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Woodward, Inc. - Quarter Report: 2017 March (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 March 31, 2017

or

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

For the transition period from _____ to _____



 



 



 

Commission file number 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)



Delaware

 

36-1984010



(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



1081 Woodward Way, Fort Collins, Colorado

 

80524



(Address of principal executive offices)

 

(Zip Code)

(970) 482-5811



(Registrant’s telephone number, including area code)



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 April 17,  2017, 61,272,506 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

 

 


 







 

 

TABLE OF CONTENTS



 

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements



Condensed Consolidated Statements of Earnings



Condensed Consolidated Statements of Comprehensive Earnings



Condensed Consolidated Balance Sheets



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Stockholders’ Equity



Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29 



Forward Looking Statements

29 



Overview

31 



Results of Operations

32 



Liquidity and Capital Resources

36 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40 

Item 4.

Controls and Procedures

40 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

40 

Item 1A.

Risk Factors

41 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41 

Item 6.

Exhibits

41 



Signatures

42 

1


 



PART I – FINANCIAL INFORMATION

Item 1.Financial Statements



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)











 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended

 

Six-Months Ended



March 31,

 

March 31,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

Net sales

$

500,381 

 

$

479,382 

 

$

943,275 

 

$

924,492 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

    Cost of goods sold

 

365,156 

 

 

346,139 

 

 

692,350 

 

 

679,516 

    Selling, general and administrative expenses

 

43,172 

 

 

36,823 

 

 

76,968 

 

 

77,605 

    Research and development costs

 

30,385 

 

 

31,762 

 

 

56,925 

 

 

63,359 

    Amortization of intangible assets

 

6,431 

 

 

6,926 

 

 

12,889 

 

 

13,872 

    Interest expense

 

6,790 

 

 

6,234 

 

 

13,630 

 

 

13,142 

    Interest income

 

(474)

 

 

(441)

 

 

(879)

 

 

(888)

    Other (income) expense, net (Note 16)

 

(1,315)

 

 

(2,427)

 

 

(5,903)

 

 

(4,436)

Total costs and expenses

 

450,145 

 

 

425,016 

 

 

845,980 

 

 

842,170 

Earnings before income taxes

 

50,236 

 

 

54,366 

 

 

97,295 

 

 

82,322 

Income tax expense

 

12,131 

 

 

13,542 

 

 

12,642 

 

 

15,678 

Net earnings

$

38,105 

 

$

40,824 

 

$

84,653 

 

$

66,644 



 

 

 

 

 

 

 

 

 

 

 

Earnings per share (Note 3):

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.62 

 

$

0.66 

 

$

1.38 

 

$

1.07 

Diluted earnings per share

$

0.60 

 

$

0.65 

 

$

1.33 

 

$

1.05 



 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (Note 3):

 

 

 

 

 

 

 

 

 

 

 

Basic

 

61,310 

 

 

61,639 

 

 

61,436 

 

 

62,351 

Diluted

 

63,499 

 

 

63,064 

 

 

63,593 

 

 

63,768 

Cash dividends per share paid to Woodward common stockholders

$

0.125 

 

$

0.110 

 

$

0.235 

 

$

0.210 







See accompanying Notes to Condensed Consolidated Financial Statements

2


 



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)



































 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended

 

Six-Months Ended



March 31,

 

March 31,



2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

38,105 

 

$

40,824 

 

$

84,653 

 

$

66,644 



 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

7,741 

 

 

10,125 

 

 

(10,894)

 

 

(129)

Gain (loss) on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 6)

 

(945)

 

 

(345)

 

 

2,885 

 

 

517 

Taxes on changes in foreign currency translation adjustments

 

(180)

 

 

(601)

 

 

(486)

 

 

(295)

Foreign currency translation and transactions adjustments, net of tax

 

6,616 

 

 

9,179 

 

 

(8,495)

 

 

93 



 

 

 

 

 

 

 

 

 

 

 

Reclassification of net realized (gains) losses on derivatives to earnings (Note 6)

 

(18)

 

 

28 

 

 

(36)

 

 

57 

Taxes on changes in derivative transactions

 

 

 

(10)

 

 

14 

 

 

(21)

Derivative adjustments, net of tax

 

(11)

 

 

18 

 

 

(22)

 

 

36 

Minimum retirement benefit liability adjustments (Note 18)

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

Net prior service cost

 

57 

 

 

57 

 

 

113 

 

 

113 

Net loss

 

640 

 

 

425 

 

 

1,281 

 

 

852 

Foreign currency exchange rate changes on minimum retirement benefit liabilities

 

(312)

 

 

287 

 

 

943 

 

 

571 

Taxes on changes in minimum retirement liability adjustments, net of foreign currency exchange rate changes

 

(152)

 

 

(290)

 

 

(845)

 

 

(576)

Pension and other postretirement benefit plan adjustments, net of tax

 

233 

 

 

479 

 

 

1,492 

 

 

960 

Total comprehensive earnings

$

44,943 

 

$

50,500 

 

$

77,628 

 

$

67,733 



See accompanying Notes to Condensed Consolidated Financial Statements



3


 







WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



March 31,

 

September 30,



2017

 

2016

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

78,953 

 

$

81,090 

Accounts receivable, less allowance for uncollectible amounts of $2,494 and $2,540, respectively

 

279,897 

 

 

343,768 

Inventories

 

506,275 

 

 

461,683 

Income taxes receivable

 

15,942 

 

 

20,358 

Other current assets

 

29,456 

 

 

37,525 

Total current assets

 

910,523 

 

 

944,424 

Property, plant and equipment, net

 

888,235 

 

 

876,350 

Goodwill

 

553,974 

 

 

555,684 

Intangible assets, net

 

