UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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 July 29, 2021, 63,603,338 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
7
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
37
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 6.
Exhibits
Signatures
46
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three-Months Ended
Nine-Months Ended
June 30,
2021
2020
Net sales
$
556,675
523,826
1,675,615
1,964,401
Costs and expenses:
Cost of goods sold
422,457
395,511
1,258,340
1,447,942
Selling, general and administrative expenses
48,021
57,361
148,461
177,035
Research and development costs
29,765
34,522
89,388
106,029
Impairment of assets sold
—
37,902
Restructuring charges
19,040
Gain on cross-currency interest rate swaps, net
(30,481
)
Interest expense
8,397
8,737
25,552
26,502
Interest income
(308
(377
(1,086
(1,340
Other (income) expense, net
(10,355
(5,503
(29,809
(31,991
Total costs and expenses
497,977
478,810
1,490,846
1,750,638
Earnings before income taxes
58,698
45,016
184,769
213,763
Income tax expense
9,837
6,551
26,025
30,607
Net earnings
48,861
38,465
158,744
183,156
Earnings per share:
Basic earnings per share
0.77
0.62
2.51
2.95
Diluted earnings per share
0.74
0.61
2.42
2.85
Weighted Average Common Shares Outstanding:
Basic
63,559
62,309
63,215
62,188
Diluted
65,910
63,427
65,499
64,273
See accompanying Notes to Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
Other comprehensive earnings:
Foreign currency translation adjustments
8,255
8,057
16,590
5,855
Net loss on foreign currency transactions designated as hedges of net investments in foreign subsidiaries
(750
(792
(648
(1,187
Taxes on changes in foreign currency translation adjustments
476
(213
(395
(423
Foreign currency translation and transactions adjustments, net of tax
7,981
7,052
15,547
4,245
Unrealized gain/(loss) on fair value adjustment of derivative instruments
8,402
(26,011
(13,364
7,993
Reclassification of net realized loss/(gain) on derivatives to earnings
7,204
(22,649
7,481
(18,255
Taxes on changes in derivative transactions
(328
1,025
(125
253
Derivative adjustments, net of tax
15,278
(47,635
(6,008
(10,009
Amortization of pension and other postretirement plan:
Net prior service cost
248
240
746
721
Net loss
380
627
1,127
1,886
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities
(363
(101
(1,607
(378
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes
(49
(192
23
(544
Pension and other postretirement benefit plan adjustments, net of tax
216
574
289
1,685
Total comprehensive earnings
72,336
(1,544
168,572
179,077
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,907 and $3,497, respectively
362,007
153,270
Accounts receivable, less allowance for uncollectible amounts of $3,831 and $8,359, respectively
571,943
537,987
Inventories
427,492
437,943
Income taxes receivable
31,329
28,879
Other current assets
50,757
52,786
Total current assets
1,443,528
1,210,865
Property, plant and equipment, net
952,800
997,415
Goodwill
812,516
808,252
Intangible assets, net
582,213
606,711
Deferred income tax assets
14,582
14,658
Other assets
283,016
265,435
Total assets
4,088,655
3,903,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
1,050
101,634
Accounts payable
163,248
134,242
Income taxes payable
12,699
4,662
Accrued liabilities
163,580
151,794
Total current liabilities
340,577
392,332
Long-term debt, less current portion
739,062
736,849
Deferred income tax liabilities
165,652
163,573
Other liabilities
641,677
617,905
Total liabilities
1,886,968
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
259,424
231,936
Accumulated other comprehensive losses
(79,966
(89,794
Deferred compensation
8,150
9,222
Retained earnings
2,560,915
2,427,905
2,748,629
2,579,375
Treasury stock at cost, 9,361 shares and 10,277 shares, respectively
(538,792
(577,476
Treasury stock held for deferred compensation, at cost, 173 shares and 199 shares, respectively
(8,150
(9,222
Total stockholders' equity
2,201,687
1,992,677
Total liabilities and stockholders' equity
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Months Ended June 30,
Cash flows from operating activities:
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
97,799
97,582
Net gain on sales of assets and businesses
(4,073
(11,012
Net gain on cross-currency interest rate swaps
Stock-based compensation
19,053
20,088
Deferred income taxes
137
(1,756
Changes in operating assets and liabilities:
Trade accounts receivable
4,107
63,253
Unbilled receivables (contract assets)
(25,159
(53,851
Costs to fulfill a contract
(14,750
(18,044
13,562
(6,402
Accounts payable and accrued liabilities
51,308
(124,231
Contract liabilities
20,113
21,491
Income taxes
3,492
(33,085
Retirement benefit obligations
(5,221
(3,249
Other
(1,197
71,055
Net cash provided by operating activities
317,915
212,416
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment
(21,347
(39,072
Proceeds from sale of assets
141
18,844
Proceeds from business divestiture
10,443
Proceeds from sales of short-term investments
16,566
12,700
Payments for purchases of short-term investments
(14,326
(13,109
Net cash (used in) investing activities
(18,966
(10,194
Cash flows from financing activities:
Cash dividends paid
(25,734
(32,587
Proceeds from sales of treasury stock
32,219
14,790
Payments for repurchases of common stock
(13,346
Borrowings on revolving lines of credit and short-term borrowings
74,400
1,027,342
Payments on revolving lines of credit and short-term borrowings
(74,400
(1,191,319
Payments of long-term debt and finance lease obligations
(101,214
Net cash (used in) financing activities
(94,729
(196,307
Effect of exchange rate changes on cash and cash equivalents
4,517
(3,625
Net change in cash and cash equivalents
208,737
2,290
Cash and cash equivalents, including restricted cash, at beginning of year
99,073
Cash and cash equivalents, including restricted cash, at end of period
101,363
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Number of shares
Stockholders' equity
Accumulated other comprehensive (loss) earnings
Common
stock
Treasury
stock held for
deferred
compensation
Additional
paid-in
capital
Foreign
currency
translation
adjustments
Unrealized
derivative
gains
(losses)
Minimum
retirement
benefit
liability
Total
accumulated
other
comprehensive
(loss) earnings
Deferred
Retained
earnings
stock at
cost
stockholders'
equity
Balances as of April 1, 2020
72,960
(10,677
(216
227,494
(56,042
32,671
(44,005
(67,376
9,963
2,342,340
(594,870
(9,963
1,907,694
Other comprehensive earnings (loss), net of tax
(40,009
Cash dividends paid ($0.0813 per share)
(5,062
Sales of treasury stock
67
(813
2,878
2,065
6,613
Purchases/transfers of stock by/to deferred compensation plan
27
(27
Distribution of stock from deferred compensation plan
(230
230
Balances as of June 30, 2020
(10,610
(211
233,294
(48,990
(14,964
(43,431
(107,385
9,760
2,375,743
(591,992
(9,760
1,909,766
Balances as of April 1, 2021
(9,454
257,006
(33,125
(41,743
(28,573
(103,441
9,103
2,522,384
(542,754
(9,103
2,133,301
23,475
Cash dividends paid ($0.1625 per share)
(10,330
93
(197
3,962
3,765
2,615
40
(40
19
(993
993
Balances as of June 30, 2021
(9,361
(173
(25,144
(26,465
(28,357
Total stockholders'
Balances as of September 30, 2019
(11,040
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
(4,079
Cash dividends paid ($0.5238 per share)
Purchases of treasury stock
(124
430
(3,334
18,124
Common shares issued from treasury stock for benefit plans
124
9,420
5,328
14,748
Purchases and transfers of stock by/to deferred compensation plan
(6
651
(651
6
(273
273
Balances as of September 30, 2020
(10,277
(199
(40,691
(20,457
(28,646
9,828
Cash dividends paid ($0.4063 per share)
788
(1,107
33,326
128
9,542
5,358
14,900
(3
357
(357
(1,429
1,429
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of presentation
The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of June 30, 2021 and for the three and nine-months ended June 30, 2021 and 2020, 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 June 30, 2021, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The results of operations for the three and nine-months ended June 30, 2021 and 2020 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 unaudited 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.
