Woodward, Inc. - Quarter Report: 2014 December (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December  31, 2014

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒    Accelerated filer ☐    Non-accelerated filer ☐    Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of January 16, 2015, 65,016,278 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

 

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

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WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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WOODWARD, INC.

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 December 31, 2014 and for the three-months ended December 31, 2014 and December 31, 2013, 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 December 31, 2014, and the statements of earnings, comprehensive earnings, cash flows, and changes in the statement of stockholders’ equity for the periods presented herein.  The Condensed Consolidated Balance Sheet as of September 30, 2014 was derived from Woodward’s Annual Report on Form 10-K for the fiscal year then ended.  The results of operations for the three-months ended December 31, 2014 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.  Dollar 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 amount 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, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, valuation of identifiable intangible assets and goodwill, the provision for income tax and related valuation reserves, the valuation of assets and liabilities acquired in business combinations, 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 materially from Woodward’s estimates.

 

Note 2.  Recent accounting pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements.  Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.”  The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards.  The amendments (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of revenue recognition across entities, industries, jurisdictions, and capital markets, (iv) provide more useful information to users of financial statements through improved disclosure requirements, and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 (fiscal year 2018 for Woodward), including interim periods within that reporting period.  Early adoption is not permitted.  An entity should adopt the amendments using one of the following methods: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application.  Woodward has not determined what transition method it will use and is currently assessing the impact that this guidance may have on its Consolidated Financial Statements.   

 

 

 

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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:

 

 

The following stock option grants were outstanding during the three-months ended December 31, 2014 and 2013, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive:

 

 

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:

 

 

Note 4.  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 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.

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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 December 31, 2014 or September 30, 2014.

 

 

 

Investments in money market funds: Woodward sometimes invests excess cash in money market funds not insured by the Federal Depository Insurance Corporation (“FDIC”).  Woodward believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid.  The investments in money market funds are reported at fair value, with realized gains from interest income realized in earnings and are included in “Cash and cash equivalents.”  The fair values of Woodward’s investments in money market funds are based on the quoted market prices for the net asset value of the various money market funds.

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 realized in earnings, and are included in “Cash and cash equivalents.”  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.

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.”  The trading securities are included in “Other assets.”  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 and accounts payable 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:

 

 

In fiscal years 2014 and 2013, Woodward received long-term notes from a municipality within the state of Illinois in connection with certain economic incentives related to Woodward’s development of a second campus in the greater-

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Rockford, Illinois area for its Aerospace segment.  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 December 31, 2014 and 3.2% at September 30, 2014.  

In fiscal year 2013, Woodward received a long-term note from a municipality within the state of Colorado in connection with certain economic incentives related to Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado.  The fair value of the long-term note was estimated based on a model that discounted future principal and interest payments received at an interest rate available to 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 note were 2.8% at December 31, 2014 and 3.2% at September 30, 2014. 

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 2.4% as of December 31, 2014 and 2.4% as September 30, 2014.

 

Note 5.  Derivative instruments and hedging activities

Woodward is exposed 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 creditworthy counterparties.  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 either the three-months ended December 31, 2014 or December 31, 2013.

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated other comprehensive losses (“accumulated OCI”), were net gains of $195 as of December 31, 2014 and $170 as of September 30, 2014.

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:

 

 

 

Based on the carrying value of the realized but unrecognized gains and losses on terminated derivative instruments designated as cash flow hedges as of December 31, 2014, Woodward expects to reclassify $103 of net unrecognized losses on terminated derivative instruments from accumulated other comprehensive earnings to earnings during the next twelve months.

 

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Note 6.  Supplemental statement of cash flows information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 7.  Accounts receivable

Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced.  In the normal course of business, not all accounts receivable are collected and, therefore, an allowance for losses of accounts receivable is provided equal to the amount that Woodward believes ultimately will not be collected.  In establishing the amount of the allowance, 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.

Consistent with business practice common in China, Woodward’s Chinese subsidiary accepts from Chinese customers, in settlement of certain customer accounts receivable, bank drafts issued by creditworthy Chinese banks.  Bank drafts are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution.  Bank drafts 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 bank draft as of the maturity date.  The maturity date of bank drafts varies, but it is Woodward’s policy to only accept bank drafts 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 bank draft from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance.  Woodward only accepts bank drafts issued by creditworthy banks as to which the credit risk associated with the bank draft is assessed to be minimal.

