumptions used by management for the reported amount of assets and liabilities.
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.
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 and expects to adopt the new guidance under ASU 2019-12 in fiscal year 2022.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): 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.
Woodward adopted ASU 2016-13, and all applicable amendments, on October 1, 2020 using the modified retrospective adoption method. Based on the nature of the Company’s financial instruments included within the scope of this standard, the adoption did not have a material effect on the Condensed Consolidated Financial Statements. As a result of the adoption of ASU 2016-13, Woodward will utilize current and historical collection data, and will continue to monitor economic conditions in order to assess and determine expected credit losses on a prospective basis.
See details of the Company’s allowance for uncollectible amounts and change in expected credit losses for billed receivables and unbilled receivables (contract assets) at Note 3, Revenue.
Note 3. Revenue
Sales of Products
Revenue from manufactured products; maintenance, repair and overhaul (“MRO”); and services represented 87%, 12%, and 1%, respectively, of Woodward’s net sales for the three-months ended December 31, 2020, and for the three-months ended December 31, 2019.
The amount of revenue recognized as point in time or over time follows:
Three-Months Ended December 31, 2020
Three-Months Ended December 31, 2019
Aerospace
Industrial
Consolidated
Point in time
106,967
154,195
261,162
187,515
167,942
355,457
Over time
214,700
61,757
276,457
286,410
78,488
364,898
Total net sales
321,667
215,952
473,925
246,430
7
Accounts Receivable
Accounts receivable consisted of the following:
December 31, 2020
September 30, 2020
Billed receivables
265,732
307,914
Other (Chinese financial institutions)
46,896
56,640
Total billed receivables
312,628
364,554
Current unbilled receivables (contract assets)
204,592
181,792
Less: Allowance for uncollectible amounts
(7,499
(8,359
Total accounts receivable, net
As of December 31, 2020, “Other assets” on the Condensed Consolidated Balance Sheets includes $12,053 of unbilled receivables not expected to be invoiced and collected within a period of twelve months, compared to $16,751 as of September 30, 2020. 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.
Accounts receivable in Woodward’s Condensed Consolidated Financial Statements represent the net amount expected to be collected, and an allowance for uncollectible amounts related to credit losses is established based on expected losses in accordance with FASB ASC Topic 326, “Financial Instruments – Credit Losses”. Expected losses are estimated by reviewing specific customer accounts, taking into consideration aging, credit risk of the customers, and historical payment history, as well as current and forecasted economic conditions, and other relevant factors.
The allowance for uncollectible amounts and change in expected credit losses for trade accounts receivable and unbilled receivables (contract assets) consisted of the following:
Balance, beginning
8,359
Charged to costs and expenses
88
Deductions
(1,171
Other additions1
223
Balance, ending
7,499
(1)
Includes effects of foreign exchange rate changes during the period.
Contract liabilities consisted of the following:
Current
Noncurrent
Deferred revenue from material rights from GE joint venture formation
4,242
232,882
4,066
234,240
Deferred revenue from advanced invoicing and/or prepayments from customers
4,182
1,338
3,239
85
Liability related to customer supplied inventory
16,885
14,955
Deferred revenue from material rights related to engineering and development funding
4,076
136,804
2,360
132,317
Net contract liabilities
29,385
371,024
24,620
366,642
Woodward recognized revenue of $6,528 in the three-months ended December 31, 2020 from contract liabilities balances recorded as of October 1, 2020, compared to $3,970 in the three-months ended December 31, 2019 from contract liabilities balances recorded as of October 1, 2019.
8
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 December 31, 2020 was $1,274,218, compared to $1,454,406 as of September 30, 2020, the majority of which relate in both periods relate to Woodward’s Aerospace segment. Woodward expects to recognize almost all of these remaining performance obligations within two years after December 31, 2020.
Remaining performance obligations related to material rights that have not yet been recognized in revenue as of December 31, 2020 was $464,296, compared to $465,668 as of September 30, 2020, of which $8,952 is expected to be recognized in the remainder of fiscal year 2021, $10,625 is expected to be recognized in fiscal year 2022, 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
76,081
158,666
Commercial aftermarket
65,515
125,928
Defense OEM
131,263
140,926
Defense aftermarket
48,808
48,405
Total Aerospace segment net sales
Revenue by primary market for the Industrial reportable segment was as follows:
Reciprocating engines
164,922
174,653
Industrial turbines
51,030
51,500
Renewables1
20,277
Total Industrial segment net sales
Sales in the renewables market were discontinued as of May 1, 2020 following the closing of the divestiture of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”).
The customers who account for approximately 10% or more of net sales of each of Woodward’s reportable segments for the three-months ended December 31, 2020 are as follows:
Customer
The Boeing Company, General Electric Company, Raytheon Technologies
Rolls-Royce PLC, Weichai Westport, General Electric Company
9
Net sales by geographic area, as determined based on the location of the customer, were as follows:
United States
257,546
43,153
300,699
363,912
51,092
415,004
Germany
7,506
29,642
37,148
17,278
51,438
68,716
Europe, excluding Germany
20,940
43,068
64,008
38,987
50,501
89,488
China
8,964
65,983
74,947
10,212
53,876
64,088
Asia, excluding China
4,480
28,635
33,115
6,981
31,912
38,893
Other countries
22,231
5,471
27,702
36,555
7,611
44,166
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
2,080
2,682
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
587
653
Weighted-average option price
104.99
104.40
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
200
213
10
Note 5. Leases
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.