COVID-19 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 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 reporting 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.
Note 3. Revenue
The amount of revenue recognized as point in time or over time follows:
Three-Months Ended June 30, 2021
Three-Months Ended June 30, 2020
Aerospace
Industrial
Consolidated
Point in time
114,947
128,868
243,815
98,228
138,504
236,732
Over time
225,965
86,895
312,860
208,266
78,828
287,094
Total net sales
340,912
215,763
306,494
217,332
Nine-Months Ended June 30, 2021
Nine-Months Ended June 30, 2020
336,477
414,305
750,782
464,068
463,498
927,566
690,808
234,025
924,833
790,587
246,248
1,036,835
1,027,285
648,330
1,254,655
709,746
Accounts Receivable
Accounts receivable consisted of the following:
June 30, 2021
September 30, 2020
Billed receivables
273,951
307,914
Other (Chinese financial institutions)
87,766
56,640
Total billed receivables
361,717
364,554
Current unbilled receivables (contract assets)
214,057
181,792
Total accounts receivable
575,774
546,346
Less: Allowance for uncollectible amounts
(3,831
(8,359
Total accounts receivable, net
As of June 30, 2021, “Other assets” on the Condensed Consolidated Balance Sheets includes $9,537 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.
8
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
7,522
8,359
Charged to costs and expenses, or sales allowance
581
1,709
Deductions
(4,367
(6,375
Other additions1
95
138
Balance, ending
3,831
(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
4,595
235,463
4,066
234,240
Deferred revenue from advanced invoicing and/or prepayments from customers
3,227
513
3,239
85
Liability related to customer supplied inventory
17,456
14,955
Deferred revenue from material rights related to engineering and development funding
4,244
146,013
2,360
132,317
Net contract liabilities
29,522
381,989
24,620
366,642
Woodward recognized revenue of $3,135 in the three-months and $16,809 in the nine-months ended June 30, 2021 from contract liabilities balances recorded as of October 1, 2020, compared to $8,356 in the three-months and $28,288 in the nine-months ended June 30, 2020 from contract liabilities balances recorded as of October 1, 2019.
Remaining performance obligations
Remaining performance obligations related to the aggregate amount of the total contract transaction price of firm orders for which the performance obligation has not yet been recognized in revenue as of June 30, 2021 was $1,365,880, compared to $1,454,406 as of September 30, 2020, the majority of which relate to Woodward’s Aerospace segment in both periods. Woodward expects to recognize almost all of these remaining performance obligations within two years after June 30, 2021.
Remaining performance obligations related to material rights that have not yet been recognized in revenue as of June 30, 2021 was $471,781, compared to $465,668 as of September 30, 2020, of which $4,940 is expected to be recognized in the remainder of fiscal year 2021, $10,602 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 as Woodward believes this best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
9
Revenue by primary market for the Aerospace reportable segment was as follows:
Commercial OEM
96,290
63,804
274,278
367,080
Commercial aftermarket
75,508
68,332
218,602
328,302
Defense OEM
117,204
111,667
384,097
392,494
Defense aftermarket
51,910
62,691
150,308
166,779
Total Aerospace segment net sales
Revenue by primary market for the Industrial reportable segment was as follows:
Reciprocating engines
166,143
158,804
494,099
497,012
Industrial turbines
49,620
53,486
154,231
164,663
Renewables1
5,042
48,071
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 each account for approximately 10% or more of net sales of each of Woodward’s reportable segments are as follows:
The Boeing Company, General Electric Company, Raytheon Technologies
Rolls-Royce PLC, Weichai Westport
Rolls-Royce PLC, Weichai Westport,
General Electric Company
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
2,351
1,118
2,284
2,085
Diluted shares outstanding
Income per common share:
10
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
34
2,357
49
670
Weighted-average option price
123.23
83.75
114.00
104.48
The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the weighted-average treasury stock shares held for deferred compensation obligations of the following:
Weighted-average treasury stock shares held for deferred compensation obligations
182
214
191
213
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
21,220
18,918
Finance lease assets
886
1,201
Total lease assets
22,106
20,119
Operating lease liabilities
5,571
4,925
Finance lease liabilities
1,634
Noncurrent liabilities:
16,342
14,569
556
1,173
Total lease liabilities
23,519
22,301
During the first quarter of fiscal year 2020, 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 (“ROU”) assets of the disposal group were not recoverable and a $639 non-cash impairment charge was recorded during fiscal year 2020.
11
Lease-related expenses were as follows:
Operating lease expense
1,729
1,511
4,897
4,562
Amortization of finance lease assets
102
110
322
358
Interest on finance lease liabilities
13
25
48
65
Variable lease expense
282
192
1,100
787
Short-term lease expense
75
63
233
400
Sublease income1
(104
(236
(486
(561
Total lease expense
2,097
1,665
6,114
5,611
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
4,229
3,622
Operating cash flows for finance leases
Financing cash flows for finance leases
1,236
1,187
Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases
6,759
4,825
Finance leases
35
1,243
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 June 30, 2021. 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” in the Condensed Consolidated Statements of Earnings, was $1,519 for the three-months and $4,828 for the nine-months ended June 30, 2021, compared to $1,638 for the three-months and $4,763 for the nine-months ended June 30, 2020.
The carrying amount of property, plant and equipment leased to others through embedded leasing arrangements, included in “Property, plant and equipment, net” on the Condensed Consolidated Balance Sheets, follows:
Property, plant and equipment leased to others through embedded leasing arrangements
77,859
76,655
Less accumulated depreciation
(34,327
(29,819
Property, plant and equipment leased to others through embedded leasing arrangements, net
43,532
46,836
12
Note 6. Joint venture
In fiscal year 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 $971 for the three-months and $3,142 for the nine-months ended June 30, 2021, and $802 for the three-months and $4,331 for the nine-months ended June 30, 2020.
As part of the JV formation, GE pays contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year, which began in the second quarter of fiscal year 2017, subject to certain claw-back conditions. Woodward received its annual payments of $4,894 during the three-months ended March 31, 2021 and 2020, which were recorded as deferred income and included in “Net cash provided by operating activities” on the Condensed Consolidated Statements of Cash Flows.
Other income related to Woodward’s equity interest in the earnings of the JV was as follows:
Other income
2,688
931
8,853
8,824
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
3,000
4,000
10,000
7,000
Net sales to the JV were as follows:
Net sales1
8,441
7,026
26,825
38,511
Net sales included a reduction of $3,944 for the three-months and $14,998 for the nine-months ended June 30, 2021 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 $2,292 for the three-months and $19,305 for the nine-months ended June 30, 2020.
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
3,235
3,062
1,692
1,502
7,975
9,123
Note 7. Financial instruments and fair value measurements
The table below presents information about Woodward’s financial assets and liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value as defined by the U.S. GAAP fair value hierarchy.
At June 30, 2021
At September 30, 2020
Level 1
Level 2
Level 3
Financial assets:
Investments in term deposits with foreign banks
40,453
Equity securities
30,345
25,381
Total financial assets
65,834
Financial liabilities:
Cross-currency interest rate swaps
63,075
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.