The composition of Woodward’s accounts receivable at December 31, 2014 and September 30, 2014 follows:

 

 

 

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Note 8.  Inventories

 

 

 

 

Note 9.  Property, plant, and equipment

 

 

 

Included in “Land and land improvements” and “Buildings and improvements” are assets held for sale of $2,280 at December 31, 2014 and $2,465 at September 30, 2014.  The change in value is due to changes in foreign currency exchange rates between September 30, 2014 and December 31, 2014. 

Woodward is developing a second campus in the greater-Rockford, Illinois area for its Aerospace segment in order to address the growth expected over the next ten years and beyond and to support a substantial number of recently awarded new system platforms, particularly on narrow-body aircraft.  Included in “Construction in progress” are $102,763 at December 31, 2014 and $85,283 at September 30, 2014, of costs associated with the construction of the second campus and new equipment purchases, including capitalized interest of $3,947 at December 31, 2014 and $2,963 at September 30, 2014. 

Woodward is also developing a new campus at its corporate headquarters in Fort Collins, Colorado to support the continued growth of its Energy segment by supplementing its existing Colorado manufacturing facilities and corporate headquarters.  Included in “Construction in progress” are $49,058 at December 31, 2014 and $37,268 at September 30, 2014, of costs associated with the construction of the new campus, including capitalized interest of $2,331 at December 31, 2014 and $2,392 at September 30, 2014. 

In addition, in September 2013, Woodward invested in a building site in Niles, Illinois.  Woodward is building a new facility on this site for its Aerospace segment and has started to relocate some of its operations currently residing in nearby Skokie, Illinois to this new facility.  Included in “Construction in progress” are $2,019 at December 31, 2014 and $55,629 at September 30, 2014 of costs,  as approximately $63,000 of assets were placed in service in December 2014 and were recorded to “Buildings and improvements.”

 

 

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For the three-months ended December 31, 2014 and December 31, 2013, Woodward had depreciation expense of the following:

 

 

For the three-months ended December 31, 2014 and December 31, 2013, Woodward capitalized interest that would have otherwise been included in interest expense of the following:

 

Note 10.  Goodwill

 

 

Woodward tests goodwill for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Based on the relevant U.S. GAAP authoritative guidance, Woodward aggregates components of a single operating segment into a reporting unit, if appropriate.  The impairment tests consist of comparing the implied fair value of each reporting unit with its carrying amount including goodwill.  If the carrying amount of the reporting unit exceeds its implied fair value, Woodward compares the implied fair value of goodwill with the recorded carrying amount of goodwill.  If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its implied fair value.

Woodward completed its annual goodwill impairment test as of July 31, 2014 during the quarter ended September 30, 2014.  At that date, Woodward determined it was appropriate to aggregate certain components of the same operating segment into a single aggregated reporting unit.  The fair value of each of Woodward’s reporting units was determined using a discounted cash flow method.  This method represents a Level 3 input and incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, future tax rates, and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and terminal growth rate, of forecasted cash flows.  Management projects revenue growth rates, earnings margins and cash flows based on each reporting unit’s current operational results, expected performance and operational strategies over a five or ten-year period.  These projections are adjusted to reflect current economic conditions and demand for certain products, and require considerable management judgment.

Forecasted cash flows used in the July 31, 2014 impairment test were discounted using weighted-average cost of capital assumptions ranging from 8.93% to 11.04%.  The terminal values of the forecasted cash flows were calculated using the Gordon Growth Model and assumed an annual compound growth rate after five or ten years of 4.20%.  These inputs, which are unobservable in the market, represent management’s best estimate of what market participants would use in determining the present value of the Company’s forecasted cash flows.  Changes in these estimates and assumptions can have a significant impact on the fair value of forecasted cash flows.  Woodward evaluated the reasonableness of the reporting unit’s resulting fair values utilizing a market multiple method.

The results of Woodward’s goodwill impairment tests performed as of July 31, 2014 indicated the estimated fair value of each reporting unit was substantially in excess of its carrying value, and accordingly, no impairment existed.

During the three-months ended December 31, 2014 there were no events or changes in operation that triggered a need to assess goodwill for possible impairment.  As part of the Company’s ongoing efforts to assess goodwill for possible

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indications of impairment, Woodward continues to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on Woodward’s business.

