NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1. Basis of presentation
The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of
March 31, 2018
and for the three
and six-
months
ended
March 31, 2018
and
March
3
1
,
2017
, included herein, have not been audited by an independent registered public accounting firm. These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of
March 31, 2018
, 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 six-
months ended
March 31, 2018
are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.
The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.
Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the Condensed Consolidated Financial Statements included herein. Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, customer rebates earned and payable, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, the provision for income tax and related valuation reserves, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees and board members, and contingencies. Actual results could vary from Woodward’s estimates.
As disclosed in Note 1,
Operations and summary of significant accounting policies
in the Notes to the Consolidated Financial Stat
ements in Part II, Item 8 of Woodward’s
most recent
Annual Report on Form
10-K, the amortization of intangible assets has been recl
assified from a separate line in
the
Condensed C
onsolidated
Statement of E
arnings for the three
and six
-months ended
March 31, 2017
to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.
The reclassificatio
n of these amounts conforms to
the
current period presentation.
Note 2. New accounting standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).
I
n March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Acc
ounting Bulletin No. 118.” ASU 2018-05
formally amended
ASC Topic 740, Income Taxes (“ASC 740”)
for the guidance previously provided by
SEC
Staff Accounting Bulletin 118
(“SAB 118”). SAB 118 expressed
views of the SEC regarding
ASC 740
in the reporting period that includes the enactment date of
H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”)
. The Company adopted SAB 118 in the first quarter of fiscal year 2018 and therefore, the Company’s subsequent adoption of ASU 2018-05 in the second quarter of fiscal year 2018 had no impact on its accounting for income taxes
in the second quarter or
first half of fiscal year 2018.
In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of tax reform under the Tax Act and provides guidance on the disclosure requirements regarding the stranded tax effects. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2018-02 should be applied retrospectively in the period of adoption to all periods in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. Woodward is currently assessing the impact of the adoption of the new guidance. When adopted, if Woodward elects to reclassify under ASU 2018-02, a portion of accumulated other comprehensive earnings would be reclassified to retained earnings.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 is intended to more closely align the financial statement reporting of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in
current U.S.
GAAP. ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.
Woodward early a
dopt
ed
the new guidance
in the first quarter of fiscal year 2018
.
T
he application of the new guidance
did not
have any impact on
Woodward’s
current hedging arrangements
or on the disclosures related to such arrangements
.
In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same
statement of e
arnings captions as other compensation costs arising from services rendered by the covered employees during the period. The other components of net benefit
cost will be presented in the statement of e
arnings separately from service costs. ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward). Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice. The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the
statement of earnings
and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories. Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018. Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use. After adoption of ASU 2016-16, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods wit
hin the year of adoption.
Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018. Woodward will adopt the new guidance in fiscal year 2019
.
Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.
Woodward has not determined in which period it will adopt the new guidance. Woodward c
urrently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity, such adjustments are not expected to be significant.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years. Woodward has not determined in which period it will adopt the new guidance but does not expect the application of the CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption. In transition, Woodward will be required to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for the two fiscal years prior to the year of adoption.
However, during December 2017, the FASB proposed amending ASU 2016-02 such that restatem
ent of fiscal years 2018 and 201
9 would not be required upon
adoption
. Although early adoption is permitted,
Woodward
expects to adopt the new guidance in fiscal year 2020 and
is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidance
and whether other arrangements not currently classified as leases may become subject to the guidance of ASU 2016-02
. Rent expense for all operating leases in fiscal year 2017, none of which was recognized on the balance sheet, was $8,302. As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a customer contract are satisfied. ASC 606 is intended to provide more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period. Woodward
has determined it will
elect to adopt
using the c
umulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.
Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.
Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606. Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019.
As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.
Based on Woodward’s review of its customer contracts, Woodward has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model. Upon adoption of ASC 606, however, Woodward also believes some of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts. As a result of recognizing some revenue over time, various balance sheet line items will be impacted. As such, Woodward believes the adoption of ASC 606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.
Woodward generally expenses costs as incurred for the engineering and development of new products. Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales. ASC 606 requires customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer. ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer. Therefore, under ASC 606, Woodward expects to record both contract assets and contract liabilities related to such funded engineering and development efforts, which are expected to become material over time. Recognized revenues and research and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities. However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.
In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required. Woodward is currently
implementing
changes to its processes for preparing required disclosures and to information systems that support the financial reporting process.
Woodward is also evaluating implications to the Company’s system of internal controls, relative to revenue recognition and the related revenue disclosures, which are based on the criteria outlined in the Committee of Sponsoring Organizations of the Treadway Commission’s 2013 Internal Control – Integrated Framework.
Note 3. 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:
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Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
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|
Net earnings
|
|
$
|
38,489
|
|
$
|
38,105
|
|
$
|
56,749
|
|
$
|
84,653
|
Denominator:
|
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|
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|
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|
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Basic shares outstanding
|
|
|
61,401
|
|
|
61,310
|
|
|
61,323
|
|
|
61,436
|
Dilutive effect of stock options and restricted stock
|
|
|
2,349
|
|
|
2,189
|
|
|
2,407
|
|
|
2,157
|
Diluted shares outstanding
|
|
|
63,750
|
|
|
63,499
|
|
|
63,730
|
|
|
63,593
|
Income per common share:
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Basic earnings per share
|
|
$
|
0.63
|
|
$
|
0.62
|
|
$
|
0.93
|
|
$
|
1.38
|
Diluted earnings per share
|
|
$
|
0.60
|
|
$
|
0.60
|
|
$
|
0.89
|
|
$
|
1.33
|
The following stock option grants were outstanding during the three
and six
-months
ended March 31, 2018
and
2017
, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
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Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
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2018
|
|
2017
|
|
2018
|
|
2017
|
Options
|
|
|
764
|
|
|
67
|
|
|
759
|
|
|
2
|
Weighted-average option price
|
|
$
|
78.73
|
|
$
|
62.98
|
|
$
|
78.74
|
|
$
|
70.39
|
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:
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Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average treasury stock shares held for deferred compensation obligations
|
|
|
200
|
|
|
185
|
|
|
195
|
|
|
175
|
Note 4. Joint venture
On
January 4, 2016
, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to design, develop and source fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.
As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV. Woodward had no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV. GE purchased from Woodward a
50%
ownership interest in the JV for a
$250,000
cash payment to Woodward. In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of
$4,894
per year
,
which began on January 4, 2017
,
subject to certain claw-back conditions.
D
uring the three-months ended March 31, 2018
,
Woodward
received its second annual payment of
$4,894
, which was recorded
as deferred income
and included in
Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows
. Neither Woodward nor GE contributed any tangible assets to the JV.
Woodward determined that the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operations of the JV. Therefore, Woodward recorded
as deferred income
the $250,000 consideration receive
d from GE in January of 2016
for its purchase of a 50% equity inter
est in the JV
. The
$250,000
deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales of applicable fuel
systems within the scope of the JV in a particular period as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV. Unamortized deferred income recorded in connection with the JV formation included accrued liabilities of
$6,427
as of March 31, 2018
and
$6,451
as of September 30, 2017
, and other liabilities of
$239,275
as of March 31, 2018 and
$236,896
as of September 30, 2017. Amortization of the deferred income recognized as an increase to sales was
$1,486
for the
three-months
and
$2,539
for the six-months
ended
March 31, 2018
, and
$1,632
for the
three
-months
and
$3,128
for the six-months
ended
March
3
1
,
2017
.
Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties. Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE do have the ability to significantly influence the operating and financial decisions of the JV. Therefore, Woodward is accounting for its 50% ownership interest in the JV using the equity method of accounting. The JV is a related party to Woodward. Other income includes income of
$1,006
for the
three-months and
$1,602
for the six-months
ended
March 31, 2018
, and income of
$382
for the
three
-months
and
$1,066
for the six-months
ended
March
3
1
,
2017
related to Woodward’s equity interest in the earnings of the JV. Woodward received
no
cash distributions from the JV in the
three
and six-months
ended
March 31, 2018, compared to a
$2,500
cash distribution from the JV during the three and six-months ended March 31, 2017, which was included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.
Woodward’s net investment in the JV, which is i
ncluded in other assets, was
$7,874
as of
March 31, 2018
and
$6,272
as of September 30, 201
7
.
Woodward’s net sales include
$17,077
for the
three-months
and
$30,052
for the six-months
ended
March 31, 2018
of sales to the JV, compared to
$18,415
for the
three
-months
and
$33,717
for the six-months
ended
March
3
1
,
2017
. Woodward recorded a reduction to sales of
$6,922
for the three-months
and
$12,330
for the six-months
ended
March 31, 2018
related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to
$5,674
for the
three
-months
and
$11,077
for the six-months
ended
March
3
1
,
2017
. The
Condensed
Consolidated Balance Sheets include “Accounts receivable” of
$9,755
at March 31, 2018, and
$8,554
at September 30, 2017, related to amounts the JV owed Woodward, and include “Accounts payable” of
$6,420
at March 31, 2018, and
$6,741
at September 30, 2017,
related to amounts Woodward owed the JV.
Note 5. Financial instruments and fair value measurements
Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.
Level 3: Inputs that reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.
The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value. Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of March 31, 2018 or September 30, 2017.
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At March 31, 2018
|
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At September 30, 2017
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|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial assets:
|
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Cash
|
|
$
|
98,646
|
|
$
|
-
|
|
$
|
-
|
|
$
|
98,646
|
|
$
|
79,822
|
|
$
|
-
|
|
$
|
-
|
|
$
|
79,822
|
Investments in reverse repurchase agreements
|
|
|
557
|
|
|
-
|
|
|
-
|
|
|
557
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|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
Investments in term deposits with foreign banks
|
|
|
944
|
|
|
-
|
|
|
-
|
|
|
944
|
|
|
7,729
|
|
|
-
|
|
|
-
|
|
|
7,729
|
Equity securities
|
|
|
19,050
|
|
|
-
|
|
|
-
|
|
|
19,050
|
|
|
16,600
|
|
|
-
|
|
|
-
|
|
|
16,600
|
Total financial assets
|
|
$
|
119,197
|
|
$
|
-
|
|
$
|
-
|
|
$
|
119,197
|
|
$
|
104,152
|
|
$
|
-
|
|
$
|
-
|
|
$
|
104,152
|
Investments in reverse repurchase agreements:
Woodward sometimes invests excess cash in reverse repurchase agreements. Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement. At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement. Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid. The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets. Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.
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.
Accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value. The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2018
|
|
At September 30, 2017
|
|
|
Fair Value Hierarchy Level
|
|
Estimated Fair Value
|
|
Carrying Cost
|
|
Estimated Fair Value
|
|
Carrying Cost
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable from municipalities
|
|
2
|
|
$
|
14,506
|
|
$
|
14,346
|
|
$
|
15,848
|
|
$
|
14,507
|
Investments in short-term time deposits
|
|
2
|
|
|
-
|
|
|
-
|
|
|
8,227
|
|
|
8,223
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
2
|
|
$
|
(588,701)
|
|
$
|
(590,115)
|
|
$
|
(592,317)
|
|
$
|
(582,080)
|
In fiscal years 2014 and 2013, Woodward received long-term notes from municipalities within the states of Illinois and Colorado in connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado. The fair value of the long-term notes was estimated based on a model that discounted
future principal and interest payments received at an interest rate
available to the Company at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the long-term notes were
2.8
% at March 31, 2018 and 2.6% at September 30, 2017.
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 5.3% at September 30, 2017. There were no investments in short-term time deposits at March 31, 2018.
The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest rates used to estimate the fair value of long-term debt were 2.8% at March 31, 2018 and 2.4% at September 30, 2017.
Note 6. Derivative instruments and hedging activities
Woodward has exposures related to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices. From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges. Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates. Woodward does not enter into or issue derivatives for trading or speculative purposes.
By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument. When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering into transactions with only counterparties that are believed to be creditworthy. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates. Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Woodward did not enter into any derivatives or hedging transactions during
the three or six-months ended March 31, 2018 or 2017
.
The remaini
ng unrecognized gains
in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated other comprehensive (losses) earnings (“accumulated OCI”), were net gains of
$182
as of March 31, 2018 and
$218
as of September 30, 2017.
The following table discloses the impact of derivative instruments in cash flow hedging relationships on Woodward’s
Condensed
Consolidated Statements of Earnings, recognized in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amount of income recognized
in earnings on derivative
|
|
$
|
(18)
|
|
$
|
(18)
|
|
$
|
(36)
|
|
$
|
(36)
|
Amount of (gain) loss recognized
in accumulated OCI on derivative
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Amount of gain reclassified
from accumulated OCI into earnings
|
|
|
(18)
|
|
|
(18)
|
|
|
(36)
|
|
|
(36)
|
Based on the carrying value of the realized but unrecognized gains on terminated derivative instruments designated as cash flow hedges as of
March 31, 2018
, Woodward expects to reclassify
$72
of net unrecognized gains on terminated derivative instruments from accumulated other comprehensive (losses) earnings to earnings during the next
twelve
months.
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.
On the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings
are net foreign exchange losses
of
$1,268
for the three-months an
d $2,011
for the six-months end
ed March 31, 2018, compared to
net
foreign exchange loss
es
of
$664
for the three-months and net
foreign exchange gain
s
of
$2,150
for the six-months ended March 31, 2017.