Cash, 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
13,416
11,138
13,413
11,846
Note receivable from sale of disposal group
6,370
6,182
6,341
6,061
Investments in short-term time deposits
11,542
11,534
13,678
13,671
Liabilities:
Long-term debt
812,426
742,048
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 1.2% at both June 30, 2021 and September 30, 2020.
14
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 1.7% at June 30, 2021 and 2.3% at 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 was 3.3% at June 30, 2021 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 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 1.8% at June 30, 2021 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. At the date of settlement, the total notional value of the Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps was $108,823 and $400,000, respectively. Woodward received net cash proceeds of $59,571, which includes $58,191 related to the fair value of the derivative assets and $4,380 of net accrued interest, less payment of $3,000 for fees to terminate the swap agreements. The proceeds received for the fair value of the instruments during the nine-months ended June 30, 2020 was recorded in “Other”, while net accrued interest was recorded in “Other” and “Accrued liabilities”, respectively, in cash flows provided by operating activities of Woodward’s Condensed Consolidated Statements of Cash Flows. The fees to terminate the swap agreements were recorded as incurred and presented in the line item “Selling, general and administrative” expenses in Woodward’s Condensed Consolidated Statements of Earnings.
The net interest income of the cross-currency interest rate swaps is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings. As of June 30, 2021, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and the 2020 Fixed-Rate Cross-Currency Swaps was $30,000 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements, for the related fair value of the derivative instruments as of June 30, 2021.
15
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 settled its reciprocal intercompany cross-currency interest rate swap. The fair value hedge designated on these instruments was discontinued at the date of settlement. Concurrently 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.
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. Concurrently 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.
16
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 $750 for the three-months and $648 for the nine-months ended June 30, 2021, compared to net foreign exchange losses of $792 for the three-months and $1,187 for the nine-months ended June 30, 2020.
Impact of derivative instruments designated as qualifying hedging instruments
The following table discloses the amount of (income) expense recognized in earnings on derivative instruments designated as qualifying hedging instruments:
Three-months ended
Nine-months ended
Derivatives in:
Location
Cross-currency interest rate swap agreement designated as fair value hedges
546
2,254
736
2,487
Cross-currency interest rate swap agreements designated as cash flow hedges
6,658
(24,885
6,745
(21,492
Treasury lock agreement designated as cash flow hedge
(18
(54
(19,059
The following table discloses the amount of (gain) loss recognized in accumulated OCI on derivative instruments designated as qualifying hedging instruments:
429
718
691
2,793
(8,831
25,293
12,673
(10,786
(8,402
26,011
13,364
(7,993)
The following table discloses the amount of (gain) loss reclassified from accumulated OCI into earnings on derivative instruments designated as qualifying hedging instruments:
3,291
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 $27,014 as of June 30, 2021 and $21,132 as of September 30, 2020.
17
Note 9. Supplemental statement of cash flows information
Interest paid, net of amounts capitalized
25,617
24,323
Income taxes paid
33,293
79,353
Income tax refunds received
13,788
15,123
Non-cash activities:
Purchases of property, plant and equipment on account
1,993
2,230
Impact of the adoption of ASC 842
Common shares issued from treasury to settle benefit obligations
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 June 30, 2020.
Further, on the approval of the divestiture plan and subsequent marketing of the disposal group, Woodward determined that based on the current market conditions, the carrying value of the disposal group’s remaining held for sale net assets exceeded the fair value. As a result, Woodward recorded a valuation allowance to reduce the carrying value of the net assets of the disposal group to their fair value. The non-cash impairment charge associated with the long-lived assets, and related valuation allowance for the other remaining net assets attributable to the disposal group, resulted in a total impairment charge of $37,902.
Note 11. Inventories
Raw materials
113,929
123,626
Work in progress
95,308
92,934
Component parts(1)
254,501
255,980
Finished goods
71,565
66,889
Customer supplied inventory
On-hand inventory for which control has transferred to the customer
(125,267
(116,441
Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.
18
Note 12. Property, plant, and equipment
Land and land improvements
86,372
83,095
Buildings and building improvements
553,063
551,540
Leasehold improvements
19,406
18,610
Machinery and production equipment
793,071
776,884
Computer equipment and software
123,724
123,903
Office furniture and equipment
40,174
41,177
20,003
19,814
Construction in progress
30,058
36,367
1,665,871
1,651,390
(713,071
(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 and nine-months ended June 30, 2021 and 2020, Woodward had depreciation expense as follows:
Depreciation expense
21,717
22,378
66,244
68,101
Note 13. Goodwill
Effects of Foreign
Currency
Translation
455,423
352,829
4,264
357,093
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 nine-months ended June 30, 2021, 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 June 30, 2021. 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.
Note 14. Intangible assets, net
Gross
Value
Accumulated
Amortization
Net
Amount
Intangible assets with finite lives:
Customer relationships and contracts:
281,683
(206,917
74,766
(196,520
85,163
414,399
(52,550
361,849
429,249
(57,045
372,204
696,082
(259,467
436,615
710,932
(253,565
457,367
Intellectual property:
15,828
(15,828
15,778
(15,640
Process technology:
76,370
(66,372
9,998
76,371
(63,956
12,415
91,984
(25,419
66,565
90,945
(22,300
68,645
168,354
(91,791
76,563
167,316
(86,256
81,060
Other intangibles:
238
(238
235
(183
52
Intangible asset with indefinite life:
Tradename:
69,035
68,094
Total intangibles:
358,053
(273,289
84,764
358,054
(260,476
97,578
591,484
(94,035
497,449
604,301
(95,168
509,133
Consolidated Total
949,537
(367,324
962,355
(355,644
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 and nine-months ended June 30, 2021 and 2020, Woodward recorded amortization expense associated with intangibles of the following:
Amortization expense
10,526
9,728
31,555
29,481
20
Future amortization expense associated with intangibles is expected to be:
Year Ending September 30:
2021 (remaining)
10,397
2022
39,652
2023
38,601
2024
34,849
2025
29,635
Thereafter
360,044
513,178
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 June 30, 2021 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 June 30, 2021 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
59,157
50,850
Warranties
17,414
18,972
Interest payable
5,399
15,281
Accrued retirement benefits
3,029
3,051
3,395
Taxes, other than income
22,483
13,925
Net current contract liabilities
26,576
21,700
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.
21
Changes in accrued product warranties were as follows:
Warranties, beginning of period
18,576
21,770
27,309
Expense, net of recoveries
(798
2,407
6,189
Reductions for settlement of previous warranty liabilities
(477
(2,874
(1,928
(12,328
Foreign currency exchange rate changes
113
77
156
210
Warranties, end of period
21,380
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 nine-months ended June 30, 2021 and 2020 are as follows:
Period Activity
Charges
Payments
Non-cash
activity
Workforce management costs associated with:
COVID-19 pandemic
(2,409
180
(1,166
Duarte plant relocation
440
(440
Industrial turbomachinery business realignment
(67
(14,052
(10
4,978
507
(14,559
22
Note 17. Other liabilities
Net accrued retirement benefits, less amounts recognized within accrued liabilities
118,335
114,013
Total unrecognized tax benefits
14,508
10,230
Noncurrent income taxes payable
16,388
18,322
Deferred economic incentives (1)
8,417
9,105
Cross-currency swap derivative liability
Noncurrent operating lease liabilities
Net noncurrent contract liabilities
22,623
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)
(2,688
(931
(8,853
(8,824
Net gain on sales of assets and businesses (1)
(2,131
2,545
Rent income
(268
(520
(1,011
(1,095
Net gain on investments in deferred compensation program
(1,850
(3,456
(5,107
(1,680
Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense
(3,541
(2,911
(10,592
(8,884
123
(496
(10,355)
(29,809)
Included in net gain on sale of assets and businesses for the nine-months ended June 30, 2020 was the pre-tax gain on sale of Duarte real property in the amount of $13,522 recognized in the first quarter of fiscal year 2020 and a net loss on divestiture of the disposal group of $2,540 in the third quarter of fiscal year 2020.