184,577 

 

 

197,650 

Deferred income tax assets

 

19,421 

 

 

20,194 

Other assets

 

50,430 

 

 

48,060 

Total assets

$

2,607,160 

 

$

2,642,362 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings and current portion of long-term debt

$

134,300 

 

$

150,000 

Accounts payable

 

177,730 

 

 

169,439 

Income taxes payable

 

3,046 

 

 

4,547 

Accrued liabilities

 

105,978 

 

 

156,627 

Total current liabilities

 

421,054 

 

 

480,613 

Long-term debt, less current portion

 

562,045 

 

 

577,153 

Deferred income tax liabilities

 

9,403 

 

 

3,777 

Other liabilities

 

359,866 

 

 

368,224 

Total liabilities

 

1,352,368 

 

 

1,429,767 

Commitments and contingencies (Note 20)

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued

 

 -

 

 

 -

Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued

 

106 

 

 

106 

Additional paid-in capital

 

160,559 

 

 

141,570 

Accumulated other comprehensive losses

 

(72,730)

 

 

(65,705)

Deferred compensation

 

7,060 

 

 

5,089 

Retained earnings

 

1,719,744 

 

 

1,649,506 



 

1,814,739 

 

 

1,730,566 

Treasury stock at cost, 11,688  shares and 11,374 shares, respectively

 

(552,887)

 

 

(512,882)

Treasury stock held for deferred compensation, at cost, 186 shares and 157 shares, respectively

 

(7,060)

 

 

(5,089)

Total stockholders' equity

 

1,254,792 

 

 

1,212,595 

Total liabilities and stockholders' equity

$

2,607,160 

 

$

2,642,362 



 

 

 

 

 



See accompanying Notes to Condensed Consolidated Financial Statements.

4


 







WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)









 

 

 

 

 



 

 

 

 

 



Six-Months Ended March 31,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net earnings

$

84,653 

 

$

66,644 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

39,007 

 

 

32,621 

Net gain on sales of assets

 

(3,662)

 

 

(1,601)

Stock-based compensation

 

13,763 

 

 

11,422 

Deferred income taxes

 

4,589 

 

 

(81,496)

(Gain) loss on derivatives reclassified from accumulated comprehensive earnings into earnings

 

(36)

 

 

57 

Proceeds from formation of joint venture (Note 4)

 

 -

 

 

250,000 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

61,324 

 

 

53,666 

Inventories

 

(48,022)

 

 

(45,918)

Accounts payable and accrued liabilities

 

(23,834)

 

 

(10,734)

Current income taxes

 

3,339 

 

 

91,800 

Retirement benefit obligations

 

(1,715)

 

 

(1,969)

Other

 

588 

 

 

(2,810)

Net cash provided by operating activities

 

129,994 

 

 

361,682 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property, plant, and equipment

 

(43,053)

 

 

(99,316)

Net proceeds from sale of assets

 

3,682 

 

 

2,112 

Proceeds from sales of short-term investments

 

4,994 

 

 

 -

Net cash used in investing activities

 

(34,377)

 

 

(97,204)

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid

 

(14,415)

 

 

(13,086)

Proceeds from sales of treasury stock

 

11,223 

 

 

5,288 

Payments for repurchases of common stock

 

(61,782)

 

 

(117,820)

Borrowings on revolving lines of credit and short-term borrowings

 

684,200 

 

 

300,000 

Payments on revolving lines of credit and short-term borrowings

 

(706,600)

 

 

(385,596)

Payments of long-term debt and capital lease obligations

 

(204)

 

 

(50,075)

Net cash used in financing activities

 

(87,578)

 

 

(261,289)

Effect of exchange rate changes on cash and cash equivalents

 

(10,176)

 

 

(646)

Net change in cash and cash equivalents

 

(2,137)

 

 

2,543 

Cash and cash equivalents at beginning of year

 

81,090 

 

 

82,202 

Cash and cash equivalents at end of period

$

78,953 

 

$

84,745 



 

 

 

 

 



See accompanying Notes to Condensed Consolidated Financial Statements



 

5


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Number of shares

 

Stockholders' equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Preferred
stock

 

Common
stock

 

Treasury
stock

 

Treasury
stock held
for deferred 
compensation

 

Common
stock

 

Additional
paid-in
capital

 

Foreign
currency
translation
adjustments

 

Unrealized
derivative
gains
(losses)

 

Minimum
retirement
benefit
liability
adjustments

 

Total
accumulated
other 
comprehensive
(loss) earnings

 

Deferred
compensation

 

Retained
earnings

 

Treasury
stock
at cost

 

Treasury
stock held for
deferred
compensation

 

Total
stockholders'
equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2015

 

 -

 

72,960 

 

(9,763)

 

(173)

 

$

106 

 

$

131,231 

 

$

(21,610)

 

$

166 

 

$

(30,014)

 

$

(51,458)

 

$

4,322 

 

$

1,495,274 

 

$

(422,049)

 

$

(4,322)

 

$

1,153,104 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

66,644 

 

 

 -

 

 

 -

 

 

66,644 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

93 

 

 

36 

 

 

960 

 

 

1,089 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,089 

Cash dividends paid ($0.210 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,086)

 

 

 -

 

 

 -

 

 

(13,086)

Purchases of treasury stock

 

 -

 

 -

 

(2,543)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(120,119)

 

 

 -

 

 

(120,119)

Sales of treasury stock

 

 -

 

 -

 

254 

 

 -

 

 

 -

 

 

(2,366)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,274 

 

 

 -

 

 

5,908 

Common shares issued from treasury stock for benefit plans

 

 -

 

 -

 

317 

 

 -

 

 

 -

 

 

5,319 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

8,680 

 