Lease-related assets and liabilities follows:
Classification on the Condensed Consolidated Balance Sheets
Assets:
Operating lease assets
20,061
18,918
Finance lease assets
1,094
1,201
Total lease assets
21,155
20,119
Operating lease liabilities
4,950
4,925
Finance lease liabilities
1,634
Noncurrent liabilities:
15,683
14,569
802
1,173
Total lease liabilities
23,058
22,301
During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”) represented a triggering event requiring that 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 right-of-use assets of the disposal group were not recoverable and a $639 non-cash impairment charge was recorded during fiscal year 2020.
Lease-related expenses were as follows:
December 31, 2019
Operating lease expense
1,553
1,519
Amortization of finance lease assets
126
147
Interest on finance lease liabilities
20
Variable lease expense
322
307
Short-term lease expense
82
175
Sublease income1
(168
(125
Total lease expense
1,933
2,043
Relates to two separate subleases Woodward has entered into for a leased manufacturing building in Niles, Illinois.
Lease-related supplemental cash flow information was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
1,151
1,254
Operating cash flows for finance leases
Financing cash flows for finance leases
396
439
Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases
1,130
3,540
Finance leases
12
1,211
11
Lessor arrangements
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. 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 December 31, 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.
Revenue from contracts with customers that included embedded operating leases, which is included in “Net sales” at the Condensed Consolidated Statements of Earnings, was $1,798 for the three-months ended December 31, 2020 and $1,564 for the three-months ended December 31, 2019.
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
78,176
76,655
Less accumulated depreciation
(31,714
(29,819
Property, plant and equipment leased to others through embedded leasing arrangements, net
46,462
46,836
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:
Amortization of the deferred revenue (material right) recognized as an increase to sales was $1,182 for the three-months ended December 31, 2020, and $1,708 for the three-months ended December 31, 2019.
Other income related to Woodward’s equity interest in the earnings of the JV was as follows:
Other income
2,386
3,212
Cash distributions to Woodward from the JV, recognized in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows, were as follows:
Cash distributions
3,500
3,000
Net sales to the JV were as follows:
Net sales1
10,059
14,878
Net sales included a reduction of $4,420 for the three-months ended December 31, 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 $7,234 for the three-months ended December 31, 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
2,892
3,062
1,478
1,502
8,009
9,123
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 December 31, 2020 of $70,697 compared to $70,618 as of fiscal year ended September 30, 2020. Woodward’s costs to fulfill a contract included in “Other assets” related to JV activities were $70,697 as of December 31, 2020 and $70,618 as of fiscal year ended September 30, 2020.
Note 7. Financial instruments and fair value measurements
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 as defined by the U.S. GAAP fair value hierarchy.
At December 31, 2020
At September 30, 2020
Level 1
Level 2
Level 3
Financial assets:
Cash
188,104
112,817
Investments in term deposits with foreign banks
13,777
40,453
Equity securities
28,526
25,381
Total financial assets
230,407
178,651
Financial liabilities:
Cross-currency interest rate swaps
83,137
51,387
Total financial liabilities
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.
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
13,579
10,941
13,413
11,846
Note receivable from sale of disposal group
6,341
6,111
6,061
Investments in short-term time deposits
16,537
16,521
13,678
13,671
Liabilities:
Long-term debt
853,830
749,172
935,610
840,654
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 1.0% at December 31, 2020 and 1.2% at September 30, 2020.
In connection with the sale of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”), 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 2.3% at both December 31, 2020 and September 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 3.9% at December 31, 2020 and 4.4% at September 30, 2020.
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 1.3% at December 31, 2020 and 1.5% at September 30, 2020.
Woodward does not have expected credit losses related to any financial assets that are not required to be remeasured at fair value.
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 16, Credit Facilities, short-term borrowings and long-term debt, in Woodward’s most recently filed Form 10-K) 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 16, Credit Facilities, short-term borrowings and long-term debt, in Woodward’s most recently filed Form 10-K) and Woodward’s then existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings.
In May 2020, Woodward terminated and settled its Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps and 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 reduced the interest rates on the underlying fixed and floating-rate debt, respectively under the 2018 Notes and Woodward’s existing revolving credit agreement. 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 December 31, 2020, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and 2020 Fixed-Rate Cross-Currency Swaps was $37,500 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements, for the related fair value of the derivative instruments as of December 31, 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. 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 other comprehensive income (“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.
15
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. 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 $2,227 for the three-months ended December 31, 2020, compared to net foreign exchange losses of $1,045 for the three-months ended December 31, 2019.