 

Note 11.  Intangible assets, net

 

For the three-months ended December 31, 2014 and December 31, 2013, Woodward recorded amortization expense associated with intangibles of the following:

 

 

 

 

Future amortization expense associated with intangibles is expected to be:

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Note 12.  Credit facilities, short-term borrowings and long-term debt

 

Revolving credit facility

Woodward maintains a $600,000 revolving credit facility established under a revolving credit agreement between Woodward and a syndicate of lenders led by 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 $800,000, subject to lenders’ participation, and matures in July 2018.  Borrowings under the Revolving Credit Agreement generally bear interest at LIBOR plus 0.85% to 1.65%.  Under the Revolving Credit Agreement, there were $200,000 in principal amount of borrowings outstanding as of December 31, 2014, at an effective interest rate of 1.22%, and $210,000 in principal amount of borrowings outstanding as of September 30, 2014, at an effective interest rate of 1.21%.  As of December 31, 2014 and September 30, 2014, the entire outstanding balance under the Revolving Credit Agreement was classified as long-term debt.

The Notes

In October 2008, Woodward entered into a note purchase agreement (the “2008 Note Purchase Agreement”) relating to the Series B, C, and D Notes (the “2008 Notes”).  In April 2009, Woodward entered into a note purchase agreement (the “2009 Note Purchase Agreement”) relating to the Series E and F Notes (the “2009 Notes”).

On October 1, 2013, Woodward entered into a note purchase agreement (the “2013 Note Purchase Agreement” and, together with the 2008 Note Purchase Agreement and the 2009 Note Purchase Agreement, the “Note Purchase Agreements”) 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 2008 Notes, 2009 Notes and First Closing Notes, the “Notes”) on November 15, 2013. 

Interest on the 2008 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 paid.  Interest on the 2009 Notes is payable semi-annually on April 15 and October 15 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 December 31, 2014, the Series J Notes bore interest at an effective rate of 1.48%.

Principal payment of the Series C Notes is due on October 1, 2015.  This payment is classified as long-term based on Woodward’s intent and ability to refinance this debt for a longer term either through the issuance of new long-term debt or payment of the principal amount with its existing revolving line of credit, which does not mature until July 2018.

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In connection with the 2013 Note Purchase Agreement, in fiscal year 2014, Woodward incurred $1,297 in financing costs, which are deferred and will be amortized using the straight-line method over the life of the agreement. 

Short-term borrowings

A Chinese subsidiary of Woodward has a local credit facility with the Hong Kong and Shanghai Banking Company under which it has the ability to borrow up to either $22,700, or the local currency equivalent of $22,700. Any cash borrowings under the local Chinese credit facility are secured by a parent guarantee from Woodward.  The Chinese subsidiary may utilize the local facility for cash borrowings to support its operating cash needs. Local currency borrowings on the Chinese credit facility are charged interest at the prevailing interest rate offered by the People’s Bank of China on the date of borrowing, plus a margin equal to 25% of that prevailing rate.  U.S. dollar borrowings on the credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 3%.  The Chinese subsidiary had no outstanding cash borrowings against the local credit facility at December 31, 2014 and September 30, 2014.

Woodward also 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 December 31, 2014 and September 30, 2014 on Woodward’s other foreign lines of credit and foreign overdraft facilities.

 

Note 13.  Accrued liabilities

 

 

 

 

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:

 

 

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Note 14.  Other liabilities

 

 

Note 15.  Other (income) expense, net 

 

 

Note 16.  Income taxes

U.S. GAAP requires that the interim period tax provision be determined as follows:  

 

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 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, as well as other factors that cannot be predicted with certainty.  As such, there can be significant volatility in interim tax provisions.

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The following table sets forth the tax expense and the effective tax rate for Woodward’s income from operations:

 

 

The decrease in the year-over-year effective tax rate for the three-months ended December 31, 2014 is primarily attributable to the retroactive extension of the U.S. research and experimentation tax credit for calendar year 2014, which was enacted in December 2014.  The portion related to the nine-months ended September 30, 2014 was $5,063 and was included in the results of the first fiscal quarter of fiscal year 2015.  No similar retroactive benefit occurred in the prior fiscal year.