 

 -

 

 

13,999 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

11,422 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

11,422 

Purchases of stock by deferred compensation plan

 

 -

 

 -

 

 -

 

(24)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,195 

 

 

 -

 

 

 -

 

 

(1,195)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

23 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(298)

 

 

 -

 

 

 -

 

 

298 

 

 

 -

Balances as of March 31, 2016

 

 -

 

72,960 

 

(11,735)

 

(174)

 

$

106 

 

$

145,606 

 

$

(21,517)

 

$

202 

 

$

(29,054)

 

$

(50,369)

 

$

5,219 

 

$

1,548,832 

 

$

(525,214)

 

$

(5,219)

 

$

1,118,961 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2016

 

 -

 

72,960 

 

(11,374)

 

(157)

 

$

106 

 

$

141,570 

 

$

(25,971)

 

$

179 

 

$

(39,913)

 

$

(65,705)

 

$

5,089 

 

$

1,649,506 

 

$

(512,882)

 

$

(5,089)

 

$

1,212,595 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

84,653 

 

 

 -

 

 

 -

 

 

84,653 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(8,495)

 

 

(22)

 

 

1,492 

 

 

(7,025)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,025)

Cash dividends paid ($0.235 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(14,415)

 

 

 -

 

 

 -

 

 

(14,415)

Purchases of treasury stock

 

 -

 

 -

 

(915)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(63,255)

 

 

 -

 

 

(63,255)

Sales of treasury stock

 

 -

 

 -

 

376 

 

 -

 

 

 -

 

 

(2,015)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

14,710 

 

 

 -

 

 

12,695 

Common shares issued from treasury stock for benefit plans

 

 -

 

 -

 

199 

 

 -

 

 

 -

 

 

6,501 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7,513 

 

 

 -

 

 

14,014 

Common shares issued from treasury stock to settle employee liabilities

 

 -

 

 -

 

26 

 

(26)

 

 

 -

 

 

740 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,767 

 

 

 -

 

 

1,027 

 

 

(1,767)

 

 

1,767 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

13,763 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,763 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

(3)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

211 

 

 

 -

 

 

 -

 

 

(211)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of March 31, 2017

 

 -

 

72,960 

 

(11,688)

 

(186)

 

$

106 

 

$

160,559 

 

$

(34,466)

 

$

157 

 

$

(38,421)

 

$

(72,730)

 

$

7,060 

 

$

1,719,744 

 

$

(552,887)

 

$

(7,060)

 

$

1,254,792 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





See accompanying Notes to Condensed Consolidated Financial Statements



 

6


 



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 March 31, 2017 and for the three and six-months ended March 31, 2017 and March 31, 2016, 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, 2017, 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, 2017 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.





Note 2.  New accounting standards

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

In March 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 Earnings 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 Earnings 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.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward has not determined whether it will adopt the new guidance in fiscal year 2018 or fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350):  Simplifying the Accounting for Goodwill Impairment,” to simplify financial reporting by eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment.  Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the amount of goodwill allocated to that reporting unit.  The new guidance effectively eliminates “Step 2” from the previous goodwill impairment test.  ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 (fiscal year 2021 for Woodward).  Early adoption is permitted for goodwill impairment tests performed on testing

7


 

dates after January 1, 2017.  Woodward has not determined in which period it will adopt the new guidance but does not expect the adoption of ASU 2017-04 to have a significant impact on the results of its goodwill impairment testing.

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 within the year of adoption.  Early adoption is allowed only in the first quarter of fiscal year 2017 or the first quarter of fiscal year 2018.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Woodward currently 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.  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.  Early adoption is permitted.  Woodward has not determined in which period it will adopt the new guidance.  Woodward 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 2016, none of which was recognized on the balance sheet, was $7,359.  As of September 30, 2016, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $15,612.

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.  While Woodward may elect to adopt ASC 606 in fiscal year 2018, it does not expect to do so. Upon adoption, Woodward must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application. Woodward has not determined what transition method it will use.  

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.  Based on Woodward’s preliminary review of its customer contracts, Woodward expects 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 to the terms of certain customer contracts.   Some revenue related to customer funded development activities, currently recognized upon completion of the development activities, will be deferred and recognized over a number of years.  Related to recognizing some revenue over

8


 

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.

In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required.  Woodward is currently evaluating potential changes to its processes for preparing required disclosures and to information systems that support the financial reporting process.  In addition, Woodward is 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:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings 

 

$

38,105 

 

$

40,824 

 

$

84,653 

 

$

66,644 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

 

61,310 

 

 

61,639 

 

 

61,436 

 

 

62,351 

Dilutive effect of stock options and restricted stock

 

 

2,189 

 

 

1,425 

 

 

2,157 

 

 

1,417 

Diluted shares outstanding

 

 

63,499 

 

 

63,064 

 

 

63,593 

 

 

63,768 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.62 

 

$

0.66 

 

$

1.38 

 

$

1.07 

Diluted earnings per share

 

$

0.60 

 

$

0.65 

 

$

1.33 

 

$

1.05 



The following stock option grants were outstanding during the three and six-months ended March 31, 2017 or 2016, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Options

 

 

67 

 

 

731 

 

 

 

 

734 

Weighted-average option price

 

$

62.98 

 

$

46.55 

 

$

70.39 

 

$

46.55 







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:















 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Weighted-average treasury stock shares held for deferred compensation obligations

 

 

185 

 

 

185 

 

 

175 

 

 

181 









9


 

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.  Woodward received its first annual payment of $4,894, which was recorded as deferred income and is included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows, during the three-months ended March 31, 2017.  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 the $250,000 consideration received from GE, in January of 2016, for its purchase of a 50% equity interest in the JV as deferred income.  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 $6,352 as of March 31, 2017 and $6,552 as of September 30, 2016, and other liabilities of $240,153 as of March 31, 2017 and $238,187 as of September 30, 2016.  Amortization of the deferred income recognized as an increase to sales was $1,632 for the three months and $3,128 for the six-months ended March 31, 2017, and $1,962 for the three and six-months ended March 31, 2016. 