In July 2016, Woodward designated a
n
intercompany loan of
160,000 renminbi
between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender.
Related to the intercompany loan, u
nrealized foreign exchange losses
of
$281
for the three-months and unrealized foreign exchange gains of
$735
for the six-months ended March 31, 2017 are included in foreign currency translation adjustments within total comprehensive (losses) earnings. T
he intercompany loan was repaid
i
n July 2017
.
Note 7. Supplemental statement of cash flows information
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
2017
|
Interest paid, net of amounts capitalized
|
|
$
|
14,032
|
|
$
|
13,999
|
Income taxes paid
|
|
|
28,592
|
|
|
9,160
|
Income tax refunds received
|
|
|
1,841
|
|
|
90
|
Non-cash activities:
|
|
|
|
|
|
|
Purchases of property, plant and equipment on account
|
|
|
9,051
|
|
|
7,621
|
Common shares issued from treasury to settle employee liabilities
|
|
|
-
|
|
|
1,767
|
Common shares issued from treasury to settle benefit obligations (Note 18)
|
|
|
14,741
|
|
|
14,014
|
Cashless exercise of stock options
|
|
|
-
|
|
|
1,473
|
Note 8. Accounts receivable
Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced and are generally not collateralized. In the normal course of business, not all accounts receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal to the amount that Woodward believes ultimately will not be collected. In establishing the amount of the allowance related to the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating results or financial position, and current economic conditions.
Accounts receivable losses are deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received. In addition, an allowance associated with anticipated future sales returns is also established and is included in the allowance for uncollectible amounts.
Consistent with common business practice in China, Woodward’s Chinese subsidiary accepts from Chinese customers, in settlement of certain customer accounts receivable, bankers’ acceptance notes issued by Chinese banks that are believed to be creditworthy. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of Woodward’s receipt of such draft. The issuing financial institution is the obligor, not Woodward’s customers. Upon Woodward’s acceptance of a banker’s acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance. Woodward only accepts bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be minimal.
The composition of Woodward’s accounts receivable at
March 31, 2018
and September 30, 201
7
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Accounts receivable from:
|
|
|
|
|
|
|
Customers
|
|
$
|
326,057
|
|
$
|
367,715
|
Other (Chinese financial institutions)
|
|
|
42,969
|
|
|
38,243
|
Allowance for uncollectible customer amounts
|
|
|
(3,675)
|
|
|
(3,776)
|
|
|
$
|
365,351
|
|
$
|
402,182
|
Note
9
. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Raw materials
|
|
$
|
59,171
|
|
$
|
59,034
|
Work in progress
|
|
|
111,775
|
|
|
103,790
|
Component parts (1)
|
|
|
283,489
|
|
|
262,755
|
Finished goods
|
|
|
54,536
|
|
|
47,926
|
|
|
$
|
508,971
|
|
$
|
473,505
|
|
(1)
|
|
Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.
|
N
ote
10
. Property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Land and land improvements
|
|
$
|
88,595
|
|
$
|
88,326
|
Buildings and building improvements
|
|
|
516,687
|
|
|
514,453
|
Leasehold improvements
|
|
|
18,303
|
|
|
16,142
|
Machinery and production equipment
|
|
|
575,695
|
|
|
543,641
|
Computer equipment and software
|
|
|
122,663
|
|
|
124,723
|
Office furniture and equipment
|
|
|
24,661
|
|
|
24,308
|
Other
|
|
|
19,397
|
|
|
19,393
|
Construction in progress
|
|
|
115,551
|
|
|
111,910
|
|
|
|
1,481,552
|
|
|
1,442,896
|
Less accumulated depreciation
|
|
|
(538,119)
|
|
|
(520,853)
|
Property, plant, and equipment, net
|
|
$
|
943,433
|
|
$
|
922,043
|
In the second quarter of fiscal year 2018, the Company announced its
decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Ca
mpus in Fort Collins, Colorado. I
ncluded in “Land and land improvements” and “Buildings and improv
ements” are assets held for use
of
$7,604
at March 31, 2018, which relate to the land, building and building improvements at the Duarte facility
. The assets held for use are included in the Company’s Aerospace segment
.
The Company had
no
assets held for use recorded as of September 30, 2017.
The Company has not yet determined
which of
the
remaining assets at the Duarte facility,
consisting
mainly of machinery and equipment, will be sold or relocated to the renovated Drake Campus and therefore, has continued to depreciate these assets until a determination is made. The carrying value of
the remaining assets
at the Duarte facility was approximately
$13,200
as of March 31, 2018.
The Company assessed whether the decision to relocate from its Duarte facility could indicate a potential impairment of the assets at the Duarte facility and concluded that the assets were not impaired as of March 31, 2018.
Included in “Office furniture and equipment” and “Other” is
$1,653
at each of
March 31, 2018
and September 30, 201
7
, of gross assets acquired on capital leases, and accumulated depreciation included
$948
at March 31, 2018 and
$739
at September 30, 2017 of amortization associated with the capital lease assets.
In fiscal year 2015, Woodward completed and placed into service a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and has occupied the new facility for its Aerospace segment. This campus is intended to support Woodward’s expected growth in its Aerospace segment as a result of Woodward being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.
Included in “Construction in progress” are costs of
$40,792
at March 31, 2018 and
$49,347
at September 30, 2017 associated with new equipment purchases for the
greater-Rockford campus and costs of
$29,644
at March 31, 2018 and
$15,584
at September 30, 2017 associated
with the renovation of the Drake Campus
.
For the
three and six-months
ended
March 31, 2018 and 2017
, Woodward had depreciation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Depreciation expense
|
|
$
|
15,754
|
|
$
|
13,663
|
|
$
|
30,581
|
|
$
|
26,118
|
For the
three and six-months
ended
March 31, 2018 and 2017
, Woodward capitalized interest that would have otherwise been included in interest expense of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Capitalized interest
|
|
$
|
633
|
|
$
|
481
|
|
$
|
1,234
|
|
$
|
953
|
Note 1
1
. Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Effects of Foreign Currency Translation
|
|
March 31, 2018
|
Aerospace
|
|
$
|
455,423
|
|
$
|
-
|
|
$
|
455,423
|
Industrial
|
|
|
101,122
|
|
|
1,436
|
|
|
102,558
|
Consolidated
|
|
$
|
556,545
|
|
$
|
1,436
|
|
$
|
557,981
|
Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, or at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events. There have been no such triggering events during any of the periods presented and Woodward’s fourth quarter of fiscal year 2017 impairment test resulted in no impairment.
Note 12
. Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Customer relationships and contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
281,683
|
|
$
|
(158,666)
|
|
$
|
123,017
|
|
$
|
282,225
|
|
$
|
(151,155)
|
|
$
|
131,070
|
Industrial
|
|
41,185
|
|
|
(35,064)
|
|
|
6,121
|
|
|
40,962
|
|
|
(34,407)
|
|
|
6,555
|
Total
|
$
|
322,868
|
|
$
|
(193,730)
|
|
$
|
129,138
|
|
$
|
323,187
|
|
$
|
(185,562)
|
|
$
|
137,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Industrial
|
|
19,723
|
|
|
(18,657)
|
|
|
1,066
|
|
|
19,422
|
|
|
(18,196)
|
|
|
1,226
|
Total
|
$
|
19,723
|
|
$
|
(18,657)
|
|
$
|
1,066
|
|
$
|
19,422
|
|
$
|
(18,196)
|
|
$
|
1,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Process technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
76,372
|
|
$
|
(51,881)
|
|
$
|
24,491
|
|
$
|
76,605
|
|
$
|
(49,124)
|
|
$
|
27,481
|
Industrial
|
|
23,062
|
|
|
(18,635)
|
|
|
4,427
|
|
|
22,950
|
|
|
(17,756)
|
|
|
5,194
|
Total
|
$
|
99,434
|
|
$
|
(70,516)
|
|
$
|
28,918
|
|
$
|
99,555
|
|
$
|
(66,880)
|
|
$
|
32,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Industrial
|
|
1,478
|
|
|
(1,152)
|
|
|
326
|
|
|
1,312
|
|
|
(956)
|
|
|
356
|
Total
|
$
|
1,478
|
|
$
|
(1,152)
|
|
$
|
326
|
|
$
|
1,312
|
|
$
|
(956)
|
|
$
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
358,055
|
|
$
|
(210,547)
|
|
$
|
147,508
|
|
$
|
358,830
|
|
$
|
(200,279)
|
|
$
|
158,551
|
Industrial
|
|
85,448
|
|
|
(73,508)
|
|
|
11,940
|
|
|
84,646
|
|
|
(71,315)
|
|
|
13,331
|
Consolidated Total
|
$
|
443,503
|
|
$
|
(284,055)
|
|
$
|
159,448
|
|
$
|
443,476
|
|
$
|
(271,594)
|
|
$
|
171,882
|
For the
three and six-months
ended
March 31, 2018 and 2017
, Woodward recorded amortization expense associated with intangibles of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amortization expense
|
$
|
6,258
|
|
$
|
6,431
|
|
$
|
12,501
|
|
$
|
12,889
|
Future amortization expense associated with intangibles is expected to be:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending September 30:
|
|
|
|
|
|
2018 (remaining)
|
|
|
|
$
|
12,513
|
2019
|
|
|
|
|
23,165
|
2020
|
|
|
|
|
20,407
|
2021
|
|
|
|
|
18,405
|
2022
|
|
|
|
|
16,253
|
Thereafter
|
|
|
|
|
68,705
|
|
|
|
|
$
|
159,448
|
Note 1
3
. 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 to up to
$1,200,000
, 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
0.85%
to
1.65%
. The Revolving Credit Agreement matures in
April 2020
. Under the Revolving Credit Agreement, there were
$
41,930
in principal amount of borrowings outstanding as of
March 31, 2018
, at an effective interest rate of
3.28
%
, and
$32,600
in principal amount of borrowings outstanding as of September 30, 2017, at an ef
fective interest rate of
2.29%
. As of
March 31, 2018 and
September 30, 2017, all of the borrowings under the Revolving Credit Agreement were classified as short-term based on Woodward’s intent and ability to pay this amount in the next twelve months.
Short-term borrowings
Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were
no
borrowings outstanding as of
March 31, 2018 and
September 30, 2017 on Woodward’s foreign lines of credit and foreign overdraft facilities.
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Series D notes – 6.39%, due October 2018; unsecured
|
|
$
|
100,000
|
|
$
|
100,000
|
Series F notes – 8.24%, due April 2019; unsecured
|
|
|
43,000
|
|
|
43,000
|
Series G notes – 3.42%, due November 2020; unsecured
|
|
|
50,000
|
|
|
50,000
|
Series H notes – 4.03%, due November 2023; unsecured
|
|
|
25,000
|
|
|
25,000
|
Series I notes – 4.18%, due November 2025; unsecured
|
|
|
25,000
|
|
|
25,000
|
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured
|
|
|
50,000
|
|
|
50,000
|
Series K notes – 4.03%, due November 2023; unsecured
|
|
|
50,000
|
|
|
50,000
|
Series L notes – 4.18%, due November 2025; unsecured
|
|
|
50,000
|
|
|
50,000
|
Series M notes – 1.12% due September 2026; unsecured
|
|
|
49,279
|
|
|
47,270
|
Series N notes – 1.31% due September 2028; unsecured
|
|
|
94,861
|
|
|
90,995
|
Series O notes – 1.57% due September 2031; unsecured
|
|
|
52,975
|
|
|
50,815
|
Unamortized debt issuance costs
|
|
|
(1,654)
|
|
|
(1,794)
|
Total long-term debt
|
|
|
588,461
|
|
|
580,286
|
Less: Current portion of long-term debt
|
|
|
-
|
|
|
-
|
Long-term debt, less current portion
|
|
$
|
588,461
|
|
$
|
580,286
|
The Notes
In
October 2008
, Woodward entered into a note purchase agreement relating to the S
eries D Notes
.
The Series D Notes mature and are payable in October 2018.
As of March 31, 2018, the entire amount of debt under the Series D Notes has been classified as long-term based on Woodward’s intent and ability to refinance this debt using cash proceeds from its existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months.
In
April 2009
, Woodward entered into a note purchase agreement relating to the S
eries F Notes
.
On
October 1, 2013
, Woodward entered into a note purchase agreement relating to the sale by Woodward of an aggregate principal amount of
$250,000
of its senior unsecured notes in a series of private placement transactions. Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on
October 1, 2013
. Woodward issued the Series J, K and L Notes (the “Second Closing Notes,” and together with the
Series D Notes, the Series F Notes
and the First Closing Notes, the “USD Notes”) on
November 15, 2013
.
On
September 23, 2016
, Woodward and the BV Subsidiary each entered into note purchase agreements relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of
€160,000
of senior unsecured notes in a series of private placement transactions. Woodward issued
€40,000
Series M Notes
. The BV Subsidiary issued (a)
€77,000
aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b)
€43,000
aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Se
ries N Notes, the “2016 Notes,” and, together with the USD Notes, collectively, the “Notes”).