16
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
1,850
1,663
Cross currency interest rate swap agreements designated as cash flow hedges
19,110
28,995
30,658
in Earnings
on Derivative
2,276
3,598
2,683
8,991
7,696
Treasury lock agreement designated as cash flow hedge
(18
11,249
11,294
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 $30,830 as of December 31, 2020 and $21,132 as of September 30, 2020.
Note 9. Supplemental statement of cash flows information
Interest paid, net of amounts capitalized
12,280
10,749
Income taxes paid
4,002
7,086
Income tax refunds received
Non-cash activities:
Purchases of property, plant and equipment on account
1,699
2,551
Impact of the adoption of ASC 842
17
Note 10. Sale of businesses
In 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 fiscal year 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 December 31, 2019.
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.
Note 11. Inventories
Raw materials
124,900
123,626
Work in progress
93,652
92,934
Component parts(1)
266,018
255,980
Finished goods
66,712
66,889
Customer supplied inventory
On-hand inventory for which control has transferred to the customer
(122,704
(116,441
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
83,606
83,095
Buildings and building improvements
553,274
551,540
Leasehold improvements
19,577
18,610
Machinery and production equipment
786,343
776,884
Computer equipment and software
124,290
123,903
Office furniture and equipment
41,825
41,177
19,849
19,814
Construction in progress
36,034
36,367
1,664,798
1,651,390
(678,768
(653,975
Property, plant, and equipment, net
During the three-months ended December 31, 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.
During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of 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 plant, property and equipment of the disposal group was not recoverable and a $13,421 non-cash impairment charge was recorded during fiscal year 2020.
For the three-months ended December 31, 2020 and 2019, Woodward had depreciation expense as follows:
Depreciation expense
22,608
22,546
Note 13. Goodwill
Effects of Foreign
Currency
Translation
455,423
352,829
13,357
366,186
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 2020 impairment test resulted in no impairment.
During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of 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 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 fiscal year 2020.
During the three-months ended December 31, 2020, Woodward determined the economic uncertainty and global disruption caused by the COVID-19 pandemic significantly impacted 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 December 31, 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.
19
Note 14. Intangible assets, net
Gross
Value
Amortization
Net
Amount
Intangible assets with finite lives:
Customer relationships and contracts:
281,683
(199,985
81,698
(196,520
85,163
447,664
(63,492
384,172
429,249
(57,045
372,204
729,347
(263,477
465,870
710,932
(253,565
457,367
Intellectual property:
15,816
(15,724
92
15,778
(15,640
138
Process technology:
76,370
(64,760
11,610
76,371
(63,956
12,415
94,506
(23,711
70,795
90,945
(22,300
68,645
170,876
(88,471
82,405
167,316
(86,256
81,060
Other intangibles:
245
(212
33
235
(183
52
Intangible asset with indefinite life:
Tradename:
71,321
68,094
Total intangibles:
358,053
(264,745
93,308
358,054
(260,476
97,578
629,552
(103,139
526,413
647,738
(138,605
509,133
Consolidated Total
987,605
(367,884
1,005,792
(399,081
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. Woodward’s fourth quarter of fiscal year 2020 impairment test resulted in no impairment.
During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of 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 intangible assets of the disposal group was not recoverable, and a $200 non-cash impairment charge was recorded during fiscal year 2020.
For the three-months ended December 31, 2020 and 2019, Woodward recorded amortization expense associated with intangibles of the following:
Amortization expense
10,469
9,905
Future amortization expense associated with intangibles is expected to be:
Year Ending September 30:
2021 (remaining)
31,888
2022
39,683
2023
38,632
2024
34,880
2025
29,665
Thereafter
373,652
548,400
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 no borrowings outstanding as of December 31, 2020 and September 30, 2020.
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 December 31, 2020 and September 30, 2020.
On November 15, 2020, Woodward paid the entire principal balance of $100,000 on its Series G and J Notes using cash on hand and proceeds from borrowings under its existing revolving credit facility.
Note 16. Accrued liabilities
Salaries and other member benefits
40,392
50,850
Warranties
21,079
18,972
Interest payable
5,501
15,281
Accrued retirement benefits
3,063
3,051
Restructuring charges
1,596
3,395
Taxes, other than income
26,432
13,925
Net current contract liabilities (Note 3)
28,484
21,700
21
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
27,309
Expense, net of recoveries
1,389
(4,333
Reductions for settlement of previous warranty liabilities
392
(4,277
Foreign currency exchange rate changes
326
228
Warranties, end of period
18,927
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 $23,673 of restructuring charges related to employee severance and benefits costs as of September 30, 2020. All of the restructuring charges recorded during the fiscal year ended September 30, 2020 were recorded as nonsegment expenses.