Gross unrecognized tax benefits were $23,075 as of December 31, 2014 and $22,687 as of September 30, 2014.  Included in the balance of unrecognized tax benefits were $13,613 as of December 31, 2014 and $12,807 as of September 30, 2014, 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 $115 in the next twelve months due to the completion of reviews by tax authorities and the expiration of certain statutes of limitations.  Woodward accrues for potential interest and penalties related to unrecognized tax benefits in tax expense.  Woodward had accrued gross interest and penalties of $1,236 as of December 31, 2014 and $1,158 as of September 30, 2014.

Woodward’s tax returns are audited by U.S., 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.  With a few exceptions, Woodward’s fiscal years remaining open to examination in the United States include fiscal years 2011 and thereafter, and fiscal years remaining open to examination in significant foreign jurisdictions include 2005 and thereafter.

 

Note 17.  Retirement benefits

Woodward provides various 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 contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes.  Certain foreign employees are also eligible to participate in foreign plans. 

The amount of expense associated with defined contribution plans was as follows:

 

 

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.  During the third quarter of fiscal year 2014, Woodward terminated its defined benefit pension plan in Switzerland due to workforce reductions related to the closure of Woodward’s Swiss facility in connection with the realignment of the renewable power business that occurred in the third quarter of fiscal year 2013.  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.

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U.S. GAAP requires that, for obligations outstanding as of September 30, 2014, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

The components of the net periodic retirement pension costs recognized are as follows:

 

 

The components of the net periodic other postretirement benefit costs recognized are as follows:

 

 

The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans.  As a result, the actual funding in fiscal year 2015 may differ from the current estimate.  Woodward estimates its remaining cash contributions in fiscal year 2015 will be as follows:

 

 

 

 

 

 

 

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Multiemployer defined benefit plans

Woodward operates two multiemployer defined benefit plans for certain employees in the Netherlands and Japan.  The amounts of contributions associated with the multiemployer plans were as follows:

 

 

Note 18.  Stock-based compensation

Stock options

Woodward’s 2006 Omnibus Incentive Plan (the “2006 Plan”), which has been approved by Woodward’s stockholders, provides for the grant of up to 7,410 stock options to its employees and directors.  Woodward believes that these stock options align the interests of its employees and directors with those of its stockholders.  Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date of grant, a  ten-year term, and generally a  four-year vesting schedule at a rate of 25% per year.

The fair value of options granted was estimated on the date of grant using the Black-Scholes-Merton option-valuation model using the assumptions in the following table.  Woodward calculates the expected term, which represents the period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants.  Expected volatility is based on historical volatility using daily stock price observations.  The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock.  The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.

 

 

 

The following is a summary of the activity for stock option awards during the three-months ended December 31, 2014:

 

 

 

 

 

 

 

 

 

 

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Changes in non-vested stock options during the three-months ended December 31, 2014 were as follows:

 

 

 

Information about stock options that have vested, or are expected to vest, and are exercisable at December 31, 2014 was as follows:

 

 

Restricted Stock

In the first quarter of fiscal year 2014, Woodward granted an award of 24 shares of restricted stock to its Chief Executive Officer and President, Thomas A. Gendron.  Subject to Mr. Gendron’s continued employment by the Company, these shares of restricted stock will vest 100% following the end of the Company’s fiscal year 2017 if a specified cumulative earnings per share (“EPS”) target is met or exceeded for fiscal years 2014 through 2017.  If this EPS target is not met, all shares of restricted stock will be forfeited by Mr. Gendron.    The shares of restricted stock were awarded to Mr. Gendron pursuant to a form restricted stock agreement approved by Woodward’s Compensation Committee. 

Woodward recognizes stock compensation expense on a straight-line basis over the requisite service period.

A summary of the activity for restricted stock awards in the three-months ended December 31, 2014 follows:

 

 

At December 31, 2014, there was approximately $18,004 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, both stock options and restricted stock awards, granted under the 2002 Plan (for which no further grants will be made) and the 2006 Plan.  The pre-vesting forfeiture rates for purposes of determining stock-based compensation cost 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 2.0 years.

 

Note 19.  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

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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 where it believes that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss. 

Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined amounts, above which third party insurance applies.  Management regularly reviews the probable outcome of these claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to such officers.

 

Note 20.  Segment information

Woodward serves the aerospace market and the energy market through its two reportable segments - Aerospace and Energy.  Woodward’s reportable segments are aggregations of Woodward’s operating segments.  Woodward uses reportable segment information internally to manage its business, including the assessment of business segment performance and decisions for the allocation of resources between 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 excludes matters such as charges for restructuring costs, interest income and expense, and certain gains and losses from asset dispositions. 