Interest on the Series D Notes
, the First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and October 1 of each year until all principal is p
aid. Interest on the Series F Notes
is payable semi-annually on April 15 and October 15 of each year until all principal is paid. Interest on the 2016 Notes is payable semi-annually on March 23 and September 23 of each year, until all principal is paid. Interest on the Series J Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year until all principal is paid. As of
March 31, 2018
, the Series J Notes bore interest at an effective rate of
3.12
%
.
Debt Issuance Costs
Unamortized debt issuance costs associated with the Notes of
$1,654
as of
March 31, 2018
and
$1,794
as of September 30, 201
7
were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets. Unamortized debt issuance costs of
$1,822
associated with the Revolving Credit Agreement as of
March 31, 2018
and
$2,259
as of September 30, 201
7
were recorded as “Other assets” in the Condensed Consolidated Balance Sheets. Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.
Note 1
4
. Accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
2018
|
|
2017
|
Salaries and other member benefits
|
$
|
27,986
|
|
$
|
91,285
|
Warranties
|
|
13,283
|
|
|
13,597
|
Interest payable
|
|
9,697
|
|
|
9,626
|
Current portion of acquired performance obligations and unfavorable contracts
(1)
|
|
1,627
|
|
|
1,627
|
Accrued retirement benefits
|
|
2,379
|
|
|
2,413
|
Current portion of loss reserve on contractual lease commitments
|
|
1,245
|
|
|
1,343
|
Current portion of deferred income from JV formation (Note 4)
|
|
6,427
|
|
|
6,451
|
Deferred revenues
|
|
3,372
|
|
|
4,625
|
Restructuring charges
|
|
17,013
|
|
|
-
|
Taxes, other than income
|
|
17,890
|
|
|
14,401
|
Other
|
|
10,523
|
|
|
9,704
|
|
$
|
111,442
|
|
$
|
155,072
|
|
(1)
|
|
In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses. In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller. The current portion of both obligations is included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.
|
Warranties
Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements. Accruals are established for specifically identified warranty issues that are probable to result in future costs. Warranty costs are accrued on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. Changes in accrued product warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
Warranties, beginning of period
|
$
|
13,017
|
|
$
|
15,528
|
|
$
|
13,597
|
|
$
|
15,993
|
Expense, net of recoveries
|
|
2,334
|
|
|
2,139
|
|
|
304
|
|
|
4,062
|
Reductions for settling warranties
|
|
(2,209)
|
|
|
(2,750)
|
|
|
(832)
|
|
|
(4,782)
|
Foreign currency exchange rate changes
|
|
141
|
|
|
124
|
|
|
214
|
|
|
(232)
|
Warranties, end of period
|
$
|
13,283
|
|
$
|
15,041
|
|
$
|
13,283
|
|
$
|
15,041
|
Loss reserve on contractual lease commitments
In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a leased
facility in Skokie, Illinois and
recognize
d
a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.
Changes in the loss reserve were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
Loss reserve on contractual lease commitments, beginning of period
|
$
|
4,717
|
|
$
|
8,840
|
|
$
|
5,270
|
|
$
|
9,242
|
Payments, net of sublease income
|
|
(239)
|
|
|
(445)
|
|
|
(792)
|
|
|
(847)
|
Loss reserve on contractual lease commitments, end of period
|
$
|
4,478
|
|
$
|
8,395
|
|
$
|
4,478
|
|
$
|
8,395
|
Other liabilities included
$3,233
and
$3,927
of
accrued loss reserve on contractual lease commitments
as of March 31, 2018 and September 30, 2017, respectively,
which are not expected to be settled or paid within twelve months
of the respective balance sheet date.
Restructuring charges
In the second quarter of fiscal 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado. The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s Aerospace segment. Included in the
$17,013
of
restructuring
charges
for the three and six-months ended March 31, 2018,
is
$12,504
of workforce management costs associated with the transfer of the business from Duarte to Fort Collins.
The remaining restructuring charges recognized in the three and six-months ended March 31, 2018 is
$4,509
of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the Company’s Industrial segment, with current market conditions. All of the restructuring charges recorded in the second quarter and first half of fiscal 2018 were recorded as nonsegment expenses.
All of the restructuring charges recorded as of March 31, 2018 are expected to be paid within one year of the balance sheet date
.
In addition to
the restructuring
charges
recognized in the second quarter of fiscal year 2018
,
the Company
anticipates incurring
additional
costs
associated with the Duarte relocation such as expenses associated with
equipment
relocation
, employee training, accelerated depreciation, and increased labor e
xpenses over the coming year. The Company
anticipate
s
these
additional
expenses will vary by quarter, but are expected to be approximately
$12,000
in total.
Although the Company plans to sell
the Duarte
facility’s land, building and building improvements, it is currently still occupying the Duarte facility and has recorded these as assets held for use as of March 31, 2018 (see Note 10,
Property, plant and equipment
).
Note 15
. Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2018
|
|
2017
|
Net accrued retirement benefits, less amounts recognized within accrued liabilities
|
|
$
|
53,234
|
|
$
|
52,211
|
Noncurrent portion of deferred income from JV formation
(1)
|
|
|
239,275
|
|
|
236,896
|
Total unrecognized tax benefits
|
|
|
20,684
|
|
|
20,949
|
Noncurrent income taxes payable
(2)
|
|
|
23,920
|
|
|
-
|
Acquired unfavorable contracts
(3)
|
|
|
1,149
|
|
|
2,076
|
Deferred economic incentives
(4)
|
|
|
13,801
|
|
|
14,574
|
Loss reserve on contractual lease commitments
(5)
|
|
|
3,233
|
|
|
3,927
|
Other
|
|
|
10,850
|
|
|
14,165
|
|
|
$
|
366,146
|
|
$
|
344,798
|
|
(1)
|
|
See Note 4,
Joint venture
for more information on the deferred income from JV formation.
|
|
(2)
|
|
See Note 17,
Income taxes
for more information on the noncurrent income taxes payable.
|
|
(3)
|
|
In connection with the Duarte Acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses. The long-term portion of the acquired unfavorable contracts is included in Other liabilities.
|
|
(4)
|
|
Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.
|
|
(5)
|
|
See Note 14,
Accrued liabilities
for more information on the loss reserve on contractual lease commitments
.
|
Note 16
. Other (income) expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Equity interest in the earnings of the JV (Note 4)
|
|
$
|
(1,006)
|
|
$
|
(382)
|
|
$
|
(1,602)
|
|
$
|
(1,066)
|
Net (gain) loss on sales of assets
|
|
|
(396)
|
|
|
37
|
|
|
(454)
|
|
|
(3,662)
|
Rent income
|
|
|
(17)
|
|
|
(70)
|
|
|
(71)
|
|
|
(143)
|
Net gain on investments in deferred compensation program
|
|
|
(46)
|
|
|
(705)
|
|
|
(700)
|
|
|
(729)
|
Other
|
|
|
(148)
|
|
|
(195)
|
|
|
(358)
|
|
|
(303)
|
|
|
$
|
(1,613)
|
|
$
|
(1,315)
|
|
$
|
(3,185)
|
|
$
|
(5,903)
|
Note 17. Income taxes
On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of
the Tax Act.
The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.
U.S. GAAP requires that the interim period tax provision be determined as follows:
|
·
|
|
At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.” The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items.
|
The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.
|
·
|
|
The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs. Enactment of the Tax Act during December 2017 resulted in a provisional discrete net charge to Woodward’s income tax expense in the amount of $14,778, which was recorded in the first quarter of fiscal year 2018. The
re were
no provisional
adjustments recorded to
income tax expense in the three-months ended March 31, 2018.
|
The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
The permanent reduction to the U.S. federal corporate income tax rate from
35
% to
21
% is effective January 1, 2018 (the “Effective Date”). When a U.S. federal tax rate change occurs during a
taxpayer’s
fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of the Tax Act, Woodward has calculated a U.S. federal statutory corporate income tax rate of
24.5%
for the fiscal year ending September 30, 2018 and applied this rate in computing the income tax provision for the three and six-months ended March 31, 2018. The U.S. federal statutory corporate income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter. Woodward expects the U.S. federal statutory rate to be
21%
for fiscal years beginning after September 30, 2018.
On December 22, 2017, the SEC issued
SAB 118
. SAB 118 expresses views of the SEC regarding
ASC 740
in the reporting period that includes the enactment date of the Tax Act. Subsequent to the issuance of SAB 118, in March 2018, the FASB issued ASU 2018-05
,
which formally amended ASC 740 for the guidance previously provided by SAB 118. The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC Topic 805,
Business Combinations
, which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs. Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act. If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year. For the three and six-months ended March 31, 2018, Woodward has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.
Accordingly, Woodward’s income tax provision for the three and six-months ended March 31, 2018 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) discrete items
, if any,
resulting directly
from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.
There were
no
changes in the discrete impact from the enactment of the Tax Act for the three-months ended March 31, 2018.
|
|
|
|
|
|
|
|
|
|
Six-Months Ended
|
|
|
March 31, 2018
|
Transition tax (provisional)
|
|
$
|
26,000
|
Net impact on U.S. deferred tax assets and liabilities (provisional)
|
|
|
(16,260)
|
Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)
|
|
|
5,038
|
Net discrete impacts of the enactment of the Tax Act
|
|
$
|
14,778
|
Woodward determined that the Transition Tax is provisional because various components of the computation are unknown as of March 31, 2018, including the following significant items: the exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of September 30, 2018, the interpretation and identification of cash positions as of September 30, 2018, and incomplete computations of accumulated earnings and profits balances as of November 2, 2017
and December 31, 2017
. Consistent with provisions allowed under the Tax Act, the
$26,000
estimated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. As of March 31, 2018, the current portion of the estimated Transition Tax liability
in the amount
of
$2,080
has been included in “Income taxes receivable
, net
”
,
and
the noncurrent portion
in the amount
of
$23,920
has been included in “Other liabilities” in the Condensed Consolidated Balance Sheets.
Woodward also determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.
Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, Woodward is in the process of evaluating its current indefinite assertions. As a result of the Tax Act, Woodward now expects to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes
were
recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount.
Woodward continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Woodward, which are not effective until fiscal year 2019. Woodward has not recorded any impact associated with either GILTI or BE
AT in the tax rate as of the second
quarter of fiscal year 2018.
Within the calculation of Woodward’s annual effective tax rate Woodward has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, Woodward anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.
The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Earnings before income taxes
|
|
$
|
48,647
|
|
$
|
50,236
|
|
$
|
86,134
|
|
$
|
97,295
|
Income tax expense
|
|
|
10,158
|
|
|
12,131
|
|
|
29,385
|
|
|
12,642
|
Effective tax rate
|
|
|
20.9%
|
|
|
24.1%
|
|
|
34.1%
|
|
|
13.0%
|
The decrease in the year-over-year effective tax rate for the three-months ended March 31, 2018 is primarily attributable to the benefits of the current year effect of the U.S. federal corporate tax rate reduction
in connection with
the enactment of the Tax Act on the estimated annual effective tax rate
,
partially offset by
a
smaller favorable adjustment for the net excess income tax benefits from stock-based compensation, less foreign earnings taxed at lower tax rate
s
and fewer favorable resolutions of tax matters in the current quarter.
The increase in the effective tax rate for the six-months ended March 31, 2018 compared to the six-months ended March 31, 2017 is primarily attributable to the
$14,778
discrete net
unfavorable
impact
in the first quarter of fiscal year 2018
resulting from the enactment of the Tax Act partially offset by benefits of the current year effect of the U.S. federal corporate tax rate reduction
in connection with
the enactment of the Tax Act on the estimated ann
ual effective tax rate. In addition
, the effective tax rate for the six-months ended
March 31
, 201
7 included
the impact of the repatriation to the U.S. of certain net
foreign profits and losses.
In the first quarter of fiscal year 2017, the
U.S. foreign tax credits available as a result of the repatriation of the fo
reign net earnings
were greater than the
U.S. taxes payable on these
foreign
net
earnings.
Gross unrecognized tax benefits were
$19,574
as of March 31, 2018, and
$20,132
as of September 30, 2017. Included in the balance of unrecognized tax benefits were
$9,176
as of March 31, 2018 and
$9,677
as of September 30, 2017 of tax benefits that, if recognized, would affect the effective tax rate. At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as
$8,901
in the next twelve months due to the completion of reviews by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense. Woodward had accrued gross interest and penalties of
$1,372
as of March 31, 2018 and
$1,123
as of September 30, 2017.
Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitations may result in changes to tax expense. Fiscal years remaining open to examination in significant foreign jurisdictions include 2008 and thereafter. Woodward’s fiscal years remaining open to examination in the United States include fiscal years 2014 and thereafter. Woodward is currently under examination by the Internal Revenue Service for fiscal years 2016, 2015 and 2014. Woodward has concluded U.S. federal income tax examinations through fiscal year 2012. Woodward is generally subject to U.S. state income tax examinations for fiscal years 2012 and the periods thereafter.
Note 18. 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 foreign employees are also eligible to participate in similar foreign 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
202
shares of common stock for a value of
$14,741
in the second quarter of fiscal year 2018, compared to a
total
of
199
shares of com
mon stock for a value of
$14,014
in the second quarter of fiscal year 2017
.