The summary of activity in accrued restructuring charges during the three-months ended December 31, 2020 and December 31, 2019 are as follows:
Period Activity
Charges
(reductions)
Cash receipts
(payments)
Non-cash
activity
Workforce management costs associated with:
COVID-19 pandemic
(1,742
45
(102
Duarte plant relocation
440
(228
212
Industrial turbomachinery business realignment
67
(24
507
22
Note 17. Other liabilities
Net accrued retirement benefits, less amounts recognized within accrued liabilities
120,313
114,013
Total unrecognized tax benefits
10,602
10,230
Noncurrent income taxes payable
18,322
Deferred economic incentives (1)
8,852
9,105
Cross-currency swap derivative liability
Noncurrent operating lease liabilities
Net noncurrent contract liabilities
26,355
33,637
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.
Note 18. Other (income) expense, net
Equity interest in the earnings of the JV (Note 6)
(2,386
(3,212
Net gain on sales of assets and businesses(1)
Rent income
(350
(251
Net gain on investments in deferred compensation program
(983
(1,244
Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense
(3,650
(3,047
(166
(124
Included in net gain on sale of assets and businesses for the three-months ended December 31, 2019 was the pre-tax gain on sale of Duarte real property in the amount of $13,522.
Note 19. Income taxes
The determination of the estimated 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, issuance of future guidance, interpretation, and rule-making, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:
Effective tax rate
12.6
%
13.3
The decrease in the effective tax rate for the three-months ended December 31, 2020 compared to the three-months ended December 31, 2019 is primarily attributable to the impact of decreased projected full-year earnings for fiscal year 2021 relative to the expected tax benefits from the research credit, net excess income tax benefit from stock-based compensation, and various state income tax credits. This decrease was partially offset by the tax benefit associated with the impairment of assets held for sale in the first quarter of fiscal year 2020 that did not repeat in the current quarter and increased taxes on combined foreign earnings.
23
Gross unrecognized tax benefits were $10,194 as of December 31, 2020, and $9,851 as of September 30, 2020. At December 31, 2020, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $4,948. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $1,884 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward’s tax expense includes accruals for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments.
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 2018 and thereafter. 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.
The amount of expense associated with defined contribution plans was as follows:
Company costs
8,036
8,704
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.
U.S. GAAP requires that, for obligations outstanding as of September 30, 2020, 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.
24
The components of the net periodic retirement pension costs recognized are as follows:
Other Countries
Service cost
432
415
729
710
1,161
1,125
Interest cost
1,239
1,398
333
321
1,572
1,719
Expected return on plan assets
(3,536
(3,087
(602
(832
(4,138
(3,919
Amortization of:
Net actuarial loss
135
358
261
363
619
Prior service cost
242
234
Net periodic retirement pension (benefit) cost
(1,488
(682
694
466
(794
(216
Contributions paid
1,131
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 included 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:
150
195
Prior service cost (benefit)
Net periodic other postretirement cost
157
209
38
345
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 2021 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2021 will be as follows:
Retirement pension benefits:
United Kingdom
512
Japan
868
Other postretirement benefits
3,075
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
68
70
25
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”).
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 1,228 shares of Woodward’s common stock available for future grants as of December 31, 2020 and 1,972 shares as of September 30, 2020.
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
81.06
104.82
Weighted-average grant date market value of Woodward stock
Expected term (years)
6.5
-
8.7
6.4
Estimated volatility
33.3%
36.1%
25.7%
30.1%
Estimated dividend yield
0.3%
0.4%
0.6%
Risk-free interest rate
1.6%
1.7%
The following is a summary of the activity for stock option awards during the three-months ended December 31, 2020:
Number of
options
Weighted-Average
Exercise Price
per Share
Options, beginning balance
5,443
62.00
Options granted
747
Options exercised
(286
39.82
Options forfeited
87.38
Options, ending balance
5,901
65.47
26
Changes in non-vested stock options during the three-months ended December 31, 2020 were as follows:
Grant Date Fair
Value per Share
Non-vested options outstanding, beginning balance
2,078
24.69
27.73
Options vested
(652
25.81
25.18
Non-vested options outstanding, ending balance
2,170
25.40
Information about stock options that have vested, or are expected to vest, and are exercisable at December 31, 2020 was as follows:
Number
Remaining Life in
Years
Aggregate Intrinsic
Options outstanding
330,818
Options vested and exercisable
3,731
55.73
5.0
245,492
Options vested and expected to vest
5,797
65.20
6.3
326,577
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.
At December 31, 2020, there was approximately $16,759 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 7.3% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.3 years.
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.
In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to such officers.
27
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.
A summary of consolidated net sales and earnings by segment follows:
Segment external net sales:
Total consolidated net sales
Segment earnings:
46,466
92,911
32,888
28,230
Nonsegment expenses
(23,359
(51,071
Interest expense, net
(8,411
(8,522
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 by segment follows:
Segment assets:
1,717,820
1,752,516
1,560,889
1,529,411
Unallocated corporate property, plant and equipment, net
103,830
106,380
Other unallocated assets
576,966
515,029
Consolidated total assets
Note 24. Subsequent events
On January 27, 2021, the Board approved a cash dividend of $0.1625 per share for the quarter, payable on March 8, 2021, for stockholders of record as of February 22, 2021.