A summary of consolidated net sales and earnings by segment follows:

 

 

 

 

 

 

 

 

 

 

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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:

 

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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:

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:

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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 under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the SEC (our “Form 10-K”), as updated from time to time in our subsequent Securities and Exchange Commission (“SEC”) filings.  We undertake no obligation to revise or update any forward-looking statements for any reason.

Unless we have indicated otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q (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.

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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.

 

Non-U.S. GAAP Financial Measures

Earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Earnings based non-U.S. GAAP financial measures

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.

EBIT and EBITDA for the three-months ended December 31,  2014  and December 31, 2013  were as follows:

 

 

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 EBIT and 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 EBIT and 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 as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of Woodward’s various business groups and evaluating cash levels.  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 a substitute for, the financial information prepared and presented in accordance with U.S. GAAP.  Free 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 three-months ended December 31, 2014 and December 31, 2013 were as follows:

 

 

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OVERVIEW

Operational Highlights

Net sales for the first quarter of fiscal year 2015 increased by 13.7% to $487,646 compared to $429,042 for the first quarter of the prior fiscal year.

Historically, sales in the first quarter of our fiscal year have generally been lower than the final three quarters of the fiscal year due to the observance of various holidays and scheduled plant shutdowns for annual maintenance, as well as variability in customer buying patterns.  However, we experienced stronger than average customer buying patterns in the first quarter of fiscal year 2015 as compared to fiscal first quarters for the last five years.   

Net earnings for the first quarter of fiscal year 2015 were $43,784, or $0.66 per diluted share, an increase in net earnings of 87.2% compared to $23,383, or $0.34 per diluted share, for the first quarter of fiscal year 2014.  Net earnings for the first quarter of fiscal year 2015 included an after-tax benefit of $5,063, or $0.08 per diluted share, related to the retroactive extension of the U.S. research and experimentation tax credit for the nine-month period ended September 30, 2014.

EBIT increased by $23,947, or 61.5%, to $62,894 for the first quarter of fiscal year 2015, compared to $38,947 for the first quarter of fiscal year 2014.  EBITDA for the first quarter of fiscal year 2015  was $81,467, an increase of 40.3% from $58,063 for the first quarter of fiscal year 2014.

Liquidity Highlights

Net cash provided by operating activities for the first quarter of fiscal year 2015 was $37,856, compared to $44,433 for the first quarter of fiscal year 2014.

Free cash flow for the first quarter of fiscal year 2015 was  an outflow of $8,765, compared to an inflow of $7,284 for the first quarter of fiscal year 2014,  primarily attributable to $9,472 of higher capital expenditures and lower net cash provided by operating activities in the first quarter of fiscal year 2015 as compared to the same period of the prior year.

At December 31, 2014, we held $58,462 in cash and cash equivalents, and had total outstanding debt of $700,000 with additional borrowing availability of $390,992, net of outstanding letters of credit, under our $600,000 revolving credit facility.  There was additional borrowing capacity of $27,569 under various foreign lines of credit and foreign overdraft facilities.

 

RESULTS OF OPERATIONS

The following tables set forth selected consolidated statements of earnings data as a percentage of net sales for each period indicated:

 

 

 

 

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Other select financial data:

 

Net Sales

Consolidated net sales for the first quarter of fiscal year 2015 increased by $58,604, or 13.7%, compared to the same period of fiscal year 2014.  Details of the changes in consolidated net sales are as follows:

 

 

The increase in net sales for the first quarter of fiscal year 2015 was primarily attributable to improvements in the majority of the markets in both the Aerospace and Energy segments.  In Energy, sales of industrial gas turbine systems, natural gas bus and truck systems and wind turbine power converters were up significantly in the current year’s first quarter when compared to the prior year’s first quarter.  In Aerospace, we saw all markets improved as compared to the prior year’s first quarter.

During the first quarter of fiscal year 2015, our net sales were negatively impacted by $12,171 due to unfavorable impacts of fluctuations in foreign currency exchange rates compared to the same period of fiscal year 2014, driven primarily by changes in the European Monetary Unit.