The amount of expense associated with defined contribution plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Company costs
|
|
$
|
8,716
|
|
$
|
8,502
|
|
$
|
16,595
|
|
$
|
15,751
|
Defined benefit plans
Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, and Japan. Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits. Postretirement medical benefits are provided to certain current and retired employees and their covered dependents and beneficiaries in the United States and the United Kingdom. Life
insurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees. A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.
U.S. GAAP requires that, for obligations outs
tanding as of September 30, 2017
, 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.
During the third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window, which closed in the fourth quarter of fiscal year 2016 and was fully settled during the first quarter of fiscal year 2017, for certain former U.S. employees
and/or their dependents eligible to receive postretirement defined benefit pension payments for past employment services to the Company. Eligible pension plan participants were provided the opportunity to elect to receive a one-time lump-sum payment or an immediate annuity in lieu of future pension benefit payments. Pension benefit payments paid from available pension plan assets under the lump-sum buy-out options were
$670
during the first quarter and first half of fiscal year 2017. Woodward made
no
further pension benefit payments under the lump-sum buy-out options.
The components of the net periodic retirement pension costs recognized are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
|
United States
|
|
Other Countries
|
|
Total
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
411
|
|
$
|
418
|
|
$
|
165
|
|
$
|
187
|
|
$
|
576
|
|
$
|
605
|
Interest cost
|
|
|
1,501
|
|
|
1,439
|
|
|
344
|
|
|
296
|
|
|
1,845
|
|
|
1,735
|
Expected return on plan assets
|
|
|
(2,903)
|
|
|
(2,633)
|
|
|
(717)
|
|
|
(638)
|
|
|
(3,620)
|
|
|
(3,271)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
149
|
|
|
463
|
|
|
75
|
|
|
126
|
|
|
224
|
|
|
589
|
Prior service cost
|
|
|
178
|
|
|
96
|
|
|
-
|
|
|
-
|
|
|
178
|
|
|
96
|
Net periodic retirement pension benefit
|
|
$
|
(664)
|
|
$
|
(217)
|
|
$
|
(133)
|
|
$
|
(29)
|
|
$
|
(797)
|
|
$
|
(246)
|
Contributions paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
119
|
|
$
|
101
|
|
$
|
119
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended March 31,
|
|
|
United States
|
|
Other Countries
|
|
Total
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
822
|
|
$
|
837
|
|
$
|
323
|
|
$
|
379
|
|
$
|
1,145
|
|
$
|
1,216
|
Interest cost
|
|
|
3,002
|
|
|
2,878
|
|
|
673
|
|
|
592
|
|
|
3,675
|
|
|
3,470
|
Expected return on plan assets
|
|
|
(5,807)
|
|
|
(5,265)
|
|
|
(1,403)
|
|
|
(1,279)
|
|
|
(7,210)
|
|
|
(6,544)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
299
|
|
|
927
|
|
|
147
|
|
|
253
|
|
|
446
|
|
|
1,180
|
Prior service cost
|
|
|
355
|
|
|
192
|
|
|
-
|
|
|
-
|
|
|
355
|
|
|
192
|
Net periodic retirement pension benefit
|
|
$
|
(1,329)
|
|
$
|
(431)
|
|
$
|
(260)
|
|
$
|
(55)
|
|
$
|
(1,589)
|
|
$
|
(486)
|
Contributions paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
431
|
|
$
|
466
|
|
$
|
431
|
|
$
|
466
|
The components of the net periodic other postretirement benefit costs recognized are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
2
|
|
$
|
3
|
|
$
|
4
|
|
$
|
7
|
Interest cost
|
|
|
291
|
|
|
311
|
|
|
583
|
|
|
622
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
24
|
|
|
51
|
|
|
48
|
|
|
101
|
Prior service benefit
|
|
|
(39)
|
|
|
(39)
|
|
|
(79)
|
|
|
(79)
|
Curtailment gain
|
|
|
-
|
|
|
-
|
|
|
(330)
|
|
|
-
|
Net periodic other postretirement cost
|
|
$
|
278
|
|
$
|
326
|
|
$
|
226
|
|
$
|
651
|
Contributions paid
|
|
$
|
1,009
|
|
$
|
804
|
|
$
|
1,235
|
|
$
|
1,419
|
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 ac
tual funding in fiscal year 2018
may differ from the current estimate. Woodward estimates its remaining cash c
ontributions in fiscal year 2018
will be as follows:
|
|
|
|
|
|
|
|
Retirement pension benefits:
|
|
|
|
United States
|
|
$
|
-
|
United Kingdom
|
|
|
219
|
Japan
|
|
|
-
|
Other postretirement benefits
|
|
|
2,636
|
Multiemployer defined benefit plans
Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan. The amounts of contributions associated with the multiemployer plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Company contributions
|
|
$
|
87
|
|
$
|
79
|
|
$
|
167
|
|
$
|
147
|
Note 19. Stockholders’ equity
Stock repurchase program
In the first quarter o
f fiscal year 2017, Woodward’s board of d
irectors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to
$500,000
of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a
three
-year period that will end in
November 2019 (the “2017
Authorization”). I
n the
first half of
fiscal year 2017, Woodward
purchased, under the 2017 Authorization,
886
shares
of its common stock for
$61,229
, of which
350
shares
were purchased
pursuant to a 10b5-1 plan and
536
shares were purchased pursuant to a 10b-18 plan. Woodward repurchased
no common
stock under a stock repurchase program in the first half of fiscal year 2018.
Stock-based compensation
Provisions governing outstanding stock option awards are included in the
2017 Omnibus Incentive Plan (the “2017 Plan”), the
2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”). The 2002 Plan provided that no further grants would be made after December 31, 2006.
No
further grants will be made under the 2006 Plan
, which expired in fiscal year 2016
.
Woodward has reserved a total of
2,000
shares of Woodward’s common stock for issuance under the 2017
Plan
, which was approved by Woodward’s stockholders in January 2017 and is a successor plan to the 2006 Plan.
Stock options
To date
,
equity awards under the 2017 Plan have consisted of grants of stock opti
ons to Woodward’s employees and
directors. Woodward believes that these stock options align the
interests of its employees and
directors with the interests of its stockholders. Stock option awards are granted with an exercise price equal to the market price of
Woodward’s
stock at the date the grants are awarded, a
ten
-year term, and generally 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average exercise price per share
|
$
|
72.01
|
|
|
$
|
62.64
|
|
|
$
|
78.91
|
|
|
$
|
62.64
|
|
Weighted-average grant date market value of Woodward stock
|
$
|
72.01
|
|
|
$
|
69.45
|
|
|
$
|
78.91
|
|
|
$
|
69.45
|
|
Expected term (years)
|
|
6.4
|
|
|
|
6.0
|
-
|
8.7
|
|
|
|
6.4
|
-
|
8.7
|
|
|
|
6.0
|
-
|
8.7
|
|
Estimated volatility
|
|
29.1%
|
|
|
|
31.5%
|
-
|
33.7%
|
|
|
|
29.1%
|
-
|
32.7%
|
|
|
|
31.5%
|
-
|
33.7%
|
|
Estimated dividend yield
|
|
0.8%
|
|
|
|
0.7%
|
|
|
|
0.6%
|
-
|
0.8%
|
|
|
|
0.7%
|
|
Risk-free interest rate
|
|
2.7%
|
-
|
2.8%
|
|
|
|
2.2%
|
-
|
2.5%
|
|
|
|
2.1%
|
-
|
2.8%
|
|
|
|
2.2%
|
-
|
2.5%
|
|
The following is a summary of the activity for stock
option awards during the three and six-
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31, 2018
|
|
March 31, 2018
|
|
|
Number of options
|
|
Weighted-Average Exercise Price per Share
|
|
Number of options
|
|
Weighted-Average Exercise Price per Share
|
Options, beginning balance
|
|
|
5,937
|
|
$
|
44.48
|
|
|
5,236
|
|
$
|
39.58
|
Options granted
|
|
|
6
|
|
|
72.01
|
|
|
750
|
|
|
78.91
|
Options exercised
|
|
|
(63)
|
|
|
34.54
|
|
|
(97)
|
|
|
36.84
|
Options forfeited
|
|
|
-
|
|
|
-
|
|
|
(9)
|
|
|
55.61
|
Options, ending balance
|
|
|
5,880
|
|
|
44.62
|
|
|
5,880
|
|
|
44.62
|
Changes in non-vested stock options during the three
and six
-months ended
March 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31, 2018
|
|
March 31, 2018
|
|
|
Number of options
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
Number of options
|
|
Weighted-Average Grant Date Fair Value Per Share
|
Options outstanding, beginning balance
|
|
|
2,020
|
|
$
|
21.63
|
|
|
2,072
|
|
$
|
18.61
|
Options granted
|
|
|
6
|
|
|
22.82
|
|
|
750
|
|
|
25.66
|
Options vested
|
|
|
(4)
|
|
|
23.10
|
|
|
(791)
|
|
|
17.57
|
Options forfeited
|
|
|
-
|
|
|
-
|
|
|
(9)
|
|
|
19.82
|
Options outstanding, ending balance
|
|
|
2,022
|
|
|
21.63
|
|
|
2,022
|
|
|
21.63
|
Information about stock options that have vested, or are expected to vest, and are exercisable at
March 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted- Average Exercise Price
|
|
Weighted- Average Remaining Life in Years
|
|
Aggregate Intrinsic Value
|
Options outstanding
|
|
|
5,880
|
|
$
|
44.62
|
|
|
5.9
|
|
$
|
155,908
|
Options vested and exercisable
|
|
|
3,858
|
|
|
35.68
|
|
|
4.6
|
|
|
132,401
|
Options vested and expected to vest
|
|
|
5,782
|
|
|
44.25
|
|
|
5.9
|
|
|
155,118
|
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.
Upon approving the 2017 Plan, Woodward’s board of d
irectors delegated authority to administer the 2017 Plan to the compensation committe
e of the board
, including, but not limited to, the power to determine the recipients of awards and the terms of those awards.
The
compensation c
ommittee approved issuance of options
in the first quarter of fiscal year 2017
under the 2017 Plan, with an award date of
October 3, 2016
conditional
upon
and subject to approval of the 2017 Plan by the stockholders. The stock options conditionally awarded under the
2017
Plan were not granted or outstanding for accounting purposes prior to stockholder approval of the 2017 Plan, and as such
no
stock-based compensation expense
related to such awards
was recognized on these stock options
,
during the
three-months ended December 31, 2016, but rather the expense was recognized in the three-months ended March 31, 2017
.
Options granted in the three-months ended December 31, 2017 were not conditionally granted and, therefore, stock-based compensation expense related to those awards was recognized during the three-months ended December 31, 2017. Total stock-based compensation expense was
$2,011
for the three-months and
$14,434
for the six-months ended March 31, 2018, and
$12,502
for the three-months and
$13,763
for the six-months ended March 31, 2017.
At
March 31, 2018
, there was approximately
$12,695
of total unrecognized compensation expense related to non-vested stock-based com
pensation arrangements.
The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be
0%
for members of Woodward’s board of directors and
9%
for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately
2.2
years.
Note 20. 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 revie
ws the probable outcome of related
claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.
While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.
In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to
any such officer
if such officer’s employment is terminated within two years following the change of control
.
Note 21. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Segment external net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
386,343
|
|
$
|
320,526
|
|
$
|
692,248
|
|
$
|
587,206
|
Industrial
|
|
|
161,906
|
|
|
179,855
|
|
|
326,149
|
|
|
356,069
|
Total consolidated net sales
|
|
$
|
548,249
|
|
$
|
500,381
|
|
$
|
1,018,397
|
|
$
|
943,275
|
Segment earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
72,969
|
|
$
|
58,227
|
|
$
|
116,522
|
|
$
|
105,104
|
Industrial
|
|
|
10,237
|
|
|
17,089
|
|
|
29,581
|
|
|
35,087
|
Nonsegment expenses
(1)
|
|
|
(28,343)
|
|
|
(18,764)
|
|
|
(47,366)
|
|
|
(30,145)
|
Interest expense, net
|
|
|
(6,216)
|
|
|
(6,316)
|
|
|
(12,603)
|
|
|
(12,751)
|
Consolidated earnings before income taxes
|
|
$
|
48,647
|
|
$
|
50,236
|
|
$
|
86,134
|
|
$
|
97,295
|
|
(1)
|
|
Nonsegment expenses for the three and six-months ended March 31, 2018 includes restructuring charges of
$17,013
. See Note 14,
Accrued liabilities
for further details.
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
September 30, 2017
|
Segment assets:
|
|
|
|
|
|
|
Aerospace
|
|
$
|
1,723,472
|
|
$
|
1,722,789
|
Industrial
|
|
|
686,329
|
|
|
695,264
|
Unallocated corporate property, plant and equipment, net
|
|
|
121,216
|
|
|
104,755
|
Other unallocated assets
|
|
|
254,734
|
|
|
234,301
|
Consolidated total assets
|
|
$
|
2,785,751
|
|
$
|
2,757,109
|
Note 2
2
.
Subsequent events
On
April 9, 2018
, the Company
announced that it had signed an agreement to acquire
L’Orange GmbH
and its related operations located in Germany, the United States and China (“L’Orange”), for total consideration (including cash payments and the assumption of debt and other specified financial obligations) of
€700,000
(the “L’Orange Acquisition”). L’Orange is part of Rolls-Royce, specifically its Rolls-Royce Power Systems business.