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 $382 for the three months and $1,066 for the six-months ended March 31, 2017 and $2,158 for the three and six-months ended March 31, 2016 related to Woodward’s equity interest in the earnings of the JV.  During the three and six-months ended March 31, 2017 Woodward received a $2,500 cash distribution from the JV which is included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows. Woodward received no cash distributions from the JV in the three and six-months ended March 31, 2016.  Woodward’s net investment in the JV, which is included in other assets, was $4,770 as of March 31, 2017 and $6,204 as of September 30, 2016.  

Woodward’s  net sales include $18,415 for the three months and $33,717 for the six-months ended March 31, 2017 of sales to the JV, compared to $15,015 for the three and six-months ended March 31, 2016.  Woodward recorded a reduction to sales of $5,674 for the three months and $11,077 for the six-months ended March 31, 2017 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $7,016 for the three and six-months ended March 31, 2016The Condensed Consolidated Balance Sheets,  include “Accounts receivable” of $8,816 at  March 31, 2017 and $5,326 at September 30, 2016 related to amounts the JV owed Woodward, and include “Accounts payable” of $7,019 at March 31, 2017, and $3,926 at September 30, 2016 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.

10


 

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, 2017 or September 30, 2016.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At March 31, 2017

 

At September 30, 2016



 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

71,314 

 

$

 -

 

$

 -

 

$

71,314 

 

$

80,959 

 

$

 -

 

$

 -

 

$

80,959 

Investments in money market funds

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

48 

 

 

 -

 

 

 -

 

 

48 

Investments in reverse repurchase agreements

 

 

167 

 

 

 -

 

 

 -

 

 

167 

 

 

83 

 

 

 -

 

 

 -

 

 

83 

Investments in term deposits with foreign banks

 

 

7,472 

 

 

 -

 

 

 -

 

 

7,472 

 

 

7,136 

 

 

 -

 

 

 -

 

 

7,136 

Equity securities

 

 

15,340 

 

 

 -

 

 

 -

 

 

15,340 

 

 

12,491 

 

 

 -

 

 

 -

 

 

12,491 

Total financial assets

 

$

94,293 

 

$

 -

 

$

 -

 

$

94,293 

 

$

100,717 

 

$

 -

 

$

 -

 

$

100,717 



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 in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earningsThe 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 recognized 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.

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.”  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.

11


 

Accounts receivable, accounts payable, the current portion of long-term debt, 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, 2017

 

At September 30, 2016



 

Fair Value Hierarchy Level

 

Estimated Fair Value

 

Carrying Cost

 

Estimated Fair Value

 

Carrying Cost

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from municipalities

 

2

 

$

16,211 

 

$

15,361 

 

$

17,501 

 

$

15,849 

Investments in short-term time deposits

 

2

 

 

 -

 

 

 -

 

 

4,882 

 

 

4,918 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

2

 

 

(134,300)

 

 

(134,300)

 

 

(150,000)

 

 

(150,000)

Long-term debt, excluding current portion

 

2

 

$

(586,706)

 

$

(563,941)

 

$

(617,857)

 

$

(579,244)



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 2.9% at March 31, 2017 and 2.2% at September 30, 2016.

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 rate used to estimate the fair value of the short-term time deposits was 6.9% at September 30, 2016.  There were no investments in short-term time deposits at March 31, 2017.

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% at March 31, 2017 and 1.9% at September 30, 2016.

 

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 any of the three or six-months ended March 31, 2017 or March 31, 2016.

12


 

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) earnings (“accumulated OCI”), were net gains of $254 as of March 31, 2017 and $290 as of September 30, 2016.

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,



 

2017

 

2016

 

2017

 

2016

Amount of (income) expense recognized in earnings on derivative

 

$

(18)

 

$

28 

 

$

(36)

 

$

57 

Amount of (gain) loss recognized in accumulated OCI on derivative

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Amount of (gain) loss reclassified from accumulated OCI into earnings

 

 

(18)

 

 

28 

 

 

(36)

 

 

57 



Based on the carrying value of the realized but unrecognized gains on terminated derivative instruments designated as cash flow hedges as of March 31, 2017, 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.  Woodward designated the €40,000 Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries.  A foreign exchange loss on the Series M Notes of $664 for the three months and a foreign exchange gain of $2,150 for the six months ended March 31, 2017 is included in foreign currency translation adjustments within total comprehensive (losses) earnings. 

In June 2015, Woodward designated an intercompany loan of 160,000 Renminbi (“RMB”) between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender.  Net unrealized foreign exchange losses on the loan of $345 for the three months and net unrealized foreign exchange gains on the loan of $517 for the six-months ended March 31, 2016 is included in foreign currency translation adjustments within total comprehensive earnings.  In June 2016, the intercompany loan was repaid. 

In July 2016, Woodward designated a new intercompany loan of 160,000 RMB between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender.  Net unrealized foreign exchange losses on the loan of $281 for the three months and net unrealized foreign exchange gains on the loan of $735 for the six-months ended March 31, 2017 are included in foreign currency translation adjustments within total comprehensive (losses) earnings.