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
16.8
%
14.6
14.1
14.3
The year-over-year increase in the current fiscal year third quarter effective tax rate is primarily attributable to increased foreign earnings in higher tax jurisdictions and the current quarter discrete impact of the current quarter enactment of a retroactive law disallowing foreign interest expense. This increase was partially offset by a favorable increase in the net excess income tax benefit from stock-based compensation in the current quarter, adjustments to prior period tax items related to Global Intangible Low-Taxed Income (“GILTI”), and an increase in certain state income tax credits in the current year quarter.
The year-over-year decrease in the year-to-date effective tax rate is primarily attributable to a favorable increase in the net excess income tax benefits from stock-based compensation, and adjustments to prior period tax items related to GILTI. This decrease is partially offset by (i) the tax benefit associated with the impairment of assets held for sale, and a benefit from a change in India’s dividend withholding tax law in fiscal year 2020, neither of which repeated in the current fiscal year, and (ii) increased foreign earnings in higher tax jurisdictions.
Gross unrecognized tax benefits were $14,026 as of June 30, 2021, and $9,851 as of September 30, 2020. At June 30, 2021, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $7,796. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,714 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.
Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 128 shares of common stock for a value of $14,900 in the second quarter of fiscal year 2021, compared to a total of 124 shares of common stock for a value of $14,748 in the second quarter of fiscal year 2020.
The amount of expense associated with defined contribution plans was as follows:
Company costs
8,647
8,005
25,180
25,619
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. 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.
24
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.
The components of the net periodic retirement pension costs recognized are as follows:
Three-Months Ended June 30,
United States
Other Countries
Service cost
433
414
737
706
1,170
1,120
Interest cost
1,240
1,398
345
313
1,585
1,711
Expected return on plan assets
(3,536
(3,087
(632
(690
(4,168
(3,777
Amortization of:
Net actuarial loss
136
237
257
373
615
Prior service cost
242
234
239
Net periodic retirement pension (benefit) cost
(1,485
(683
693
591
(92
Contributions paid
490
335
1,297
1,244
2,202
2,124
3,499
3,368
3,718
4,193
1,021
953
4,739
5,146
(10,608
(9,260
(1,859
(2,230
(12,467
(11,490
406
1,073
699
778
1,105
1,851
727
702
745
719
(4,460
(2,048
2,081
1,642
(2,379
(406
1,708
2,067
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”, and the interest 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
449
586
Net periodic other postretirement cost
157
209
473
625
632
851
1,610
1,372
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”, and 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
Japan
Germany
217
Other postretirement benefits
1,503
Note 21. Stockholders’ equity
Stock repurchase program
In November 2019, the Board approved a program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three year period that will end in 2022 (the “2019 Authorization”). In the first nine-months of fiscal year 2021, Woodward purchased no shares of its common stock under the 2019 Authorization. Woodward repurchased 124 shares of common stock for $13,346 under the 2019 Authorization in the first nine-months of fiscal year 2020.
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 initially approved by Woodward’s stockholders in January 2017 and is the 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 and January 27, 2021, Woodward’s stockholders approved an additional 1,000 and 1,500 shares, respectively, of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 2,710 shares of Woodward’s common stock available for future grants as of June 30, 2021 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.
The following is a summary of the activity for stock option awards during the three and nine-months ended June 30, 2021:
Number of
options
Weighted-Average
Exercise Price
per Share
Options, beginning balance
5,517
67.50
5,443
62.00
Options granted
773
82.46
Options exercised
(91
41.21
(787
40.96
Options forfeited
(19
78.92
(22
80.34
Options, ending balance
5,407
67.91
26
Changes in non-vested stock options during the three and nine-months ended June 30, 2021 were as follows:
Grant Date Fair
Value per Share
Value Per Share
Non-vested options outstanding, beginning balance
2,106
25.81
2,078
24.69
28.22
Options vested
(742
25.19
24.97
25.01
Non-vested options outstanding, ending balance
2,087
25.82
Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 2021 was as follows:
Number of options
Remaining Life in
Years
Aggregate Intrinsic
Options outstanding
6.2
297,257
Options vested and exercisable
3,332
58.52
4.9
214,452
Options vested and expected to vest
5,333
67.72
294,203
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 June 30, 2021, there was approximately $12,906 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 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 corporate officers, Woodward may be required to pay termination benefits to such officers.
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:
53,167
41,096
168,641
251,645
27,166
27,438
87,925
81,640
Nonsegment expenses
(13,546
(15,158
(47,331
(94,360
Interest expense, net
(8,089)
(8,360
(24,466
(25,162
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:
1,711,257
1,752,516
1,533,123
1,529,411
Unallocated corporate property, plant and equipment, net
102,576
106,380
Other unallocated assets
741,699
515,029
Consolidated total assets
Note 24. Subsequent events
On July 28, 2021, the Board approved a cash dividend of $0.1625 per share for the quarter, payable on August 30, 2021, for stockholders of record as of August 16, 2021.
28
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 applicable tax laws.
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
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has led to significant volatility in financial, commodities (including oil and gas) and other markets and industries (including the aviation industry) and has negatively affected the business and results of operations of the Company. As the COVID-19 pandemic progressed, we reacted quickly to navigate the uncertain market environment, reduce our cost structure, increase our focus on operational excellence, and prioritize diligent cash management. The aggressive actions we implemented continue to drive strong cash flow, improve our liquidity and overall financial position, and enable ongoing investments in opportunities for growth in the markets in which we do business.
The ongoing rollout of vaccines across many countries is driving optimism for economic recovery, but the enduring turbulence caused by the COVID-19 pandemic, including significantly reduced global passenger travel and new viral variants, continues to cloud near-term forecasts. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business, including our operational performance, results of operations, financial position, and the achievement of our strategic objectives. Nonetheless, the third quarter of fiscal year 2021 showed improved results from the third quarter of fiscal year 2020 and we believe our markets will continue to improve for the remainder of the year and into fiscal year 2022.
We will continue to actively monitor the situation and may potentially take further actions to alter our business operations if we determine such actions are in the best interests of our shareholders, employees, customers, communities, business partners, and suppliers, 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 (the “Board”) 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 third quarter of fiscal year 2021 were $556,675, an increase of 6.3%, or $32,849, from $523,826 for the third quarter of the prior fiscal year. Foreign currency exchange rates had a favorable impact on net sales of $11,885 for the third 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 third quarter of fiscal year 2021, as the disposal group was divested on April 30, 2020. Net sales excluding the disposal group for the third quarter of fiscal year 2020 were $516,096. Aerospace segment net sales for the third quarter of fiscal year 2021 were up 11.2% to $340,912, compared to $306,494 for the third quarter of the prior fiscal year. Industrial segment net sales for the third quarter of fiscal year 2021 were $215,763, down 0.7% compared to $217,332 for the third quarter of fiscal year 2020. Industrial segment net sales excluding the disposal group were $209,602 for the third quarter of fiscal year 2020. Foreign currency exchange rates had a favorable impact on Industrial segment net sales of $11,199 for the third quarter of fiscal year 2021 as compared to the same period of the prior year.