The Company expects to finance the L’Orange
Acquisition
with borrowings from its revolving credit
facility, or debt proceeds from a private placement, or a combination of both. Transaction costs of
$1,136
for the three and
six-months ending March 31, 2018
are included in selling, general and
administrative expenses.
L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.
L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application vehicles,
locomotives,
oil and gas processing, and power generation.
L’Orange serves some of the world’s best known specialist diesel engine manufacturers, including Rol
ls-Royce Power Systems’
subsidiaries, MTU Friedrichshafen
(“MTU”)
and Bergen Engines
(“Bergen”)
, and other low to high speed engine builders
. L’Orange, which will be renamed Woodward L’Orange, will be integrated into the Company’s Industrial segment.
L’Orange will remain an important partner and supplier for MTU and Bergen in the future through long-term supply agreements, with an initial term of 15 years
.
Pending regulatory approval, the L’Orange Acquisition is expected to close in the third quarter of fiscal year 2018. Accordingly, the
initial accounti
ng for the business combination, including
pro forma revenues and earnings of the combined entity
,
is expected to be included in
the Company
’s Form 10-Q for the third
fiscal
quarter ending June 30, 2018
.
On
April 18, 2018
,
the Company entered into an at-the-money-
forward
option (the “Forward Option”) at a cost of
$5,543
whereby, on
May 30, 2018
, the Company
has the
ability to exercise its
op
tion to purchase
€490,000
on
June 1, 2018
using U.S. dollars at a fixed exchange
rate of
1.2432
. If the spot rate is below 1.2432 on May 30, 2018, the Company will choose not to exercise the option and any loss on the Forward Option will be limited to $5,543, which is the
cost of the instrument
. If the spot rate is above
1.2432 on May 30, 2018
, the Company will choose to exercise the option and the
gain on the
Forward Option
will be
offset by the cost of the instrument and
will be
reflected in
the Company’s
Condensed Consolidated
Statement of E
arnings in
the third fiscal quarter ending
June 30, 2018
. The Company is
not committed to purchase
Euros
if the spot rate is below 1.2432
on May 30, 2018
.
The Company entered into the Forward Option to manage its exposure to fluctuations in the Euro prior to the
anticipated
clos
e of the L’Orange Acquisition. The Company did not enter into the Forward Option for trading or speculative purposes.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Amounts in thousands, except per share amounts)
Forward Looking Statements
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 anticipated
closing of, and plans and expectations related to, our recently announced agreement to purchase L’Orange GmbH and its related operations in Germany, the United States and China (“L’Orange”
);
|
|
·
|
|
the effects of the pending L’Orange acquisition on our future business and financial results;
|
|
·
|
|
future sales, earnings, cash flow, uses of cash, and other measures of financial performance;
|
|
·
|
|
trends in our business and the markets in which we operate, including expectations in those markets in future periods;
|
|
·
|
|
our expected expenses in future periods and trends in such expenses over time;
|
|
·
|
|
descriptions of our plans and expectations for future operations;
|
|
·
|
|
plans and expectations relating to the performance of our joint venture with General Electric Company;
|
|
·
|
|
investments in new campuses, business sites and related business developments;
|
|
·
|
|
the effect of economic trends or growth;
|
|
·
|
|
the expected levels of activity in particular industries or markets and the effects of changes in those levels;
|
|
·
|
|
the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;
|
|
·
|
|
the research, development, production, and support of new products and services;
|
|
·
|
|
new business opportunities;
|
|
·
|
|
restructuring and alignment costs and savings;
|
|
·
|
|
our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;
|
|
·
|
|
our liquidity, including our ability to meet capital spending requirements and operations;
|
|
·
|
|
future repurchases of common stock;
|
|
·
|
|
future levels of indebtedness and capital spending;
|
|
·
|
|
the stability of financial institutions, in
cluding those lending to us;
|
|
·
|
|
pension and other postretirement plan assum
ptions and future contributions; and
|
|
·
|
|
our tax rate and other effects of the changes to U.S. federal tax law.
|
Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:
|
·
|
|
a decline in business with, or financial distress of, our significant customers;
|
|
·
|
|
global economic uncertainty and instability in the financial markets;
|
|
·
|
|
our ability to manage product liability claims, product recalls or other liabilities associated with the products and services that we provide;
|
|
·
|
|
our ability to obtain financing, on acceptable terms or at all, to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to business pressures;
|
|
·
|
|
the long sales cycle, customer evaluation process, and implementation period of some of our products and services;
|
|
·
|
|
our ability to implement and realize the intended effects of any restructuring and alignment efforts;
|
|
·
|
|
our ability to successfully manage competitive factors, including prices, promotional incentives, competitor product development, industry consolidation, and commodity and other input cost increases;
|
|
·
|
|
our ability to manage our expenses and product mix while responding to sales increases or decreases;
|
|
·
|
|
the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all;
|
|
·
|
|
our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities;
|
|
·
|
|
consolidation in the aerospace market and our participation in a strategic joint venture with General Electric Company may make it more difficult to secure long-term sales in certain aerospace markets;
|
|
·
|
|
our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements;
|
|
·
|
|
our ability to manage additional tax expense and exposures;
|
|
·
|
|
risks related to our U.S. Government contracting activities, including
liabilities resulting from legal and regulatory proceedings, inquiries, or investigations related to such activities
;
|
|
·
|
|
the potential of a significant reduction in defense sales due to decreases in the amount of U.S. Federal defense spending or other specific budget cuts impacting defense programs in which we participate;
|
|
·
|
|
changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;
|
|
·
|
|
future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets;
|
|
·
|
|
future results of our subsidiaries;
|
|
·
|
|
environmental liabilities related to manufacturing activities and/or real estate acquisitions;
|
|
·
|
|
our continued access to a stable workforce and favorable labor relations with our employees;
|
|
·
|
|
physical and other risks related to our operations and suppliers, including natural disasters, which could disrupt production;
|
|
·
|
|
our ability to succe
ssfully manage regulatory
and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act,
U.S.
and other
tax law
s
,
international trade regulations, and product liability, patent, and intellectual property matters);
|
|
·
|
|
chan
ges in accounting standards, which
could adversely impact our profitability or financial position;
|
|
·
|
|
risks related to our common stock, including changes in prices and trading volumes;
|
|
·
|
|
risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, tariffs, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate;
|
|
·
|
|
risks associated with global political and economic uncertainty in the European Union and elsewhere;
|
|
·
|
|
fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets;
|
|
·
|
|
industry risks, including changes in commodity prices for oil, natural gas, and other minerals, unforeseen events that may reduce commercial aviation, and changing emissions standards;
|
|
·
|
|
possible information
systems interruptions or intrusions
, which may adversely affect our operations
; and
|
|
·
|
|
certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company.
|
These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed
elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”),
under
the caption “Risk Factors” in Part I, Item 1A in
our most recent
Annual Report on Form 10-K
filed
with the Securities and Exchange Commission (“SEC”) (our “Form 10-K”), as updated from time to time in our subsequent SEC filings
, and other documents we have
filed
or will file with the SEC
. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law.
Unless we have indicated otherwise or the context otherwise requires, references in this
Form 10-Q
to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries.
Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-
Q
are in thousands, except per share amounts.
This discussion should be read together with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K and the Condensed Consolidated Financial Statements and Notes included therein and in this report.
OVERV
IEW
On April 9
, 2018,
we announced that we had signed an agreement to acquire L’Orange
GmbH and its related operations located in Germany, the United States and China (“L’Orange”),
for total consideration (including cash payments and the assumption of debt and other specified financial obligations)
of
€
700,000
(the “L’Orange Acquisition”)
. L’Orange is part of Rolls-Royce, specifically its Rolls-Royce Power Systems business.
L’Orange is a supplier
of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.
L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application vehicles, locomotives, oil and gas processing, and power generation.
L’Orange serves some of the world’s best known specialist diesel engine manufacturers, including Rol
ls-Royce Power Systems’
subsidiar
ies, MTU Friedrichshafen and Bergen Engines
, and other low to high speed engine builders.
L’Orange, which will be renamed Woodward L’Orange, will
be integrated into our
Industrial segment.
The L’Orange Acq
uisition is expected to close in the
third quarter of fiscal
year
2018.
Operational Highlights
Quarter to Date Highlights
Net sales for the second quarter of fiscal year 2018 were $548,249, an increase of 9.6% from $500,381 for the prior year’s second quarter.
F
oreign currency exchange rates had a favorable impact
on net sales
of
$11,032
for the second quarter of fisca
l year 2018
.
Aerospace segment sales for the second quarter of fiscal year 2018 were up 20.5% to $386,343, compared to $320,526 for the second quarter of the prior fiscal year. Industrial segment sales for the second quarter of fiscal year 2018 were down 10.0% to $161,906, compared to $179,855 for the second quarter of the prior fiscal year.
Net earnings for the second quarter of fiscal year 2018 were $38,489, or $0.60 per diluted share, compared to $38,105, or $0.60 per diluted share, for the second quarter of fiscal year 2017. Net earnings for the second quarter of fiscal year 2018 included $17,013 of restructuring charges
(
$12,667 net of tax
)
, or $0.20 per diluted
share, related primarily to our
previousl
y announced decision to move our
operations located in Duarte, California to the recently renovated Drake Campus in Fort Collins, Colorado.
Adjusted net earnings, which excludes (i) restructuring charges, (ii) move costs associated with the relocation of our
Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado
(“Duarte move related costs”), and (iii) merger and acquisition transaction and integration costs, were $52,357, or adjusted earnings per share of $0.82 per diluted share. (Adjusted net earnings and adjusted earnings per share are
non-U.S. GAAP financial measure
s. A reconciliation of adjusted net earnings and adjusted earnings per share
to the closest U.S. GAAP financial measure
, net earnings and earnings per share, respectively,
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.)
The effective tax rate in the second quarter of fiscal year 2018 was 20.9% compared to 24.1% for the second quart
er of the prior fiscal year
primarily due
to
the benefits of the current year effect of the U.S. federal corporate tax rate reduction resu
lting from the enactment
of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”)
on the estimated annual effective tax rate
.
Earnings before interest and taxes (“EBIT”) for the second quarter of fiscal year 2018 were $54,863, a decrease of 3.0% from $56,552 in the second quarter of fiscal year 2017. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the second quarter of fiscal year 2018 were $76,875, flat compared to $76,646 for the second quarter of fiscal year 2017.
Adjusted EBIT and adjusted EBITDA for the second quarter of fiscal year 2018
were $73,411 and $95,423, respectively
. Adjusted EBIT and adjusted EBITDA exclude (i) restructuring charges, (ii) Duarte move related costs, and (iii) merger and acquisition transaction and integration costs.
(
EBIT, adjusted EBIT, EBITDA and adjusted EBITDA are non-U.S. GAAP financial measures.
A reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measure can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)
Aerospace segment earnings as a percent of segment net sales increased to 18.9% in the second quarter of fiscal year 2018 from 18.2% in the second quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales decreased to 6.3% in the second quarter of fiscal year 2018 from 9.5% in the second quarter of the prior fiscal year.
Year to Date Highlights
Net sales for the first half of fiscal year 2018 were $1,018,397, an increase of 8.0% from $943,275 for the first half of the prior fiscal year.
F
oreign currency exchange rates had a favorable impact
on net sales
of $
16,624
for the first half of fisca
l year 2018
.
Aerospace segment sales for the first half of fiscal year 2018 were up 17.9% to $692,248, compared to $587,206 for the first half of the prior fiscal year. Industrial segment sales for the first half of fiscal year 2018 were down 8.4% to $326,149 compared to $356,069 for the first half of the prior fiscal year.
Net earnings for the first half
of fiscal year 2018 were $56,749
, or $0.89 per diluted share, compared to $84,653, or $1.33 per diluted share, for the first half of fiscal year 2017. Net earnings for the first half of fiscal year 2018 included $17,013 of restructuring charges
(
$12,667 net of tax
)
, or $0.20 per diluted share, discussed above.
Adjust
ed net earnings, which excludes (i) restructuring charges, (ii) Duarte move related costs, (iii) merger and acquisition transaction and integration costs, and (iv) the transition impacts of the change in U.S. federal tax legislation in December 2017, were $85,395
, or adju
sted earnings per share of $1.34
per diluted share.
The effective tax rate in the first half of fiscal year 2018 was 34.1%, compared to 13.0% for the first half of the prior fiscal year primarily due to discrete charges related to recent changes in the U.S. federal tax law.
EBIT for the first half of fiscal year 2018 was $98,737, down 10.3% from $110,046 in the same period of fiscal year 2017. EBITDA for the first half
of fiscal year 2018 was $141,819, down 4.9
% from $149,053 for the same period of fiscal year 2017.
Adjusted EBIT and adjusted EBIT
D
A for the
first half
of fiscal year 2018,
which exclude (i) restructuring charges, (ii) Duarte move related costs, and (iii) merger and acquisition transaction and integration costs, were $117,285 and $160,367
, respectively.
Aerospace segment earnings as a percent of segment net sales decreased to 16.8% in the first half of fiscal year 2018 from 17.9% in the
first half of the
prior fiscal year. Industrial segment earnings as a percent of segment net sales decreased to 9.1% in the first half of fiscal year 2017 from 9.9% in the
first half of the
prior fiscal year.