 

13


 

Note 7.  Supplemental statement of cash flows information

















 

 

 

 

 

 



 

 

 



 

Six-Months Ended March 31,



 

2017

 

2016

Interest paid, net of amounts capitalized

 

$

13,999 

 

$

18,127 

Income taxes paid

 

 

9,160 

 

 

7,470 

Income tax refunds received

 

 

90 

 

 

1,361 

Non-cash activities:

 

 

 

 

 

 

Purchases of property, plant and equipment on account

 

 

7,621 

 

 

12,028 

Property, plant and equipment acquired by capital lease

 

 

 -

 

 

1,239 

Common shares issued from treasury to settle employee liabilities

 

 

1,767 

 

 

 -

Common shares issued from treasury to settle benefit obligations (Note 18)

 

 

14,014 

 

 

13,999 

Purchases of treasury stock on account

 

 

 -

 

 

1,745 

Cashless exercise of stock options

 

 

1,473 

 

 

555 

 

Note 8.  Accounts receivable

Almost all of Woodward’s sales are made on credit and result in accounts receivable that are recorded at the amount invoiced.  In the normal course of business, not all accounts receivable are collected.  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, Woodward considers customer-specific information 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, 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 as to which the credit risk associated with the bankers’ acceptance notes is believed to be minimal.



The composition of Woodward’s accounts receivable at March 31, 2017 and September 30, 2016 follows:











 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

September 30,



 

2017

 

2016

Accounts receivable from:

 

 

 

 

 

 

Customers

 

$

263,773 

 

$

341,215 

Other (Chinese financial institutions)

 

 

18,618 

 

 

5,093 

Allowance for uncollectible customer amounts

 

 

(2,494)

 

 

(2,540)



 

$

279,897 

 

$

343,768 

 



14


 

Note 9.  Inventories







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

September 30,



 

2017

 

2016

Raw materials

 

$

56,500 

 

$

54,246 

Work in progress

 

 

119,952 

 

 

109,756 

Component parts (1)

 

 

273,341 

 

 

249,307 

Finished goods

 

 

56,482 

 

 

48,374 



 

$

506,275 

 

$

461,683 

(1)

Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

 

Note 10.  Property, plant, and equipment







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

September 30,



 

2017

 

2016

Land and land improvements

 

$

87,514 

 

$

87,696 

Buildings and building improvements

 

 

526,597 

 

 

527,704 

Leasehold improvements

 

 

14,990 

 

 

15,213 

Machinery and production equipment

 

 

488,851 

 

 

484,315 

Computer equipment and software

 

 

122,570 

 

 

117,984 

Office furniture and equipment

 

 

26,841 

 

 

29,344 

Other

 

 

19,165 

 

 

18,969 

Construction in progress

 

 

108,020 

 

 

88,909 



 

 

1,394,548 

 

 

1,370,134 

Less accumulated depreciation

 

 

(506,313)

 

 

(493,784)

Property, plant, and equipment, net

 

$

888,235 

 

$

876,350 



Included in “Office furniture and equipment” and “Other” is $1,653 at March 31, 2017 and September 30, 2016, of gross assets acquired on capital leases, and accumulated depreciation included $530 at March 31, 2017 and $322 at September 30, 2016 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 in anticipation of beginning serial production of new narrow-body product lines beginning in fiscal year 2017 for its Aerospace segment.  This campus is intended to support Woodward’s expected growth in its Aerospace segment over the next ten years and beyond, required 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 $41,941 at March  31, 2017 and $26,741 at September 30, 2016 associated with new equipment purchases for the second campus. 

For the three and six-months ended March 31, 2017 and 2016, Woodward had depreciation expense as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Depreciation expense

 

$

13,663 

 

$

8,633 

 

$

26,118 

 

$

18,749 



For the three and six-months ended March 31, 2017  and 2016, 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,



 

2017

 

2016

 

2017

 

2016

Capitalized interest

 

$

481 

 

$

2,267 

 

$

953 

 

$

4,140 

15


 

 

Note 11.  Goodwill





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

September 30, 2016

 

Effects of Foreign Currency Translation

 

March 31, 2017

Aerospace

 

$

455,423 

 

$

 -

 

$

455,423 

Industrial

 

 

100,261 

 

 

(1,710)

 

 

98,551 

Consolidated

 

$

555,684 

 

$

(1,710)

 

$

553,974 



 

 

 

 

 

 

 

 

 





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 2016 impairment test resulted in no impairment.

 

Note 12.  Intangible assets, net



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2017

 

September 30, 2016



Gross Carrying Value

 

Accumulated Amortization

 

Net Carrying Amount

 

Gross Carrying Value

 

Accumulated Amortization

 

Net Carrying Amount

Customer relationships and contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

282,225 

 

$

(142,657)

 

$

139,568 

 

$

282,225 

 

$

(134,158)

 

$

148,067 

Industrial

 

40,860 

 

 

(33,896)

 

 

6,964 

 

 

40,969 

 

 

(33,509)

 

 

7,460 

Total

$

323,085 

 

$

(176,553)

 

$

146,532 

 

$

323,194 

 

$

(167,667)

 

$

155,527 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intellectual property:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Industrial

 

19,190 

 

 

(17,844)

 

 

1,346 

 

 

19,435 

 

 

(17,876)

 

 

1,559 

Total

$

19,190 

 

$

(17,844)

 

$

1,346 

 

$

19,435 

 

$

(17,876)

 

$

1,559 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Process technology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

76,605 

 

$

(46,177)

 

$

30,428 

 

$

76,605 

 

$

(43,229)

 

$

33,376 

Industrial

 

22,721 

 

 

(16,812)

 

 

5,909 

 

 

22,965 

 

 

(16,200)

 

 

6,765 

Total

$

99,326 

 

$

(62,989)

 

$

36,337 

 

$

99,570 

 

$

(59,429)

 

$

40,141 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

Industrial

 

1,186 

 

 

(824)

 