28
(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:
•
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 status 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 and private industry around the world have enacted various measures, including orders to temporarily close businesses not deemed “essential,” isolate residents to their homes or places of residence, and mandate social distancing. We have generally been deemed an essential business and therefore have continued to operate during the pandemic.
As a result of the global health crisis caused by COVID-19 and the related responses of governments and private industry, we have experienced declining demand, and both our aerospace and industrial markets have been significantly impacted economically. Outbreaks in various regions have also resulted in the extended shutdown of certain businesses in those regions, which has resulted in disruptions or delays to our supply chain. In an effort to protect the health and safety of our 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 generally suspending employee travel. We have also 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. We have increased focus on reducing working capital and have limited capital expenditures to business-critical items. In addition, we have taken specific actions to reduce all non-essential costs and we have implemented workforce management actions through a hiring freeze, staff reductions, reduction in employee hours and/or salaries, furloughs, temporary layoffs, wage freezes, or a combination of these actions, at many of our locations.
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 recovery, and the effectiveness of the containment efforts deployed by various national, state, and local governments. We will continue to actively monitor the situation and may take further actions potentially 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 in future periods, including the effects on the Company's customers, employees, and prospects, or on our financial results.
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 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 first quarter of fiscal year 2021 were $537,619, a decrease of 25.4% from $720,355 for the first quarter of the prior fiscal year. Foreign currency exchange rates had a favorable impact on net sales of $9,478 for the first quarter of fiscal year 2021 as compared to the same period of the prior year. There were no sales for the disposal group for the first quarter of fiscal year 2021, as the disposal group was divested on April 30, 2020. Net sales excluding the disposal group for the first quarter of fiscal year 2020 were $691,789. Aerospace segment net sales for the first quarter of fiscal year 2021 were down 32.1% to $321,667, compared to $473,925 for the first quarter of the prior fiscal year. Industrial segment net sales for the first quarter of fiscal year 2021 were $215,952, down 12.4%, compared to $246,430 for the first quarter of fiscal year 2020. Foreign currency exchange rates had a favorable impact on Industrial segment net sales of $9,287 for the first quarter of fiscal year 2021 as compared to the same period of the prior year. Industrial segment net sales excluding the disposal group were $217,864 for the first quarter of fiscal year 2020.
Net earnings and adjusted net earnings for the first quarter of fiscal year 2021 were both $41,570, or $0.64 per diluted share. Net earnings for the first quarter of fiscal year 2020 were $53,373, or $0.83 per diluted share, and adjusted net earnings for the first quarter of fiscal year 2020 were $71,214, or $1.10 per diluted share. Net earnings excluding the disposal group were $51,126 for the first quarter of fiscal year 2020.
The effective tax rate and adjusted effective tax rate in the first quarter of fiscal year 2021 was 12.6%. The effective tax rate in the first quarter of fiscal year 2020 was 13.3%, and the adjusted effective tax rate in the first quarter of fiscal year 2020 was 17.1%.
Earnings before interest and taxes (“EBIT”) for the first quarter of fiscal year 2021 was $55,995, down 20.1% from $70,070 in the same period of fiscal year 2020. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the first quarter of fiscal year 2021 was $89,072, down 13.1% from $102,521 for the same period of fiscal year 2020. No adjustments were made to EBIT or EBITDA for the first quarter of fiscal year 2021. Adjusted EBIT and adjusted EBITDA for the first quarter of fiscal year 2020 were $94,450 and $126,901, respectively.
Aerospace segment earnings as a percent of segment net sales were 14.4% in the first quarter of fiscal year 2021, compared to 19.6% in the first quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales in the first quarter of fiscal year 2021 were 15.2%, compared to 11.5% in the first quarter of the prior fiscal year. Industrial segment earnings excluding the disposal group were 11.9% of Industrial segment net sales excluding the disposal group for the first quarter of fiscal year 2020.
Sales excluding the disposal group, adjusted net earnings, earnings excluding the disposal group, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA 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.
Liquidity Highlights
Net cash provided by operating activities for the first quarter of fiscal year 2021 was $146,725, compared to $27,445 for the first quarter of fiscal year 2020. The increase in net cash provided by operating activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily attributable to the timing of cash received from customers and cash payments for annual bonuses, which were paid in the first quarter of fiscal year 2020, while no such payments were made in the first quarter of fiscal year 2021.
For the first quarter of fiscal year 2021, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $139,462, compared to $10,213 for the first quarter of fiscal year 2020. 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 was $28,980 for the first quarter of fiscal year 2020. No adjustments were made to free cash flow for the first quarter of fiscal year 2021. Free cash flow and adjusted free cash flow 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.
At December 31, 2020, we held $201,881 in cash and cash equivalents, and had total outstanding debt of $747,087. We have additional borrowing availability of $988,367, net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2020, we also had additional borrowing capacity of $7,648 under various foreign lines of credit and foreign overdraft facilities.