Liquidity Highlights
Net cash provided by
operating activities for the
first half
of fiscal year 201
8
was
$
56,718
, compared $
129,994
for the
first half
of fiscal year 201
7
. The
decrease
in net cash
provided by
operating activities
in the first half of fiscal year 2018 compared to the first half of the prior year
is primarily attributable
to higher working capital used in the current fiscal year primarily due to the timing of payments for accounts payable and accrued liabilities
, and increased accounts receivable
.
For the
first half
of fiscal year 201
8
, free cash flow, which we define as net cash flows
from
operating activities less payments for property, plant and equipment, was
an outflow of $1,760
, compared to
an inflow of
$
86,941
for the
first half of fiscal year 2017
.
H
igher payments for plant, property and equipment in the first half of
fiscal year 2018 were largely the result of renovations at our Drake Campus in Fort Collins, Colorado
and equipment purchases for our
second campus in the greater-Rockford, Illinois area
. (A reconciliation of this non-U.S. GAAP financial measure to the closest U.S. GAAP financial measure can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)
At
March 31, 2018
, we held $
100,147
in cash and cash equivalents, and had total outstanding debt of $
630,391
with
additional borrowing availability of $
947,099
, net of outstanding letters of credit, under our revolving credit agreement. At March 31, 2018, we had additional borrowing capacity of $
7,674
under various foreign lines of credit and foreign overdraft facilities
.
RESULTS OF OP
ERATIONS
The fol
lowing table sets forth
consolidated statements of earnings data as a percentage of net sales for each period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
|
|
Six-Months Ended
|
|
|
March 31, 2018
|
|
% of Net Sales
|
|
March 31, 2017
|
|
% of Net Sales
|
|
March 31, 2018
|
|
% of Net Sales
|
|
March 31, 2017
|
|
% of Net Sales
|
Net sales
|
|
$
|
548,249
|
|
100
|
%
|
|
$
|
500,381
|
|
100
|
%
|
|
$
|
1,018,397
|
|
100
|
%
|
|
$
|
943,275
|
|
100
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
401,331
|
|
73.2
|
|
|
|
367,099
|
|
73.4
|
|
|
|
748,115
|
|
73.5
|
|
|
|
696,247
|
|
73.8
|
|
Selling, general, and administrative expenses
|
|
|
39,486
|
|
7.2
|
|
|
|
47,660
|
|
9.5
|
|
|
|
85,762
|
|
8.4
|
|
|
|
85,960
|
|
9.1
|
|
Research and development costs
|
|
|
37,169
|
|
6.8
|
|
|
|
30,385
|
|
6.1
|
|
|
|
71,955
|
|
7.1
|
|
|
|
56,925
|
|
6.0
|
|
Restructuring charges
|
|
|
17,013
|
|
3.1
|
|
|
|
-
|
|
-
|
|
|
|
17,013
|
|
1.7
|
|
|
|
-
|
|
-
|
|
Interest expense
|
|
|
6,687
|
|
1.2
|
|
|
|
6,790
|
|
1.4
|
|
|
|
13,437
|
|
1.3
|
|
|
|
13,630
|
|
1.4
|
|
Interest income
|
|
|
(471)
|
|
(0.1)
|
|
|
|
(474)
|
|
(0.1)
|
|
|
|
(834)
|
|
(0.1)
|
|
|
|
(879)
|
|
(0.1)
|
|
Other (income) expense, net
|
|
|
(1,613)
|
|
(0.3)
|
|
|
|
(1,315)
|
|
(0.3)
|
|
|
|
(3,185)
|
|
(0.3)
|
|
|
|
(5,903)
|
|
(0.6)
|
|
Total costs and expenses
|
|
|
499,602
|
|
91.1
|
|
|
|
450,145
|
|
90.0
|
|
|
|
932,263
|
|
91.5
|
|
|
|
845,980
|
|
89.7
|
|
Earnings before income taxes
|
|
|
48,647
|
|
8.9
|
|
|
|
50,236
|
|
10.0
|
|
|
|
86,134
|
|
8.5
|
|
|
|
97,295
|
|
10.3
|
|
Income tax expense
|
|
|
10,158
|
|
1.9
|
|
|
|
12,131
|
|
2.4
|
|
|
|
29,385
|
|
2.9
|
|
|
|
12,642
|
|
1.3
|
|
Net earnings
|
|
$
|
38,489
|
|
7.0
|
|
|
$
|
38,105
|
|
7.6
|
|
|
$
|
56,749
|
|
5.6
|
|
|
$
|
84,653
|
|
9.0
|
|
Other select financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
2018
|
|
2017
|
Working capital
|
$
|
677,270
|
|
$
|
593,955
|
Short-term borrowings
|
|
41,930
|
|
|
32,600
|
Total debt
|
|
630,391
|
|
|
612,886
|
Total stockholders' equity
|
|
1,456,910
|
|
|
1,371,383
|
Net Sales
Consolidated net sales for the second quarter of fiscal year 2018 increased by $47,868, or 9.6%, compared to the same period of fiscal year 2017. Consolidated net sales for the first half of fiscal year 2018 increased by $75,122, or 8.0%, compared to the same period of fiscal year 2017. Details of the changes in consolidated net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period
|
|
Six-Month
Period
|
Consolidated net sales for the period ended March 31, 2017
|
|
$
|
500,381
|
|
$
|
943,275
|
Aerospace volume
|
|
|
62,145
|
|
|
98,462
|
Industrial volume
|
|
|
(27,427)
|
|
|
(43,042)
|
Effects of changes in price and sales mix
|
|
|
2,118
|
|
|
3,078
|
Effects of changes in foreign currency rates
|
|
|
11,032
|
|
|
16,624
|
Consolidated net sales for the period ended March 31, 2018
|
|
$
|
548,249
|
|
$
|
1,018,397
|
The increase in net sales for the second quarter and first half of fiscal year 2018 was primarily attributable to increased defense original equipment manufacturer (“OEM”) sales boosted by continued momentum in smart weapon sales and increased commercial aftermarket and OEM sales in the Aerospace segment, partially offset by net sales declines in the Industrial segment.
The Industrial segment experienced decreased i
ndustrial gas turbine sales and renewables sales, which were partially offset by increased sales of reciprocating engines used in both power generation and oil and gas applications.
Costs and Expenses
Cost of goods sold
increased by $34,232 to $401,331, or 73.2% of net sales, for the second quarter of fiscal year 2018 from $367,099, or 73.4% of net sales, for the second quarter of fiscal year 2017. Cost of
goods sold increased by $51,868
to $748,115, or 73.5% of net sales, for the first half of fiscal year 2018 from $696,247, or 73.8% of net sales, for the first half of
fiscal year 2017. The increase in cost of goods sold in the second quarter and first half of 2018 as compared to the same
periods
last year was primarily attribut
able to higher sales volume,
planned production facility capacity expansion costs
and learning curve effects
. In the first half of fiscal year 2018, the cost of goods sold increase was partially offset by savings from cost reduction initiatives in our Industrial segment.
Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 26.8% for the second quarter of fiscal year 2018, compared to 26.6% for the second quarter of fiscal year 2017. Gross margin was 26.5% for the first half of fiscal year 2018, compared to 26.2% for the first half of fiscal year 2017. In both the second quarter and first half of fiscal 2018,
the
gross margin increases
are
attributable to increased sales volume
, partially
offset by planned production facility capacity expansion costs and unfavorable product mix.
Selling, general, and administrative expenses
decreased by $8,174, or 17.2%, to $39,486 for the second quarter of fiscal year 2018, as compared to $47,660 for the second quarter of fiscal year 2017. Selling, general, and administrative expenses as a percentage of net sales was 7.2% for the second quarter of fiscal year 2018 as compared to 9.5% for the second quarter of fiscal year 2017. The decrease in selling, general and administrative expenses for the second quarter of fiscal year 2018 was primarily due to
the timing of the recognition of stock-based compensation expense.
We recognized the majority of our annual stock-based compensation expense in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarter of the fiscal year.
The decrease in the second quarter of fiscal year 2018 was offset slightly by increased transaction costs of $1,136 associated with the L’Orange Acquisition.
Selling, general, and administrative expenses of $85,762 for the first half of fiscal year 2018 were virtually flat compared to $85,960 for the first half of fiscal year 2017. Selling, general, and administrative expenses as a percentage of net sales was 8.4% for the first half of fiscal year 2018, as compared to 9.1% for the first half of fiscal year 2017.
Included in
selling, general, and administrative expenses for the first half of fiscal year 2018 were transaction costs of
$1,136 associated with the
L’Orange acquisition.
Research and development costs
increased by $6,784, or 22.3%, to $37,169 for the second quarter of fiscal year 2018, as compared to $30,385 for the second quarter of fiscal year 2017. Research and development costs as a percentage of net sales increased to 6.8% for the second quarter of fiscal year 2018 as compared to 6.1% for the second quarter of fiscal year 2017. Research and development costs increased by $15,030, or 26.4%, to $71,955 for the first half of fiscal year 2018, as compared to $56,925 for the first half of fiscal year 2017. R
esearch and development costs in
creased as a percentage of net sales to 7.1% for the first half of fiscal year 2018, as compared to 6.0% for the first half of fiscal year 2017.
Research and development costs in the second quarter and first half of fiscal year 2018 were higher due to increased spending on new awards and opportunities being pursued primarily in our Aerospace segment
,
as well as variability in the timing of projects and expenses. 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.
Restructuring charges
of $17,013
in the
second quarter and first half of fiscal year 2018 relate primarily to the Company’s decision in the second quarter of fiscal year 2018 to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado (the “Duarte Relocation”).
Also included in the restructuring charges
of $17,013
for the
second
quarter and first half
of fiscal year 2018
were workforce management costs related to the Company’s ongoing effort to align its industrial turbomachinery business with current market conditions.
All of the restructuring charges recorded in the second quarter and first half of fiscal 2018 were recorded as nonsegment expenses.
There were no comparable costs and expenses recorded in the second quarter or first half of fiscal year 2017.
Interest expense
was
$6,687, or 1.2% of net sales, for the second quarter and $13,437, or 1.3% of net sales for the first half of fiscal year 2018, compared to $6,790, or 1.4% of net sales, for the second quarter and $13,630, or 1.4%
of net sales
for the first half of fiscal year 2017.
Income taxes
were provided at an effective rate on earnings before income taxes of 20.9% for the second quarter and 34.1% for the first half of fiscal year 2018, compared to 24.1% for the second quarter and 13.0% for the first half of fiscal year 2017. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
|
|
Six-Month
|
|
|
|
|
|
Period
|
|
|
|
Period
|
|
Effective tax rate for the period ended March 31, 2017
|
|
|
|
24.1
|
%
|
|
|
13.0
|
%
|
Current year effect of U.S. federal corporate rate reduction
|
|
|
|
(10.5)
|
|
|
|
(10.5)
|
|
Impact of the Tax Act:
|
|
|
|
|
|
|
|
|
|
Effect of U.S. federal corporate rate reduction on net U.S. deferred tax liability
|
|
0.9
|
|
|
|
(17.9)
|
|
|
|
Transition tax
|
|
-
|
|
|
|
30.2
|
|
|
|
Increased deferred tax liability associated with anticipated repatriation taxes
|
|
-
|
|
|
|
5.9
|
|
|
|
Net impact of enactment of the Tax Act
|
|
|
|
0.9
|
|
|
|
18.2
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on international activities
|
|
|
|
2.1
|
|
|
|
12.2
|
|
Research and experimentation credit
|
|
|
|
(0.2)
|
|
|
|
(0.2)
|
|
State and local taxes
|
|
|
|
-
|
|
|
|
-
|
|
Adjustment of prior period tax items
|
|
|
|
1.4
|
|
|
|
(0.6)
|
|
Net excess income tax benefit from stock-based compensation
|
|
|
|
3.1
|
|
|
|
2.2
|
|
Other
|
|
|
|
-
|
|
|
|
(0.2)
|
|
Effective tax rate for the period ended March 31, 2018
|
|
|
|
20.9
|
%
|
|
|
34.1
|
%
|
The decrease in the year-over-year effective tax rate for the three-months ended March 31, 2018 is primarily attributable to the benefits of the current year effect of the U.S. federal corporate t
ax rate reduction in connection with
the enactment of the Tax Act on the estimated annual effective tax rate
,
partially offset by smaller favorable adjustment for the net excess income tax benefits from stock-based compensation, less foreign earnings taxed at lower tax rate
s
and fewer favorable resolutions of tax matters in the current quarter.
The increase in the effective tax rate for the six-months ended March 31, 2018 compared to the six-months ended March 31, 2017 is primarily attributable to the $14,778 discrete net
unfavorable
impact
in the first quarter of fiscal year 2018
resulting from the enactment of the Tax Act
,
partially offset by benefits of the current year effect of the U.S. federal corpo
rate tax rate reduction in connection with
the enactment of the Tax Act on the estimated ann
ual effective tax rate. In addition
, the effective tax rate f
or the six-months ended March 31, 2017 included
the impact of the repatriation to the U.S. of certain net foreign profits and losses.
In the first quarter of fiscal year 2017, the
U.S. foreign tax credits available as a result of the repatriation of the foreign net earnings were greater than the
U.S. taxes payable on these
foreign
net
earnings.