 

362 

 

 

1,246 

 

 

(823)

 

 

423 

Total

$

1,186 

 

$

(824)

 

$

362 

 

$

1,246 

 

$

(823)

 

$

423 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

$

358,830 

 

$

(188,834)

 

$

169,996 

 

$

358,830 

 

$

(177,387)

 

$

181,443 

Industrial

 

83,957 

 

 

(69,376)

 

 

14,581 

 

 

84,615 

 

 

(68,408)

 

 

16,207 

Consolidated Total

$

442,787 

 

$

(258,210)

 

$

184,577 

 

$

443,445 

 

$

(245,795)

 

$

197,650 



16


 

For the three and six-months ended March 31, 2017 and 2016, Woodward recorded amortization expense associated with intangibles of the following:











 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended

 

Six-Months Ended



March 31,

 

March 31,



2017

 

2016

 

2017

 

2016

Amortization expense

$

6,431 

 

$

6,926 

 

$

12,889 

 

$

13,872 



Future amortization expense associated with intangibles is expected to be:







 

 

 

 

 



 

 

 

 

 

Year Ending September 30:

 

 

 

 

 

2017 (remaining)

 

 

 

$

12,865 

2018

 

 

 

 

24,931 

2019

 

 

 

 

23,095 

2020

 

 

 

 

20,340 

2021

 

 

 

 

18,394 

Thereafter

 

 

 

 

84,952 



 

 

 

$

184,577 

 



Note 13.  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 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 $134,300 in principal amount of borrowings outstanding as of March 31, 2017, at an effective interest rate of 2.03% and $156,700 in principal amount of borrowings outstanding as of September 30, 2016, at an effective interest rate of 1.77%.   As of March 31, 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

During the three-months ended March 31, 2017, a Chinese subsidiary of Woodward amended its local uncommitted credit facility with the Hong Kong and Shanghai Banking Company (“HSBC”) under which it had the ability to borrow up to either $22,700, or the local currency equivalent of $22,700, up to the amount of a parent guarantee from Woodward.  Under the amended agreement, the Chinese subsidiary has the ability to borrow up to either $4,550, or the local currency equivalent of $4,550, up to the amount of 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 15% 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 March 31, 2017 and September 30, 2016.

On January 5, 2017, the Brazilian subsidiary of Woodward amended its local uncommitted credit facility with the Banco J.P. Morgan S.A., under which it had the ability to borrow up to 52,000 Brazilian Real, to extend the maturity date until July 14, 2017 and decrease the maximum borrowing capacity to 1,000 Brazilian Real.  Any cash borrowings under the local Brazilian credit facility are secured by a parent guarantee from Woodward.  The Brazilian subsidiary may utilize the local facility to support its operating cash needs.  Local currency borrowings on the Brazilian credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 1.75%.  The Brazilian subsidiary had no outstanding cash borrowings against the local credit facility at March 31, 2017 and September 30, 2016.

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 March 31, 2017 and September 30, 2016 on Woodward’s other foreign lines of credit and foreign overdraft facilities.

17


 

Long-term debt



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

September 30,



 

2017

 

2016

Revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020, unsecured

 

$

134,300 

 

$

156,700 

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

 

 

42,735 

 

 

44,886 

Series N notes – 1.31% due September 2028; unsecured

 

 

82,265 

 

 

86,406 

Series O notes – 1.57% due September 2031; unsecured

 

 

45,941 

 

 

48,252 

Total debt

 

 

698,241 

 

 

729,244 

Less: Current portion of long-term debt

 

 

(134,300)

 

 

(150,000)

        Unamortized debt issuance costs

 

 

(1,896)

 

 

(2,091)

Long-term debt, less current portion

 

$

562,045 

 

$

577,153 

The Notes

In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes (the “2008 Notes”).  In April 2009, Woodward entered into a note purchase agreement relating to the Series F Notes (the “2009 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 2008 Notes, 2009 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 aggregate principal amount of Woodward’s Series M Senior Notes (the “Series M Notes”).  The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Series N Notes, the “2016 Notes”, and together with the USD Notes, collectively, the “Notes”). 

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 2016 Notes will be payable semi-annually on March 23 and September 23 of each year, commencing on March 23, 2017, 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, 2017, the Series J Notes bore interest at an effective rate of 2.3%.

Debt Issuance Costs

Unamortized debt issuance costs associated with the Notes of $1,896 as of March 31, 2017 and $2,091 as of September 30, 2016 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets.  Unamortized debt issuance costs of $2,697 associated with the Revolving Credit Agreement as of March 31, 2017 and $3,134 as of September 30, 2016 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.

 

18


 

Note 14.  Accrued liabilities





 

 

 

 

 



 

 

 

 

 



March 31,

 

September 30,



2017

 

2016

Salaries and other member benefits

$

37,947 

 

$

87,197 

Warranties

 

15,041 

 

 

15,993 

Interest payable

 

9,091 

 

 

9,071 

Current portion of acquired performance obligations and unfavorable contracts (1)

 

2,393 

 

 

2,910 

Accrued retirement benefits

 

2,503 

 

 

2,505 

Current portion of loss reserve on contractual lease commitments

 

1,840 

 

 

1,840 

Current portion of deferred income from JV formation (Note 4)

 

6,352 

 

 

6,552 

Deferred revenues

 

5,385 

 

 

5,779 

Taxes, other than income

 

13,890 

 

 

14,580 

Other 

 

11,536 

 

 

10,200 



$

105,978 

 

$

156,627 



(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.