Our worldwide sales activities are primarily denominated in U.S. dollars (“USD”), European Monetary Units (“EUR”), Great Britain Pounds (“GBP”), Japanese Yen (“JPY”), and Chinese Yuan (“CNY”).  As the USD, EUR, GBP, JPY, and CNY fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions.  If the CNY, which the Chinese government has not historically allowed to fluctuate significantly against USD, is allowed to fluctuate against USD in the future, we would be exposed to greater variability on sales transactions denominated in CNY.  For additional information on foreign currency exchange rate risk, please refer to the risk factor titled “We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks inherent in doing business in other countries” set forth under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K.

Costs and Expenses

The Woodward variable compensation plan, which is tied to financial and operating performance, covers all segments and substantially all members.  Therefore, variable compensation expense can vary significantly from fiscal year to year.  As a result of improved financial performance during the first quarter of fiscal year 2015 as compared to the first quarter of fiscal year 2014, variable compensation expense increased approximately $13,000 and is reflected in cost of goods sold, selling, general and administrative expenses, and research and development costs.

Cost of goods sold increased by $28,294 to $343,760, or 70.5% of net sales, for the first quarter of fiscal year 2015 from $315,466, or 73.5% of net sales, for the first quarter of fiscal year 2014.  The increase in costs of goods sold is attributable to the higher sales volumes and variable compensation expense in the first quarter of fiscal year 2015 as compared to fiscal year 2014. 

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 29.5% for the first quarter of fiscal year 2015, compared to 26.5% for the same period of the prior fiscal year.  Gross margin for the first quarter of fiscal year 2015 was up compared to the first quarter of fiscal year 2014, primarily related to the increase in sales volume and related fixed cost leverage, improved product mix in the Aerospace segment, and overall operational improvements, partially offset by increased variable compensation expense, in the current year’s first quarter as compared to the prior year’s first quarter.

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Selling, general, and administrative expenses increased by $2,515 or 6.7%, to $39,843 for the first quarter of fiscal year 2015 as compared to $37,328 for the same period of fiscal year 2014.  Selling, general and administrative expenses decreased as a percentage of net sales to 8.2% for the first quarter of fiscal year 2015 as compared to 8.7% for the same period of fiscal year 2014.  The increase in selling, general and administrative expenses for the first quarter of fiscal year 2015 is primarily due to increased variable compensation expense.

Research and development costs increased by $4,605, or 15.7%, to $34,029 for the first quarter of fiscal year 2015  as compared to $29,424 for the same period of fiscal year 2014.  Research and development costs increased as a percentage of net sales to 7.0% for the first quarter of fiscal year 2015 as compared to 6.9% for the same period of fiscal year 2014.  Research and development costs increased primarily due to higher variable compensation expense in the first quarter of fiscal year 2015 as compared to the same period of fiscal year 2014.  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.

Amortization of intangible assets decreased to $7,575 for the first quarter of fiscal year 2015 compared to $8,484 for the same period of fiscal year 2014.  As a percentage of net sales, amortization of intangible assets decreased to 1.6% for the first quarter of fiscal year 2015 as compared to 2.0% for the same period of fiscal year 2014.  The decrease in amortization expense is primarily related to some intangible assets becoming fully amortized during the prior fiscal year.

Interest expense decreased slightly to $5,949, or 1.2% of net sales, for the first quarter of fiscal year 2015, compared to $6,062, or 1.4% of net sales, for the same period of fiscal year 2014. 

Income taxes were provided at an effective rate on earnings before income taxes of 23.3% for the first quarter of fiscal year 2015, compared to 29.0% for the same period of fiscal year 2014.  The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:

 

 

 

The decrease in the year-over-year effective tax rate for the three-months ended December 31, 2014 is primarily attributable to the retroactive extension of the U.S. research and experimentation tax credit for calendar year 2014, which was enacted in December 2014.  The portion related to the nine-months ended September 30, 2014 was $5,063 and was included in the results of the first fiscal quarter of fiscal year 2015.  No similar retroactive benefit occurred in the prior fiscal year.

Segment Results

The following table presents sales by segment:

 

 

 

 

 

 

 

 

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The following table presents earnings by segment:

 

 

The following table presents earnings by segment as a percent of segment net sales:

 

 

Aerospace

Aerospace segment net sales were $255,770 for the first quarter of fiscal year 2015, compared to $229,872 for the same period of fiscal year 2014.  The increase in segment net sales for the first quarter of fiscal year 2015 as compared to the same period of fiscal year 2014 was driven primarily by strong commercial aftermarket sales, some recovery in the defense aftermarket, and a moderate increase in commercial original equipment manufacturer (“OEM”) sales.  Defense OEM sales were relatively flat when compared to the prior year’s first quarter.