As a result of the Tax Act, we have calculated a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and we expect the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018. Overall, we anticipate the decrease in the U.S. federal statutory rate resulting from the enactment of the Tax Act will have
a
favorable impact on our future U.S. tax expense and operating cash flows.
Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense.
Segment Results
The following table presents sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
|
$
|
386,343
|
|
70.5
|
%
|
|
$
|
320,526
|
|
64.1
|
%
|
|
$
|
692,248
|
|
68.0
|
%
|
|
$
|
587,206
|
|
62.3
|
%
|
Industrial
|
|
|
161,906
|
|
29.5
|
|
|
|
179,855
|
|
35.9
|
|
|
|
326,149
|
|
32.0
|
|
|
|
356,069
|
|
37.7
|
|
Consolidated net sales
|
|
$
|
548,249
|
|
100.0
|
%
|
|
$
|
500,381
|
|
100.0
|
%
|
|
$
|
1,018,397
|
|
100.0
|
%
|
|
$
|
943,275
|
|
100.0
|
%
|
The following table presents earnings by segment
and reconciles segment earnings to consolidated net earnings
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Aerospace
|
$
|
72,969
|
|
$
|
58,227
|
|
$
|
116,522
|
|
$
|
105,104
|
Industrial
|
|
10,237
|
|
|
17,089
|
|
|
29,581
|
|
|
35,087
|
Nonsegment expenses
|
|
(28,343)
|
|
|
(18,764)
|
|
|
(47,366)
|
|
|
(30,145)
|
Interest expense, net
|
|
(6,216)
|
|
|
(6,316)
|
|
|
(12,603)
|
|
|
(12,751)
|
Consolidated earnings before income taxes
|
|
48,647
|
|
|
50,236
|
|
|
86,134
|
|
|
97,295
|
Income tax expense
|
|
(10,158)
|
|
|
(12,131)
|
|
|
(29,385)
|
|
|
(12,642)
|
Consolidated net earnings
|
$
|
38,489
|
|
$
|
38,105
|
|
$
|
56,749
|
|
$
|
84,653
|
The following table presents
segment earnings
as a percent of segment net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
Aerospace
|
|
18.9%
|
|
|
18.2%
|
|
|
16.8%
|
|
|
17.9%
|
Industrial
|
|
6.3%
|
|
|
9.5%
|
|
|
9.1%
|
|
|
9.9%
|
Aerospace
Aerospace segment net sales
were
$386,343
for the
second quarter
of fiscal year 201
8
,
up
20.5
% compared to $
320,526
for the
second quarter
of fiscal year 201
7
.
Aerospace segment net sales were $
692,248
for th
e first half of fiscal year 2018, up 17.9
% compared to $
587,206
for the same period of fiscal year 201
7
.
The
increase
in
segment net sales for the
second quarter
and first half
of fiscal year 2018 as compared to the
same periods
of fiscal ye
ar 2017 was driven primarily by
increased commercial
OEM and aftermarket
sales
and
increased defense OEM sales
.
Defense aftermarket sales were down in the
second quarter and first half
of fiscal year 2018 as compared to the same period
s
of fiscal year 2017.
Commercial OEM sales were up for the second quarter and first half of fiscal year 2018 as compared to the
same periods
of fiscal year 2017
, driven by ongoing ramp-up
in production of next generation aircraft
on which we have increased content.
Commercial aftermarket sales increased significantly in the second quarter and first half of fiscal year 2018 as compared to the same periods of fiscal year 2017, benefitting from both the initial provisioning for new platforms and increased utilization o
f existing fleets.
U.S. government funds continue to be prioritized for defense platforms on which we have content. Defense OEM sales increased in the second quarter and first half of fiscal year 2018 compared to the
same periods
of fiscal year 2017, driven primarily by continued strong demand for smart weapons, as well as growing international demand for various other military programs. Defense aftermarket sales decreased in the second quarter and first half of fiscal year 2018 as compared to the second quarter and first half of fiscal year 2017, reflecting variability in the timing of continued maintenance needs and upgrade programs.
Aerospace segment earnings
increased
by $
14,742
, or
25.3
%, to
$72,969
for the
second quarter of fiscal year 2018
, compared to
$58,227
for the
second quarter
of fiscal year 201
7
.
Aerospace segment earnings increased
by $
11,418
, or
10.9%, to $116,522
for the first half of fiscal year 201
8
, compared to $
105,104
for the first half of fiscal year 201
7
.
The net
increase
in Aerospace segment earnings for the
second quarter
and first half
of fiscal year 201
8
was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
Six-Month
|
|
|
Period
|
|
Period
|
Earnings for the period ended March 31, 2017
|
|
$
|
58,227
|
|
$
|
105,104
|
Sales volume
|
|
|
30,226
|
|
|
48,433
|
Price, sales mix and productivity
|
|
|
(5,916)
|
|
|
(10,868)
|
Production capacity expansion costs
|
|
|
(4,024)
|
|
|
(9,162)
|
Increases in research and development expenses
|
|
|
(4,786)
|
|
|
(10,662)
|
Other, net
|
|
|
(758)
|
|
|
(6,323)
|
Earnings for the period ended March 31, 2018
|
|
$
|
72,969
|
|
$
|
116,522
|
Aerospace segment earnings as a percentage of
segment net
sales were
18.9%
for the
second quarter and 16.8% for the first half
of fiscal year 201
8, compared to 18.2
%
f
or the
second quarter
and 17.9% for the first half
of fiscal
year 2017. Aerospace segment earnings in both the second quarter and first half of fiscal year 2018 benefitted from
the impact of
higher sales volume
,
which was partially offset by unfavo
rable product sales mix,
higher manufacturing costs related to increased capacity expansion costs to support increased production levels
and
learning
curve effects
. Aerospace segment earnings were also negatively impacted by increased investment in research and development for new program awards and opportunities being pursued
.
Industrial
Industrial
segment net sales
decreased by
10.0
% to
$161,906
for the
second quarter
of fiscal year 201
8
, compared to
$
179,855
for the
second quarter
of fiscal year 201
7.
Segment net sales
decreased by 8.4% to
$326,149 for the first half of fiscal year 2018, compared to $356,069 for the same period of fiscal year 2017.
F
oreign currency exchange rates had a favorable impact
on segment net sales
of
$9,578 and $14,522
for the
second quarter and first half of fiscal year 2018, respectively
.
The overall decreases in both periods were primarily due to declines in industrial gas turbine and renewables
sales
.
The decline in industrial gas turbine sales was
the result of
increased efficiency leading to
lower
overall demand for electricity and
a decrease in volume resulting from the penetration of renewable power sources
.
We project that the industrial gas turbine business may not begin to recover until 2020.
The sales decline in our renewables business was due to
the short-term
unfavorable
impact of
platform transitions by some of our customers
.
Sales
of
large
reciprocating engines used in both power generation and oil and gas applications were up in
both
the
second quarter and first half
of fiscal year 2018 as compared to the same period
s
of the prior fiscal year.
Although s
ales
of fuel systems for
compressed natural gas (“
CNG
”)
trucks in Asia
decreased
in the
second quarter
of fis
cal year 2018 as compared to the
second quarter
of fiscal year 2017
, sales of these fuel systems continues to be up for the first half of fiscal year 2018 compared to the first half of fiscal year 2017 as
the Chinese government continues to encourage natural gas usage.
Industrial segment earnings
decreased
by $
6,852
, or
40.1
%, to
$10,237
for the
second quarter
of fiscal year 201
8
, compared to $17,
089
for the
second quarter
of fiscal year 201
7
.
Segment earnings decreased by $
5,506
, or
15.7
% to $
29,581
for the first half of fiscal year 201
8
compared to $
35,087 for the same period of 2017
.
The net
decrease
in Industrial segment earnings for the
second quarter
and first half
of fiscal year 201
8
was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
|
|
Six-Month
|
|
|
Period
|
|
Period
|
Earnings for the period ended March 31, 2017
|
|
$
|
17,089
|
|
$
|
35,087
|
Sales volume
|
|
|
(12,768)
|
|
|
(20,087)
|
Price, sales mix and productivity
|
|
|
3,366
|
|
|
3,532
|
Savings from cost reduction initiatives
|
|
|
-
|
|
|
3,765
|
Effects of changes in foreign currency rates
|
|
|
774
|
|
|
1,528
|
Other, net
|
|
|
1,776
|
|
|
5,756
|
Earnings for the period ended March 31, 2018
|
|
$
|
10,237
|
|
$
|
29,581
|
Industrial segment earnings as a percentage of
segment net
sales were
6.3%
for the
second quarter
and 9.1% for the first half
of
fiscal year 2018, compared to 9.5
% for the
second quarter
and 9.9% for the first half
of fiscal year 201
7
. The
decrease
in
segment earnings
as a percentage of sales
for the
second quarter
and first half
of fiscal year 2018
were
largely
driven by
sales volume decreases, partially offset by favorable sales mix and, in the first half of fiscal year 2018, savings from prior year cost reduction initiatives
.
Nonsegment expenses
Nonsegment expenses
increased
to
$28,343
for the
second quarter
of fiscal year 201
8
, compared to $
18,764
for the
second quarter
of fiscal year 201
7
. As a percent of
consolidated net
sales, nonsegment expenses
increased
to
5.2
% of
consolidated
net sales for the
second quarter
of fiscal year 201
8
, compared to
3.7
% of
consolidated
net sales for the
second quarter
of fiscal year 2017. The
increase
in nonsegment expenses in the
second quarter
of fiscal year 2018 as compared to the
second quarter of fiscal year 2017 is
due to
the recording of restructuring charges of $17,013 in the second quarter of fiscal year 2018 related primarily
to the
Duarte Relocation
and transaction costs of
$1,136 associated with the L’Orange Acquisition (see Note 22,
Subsequent events
in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q)
. Partially offsetting the
increase to nonsegment expense
s
in the current quarter was the recognition of the majority of our annual
stock-based compensation expense
in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarter of the fiscal year.
Nonsegment expenses increased to $47,366 for the first half of fiscal year 2018, compared to $30,145 for the first half of fiscal year 2017. As a percent of consolidated net sales, nonsegment expenses were 4.7% of consolidated net sales for the first half of fiscal year 2018, compared to 3.2% of consolidated net sales for the first half of fiscal
year 2017. Included in nonsegment expenses for the first half of
fiscal year
2018 were restructuring charges of $17,013
,
discussed above
, and transaction costs of
$1,136 associated with the
L’Orange Acquisition
.
LIQUIDI
TY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities.
Historically, we have also issued debt to supplement our cash needs or repay our other indebtedness.
We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility
and other borrowing capacity
, will be sufficient to fund our continuing operating needs, including capital expansion funding for the foreseeable future.
Our aggregate cash and cash equivalents were $
100,147 at March 31, 2018 and $
87,55
2 at September 30, 2017
, and our working capital was
$677,270
at
March 31, 2018
and $593,955 at September 30, 2017. Of the $
100,147
of cash and cash equivalent
s held at March 31, 2018, $99,812
was held by our foreign locations.
We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits.
The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if thes
e funds were to be repatriated. The additional uncertainty associated with the Tax Act increases the impracticality of determining this income tax liability.
We do not believe the Transition Tax, which is expected to be paid over an eight year period beginning in January 2019, will have a significant impact on our cash flows in any individual fiscal year.
Consistent with common business practice in China, our Chinese subsidiary accepts bankers’ acceptance notes from Chinese customers, in settlement of certain customer accounts receivable. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft. The issuing financial institution is the obligor, not our
customers. Upon our acceptance of a bankers’ acceptance note from a customer, such customer has no further obligation to pay us for the related accounts receivable balance. We had
bankers’ acceptance notes of $42,969
at
March 31, 2018
and
$38,243 at September 30, 2017 recorded as no
n-customer accounts receivable i
n our
Condensed Consolidated B
alance
S
heets.
We
only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.
Our revolving credit facility matures in April 2020 and provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,200,000, subject to lenders’ participation. We can borrow against our $1,000,000 revolving credit facility as long as we are in compliance with all of our debt covenants.
Borrowings under the
revolving credit facility
can be made in U.S dollars or in foreign currencies other than the U.S. dollar provided that the U.S
dollar equivalent of any foreign currency borrowings and U.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility.
Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our common stock, payments of dividends, acquisitions, and facilities expansions. In addition, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our $1,000,000 revolving credit facility and our other credit facilities, see Note
13
,
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 March 31, 2018, we
had total outstanding debt of $
630,391
consisting of amounts borrowed under our revolving credit
facility and various series of unsecured notes due between 2018 and 2031
, with additional borrowing availability of $947,099 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,674 under various foreign credit facilities. As of
March 31, 2018, the $100,000 in debt related to our Series D Notes, which mature and are payable in October 2018, has been classified as long-term based on our intent and ability to refinance this debt using cash proceeds from our existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months.
For
further discussion of our notes, see Note
13
,
Credit facilities, short-term borrowings and long-term debt
in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.
At March 31, 2018, we had $41,930 of borrowings outstanding under our revolving credit facility, all of whi
ch was classified as short-term.
Of these borrowings, as of March 31, 2018 the entire amount is denominated in U.S. dollars.