31
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
74.7
74.3
Selling, general, and administrative expenses
10.4
8.6
6.0
5.1
0.0
5.3
1.7
1.3
(0.1
)%
(1.5
(3.0
91.1
91.5
8.9
8.5
1.1
7.7
7.4
Other select financial data:
Working capital
918,444
818,533
Total debt
747,087
838,483
Total stockholders’ equity
Net Sales
Consolidated net sales for the first quarter of fiscal year 2021 decreased by $182,736, or 25.4%, compared to the same period of fiscal year 2020.
Details of the changes in consolidated net sales are as follows:
Three-Month Period
Consolidated net sales for the period ended December 31, 2019
Aerospace volume
(150,037
Industrial volume
(11,415
Disposals group divestiture impact
(28,566
Noncash consideration
(6,318
Effects of changes in price and sales mix
4,122
Effects of changes in foreign currency rates
Consolidated net sales for the period ended December 31, 2020
The decrease in consolidated net sales for the first quarter of fiscal year 2021 is primarily attributable to the decline in sales volume related to the ongoing impact of the COVID-19 pandemic. 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 the divestiture of the disposal group, continued weakness in the oil and gas market and the associated aftermarket, and the ongoing impact of the COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates.
Costs and Expenses
Cost of goods sold decreased by $133,277 to $401,640, or 74.7% of net sales, for the first quarter of fiscal year 2021, from $534,917, or 74.3% of net sales, for the first quarter of fiscal year 2020. Cost of goods sold decreased in the first quarter of fiscal year 2021 primarily due to lower sales volume as a result of global disruption from the COVID-19 pandemic and the elimination of annual bonus for fiscal year 2021.
Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 25.3% for the first quarter of fiscal year 2021, compared to 25.7% for the first quarter of fiscal year 2020. Gross margin decreased for the first quarter of fiscal year 2021 compared to the same period of the prior year primarily due to lower Aerospace OEM and aftermarket sales volume as a result of global disruption from the COVID-19 pandemic.
Selling, general and administrative expenses decreased by $5,934, or 9.6%, to $56,111 for the first quarter of fiscal year 2021, compared to $62,045 for the first quarter of fiscal year 2020. Selling, general, and administrative expenses as a percentage of net sales increased to 10.4% for the first quarter of fiscal year 2021, compared to 8.6% for the first quarter of fiscal year 2020. The decrease in selling, general and administrative expenses for the first quarter of fiscal year 2021 compared to same period of the prior year primarily due to savings from cost reduction initiatives.
Research and development costs decreased by $4,850, or 13.2%, to $31,996 for the first quarter of fiscal year 2021, as compared to $36,846 for the first quarter of fiscal year 2020. Research and development costs as a percentage of net sales increased to 6.0% for the first quarter of fiscal year 2021, as compared to 5.1% for the first quarter of fiscal year 2020. Research and development costs decreased primarily due to savings from cost reduction initiatives. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development due to the timing of customer business needs on current and future programs.
Impairment of assets sold was comprised entirely of a charge of $37,902 recognized in the first quarter of fiscal year 2020. Woodward’s board of directors approved a plan to divest the disposal group, which resulted in the recognition of the associated assets and liabilities as held for sale at that time. 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.
Interest expense decreased by $103, or 1.1%, to $8,906 for the first quarter of fiscal year 2021, compared to $9,009 for the first quarter of fiscal year 2020. Interest expense increased as a percentage of net sales to 1.7% for the first quarter of fiscal year 2021, as compared to 1.3% for the first quarter of fiscal year 2020. In the first quarter of fiscal year 2021, we have paid the entire balance of two series of private placement notes totaling $100,000 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 $13,302 to $8,123 for the first quarter of fiscal year 2021, compared to $21,425 for the first quarter of fiscal year 2020. Other income decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020 primarily due to a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552, 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 12.6% for the first quarter of fiscal year 2021 and 13.3% for the first quarter of fiscal year 2020.
The decrease in the effective tax rate for the first quarter of fiscal year 2021 compared to the same period of the prior year is primarily attributable to the impact of decreased projected full-year earnings for fiscal year 2021 relative to the expected tax benefits from the research credit, net excess income tax benefit from stock-based compensation, and various state income tax credits. This decrease was partially offset by the tax benefit associated with the impairment of assets held for sale in the first quarter of fiscal year 2020 that did not repeat in the current quarter and increased taxes on combined foreign earnings.
Segment Results
The following table presents sales by segment:
Net sales:
59.8
65.8
40.2
34.2
Consolidated net sales
The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:
(6,014
(8,175
Consolidated net earnings
The following table presents segment earnings as a percent of segment net sales:
14.4
19.6
15.2
11.5
Aerospace segment net sales decreased by $152,258, or 32.1%, to $321,667 for the first quarter of fiscal year 2021, compared to $473,925 for the first quarter of fiscal year 2020. Segment net sales decreased, primarily driven by lower commercial sales due to the decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic.
Defense OEM sales decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020, primarily driven by lower sales for guided weapons and fixed wing aircraft primarily due to absenteeism and supply chain disruptions as a result of the global COVID-19 pandemic, as well as a very strong quarter in the same period of the prior fiscal year. Our defense aftermarket declined slightly in the first quarter of fiscal year 2021, compared to the first quarter of fiscal year 2020, but remains strong as the U.S. Government has prioritized the combat readiness of existing military programs on which we have content.