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,



 

2017

 

 

2016

 

 

2017

 

 

2016

Warranties, beginning of period

$

15,528 

 

$

13,370 

 

$

15,993 

 

$

13,741 

Expense, net of recoveries

 

2,139 

 

 

3,175 

 

 

4,062 

 

 

6,411 

Reductions for settling warranties

 

(2,750)

 

 

(1,274)

 

 

(4,782)

 

 

(4,743)

Foreign currency exchange rate changes 

 

124 

 

 

282 

 

 

(232)

 

 

144 

Warranties, end of period

$

15,041 

 

$

15,553 

 

$

15,041 

 

$

15,553 



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.  During the first quarter of fiscal year 2016 Woodward fully vacated the Skokie facility and therefore recorded a charge of $8,165 to recognize a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.

19


 

The summary for the activity in the loss reserve during the three and six-months ended March 31, 2017 and March 31, 2016 is as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended March 31,

 

Six-Months Ended March 31,



 

2017

 

 

2016

 

 

2017

 

 

2016

Loss reserve on contractual lease commitments, beginning of period

$

8,840 

 

$

10,629 

 

$

9,242 

 

$

2,464 

Additions

 

 -

 

 

 -

 

 

 -

 

 

8,165 

Payments

 

(445)

 

 

(857)

 

 

(847)

 

 

(857)

Loss reserve on contractual lease commitments, end of period

$

8,395 

 

$

9,772 

 

$

8,395 

 

$

9,772 



Other liabilities included $6,555 of accrued loss reserve on contractual lease commitments that are not expected to be settled or paid within twelve months as of March 31, 2017.

 

Note 15.  Other liabilities







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

September 30,



 

2017

 

2016

Net accrued retirement benefits, less amounts recognized within accrued liabilities

 

$

69,858 

 

$

70,479 

Noncurrent portion of deferred income from JV formation (1)

 

 

240,153 

 

 

238,187 

Total unrecognized tax benefits, net of offsetting adjustments

 

 

12,840 

 

 

17,239 

Acquired unfavorable contracts (2)

 

 

3,081 

 

 

3,148 

Deferred economic incentives (3)

 

 

15,306 

 

 

16,196 

Loss reserve on contractual lease commitments (4)

 

 

6,555 

 

 

7,402 

Other

 

 

12,073 

 

 

15,573 



 

$

359,866 

 

$

368,224 





(1)

See Note 4, Joint venture for more information on the deferred income from JV formation.

(2)

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.

(3)

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.

(4)

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,



 

2017

 

2016

 

2017

 

2016

Equity interest in the earnings of the JV (Note 4)

 

$

(382)

 

$

(2,158)

 

$

(1,066)

 

$

(2,158)

Net (gain) loss on sales of assets

 

 

37 

 

 

 

 

(3,662)

 

 

(1,601)

Rent income

 

 

(70)

 

 

(83)

 

 

(143)

 

 

(184)

Net (gain) loss on investments in deferred compensation program

 

 

(705)

 

 

(130)

 

 

(729)

 

 

(434)

Other

 

 

(195)

 

 

(57)

 

 

(303)

 

 

(59)



 

$

(1,315)

 

$

(2,427)

 

$

(5,903)

 

$

(4,436)

 

20


 

Note 17.  Income taxes

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.

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.

On December 7, 2016, the U.S. Treasury Department issued regulations under Internal Revenue Code Section 987 (“Section 987 Regulations”) which clarify how companies calculate foreign currency translation gains and losses for income tax purposes for branches whose accounting records are kept in a currency other than the currency of the company.  The issuance of these Section 987 Regulations had no significant impact on Woodward’s Condensed Consolidated Financial Statements for the six months ended March 31, 2017.

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,



 

2017

 

2016

 

2017

 

2016

Earnings before income taxes

 

$

50,236 

 

$

54,366 

 

$

97,295 

 

$

82,322 

Income tax expense

 

 

12,131 

 

 

13,542 

 

 

12,642 

 

 

15,678 

Effective tax rate

 

 

24.1% 

 

 

24.9% 

 

 

13.0% 

 

 

19.0% 

The decrease in the year-over-year effective tax rate for the second quarter of fiscal year 2017 is primarily attributable to a larger favorable adjustment for the net excess income tax benefits from stock-based compensation and favorable changes to state apportionment in the current quarter.  These decreases in the year-over-year effective tax rate were partially offset by smaller net favorable resolutions of tax matters in the current quarter compared to the prior year quarter and the release of foreign valuation allowances in the second quarter of fiscal year 2016 that did not repeat in the current quarter.   

The decrease in the year-over-year effective tax rate for the six-months ended March 31, 2017 is primarily attributable to the impact of the repatriation to the U.S. of certain net foreign profits and losses in the first quarter of fiscal year 2017 and a larger favorable adjustment for the net excess income tax benefit from stock-based compensation in the current fiscal year.  This combined decrease was partially offset by the retroactive benefit of the U.S. research and experimentation credit pursuant to the December 18, 2015 enactment of the Protecting Americans from Tax Hikes Act of 2015, which was included in the effective tax rate for the first quarter of fiscal year 2016 but did not repeat in the first quarter of fiscal year 2017. 

Gross unrecognized tax benefits were $18,747 as of March 31, 2017, and $23,526 as of September 30, 2016.  Included in the balance of unrecognized tax benefits were $11,618 as of March 31, 2017 and $11,426 as of September 30, 2016 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 $3,702 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 $1,679 as of March 31, 2017 and $1,273 as of September 30, 2016.

21


 

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 2013 and thereafterWoodward is currently under examination by the Internal Revenue Service for fiscal year 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 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.  In the second quarter of fiscal years 2017 and 2016, Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 199 shares of common stock for a value of $14,014 in fiscal year 2017, and 317 total shares of common stock for a value of $13,999 in fiscal year 2016. 