Revolving credit facility and short-term borrowing activity during the six-months ended March 31, 2018 were as follows:
|
|
|
|
|
|
Maximum daily balance during the period
|
$
|
196,600
|
Average daily balance during the period
|
$
|
166,920
|
Weighted average interest rate on average daily balance
|
|
2.54%
|
We believe we were in compliance with all our debt covenants as of
March 31, 2018
. See Note
12
,
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 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.
On April 9, 2018, we announced that we had signed an agreement to acquire L’Orange,
for total consideration (including cash payments and the assumption of debt and other specified financial obligations) of €700,000
. We expect
to finance the L’Orange Acqu
isition with borrowings from our
revolving credit facility,
or
debt proceeds from a private placement, or a combination of both
, which will increase our interest expense and outstanding debt, and could decrease our availability under our revolving credit facility
.
See Note 22,
Subsequent events
in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q, for more information regarding the L’Orange Acquisition
.
On April 18
, 2018, we
entered into an at-the-money-forward option (the “Forward Option”) at a cost of $5,543 whereby, on May 30, 2018,
we have the ability to exercise an
option to purchase
€490,000
on June 1, 2018
using U.S. dollars at a fixed exchange rate of 1.2432. If
the
spot rate is below 1.2432 on May 30, 2018,
we
will choose not to exercise the option and the loss on Forward Option will be limited to $5,543, which is the cost of the instrument. If the spot rate is above 1.2432 on May 30, 2018,
we
will choos
e to exercise the option and any
gain on the Forward Option will be offset by the cost of the instrument and reflected in
the
Condensed Consolidated Statement of Earnings in the third
fiscal
quarter ending June 30, 2018.
We are
not committed to purchase Euros if the spot rate is below 1.2432 on May 30, 2018.
We
entered into
the Forward Option to manage our
exposure to fluctuations in the Euro prior to the
anticipated
close of the L’Orange Acquisition.
We
did not enter into the Forward Option for trading or speculative purposes.
See Note 22,
Subsequent events
in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q, for more information regarding the L’Orange Acquisition
and the Forward Option.
Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements, and to fund working capital, capital expenditures and product development efforts will depend on our ability to generate cash from operating activities, which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control.
In the
first quarter of fiscal year 2017, our board of d
irectors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in
November
2019 (the “201
7
Authorization”). In the
first half of fiscal year 2017,
we purchased
886
shares of our common stock for $
61,229
under the 2017 Authorization
,
of which 350 shares were purchased
pursuant to a 10b5-1 plan
and 536 were purchased pursuant to a 10b-18 plan
.
We repurchased no stock in the six-months ended March 31, 2018.
For our Aerospace segment,
w
e have been purchasing production equipment
for our
second campus in the greater-Rockford, Illinois area and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes.
The second campus, completed in 2015, was built to
support the expected growth in our Aerospace segment as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.
Associated with the
Duarte Relocation
,
we have identified
assets held for use of $7,604 at March 31, 2018, which relate to the land, building and building improvements at the Duarte facility.
Based on current market conditions, w
e expect to record a gain on the eventual sale of these assets.
We have not yet determined which of the
remaining assets at th
e Duarte facility, consisting
mainly of machinery and equipment, will be sold or relocated to the renovated
Drake Campus and therefore, we have
continued to depreciate these assets until a determination is made. The carrying value of
the remaining assets
at the Duarte
facility was approximately $13,2
00 as of March 31, 2018.
We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable.
Cash Flows
|
|
|
|
|
|
|
Six-Months Ended
|
|
March 31,
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
$
|
56,718
|
|
$
|
129,994
|
Net cash used in investing activities
|
|
(49,118)
|
|
|
(34,377)
|
Net cash used in financing activities
|
|
(3,742)
|
|
|
(87,578)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
8,737
|
|
|
(10,176)
|
Net change in cash and cash equivalents
|
|
12,595
|
|
|
(2,137)
|
Cash and cash equivalents at beginning of year
|
|
87,552
|
|
|
81,090
|
Cash and cash equivalents at end of period
|
$
|
100,147
|
|
$
|
78,953
|
Net cash flows provided by operating activities
for the first half of fiscal year 2018 was $56,718, compared to $129,994 for the same period of fiscal year 2017. The
decrease in cash flows from operating activities
in the first half of fiscal year 2018 compared to the prior fiscal year
is primarily attributable to working capital changes which had an increase in cash use in the first half of 2018 due mainly to increased payments of accounts payable and accrued liabilities
, and increased accounts receivable
in the first half of fiscal year 2018
.
Net cash flows used in investing activities
for the first half of fiscal year 2018 was $49,118, compared to $34,377 in the second quarter of fiscal year 2017. The increase in cash used in investing activities compared to the same period of the prior fiscal year is primarily due to increased payments for capital expenditures. Payments for property, plant and equipment increased by $15,425 from $43,053 in the first half of fiscal year 2017 to $58,478 in the first half of this year
primarily due to renovations at our Drake Campus in Fort Collins, Colorado
and equipment purchases for our second campus in the greater-Rockford, Illinois area
.
Net cash flows used in financing activities
for the first half of fiscal year 2018 was $3,742, compared to $87,578 in the first half of fiscal year 2017. During the first half of fiscal year 2018, we
paid cash dividends of $16,422
, partially offset by net debt borrowings of $9,120 compared
to cash dividends
paid
of $14,415
and net debt payments of $22,604 in the first half of fiscal year 2017. Also in the first half of fiscal year 2017, we utilized $61,229 to repurchase 886 shares of our common stock under the 2017 Authorization. We made no stock repurchases in the first half of fiscal year 2018.
Contractual Obligations
We have various contractual obligations, including obligations related to long-term debt, operating and capital leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K. There have been no material changes to our various contractual obligations during the
first half of fiscal year 2018 other than those related to the L’Orange Acquisition
.
As of March 31, 2018, any fees that would be incurred should the L’Orange Acquisition not be finalized are insignificant.
Non-U.S. GAAP Financial Measures
Adjusted
net
earnings, adjusted earnings per share,
EBIT
, adjusted EBIT
, EBITDA
, adjusted EBITDA
,
and free cash flow
are financial measures not prepared and presented in accordance with U.S. GAAP. However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.
Earnings based non-U.S. GAAP financial measures
Adjusted net earnings is defined by the Company as net earnings less, as applicable,
(i) restructuring charges, (ii) Duarte mo
ve related costs,
(iii) merger and acquisition transaction and integration costs, and (iv) the transition impacts of the change in U.S. federal tax legislation in December 2017
. The Company
believes
that these excluded items are short-term in nature
, not related to the ongoing operations of the business and therefore,
the exclusion of them
illustrate
s
more clearly how the underlying business of Woodward is performing
. Management uses adjusted net earnings in evaluating the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided
by the weighted-average number of
diluted
shares of common stock outstanding for the period
. Management uses both adjusted
net
earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar infrequent or unusual charges.
The reconciliation of
net
e
arnings and
earnings per share
to adjusted net earnings and adjusted earnings per share, respectively,
for the three and six-
months ended March 31, 2018 are shown in the table below. Adjusted
net
earnings and adjusted earnings per share f
or the three and six-
months ended March 31, 2017 are not shown
,
as there were no comparable adjustments to U.S. GAAP net earnings or earnings per share in those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended
March 31, 2018
|
|
Six-Months Ended
March 31, 2018
|
|
|
Net Earnings
|
|
Earnings Per Share
|
|
Net Earnings
|
|
Earnings Per Share
|
Net earnings (U.S. GAAP)
|
|
$
|
38,489
|
|
$
|
0.60
|
|
$
|
56,749
|
|
$
|
0.89
|
Non-U.S. GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net of tax
|
|
|
12,667
|
|
|
0.20
|
|
|
12,667
|
|
|
0.20
|
Other charges, net of tax
(1)
|
|
|
1,201
|
|
|
0.02
|
|
|
1,201
|
|
|
0.02
|
Total Non-U.S. GAAP adjustments, net of tax
|
|
|
13,868
|
|
|
0.22
|
|
|
13,868
|
|
|
0.22
|
Transition impacts of the change in U.S. tax legislation
|
|
|
-
|
|
|
-
|
|
|
14,778
|
|
|
0.23
|
Total Non-U.S. GAAP adjustments
|
|
|
13,868
|
|
|
0.22
|
|
|
28,646
|
|
|
0.45
|
Adjusted net earnings (Non-U.S. GAAP)
|
|
$
|
52,357
|
|
$
|
0.82
|
|
$
|
85,395
|
|
$
|
1.34
|
|
(1)
|
|
Other charges include (i) Duarte move related costs and (ii) merger and acquisition transaction and integration costs
, net of tax.
|
Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization.
Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude,
as applicable,
(i) restructuring charges, (ii) Duarte move related costs, and (iii) merger and acquisition tr
ansaction and integration costs.
As these charges are infrequent or unusual charges that can be variable from period to
period and may not fluctuate with operating results, management believes that by removing these charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.
EBIT and
adjusted EBIT
for the
three and six-months
ended
March 31, 2018
and March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net earnings (U.S. GAAP)
|
|
$
|
38,489
|
|
$
|
38,105
|
|
$
|
56,749
|
|
$
|
84,653
|
Income tax expense
|
|
|
10,158
|
|
|
12,131
|
|
|
29,385
|
|
|
12,642
|
Interest expense
|
|
|
6,687
|
|
|
6,790
|
|
|
13,437
|
|
|
13,630
|
Interest income
|
|
|
(471)
|
|
|
(474)
|
|
|
(834)
|
|
|
(879)
|
EBIT (Non-U.S. GAAP)
|
|
$
|
54,863
|
|
$
|
56,552
|
|
$
|
98,737
|
|
$
|
110,046
|
Restructuring and other charges
(1)
|
|
|
18,548
|
|
|
-
|
|
|
18,548
|
|
|
-
|
Adjusted EBIT (Non-U.S. GAAP)
|
|
$
|
73,411
|
|
$
|
56,552
|
|
$
|
117,285
|
|
$
|
110,046
|
|
(1)
|
|
Includes
(i) restructuring charges, (ii)
Duarte move related costs, and (iii) merger and acquisition transaction and integration costs
,
recognized in the three and six-months ended March 31, 2018.
|
EBIT
DA
and
adjusted
EBITDA for the three and six-months ended March 31, 2018 and March 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended March 31,
|
|
Six-Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net earnings (U.S. GAAP)
|
|
$
|
38,489
|
|
$
|
38,105
|
|
$
|
56,749
|
|
$
|
84,653
|
Income tax expense
|
|
|
10,158
|
|
|
12,131
|
|
|
29,385
|
|
|
12,642
|
Interest expense
|
|
|
6,687
|
|
|
6,790
|
|
|
13,437
|
|
|
13,630
|
Interest income
|
|
|
(471)
|
|
|
(474)
|
|
|
(834)
|
|
|
(879)
|
Amortization of intangible assets
|
|
|
6,258
|
|
|
6,431
|
|
|
12,501
|
|
|
12,889
|
Depreciation expense
|
|
|
15,754
|
|
|
13,663
|
|
|
30,581
|
|
|
26,118
|
EBITDA (Non-U.S. GAAP)
|
|
|
76,875
|
|
|
76,646
|
|
|
141,819
|
|
|
149,053
|
Restructuring and other charges
(1)
|
|
|
18,548
|
|
|
-
|
|
|
18,548
|
|
|
-
|
Adjusted EBITDA (Non-U.S. GAAP)
|
|
$
|
95,423
|
|
$
|
76,646
|
|
$
|
160,367
|
|
$
|
149,053
|
|
(1)
|
|
Includes
(i) restructuring charges, (ii)
Duarte move related costs, and (iii) merger and acquisition transaction and integration costs
,
recognized in the three and six-months ended March 31, 2018.
|
The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in
accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share,
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, E
BIT, adjusted EBIT, EBITDA and a
djusted EBITDA
may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.
Cash flow-based non-U.S. GAAP financial measures
Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance
and cash generation by
Woodward’s various business groups. We believe free cash flow
is a useful measure
for investors because
it
portray
s
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. The use of
this
non-U.S. GAAP financial measure
is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP.
F
ree cash flow
does not
necessarily represent funds available for discretionary use, and is
not
necessarily a measure of our ability to fund our cash
needs. Our calculation of free cash flow may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure.
Free cash flow for the
six-months ended March 31, 2018
and
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended March 31,
|
|
2018
|
|
2017
|
Net cash provided by operating activities (U.S. GAAP)
|
$
|
56,718
|
|
$
|
129,994
|
Payments for property, plant and equipment
|
|
(58,478)
|
|
|
(43,053)
|
Free cash flow (Non-U.S. GAAP)
|
$
|
(1,760)
|
|
$
|
86,941
|
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, depreciation and amortization, reviews for impairment of goodwill, postretirement benefit obligations, and our provision for income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.
On December 22,
2017, the United States
enacted significant changes to the U.S. tax law following the passage and signing of
the Tax Act. Refer to Note 17,
Income Taxes
,
in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q
for further discussion of management's significant estimates and judgements in accounting for income taxes as a result of the Tax Act.
New Accounting Standards
From time to time, the FASB
or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2,
New accounting standards
, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.
Off-Balance Sheet Arrangements
As of
March 31, 2018
, 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.