Aerospace segment earnings decreased by $46,445, or 50.0%, to $46,466 for the first quarter of fiscal year 2021, compared to $92,911 for the first quarter of fiscal year 2020.
Aerospace segment earnings decreased for the first quarter of fiscal year 2021 due to the following:
Earnings for the period ended December 31, 2019
Sales volume
(72,829
Price, sales mix and productivity
4,137
Savings from cost reduction initiatives
12,022
Other, net
10,225
Earnings for the period ended December 31, 2020
Aerospace segment earnings as a percentage of segment net sales were 14.4% for the first quarter of fiscal year 2021, compared to 19.6% for the first quarter and of fiscal year 2020. Aerospace segment earnings in the first quarter of fiscal year 2021 decreased primarily due to lower volume caused by the global COVID-19 pandemic, partially offset by savings from cost reduction initiatives.
34
Industrial segment net sales decreased by $30,478, or 12.4%, to $215,952 for the first quarter of fiscal year 2021, compared to $246,430 for the first quarter of fiscal year 2020. Industrial segment net sales for the first quarter of fiscal year 2021 decreased by $1,912, or 0.9%, compared to Industrial segment net sales excluding the disposal group of $217,864 for the first quarter of fiscal year 2020. Foreign currency exchange rates had a favorable impact on segment net sales of $9,287 for the first quarter of fiscal year 2021.
Industrial segment net sales decreased in the first quarter of fiscal year 2021 primarily due to the divestiture of the disposal group, lower sales volumes as a result of the weak oil and gas market and the ongoing impact of the global COVID-19 pandemic, partially offset by strong demand for natural gas powered trucks in Asia.
Sales of fuel systems for natural gas powered trucks in Asia were up in the first quarter of fiscal year 2021, although we anticipate seasonal pressure due to high demand for natural gas during winter months. We foresee continued growth in global energy demand moving forward, with the bulk of this expansion coming from developing economies in Asia, as increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines. The industrial gas turbine market remained stable during the first quarter of fiscal year 2021 and we do not expect this market to be as negatively impacted by the global COVID-19 pandemic due to low inventory levels and pent up demand for repair and overhaul.
Industrial segment earnings increased by $4,658, or 16.5%, to $32,888 for the first quarter of fiscal year 2021, compared to $28,230 for the first quarter of fiscal year 2020. There were no earnings for the disposal group in the first quarter of fiscal year 2021 because the divestiture preceded the period. Industrial segment earnings excluding the disposal group for the first quarter of fiscal year 2020 were $25,983.
Industrial segment earnings increased for the first quarter of fiscal year 2021 due to the following:
(5,365
(385
6,573
2,136
Industrial segment earnings as a percentage of segment net sales were 15.2% for the first quarter of fiscal year 2021, compared to 11.5% for the first quarter of fiscal year 2020. Industrial segment earnings excluding the disposal group were 11.9% of Industrial segment net sales excluding the disposal group for the first quarter of fiscal year 2020. Industrial segment earnings increased in the first quarter of fiscal year 2021 primarily due to savings from cost reduction initiatives and favorable effects from changes in foreign currency rates, partially offset by lower sales volume.
Nonsegment
Nonsegment expenses decreased to $23,359 for the first quarter of fiscal year 2021, compared to $51,071 for the first quarter of fiscal year 2020. Included in nonsegment expenses for the first quarter of fiscal year 2020 was an impairment charge on assets held for sale associated with the divestiture of our disposal group in the amount of $37,902, partially offset by a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552. Considering these items, nonsegment expenses decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020 primarily due to savings from cost reduction initiatives.
35
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 for the foreseeable future.
Our aggregate cash and cash equivalents were $201,881 at December 31, 2020 and $153,270 at September 30, 2020, and our working capital was $918,444 at December 31, 2020 and $818,533 at September 30, 2020. Of the cash and cash equivalents held at December 31, 2020, $188,307 was held by our foreign locations and $1,908 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 funds held by our foreign locations, 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. The repatriation of these funds into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes, but 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.
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 $46,896 at December 31, 2020 and $56,640 at September 30, 2020 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 December 31, 2020, we had total outstanding debt of $747,087 consisting of various series of unsecured notes due between 2023 and 2033 and obligations under our finance leases. At December 31, 2020, we had additional borrowing availability of $988,367 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,648 under various foreign credit facilities.
At December 31, 2020, we had no borrowings outstanding under our revolving credit facility. Revolving credit facility and short-term borrowing activity during the three-months ended December 31, 2020 were as follows:
Maximum daily balance during the period
20,100
Average daily balance during the period
2,840
Weighted average interest rate on average daily balance
1.30
We believe we were in compliance with all our debt covenants as of December 31, 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 November 2019, 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 ending in in 2022 (the “2019 Authorization). We repurchased no common stock under the 2019 Authorization during the first quarter of both fiscal year 2021 and 2020.