Defense sales continue to reflect the ongoing U.S. government budget constraints, which have impacted the timing of contracts and upgrade programs, and we continue to expect variability during the current fiscal year.

Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft have continued to increase based on improved airline demand and new product introduction.  The commercial aftermarket showed significant improvement as global passenger traffic growth continues to drive aircraft utilization. 

Aerospace segment earnings increased by $13,244, or 58.7%,  to $35,793 for the first quarter of fiscal year 2015, compared to $22,549 for the same period of fiscal year 2014 due to the following:

 

Aerospace segment earnings as a percentage of sales were 14.0% for the first quarter of fiscal year 2015 compared to 9.8% for the same period of fiscal year 2014.  The increase was primarily attributable to increased sales volume and related fixed cost leverage, favorable product mix due to increased aftermarket sales, and productivity improvements,  partially offset by increased variable compensation expense.

 

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Energy

Energy segment net sales were $231,876 for the first quarter of fiscal year 2015, compared to $199,170 for the same period of fiscal year 2014.  The increase in sales is primarily attributable to increased sales volumes of industrial gas turbine systems, natural gas bus and truck systems, wind turbine power converters, and steam turbine compressor and distribution controls.  The increase in sales of natural gas bus and truck systems reflected increased demand in the volatile China market driven by customer rebates for truck manufacturers that drove short-term demand.  These increases were partially offset by the unfavorable impact of changes in foreign currency exchange rates and declines in diesel reciprocating engine sales and power generation and distribution controls sales.

Energy segment earnings increased by $12,197, or 45.1%, to $39,268 for the first quarter of fiscal year 2015, compared to $27,071 for the same period of fiscal year 2014 due to the following:

 

Energy segment earnings as a percentage of sales increased to 16.9%  in the first quarter of  fiscal year 2015 compared to 13.6% for the same period of fiscal year 2014.    The increase in segment earnings for the first quarter of fiscal year 2015 as compared to the same period of fiscal year 2014 was driven primarily by increased sales volume and related fixed cost leverage, partially offset by increased variable compensation expense and unfavorable product mix.  Foreign currency exchange rates had an unfavorable impact of $2,200 for the first quarter of fiscal year 2015 compared to the same period of fiscal year 2014.

Nonsegment expenses

Nonsegment expenses for the first quarter of fiscal year 2015 increased to $12,167 compared to $10,673 for the same period of fiscal year 2014.  As a percent of sales, nonsegment expenses for the first quarter of fiscal year 2015 were 2.5% of net sales, consistent with the same period of fiscal year 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have been able to satisfy 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.  We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility, will be sufficient to fund our continuing operating needs, including capital expansion funding for the foreseeable future.

Our aggregate cash and cash equivalents were $58,462 at December 31, 2014 and $115,287 at September 30, 2014, and our working capital was $616,741 at December 31, 2014 and $668,628 at September 30, 2014.  Of the $58,462 of cash and cash equivalents held at December 31, 2014, $53,060 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 these funds were to be repatriated.

Consistent with business practice common in China, Woodward’s 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

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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 bankers acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance.  Woodward had bankers acceptance notes of $58,482 at December 31, 2014 and $62,352 at September 30, 2014 recorded as non-customer accounts receivable on its consolidated balance sheets.  Woodward only accepts bankers acceptance notes issued by creditworthy banks as to which the credit risk associated with the bankers acceptance note is assessed to be low.

Our revolving credit facility, which we entered into on July 10, 2013, matures in July 2018 and provides a borrowing capacity of up to $600,000 with the option to increase total available borrowings to up to $800,000, subject to lenders’ participation.  We can borrow against our $600,000 revolving credit facility as long as we are in compliance with all of our debt covenants.  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 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 $600,000 revolving credit facility and our other credit facilities, see Note 12, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.

At December 31, 2014, we had total outstanding debt of $700,000, with additional borrowing availability of $390,992 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $27,569 under various foreign credit facilities. 

At December 31, 2014, we had $200,000 of borrowings outstanding under our revolving credit facility, which was classified as long-term, and no borrowings outstanding under our foreign credit facilities.    Revolving credit facility and short-term borrowing activity during the three months ended December 31, 2014 were as follows:

 

 

We  believe we were in compliance with all our debt covenants at December 31, 2014.  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 stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash.