Net earnings and adjusted net earnings for the third quarter of fiscal year 2021 were both $48,861, or $0.74 per diluted share. Net earnings for the third quarter of fiscal year 2020 were $38,465, or $0.61 per diluted share, and adjusted net earnings for the third quarter of fiscal year 2020 were $30,654, or $0.48 per diluted share.
The effective tax rate and adjusted effective tax rate in the third quarter of fiscal year 2021 were both 16.8%. The effective tax rate in the third quarter of fiscal year 2020 was 14.6%, and the adjusted effective tax rate in the third quarter of fiscal year 2020 was 29.1%.
Earnings before interest and taxes (“EBIT”) and adjusted EBIT for the third quarter of fiscal year 2021 were both $66,787, up 25.1% from $53,376 of EBIT in the same period of fiscal year 2020. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA for the third quarter of fiscal year 2021 were both $99,030, up 15.8% from $85,482 of EBITDA for the same period of fiscal year 2020. Adjusted EBIT and adjusted EBITDA for the third quarter of fiscal year 2020 were $51,583 and $83,689, respectively.
Aerospace segment earnings as a percent of segment net sales were 15.6% in the third quarter of fiscal year 2021, compared to 13.4% in the third quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales were 12.6% in the third quarter of both fiscal years 2021 and 2020. Excluding the disposal group, Industrial segment earnings were 13.0% of Industrial segment net sales in the third quarter of fiscal year 2020.
Year to Date Highlights
Net sales for the first nine-months of fiscal year 2021 were $1,675,615, a decrease of 14.7%, or $288,786, from $1,964,401 for the first nine-months of the prior fiscal year. Foreign currency exchange rates had a favorable impact on net sales of $32,370 for the first nine-months of fiscal year 2021. Aerospace segment net sales for the first nine-months of fiscal year 2021 were down 18.1% to $1,027,285, compared to $1,254,655 for the first nine-months of the prior fiscal year. Industrial segment net sales for the first nine-months of fiscal year 2021 were $648,330, down 8.7% compared to $709,746 for the first nine-months of fiscal year 2020. Industrial segment net sales excluding the disposal group for the first nine-months of fiscal year 2020 were $642,083.
Net earnings and adjusted net earnings for the first nine-months of fiscal year 2021 were both $158,744, or $2.42 per diluted share. Net earnings for the first nine-months of fiscal year 2020 were $183,156, or $2.85 per diluted share, and adjusted net earnings for the first nine-months of fiscal year 2020 were $205,920, or $3.20 per diluted share.
The effective tax rate and adjusted effective tax rate in the first nine-months of fiscal year 2021 were both 14.1%. For the first nine-months of fiscal year 2020, the effective tax rate was 14.3% and the adjusted effective tax rate was 18.7%.
EBIT and adjusted EBIT for the first nine-months of fiscal year 2021 was $209,235, down 12.4% from $238,925 of EBIT in the same period of fiscal year 2020. EBITDA and adjusted EBITDA for the first nine-months of fiscal year 2021 was $307,034, down 8.8% from $336,507 of EBITDA for the same period of fiscal year 2020. Adjusted EBIT and adjusted EBITDA for the first nine-months of fiscal year 2021 were $278,434 and $376,016, respectively.
Aerospace segment earnings as a percent of segment net sales were 16.4% in the first nine-months of fiscal year 2021, compared to 20.1% in the first nine-months of the prior fiscal year. Industrial segment earnings as a percent of segment net sales in the first nine-months of fiscal year 2021 were 13.6%, compared to 11.5% in the first nine-months of the prior fiscal year. Excluding the disposal group, Industrial segment earnings were 12.2% of Industrial segment net sales for the first nine-months of fiscal year 2020.
Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA, as well as Industrial segment sales excluding the disposal group and Industrial segment earnings excluding the disposal group, 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 nine-months of fiscal year 2021 was $317,915, compared to $212,416 for the first nine-months of fiscal year 2020. The increase in net cash provided by operating activities in the first nine-months of fiscal year 2021 compared to the first nine-months of the prior fiscal year is primarily attributable to the timing of cash payments to suppliers and certain tax payments, as well as cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, which were made in the first nine-months of fiscal year 2020, while no such activity occurred in the first nine-months of fiscal year 2021.
31
For the first nine-months of fiscal year 2021, free cash flow, which we define as net cash flow from operating activities less payments for property, plant and equipment, was $296,568, compared to $173,344 for the first nine-months of fiscal year 2020. The increase in free cash flow for the first nine-months of fiscal year 2021 as compared to the same period of the prior year is primarily due to effective working capital management and lower payments for property, plant and equipment, partially offset by lower net earnings. Adjusted free cash flow, which we define as free cash flow, plus the cash proceeds from the sale of real property at our former Duarte, California operations, and excluding cash paid for merger and divestiture transaction costs, cash paid for restructuring charges, and cash proceeds received from settlement of our cross-currency interest rate swaps, was $168,596 for the first nine-months of fiscal year 2020. No adjustments were made to free cash flow for the first nine-months 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 June 30, 2021, we held $362,007 in cash and cash equivalents and had total outstanding debt of $740,112. We have additional borrowing availability of $989,413, net of outstanding letters of credit, under our revolving credit agreement. At June 30, 2021, we also had additional borrowing capacity of $7,466 under various foreign lines of credit and foreign overdraft facilities.
RESULTS OF OPERATIONS
The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:
% of Net
Sales
100
75.9
75.5
75.1
73.7
Selling, general, and administrative expenses
8.6
11.0
8.9
9.0
5.3
6.6
5.4
0.0
1.9
3.6
1.0
(5.8
)%
(1.6
1.5
1.7
1.3
(0.1
(1.9
(1.1
(1.8
89.5
91.4
89.0
89.1
10.5
10.9
1.8
1.6
8.8
7.3
9.5
9.3
Other select financial data:
Working capital
1,102,951
818,533
Total debt
740,112
838,483
Net Sales
Consolidated net sales for the third quarter of fiscal year 2021 increased by $32,849, or 6.3%, compared to the same period of fiscal year 2020. Consolidated net sales for the first nine-months of fiscal year 2021 decreased by $288,786, or 14.7%, compared to the same period of fiscal year 2020.
Details of the changes in consolidated net sales are as follows:
Three-Month Period
Nine-Month Period
Consolidated net sales for the period ended June 30, 2020
Aerospace volume
32,390
(223,214
Industrial volume
(5,831
(26,179
Disposals groups divestiture impact
(7,730
(67,663
Noncash consideration
(14,351
Effects of changes in price and sales mix
2,513
10,252
Effects of changes in foreign currency rates
11,884
32,369
Consolidated net sales for the period ended June 30, 2021
The increase in consolidated net sales for the third quarter of fiscal year 2021 as compared to the same period of the prior year is primarily attributable to an increase in commercial aerospace sales volume as a result of higher domestic air passenger traffic. The decrease in consolidated net sales for the first nine-months of fiscal year 2021 as compared to the prior year period is primarily attributable to the decline in sales volume related to the ongoing impact of the COVID-19 pandemic as compared to the same period in the prior fiscal year.
In the Aerospace segment, the increase in net sales for the third quarter of fiscal year 2021 as compared to the same period of the prior year is primarily attributed to an increase in commercial sales from higher domestic air passenger traffic, while the decrease in net sales volumes for the first nine-months of fiscal year 2021, as compared to the same period of the prior year, 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, in each case as a result of the global COVID-19 pandemic. During the third quarter of fiscal year 2021, Aerospace segment net sales were negatively impacted by approximately $20,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for third quarter shipment.