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 supporting our capital requirements as a result of the COVID-19 pandemic.
Cash Flows
Net cash flows provided by operating activities for the first quarter of fiscal year 2021 was $146,725, compared to $27,445 for the same period of fiscal year 2020. The increase in net cash provided by operating activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily attributable to the timing of cash received from customers and the elimination of cash payments for annual bonuses. Annual bonus payments were paid in the first quarter of fiscal year 2020, but no such payments were made in the first quarter of fiscal year 2021.
Net cash flows used in investing activities for the first quarter of fiscal year 2021 was $9,955, compared to net cash flows provided by investing activities of $1,575 in the first quarter of fiscal year 2020. The increase in cash flows used in investing activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily due to proceeds in the amount of $18,767 from the sale of a parcel of our Duarte real property recognized in the first quarter of fiscal year 2020, while no such proceeds were received in same period of fiscal year 2021, partially offset by lower payments for property, plant and equipment.
Net cash flows used in financing activities for the first quarter of fiscal year 2021 was $94,642, compared to net cash flows provided by financing activities of $17,188 in the first three-months of fiscal year 2020. During the first quarter of fiscal year 2021, we had net debt payments in the amount of $100,395, compared to net borrowings in the amount of $19,694 in the first quarter of fiscal year 2020.
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.
37
Non-U.S. GAAP Financial Measures
Adjusted net earnings, adjusted earnings per share, Industrial segment net sales excluding the disposal group, Industrial segment net earnings excluding the disposal group, 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, which occurred in April 2020. The Company calculates Industrial segment net sales excluding net sales attributable to the disposal group by removing the net sales of its disposal group businesses from the net sales of its Industrial segment. The Company believes that the exclusion of the disposal group net sales illustrates more clearly how the underlying business of its Industrial segment is performing, as the disposal group sales are no longer related to the ongoing operations of the Industrial segment business. The Company’s calculation of Industrial segment net earnings and Industrial segment net earnings excluding the disposal group is discussed below.
The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group for the three-months ended December 31, 2020 and December 30, 2019 is shown in the table below:
Industrial segment sales (U.S. GAAP)
Disposal group sales
28,566
Industrial segment sales excluding disposal group (Non-U.S. GAAP)
217,864
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 and (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. 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-months ended December 31, 2020 and 2019 is shown in the tables below.
Net Earnings
Earnings Per Share
Net earnings (U.S. GAAP)
Non-U.S. GAAP adjustments:
Gain on sale of Duarte property, net of tax
(10,175
(0.16
Impairment from assets sold, net of tax
28,016
0.43
Non-U.S. GAAP adjustments
17,841
0.27
Adjusted net earnings (Non-U.S. GAAP)
71,214
1.10
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. 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.
The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group for the three-months ended December 31, 2020 and December 31, 2019 is shown in the table below.
Industrial segment earnings (U.S. GAAP)
Disposal group earnings
2,247
Industrial segment earnings excluding disposal group (Non-U.S. GAAP)
25,983
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 will the sale of the Company’s Duarte real property, and (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. 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.
EBIT and adjusted EBIT reconciled to net earnings for the three-months ended December 31, 2020 and 2019 were as follows:
EBIT (Non-U.S. GAAP)
55,995
70,070
Gain on sale of Duarte property
(13,522
Impairment from assets sold
Total non-U.S. GAAP adjustments
24,380
Adjusted EBIT (Non-U.S. GAAP)
94,450
39
EBITDA and adjusted EBITDA reconciled to net earnings for the three-months ended December 31, 2020 and 2019 were as follows:
Amortization of intangible assets
EBITDA (Non-U.S. GAAP)
89,072
102,521
Adjusted EBITDA (Non-U.S. GAAP)
126,901
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, Industrial segment earnings excluding the disposal group, 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, Industrial segment earnings excluding the disposal group, 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. Management believes that by including these proceeds 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.
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 three-months ended December 31, 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)
139,462
10,213
Cash proceeds from the sale of the Duarte facility
18,767
Adjusted free cash flow (Non-U.S. GAAP)
28,980
40
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, inventory valuation, 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, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.
Off-Balance Sheet Arrangements
As of December 31, 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.
41
In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions. We are also exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation. Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and foreign currency exchange rate changes that arise from normal purchasing and normal sales activities.
These market risks are discussed more fully in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our most recent Form 10-K. These market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.
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 December 31, 2020.
There have not been any significant changes in our internal controls over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable.
While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.
Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors:” in Part I, Item 1A of our most recent Form 10-K when making investment decisions regarding our securities. The risk factors that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.
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
Per Share
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)
October 1, 2020 through October 31, 2020
79.55
486,654
November 1, 2020 through November 30, 2020 (2)
2,383
111.83
December 1, 2020 through December 31, 2020 (2)
50
121.53
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.
(2)
Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 48 shares of common stock were acquired in October 2020, 2,239 shares of common stock were acquired in November 2020, and 50 shares of common stock were acquired in December 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, 144 shares of common stock were acquired in November 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
*
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 December 31, 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: February 4, 2021
/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)