We are currently developing a second campus in the greater-Rockford, Illinois area for our Aerospace segment.  This campus is intended to support the growth expected over the next ten years and beyond stimulated by our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.  These investments are expected to result in future productivity gains for our existing and new business.  However, given the significance of the anticipated volumes associated with the new system platforms, we still expect our Rockford area workforce to increase substantially, by as much as 70%-90% from current levels, by the end of 2021.  In addition, in September 2013, we invested in a building site in Niles, Illinois.  We are building a new facility on this site for our Aerospace segment and have started to relocate some of our operations currently residing in nearby Skokie, Illinois, to this new facility.  We are also developing a new campus at our corporate headquarters in Fort Collins, Colorado to support the continued growth of our Energy segment by supplementing our existing Colorado manufacturing facilities and corporate headquarters.  In total, we anticipate investing approximately $500,000 through fiscal year 2016 in land, buildings and equipment among our two Rockford, Illinois area campuses, the facility in Niles, Illinois, and a new campus at our corporate headquarters in Fort Collins, Colorado.  Of this $500,000 anticipated amount, we have spent approximately $250,000 to date related to these investments. 

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.  While we believe the lending institutions participating in our credit arrangements are financially stable, events in the global credit markets, including the

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failure, takeover or rescue by various government entities of major financial institutions, have created uncertainty with respect to credit availability.

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.

Cash Flows

 

 

Net cash flows provided by operating activities for the first quarter of fiscal year 2015 was $37,856 compared to $44,433 for the same period of fiscal year 2014.  The decrease of $6,577 is primarily attributable to higher sales in the first quarter of fiscal year 2015.

Net cash flows used in investing activities for the first quarter of fiscal year 2015 was $46,531 compared to $37,109 in the same period of fiscal year 2014.  The increase in cash used in investing activities compared to the same period of the last fiscal year is due to increases in capital expenditures.  Payments for property, plant and equipment increased by $9,472 to $46,621 in the first quarter of fiscal year 2015 as compared to $37,149 in the same period of fiscal year 2014 related mainly to the development of a second campus in the greater-Rockford, Illinois area, a new facility in Niles, Illinois, and a new campus at our headquarters in Fort Collins, Colorado.

Net cash flows used in financing activities for the first quarter of fiscal year 2015 was $45,455 compared to $1,959 for the same period of fiscal year 2014.  During the first quarter of fiscal year 2015, we had net short and long-term payments of $10,000 compared to net debt borrowings of $44,000 in the same period of fiscal year 2014.  Higher borrowings in the first quarter of fiscal year 2015 were primarily attributable to the increases in capital expenditures in the current year.  We utilized $32,118 to repurchase 622 shares of our common stock in the first quarter of fiscal year 2015 under our existing stock repurchase program, compared to $43,616 to repurchase 1,037 shares of our common stock in the same period of fiscal year 2014.

Contractual Obligations

We have various contractual obligations, including obligations related to long-term debt, operating 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 three months of fiscal year 2015.

 

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.  Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.  Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K include the discussion of estimates used for revenue recognition, purchase accounting, inventory valuation, postretirement benefit obligations, reviews for impairment of goodwill, and our provision for income taxes.  Such accounting policies and estimates

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require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported. 

 

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 are communicated through issuance of an Accounting Standards Update.  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.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, Recent accounting pronouncements, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

As of December 31, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions.  We are also exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation.  Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and foreign currency exchange rate changes that arise from normal purchasing and normal sales activities.

These market risks are discussed more fully in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our most recent Form 10-K.  These market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.

 

Item 4.Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman, Chief Financial Officer and Treasurer), as appropriate, to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr., evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q.  Based on their evaluations, they concluded that our disclosure controls and procedures were effective as of December 31, 2014.

Furthermore, there have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

Woodward is currently involved in claims, pending or threatened litigation, 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

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alleged violations of various laws and regulations.  We accrue for known individual matters where we believe that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss. 

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

Item 1A.Risk Factors

Investment in our securities involves risk.  An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K when making investment decisions regarding our securities.  The risk factors that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.

 

 

 

 

Item 6.Exhibits

Exhibits filed as Part of this Report are listed in the Exhibit Index.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

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WOODWARD, INC.

EXHIBIT INDEX

 

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