In the Industrial segment, the decrease in net sales for the third quarter and first nine-months of fiscal year 2021 as compared to the same period of the prior year is primarily attributable to continued weakness in the oil and gas market and the associated aftermarket due to the ongoing impact of the COVID-19 pandemic, and the divestiture of the disposal group, partially offset by favorable effects of foreign currency exchange rates and strong demand for natural gas powered trucks in China. During the third quarter of fiscal year 2021, Industrial segment net sales were negatively impacted by approximately $10,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for third quarter shipment.
Costs and Expenses
Cost of goods sold increased by $26,946 to $422,457, or 75.9% of net sales, for the third quarter of fiscal year 2021, from $395,511, or 75.5% of net sales, for the third quarter of fiscal year 2020. Cost of goods sold decreased by $189,602 to $1,258,340, or 75.1% of net sales, for the first nine-months of fiscal year 2021 from $1,447,942, or 73.7% of net sales, for the first nine-months of fiscal year 2020. The increase in cost of goods sold in the third quarter of fiscal year 2021 compared to the same period of the prior year is primarily due to increased Aerospace commercial OEM sales volume. The decrease in cost of goods sold for the first nine-months of fiscal year 2021 compared to the same period of the prior year is primarily due to lower sales volume as a result of the global disruption caused by the COVID-19 pandemic.
Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 24.1% for the third quarter and 24.9% for the first nine-months of fiscal year 2021, compared to 24.5% for the third quarter and 26.3% for the first nine-months of fiscal year 2020. The decrease in gross margin for the third quarter of fiscal year 2021 as compared to the same period of the prior year is primarily attributable to lower aerospace defense aftermarket sales. The decrease in gross margin for the first nine-months of fiscal year 2021 as compared to the same period of the prior year is primarily due to lower aerospace sales volume as a result of global disruption caused by the COVID-19 pandemic.
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Selling, general and administrative expenses decreased by $9,340, or 16.3%, to $48,021 for the third quarter of fiscal year 2021, compared to $57,361 for the third quarter of fiscal year 2020. Selling, general, and administrative expenses decreased by $28,574, or 16.1%, to $148,461 for the first nine-months of fiscal year 2021, compared to $177,035 for the first nine-months of fiscal year 2020. Selling, general, and administrative expenses as a percentage of net sales decreased to 8.6% for the third quarter of fiscal year 2021, compared to 11.0% for the third quarter of fiscal year 2020. Selling, general, and administrative expenses as a percentage of net sales decreased to 8.9% for the first nine-months of fiscal year 2021, compared to 9.0% for the first nine-months of fiscal year 2020. The decrease in selling, general and administrative expenses, both in dollars and as a percentage of net sales, for the third quarter and first nine-months of fiscal year 2021 as compared to the same periods of the prior year is primarily due to a decrease in certain expenses incurred in the third quarter of fiscal year 2020 related to merger and divestiture activities, fees incurred on termination of cross-currency interest rate swaps, and acceleration of stock compensation expense related to restructuring activities, all of which did not repeat in the current year quarter.
Research and development costs decreased by $4,757, or 13.8%, to $29,765 for the third quarter of fiscal year 2021, as compared to $34,522 for the third quarter of fiscal year 2020. As a percentage of net sales, research and development costs decreased to 5.3% for the third quarter of fiscal year 2021, as compared to 6.6% for the same period of the prior fiscal year. Research and development costs decreased by $16,641, or 15.7%, to $89,388 for the first nine-months of fiscal year 2021, as compared to $106,029 for the first nine-months of fiscal year 2020. As a percentage of net sales, research and development costs decreased to 5.3% for the first nine-months of fiscal year 2021, as compared to 5.4% for the first nine-months of fiscal year 2020. The decrease in research and development costs, both in dollars and as a percentage of net sales, for the third quarter and first nine-months of fiscal year 2021 as compared to the same periods of the prior year is 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. The Board 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 $340, or 3.9%, to $8,397 for the third quarter of fiscal year 2021, compared to $8,737 for the third quarter of fiscal year 2020. Interest expense decreased as a percentage of net sales to 1.5% for the third quarter of fiscal year 2021, as compared to 1.7% for the third quarter of fiscal year 2020. Interest expense decreased by $950, or 3.6%, to $25,552 for the first nine-months of fiscal year 2021, as compared to $26,502 for the first nine-months of fiscal year 2020. Interest expense as a percentage of net sales was 1.5% for the first nine-months of fiscal year 2021, compared to 1.3% for the first nine-months of fiscal year 2020. In the first nine-months of fiscal year 2021, we paid the entire balance of two series of private placement notes totaling $100,000 primarily using cash from operations and proceeds from our revolving credit facility. Additionally, we did not borrow from the revolving credit facility during the second and third quarter of fiscal year 2021.
Other income increased by $4,852 to $10,355 for the third quarter of fiscal year 2021, compared to $5,503 for the third quarter of fiscal year 2020. Other income decreased by $2,182 to $29,809 for the first nine-months of fiscal year, compared to $31,991 for the first nine-months of fiscal year 2020. Other income increased for the third quarter of fiscal year 2021 compared to the same period of the prior fiscal year primarily due to a loss on sale of the disposal group in the amount of $2,540, which was recognized in the third quarter of fiscal year 2020, as well as increased earnings in our equity interest in the joint venture with GE. Other income decreased in the first nine-months of fiscal year 2021 compared to the first nine-months 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, partially offset by a net loss on sale of the disposal group, which were both recognized in the first nine-months of fiscal year 2020.
Income taxes were provided at an effective rate on earnings before income taxes of 16.8% for the third quarter and 14.1% for the first nine-months of fiscal year 2021, and 14.6% for the third quarter and 14.3% for the first nine-months of fiscal year 2020.
The increase in the effective tax rate for the third quarter of fiscal year 2021 as compared to the same period of the prior year is primarily attributable to increased foreign earnings in higher tax jurisdictions and the current quarter discrete impact of the current quarter enactment of retroactive law disallowing foreign interest expense. The increase was partially offset by a favorable increase in the net excess income tax benefit from stock-based compensation in the current quarter,
adjustments to prior period tax items related to Global Intangible Low-Taxed Income (“GILTI”), an increase in certain state income tax credits in the current year quarter.
The decrease in the effective tax rate for the first nine-months of fiscal year 2021 as compared to the same period of the prior year is primarily attributable to a favorable increase in the net excess income tax benefits from stock-based compensation, as well as adjustments to prior period tax items related to GILTI. The decrease is partially offset by (i) the tax benefit associated with the impairment of assets held for sale, and a benefit from a change in India’s dividend withholding tax law in fiscal year 2020, neither of which repeated in the current fiscal year, and (ii) increased foreign earnings in higher tax jurisdictions.
Segment Results
The following table presents sales by segment:
Net sales:
61.2
58.5
61.3
63.9
38.8
41.5
38.7
36.1
Consolidated net sales
The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:
(8,089
(9,837
(6,551
(26,025
(30,607
Consolidated net earnings
The following table presents segment earnings as a percent of segment net sales:
15.6
13.4
16.4
20.1
12.6
13.6
11.5
Aerospace segment net sales increased by $34,418, or 11.2%, to $340,912 for the third quarter of fiscal year 2021, compared to $306,494 for the third quarter of fiscal year 2020. Aerospace segment net sales decreased by $227,370, or 18.1%, to $1,027,285 for the first nine-months of fiscal year 2021, compared to $1,254,655 for the same period of fiscal year 2020. The increase in segment net sales in the third quarter of fiscal year 2021 as compared to the same period of the prior fiscal year is primarily a result of increased commercial OEM and aftermarket sales due to recovering domestic global passenger traffic, increased aircraft production rates, increased fleet utilization, and the return to service of the Boeing 737 MAX aircraft in certain jurisdictions.
Defense OEM sales were flat in the third quarter and first nine-months of fiscal year 2021 as compared to the same periods of the prior year, primarily driven by strong demand for guided weapons and fixed wing aircraft, although we anticipate demand to soften in future periods. Our defense aftermarket sales decreased in both the third quarter and the first nine-months of fiscal year 2021 as compared to the same periods of the prior year primarily due to ongoing variability as a result of the global COVID-19 pandemic and timing of continued maintenance needs and upgrade programs. However, we believe defense aftermarket activity will continue to remain strong due to aircraft utilization and upgrade programs.
During the third quarter of fiscal year 2021, Aerospace segment net sales were negatively impacted by approximately $20,000 due to global supply chain disruptions, which delayed shipment of orders scheduled for third quarter shipment.
Aerospace segment earnings increased by $12,071, or 29.4%, to $53,167 for the third quarter of fiscal year 2021, compared to $41,096 for the third quarter of fiscal year 2020. Aerospace segment earnings decreased by $83,004, or
33.0%, to $168,641 for the first nine-months of fiscal year 2021, compared to $251,645 for the first nine-months of fiscal year 2020.
The increase in Aerospace segment earnings for the third quarter of fiscal year 2021, and the decrease in Aerospace segment earnings first nine-months of fiscal year 2021, in each case compared to the prior year periods, were due to the following:
Earnings for the period ended June 30, 2020
Sales volume
18,969
(108,117
Price, sales mix and productivity
(9,292
(10,884
Savings from cost reduction initiatives
2,414
21,824
Other, net
(20
14,173
Earnings for the period ended June 30, 2021
Aerospace segment earnings as a percentage of segment net sales were 15.6% for the third quarter and 16.4% for the first nine-months of fiscal year 2021, compared to 13.4% for the third quarter and 20.1% for the first nine-months of fiscal year 2020. The increase in Aerospace segment earnings in the third quarter of fiscal year 2021 as compared to the same period of the prior year was primarily due to higher volume, predominantly driven by an increase in commercial OEM. The decrease in Aerospace segment earnings in the first nine-months of fiscal year 2021 as compared to the same period of the prior year was primarily due to lower volume, including a significant decline in commercial aftermarket, as a result of the global COVID-19 pandemic, partially offset by savings from cost reduction initiatives.
Industrial segment net sales decreased by $1,569, or 0.7%, to $215,763 for the third quarter of fiscal year 2021, compared to $217,332 for the third quarter of fiscal year 2020. Industrial segment net sales for the third quarter of fiscal year 2021 increased by 2.9%, or $6,161, compared to Industrial segment net sales excluding the disposal group of $209,602 for the third quarter of fiscal year 2020. Industrial segment net sales decreased by $61,416, or 8.7%, to $648,330 for the first nine-months of fiscal year 2021, compared to $709,746 for the same period of fiscal year 2020. Industrial segment net sales for the first nine-months of fiscal year 2021 were relatively flat compared to Industrial segment net sales excluding the disposal group of $642,083 for the first nine-months of fiscal year 2020. There were no sales for the disposal group for the third quarter of fiscal year 2021 or the first nine-months of fiscal year 2021, as the disposal group was divested on April 30, 2020. Foreign currency exchange rates had a favorable impact on segment net sales of $11,199 and $30,921 for the third quarter and first nine-months of fiscal year 2021, respectively.
The decrease in Industrial segment net sales in the third quarter of fiscal year 2021 was primarily due to the divestiture of the disposal group, softening of demand for natural gas powered trucks in China as a result of anticipated implementation of China VI diesel emission regulations, and lower sales volumes as a result of the ongoing impact of the global COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates. The decrease in Industrial segment net sales for the first nine-months of fiscal year 2021 as compared to the same period of the prior year was primarily due to the divestiture of the disposal group, and lower sales volumes as a result of the ongoing impact of the global COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates and strong demand for natural gas powered trucks in China.
During the third quarter of fiscal year 2021, Industrial segment net sales were negatively impacted by approximately $10,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for third quarter shipment.
Industrial segment earnings decreased by $272, or 1.0%, to $27,166 for the third quarter of fiscal year 2021, compared to $27,438 for the third quarter of fiscal year 2020. Industrial segment earnings increased by $6,285, or 7.7%, to $87,925 for the first nine-months of fiscal year 2021, compared to $81,640 for the same period of fiscal year 2020. There were no earnings for the disposal group in the third quarter and first nine-months of fiscal year 2021 because the divestiture preceded the period. Industrial segment earnings excluding the disposal group for the third quarter and first nine-months of fiscal year 2020 were $27,186 and $78,038, respectively.
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The decrease in Industrial segment earnings for the third quarter of fiscal year 2021 and the increase in Industrial segment earnings for the first nine-months of fiscal year 2021, in each case compared to the prior year period, were due to the following:
(6,193
(19,914
(3,037
(6,069
2,987
5,248
14,202
1,038
4,398
4,933
8,420
Industrial segment earnings as a percentage of segment net sales were 12.6% for the third quarter and 13.6% for the first nine-months of fiscal year 2021, compared to 12.6% for the third quarter and 11.5% for the first nine-months of fiscal year 2020. Industrial segment earnings excluding the disposal group were 13.0% and 12.2% of Industrial segment net sales excluding the disposal group for the third quarter and first nine-months of fiscal year 2020, respectively. The decrease in Industrial segment earnings in third quarter of fiscal year 2021 was primarily due to lower sales volume, partially offset by lower research and development costs and favorable effects from changes in foreign currency rates. The increase in Industrial segment earnings in the first nine-months of fiscal year 2021 was primarily due to savings from cost reduction initiatives, lower research and development costs, and favorable effects from changes in foreign currency rates, partially offset by lower sales volume.
Nonsegment
Nonsegment expenses decreased by $1,612 to $13,546 for the third quarter of fiscal year 2021, compared to $15,158 for the third quarter of fiscal year 2020. Included in nonsegment expenses for the third quarter of fiscal year 2020 was merger and divestiture transaction costs of $1,732, restructuring charges of $19,040, and acceleration of stock compensation of $2,376, offset by the net gain on settlement of cross-currency interest rate swaps of $27,481. Aside from these items, nonsegment expenses decreased in the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020 primarily due to savings from cost reduction initiatives.
Nonsegment expenses decreased to $47,331 for the first nine-months of fiscal year 2021, compared to $94,360 for the first nine-months of fiscal year 2020. Included in nonsegment expenses for the first nine-months of fiscal year 2020 were merger and divestiture transaction costs of $18,654, the impairment charge on assets held for sale associated with the divestiture of our Renewables Business in the amount of $37,902, restructuring charges of $19,040, and acceleration of stock compensation of $2,376, partially offset by the net gain on settlement of our cross-currency interest rate swaps of $27,481, and a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552. Aside from these items, the decrease in nonsegment expenses in the first nine-months of fiscal year 2021 compared to the first nine-months of fiscal year 2020 was primarily due to savings from cost reduction initiatives.
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. From time to time, 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.
In addition to our revolving credit facility, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our revolving credit facility and our other credit facilities, see Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.
At June 30, 2021, we had total outstanding debt of $740,112 consisting of various series of unsecured notes due between 2023 and 2033 and obligations under our finance leases. At June 30, 2021, we had additional borrowing availability of $989,413 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,466 under various foreign credit facilities.
At June 30, 2021, we had no borrowings outstanding under our revolving credit facility. We also had no borrowings or average daily balance outstanding under our revolving credit facility during the third quarter of fiscal year 2021. Revolving credit facility and short-term borrowing activity during the nine-months ended June 30, 2021 were as follows:
Maximum daily balance during the period
20,100
Average daily balance during the period
957
Weighted average interest rate on average daily balance
1.26
To our knowledge, we were in compliance with all our debt covenants as of June 30, 2021. 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 16, 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, the Board 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 2022 (the “2019 Authorization). We repurchased no shares of our common stock under the 2019 Authorization during the first nine-months of fiscal year 2021. In the first nine-months of fiscal year 2020, we repurchased 124 shares of our common stock for $13,346 under the 2019 Authorization.
We 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 or otherwise.
Cash Flows
Net cash flows provided by operating activities for the first nine-months of fiscal year 2021 was $317,915, compared to $212,416 for the same period of fiscal year 2020. The increase in net cash provided by operating activities in the first nine-months of fiscal year 2021 compared to the first nine-months of the prior fiscal year is primarily attributable to the timing of cash payments to suppliers and certain tax payments, as well as cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, which were made in the first nine-months of fiscal year 2020, while no such activity occurred in the first nine-months of fiscal year 2021.
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Net cash flows used in investing activities for the first nine-months of fiscal year 2021 was $18,966, compared to $10,194 for the same period of fiscal year 2020. The increase in cash flows used in investing activities in the first nine-months of fiscal year 2021 compared to the first nine-months 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 nine-months 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 nine-months of fiscal year 2021 was $94,729, compared to $196,307 for the same period of fiscal year 2020. The change in net cash flows used in financing activities in the first nine-months of fiscal year 2021 compared to the first nine-months of the prior fiscal year is primarily attributable to the change in net debt payments. During the first nine-months of fiscal year 2021, we had net debt payments in the amount of $101,214, compared to net debt payments in the amount of $165,163 in the first nine-months 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.
Non-U.S. GAAP Financial Measures
Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, Industrial segment net sales excluding the disposal group, Industrial segment 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”, for the prior year period 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 the disposal group from the net sales of its Industrial segment. The Company believes that the exclusion of the disposal group net sales for the prior year period illustrates more clearly how the underlying business of its Industrial segment is performing in the current year period, as the disposal group sales are no longer related to the ongoing operations of the Industrial segment business. The Company’s definition of Industrial segment earnings and Industrial segment earnings excluding the disposal group is discussed below.
The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group is shown in the table below:
Industrial segment sales (U.S. GAAP)
Disposal group sales
7,730
67,663
Industrial segment sales excluding disposal groups (Non-U.S. GAAP)
209,602
642,083
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Earnings based non-U.S. GAAP financial measures
Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s Duarte real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of the disposal group, (iii) costs associated with the now-terminated merger agreement with Hexcel, and (iv) transaction costs associated with the divestiture of the disposal group, (v) restructuring charges related to the COVID-19 pandemic, (vi) acceleration of stock compensation expense related to restructuring activities, and (vii) the net gain on settlement of cross-currency interest rate swaps. The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period. Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar, infrequent or unusual charges.
The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, is shown in the tables below:
Net Earnings
Earnings Per Share
Net earnings (U.S. GAAP)
Non-U.S. GAAP adjustments:
Merger and divestiture transaction costs, net of tax
1,304
0.02
Restructuring costs related to COVID-19, net of tax
14,200
0.22
Loss on sale of disposal group, net of tax
1,801
Acceleration of stock compensation, net of tax
1,788
0.03
Net gain on cross-currency interest rate swaps, net of tax
(26,904
(0.42
Non-U.S. GAAP adjustments
(7,811
(0.13
Adjusted net earnings (Non-U.S. GAAP)
30,654
0.48
Earnings
Per Share
Gain on sale of Duarte facility, net of tax
(10,175
(0.16
Impairment from assets sold, net of tax
28,016
0.44
14,038
Total non-U.S. GAAP adjustments
22,764
0.35
205,920
3.20
Industrial segment earnings excluding the disposal group
The Company also presents certain earnings measures excluding the disposal group for the prior year period to more clearly show how the underlying business of its Industrial segment is performing in the current period. 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 excluding the disposal group is defined by management as the percentage of segment earnings compared to segment net sales excluding the earnings (or losses) and net sales related to businesses included in the disposal group.
The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group is shown in the table below:
Industrial segment earnings (U.S. GAAP)
Disposal group earnings
252
3,602
Industrial segment earnings excluding disposal group (Non-U.S. GAAP)
27,186
78,038
Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements do not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization. The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of the Company’s operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization. Further, as interest from financing, income taxes, depreciation and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability.
Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s Duarte real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of the disposal group, (iii) costs associated with the now-terminated merger agreement with Hexcel, and (iv) transaction costs associated with the divestiture of the disposal group, (v) restructuring charges related to the COVID-19 pandemic, (vi) acceleration of stock compensation expense related to restructuring activities, and (vii) the net gain on settlement of cross-currency interest rate swaps. As these gains and charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes that by removing these gains and charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.
41
EBIT and adjusted EBIT reconciled to net earnings were as follows:
EBIT (Non-U.S. GAAP)
66,787
53,376
209,235
238,925
Gain on sale of Duarte facility
(13,522
Impairment from assets sold
Merger and divestiture transaction costs
1,732
18,654
Restructuring charges related to COVID-19
Loss on sale of disposal group
2,540
Acceleration of stock options
2,376
Net gain on cross-currency interest rate swap
(27,481
(1,793
39,509
Adjusted EBIT (Non-U.S. GAAP)
51,583
278,434
EBITDA and adjusted EBITDA reconciled to net earnings were as follows:
Amortization of intangible assets
EBITDA (Non-U.S. GAAP)
99,030
85,482
307,034
336,507
Adjusted EBITDA (Non-U.S. GAAP)
83,689
376,016
The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, 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.
42
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 the prior year period to include cash proceeds received from the sale of real property located at our former operations in Duarte, California and exclude cash paid for merger and divestiture related transaction costs. Management believes that by including or excluding these items, as applicable, in free cash flow it better portrays the cash impact from our fiscal year 2018 decision to relocate our Duarte, California operations to the renovated Drake Campus in Fort Collins, Colorado and excludes the infrequent or unusual cash payments for merger and divestiture transaction costs, which are not indicative of the Company’s operating performance for the period.
The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as a comparative measure.
Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities 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)
296,568
173,344
Cash proceeds from the sale of the Duarte facility
18,767
Cash paid for merger and divestiture transaction costs
17,624
Cash paid for restructuring charges
14,052
Net cash proceeds from cross-currency interest rate swaps
(55,191
Adjusted free cash flow (Non-U.S. GAAP)
168,596
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.
43
Off-Balance Sheet Arrangements
As of June 30, 2021, 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.
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 June 30, 2021.
There have not been any significant changes in our internal controls over financial reporting during the quarter ended June 30, 2021 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)
Number
of Shares
Purchased
Weighted
Average
Price Paid
as Part of
Publicly
Announced
Plans or
Programs (1)
Maximum
Number (or
Approximate
Dollar Value)
of Shares that
may yet be
under the
Programs at
Period End (1)
April 1, 2021 through April 30, 2021
125.01
471,754
May 1, 2021 through May 31, 2021 (2)
127.18
June 1, 2021 through June 30, 2021 (2)
122.88
In November 2019, the Board 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, 23 shares of common stock were acquired in April 2021, 23 shares of common stock were acquired in May 2021, and 24 shares of common stock were acquired in June 2021 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, 244 shares of common stock were acquired in May 2021 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 June 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statements of Comprehensive Earnings, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.
104
Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Filed as an exhibit to this Report
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 3, 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)