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Company costs

 

$

8,502 

 

$

7,478 

 

$

15,751 

 

$

15,482 



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 outstanding as of September 30, 2016, 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 may 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 expects to make no further pension benefit payments under the lump-sum buy-out options.

22


 

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended March 31,



 

United States

 

Other Countries

 

Total



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Service cost

 

$

418 

 

$

424 

 

$

187 

 

$

185 

 

$

605 

 

$

609 

Interest cost

 

 

1,439 

 

 

1,309 

 

 

296 

 

 

411 

 

 

1,735 

 

 

1,720 

Expected return on plan assets

 

 

(2,633)

 

 

(2,535)

 

 

(638)

 

 

(666)

 

 

(3,271)

 

 

(3,201)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

463 

 

 

323 

 

 

126 

 

 

63 

 

 

589 

 

 

386 

Prior service cost

 

 

96 

 

 

96 

 

 

 -

 

 

 -

 

 

96 

 

 

96 

Net periodic retirement pension (benefit) cost

   

$

(217)

 

$

(383)

 

$

(29)

 

$

(7)

 

$

(246)

 

$

(390)

Contributions paid

 

$

 -

 

$

 -

 

$

101 

 

$

139 

 

$

101 

 

$

139 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six-Months Ended March 31,



 

United States

 

Other Countries

 

Total



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Service cost

 

$

837 

 

$

1,098 

 

$

379 

 

$

371 

 

$

1,216 

 

$

1,469 

Interest cost

 

 

2,878 

 

 

2,626 

 

 

592 

 

 

846 

 

 

3,470 

 

 

3,472 

Expected return on plan assets

 

 

(5,265)

 

 

(5,077)

 

 

(1,279)

 

 

(1,363)

 

 

(6,544)

 

 

(6,440)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

927 

 

 

646 

 

 

253 

 

 

128 

 

 

1,180 

 

 

774 

Prior service cost

 

 

192 

 

 

192 

 

 

 -

 

 

 -

 

 

192 

 

 

192 

Net periodic retirement pension (benefit) cost

 

$

(431)

 

$

(515)

 

$

(55)

 

$

(18)

 

$

(486)

 

$

(533)

Contributions paid

 

$

 -

 

$

 -

 

$

466 

 

$

528 

 

$

466 

 

$

528 



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







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Service cost

 

$

 

$

 

$

 

$

11 

Interest cost

 

 

311 

 

 

262 

 

 

622 

 

 

524 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

51 

 

 

39 

 

 

101 

 

 

78 

Prior service benefit

 

 

(39)

 

 

(39)

 

 

(79)

 

 

(79)

Net periodic other postretirement (benefit) cost

 

$

326 

 

$

268 

 

$

651 

 

$

534 

Contributions paid

 

$

804 

 

$

840 

 

$

1,419 

 

$

1,221 



23


 

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 2017 may differ from the current estimate.  Woodward estimates its remaining cash contributions in fiscal year 2017 will be as follows:









 

 

 



 

 

 

Retirement pension benefits:

 

 

 

United States

 

$

 -

United Kingdom

 

 

222 

Japan

 

 

 -

Other postretirement benefits

 

 

2,620 



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:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2017

 

2016

 

2017

 

2016

Company contributions

 

$

79 

 

$

157 

 

$

147 

 

$

287 

 

Note 19.  Stockholders’ equity

Stock repurchase program

In the first quarter of fiscal year 2017, Woodward’s Board of Directors terminated the Company’s prior stock repurchase program (the “Prior 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 2019 (the “2016 Authorization”).  Under the 2016 Authorization, in the first half of fiscal year 2017, Woodward purchased 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.

Under the Prior Repurchase Program, in the first quarter of fiscal year 2016, Woodward executed a 10b5-1 plan to repurchase up to $125,000 of its common stock for a period that ended on April 20, 2016.  During the first half of fiscal year 2016, Woodward purchased 2,523 shares of its common stock for $119,119.

Stock-based compensation

Provisions governing outstanding stock option awards are included in 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.  The 2006 Plan, which was approved by Woodward’s stockholders and became effective January 25, 2006, expired in fiscal year 2016.  No further grants will be made under either the 2002 Plan or the 2006 Plan. 

Woodward’s stockholders approved a successor plan to the 2006 Plan (the “2017 Plan”) at the January 25, 2017 Annual Stockholder Meeting.  As of September 14, 2016, the effective date of the 2017 Plan, Woodward’s Board of Directors delegated authority to administer the 2017 Plan to the compensation committee of the board (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards.  The Committee approved issuance of options under the 2017 Plan, with an award date of October 3, 2016 conditional 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 was recognized on these stock options during the three-months ended December 31, 2016.  Stock-based compensation expense recognized on these stock options for the three-months ended March 31, 2017 includes recognition of the elapsed service period of these stock options from October 3, 2016 through March 31, 2017.

Stock options

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.  To date equity awards under the 2017 Plan have consisted of grants of stock options 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

24


 

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 date of grant for stock options is the date when the grants become unconditionally awarded and an employer and grantee reach a mutual understanding of the key terms and conditions of the grant.  Stock options awarded as of October 3, 2016 were conditional and subject to the approval of the 2017 Plan by the stockholders.  As such, those awards have a date of grant for accounting purposes of January 25, 2017, the date the 2017 Plan was approved by stockholders.  The fair value of options granted is estimated as of that same 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,



2017

 

2016

 

2017

 

2016

Weighted-average exercise price per share

$

62.64 

 

 

 

n/a

 

 

$

62.64 

 

 

$

40.26 

 

Weighted-average grant date market value of Woodward stock

$

69.45 

 

 

 

n/a

 

 

$

69.45 

 

 

$

40.26 

 

Expected term (years)

 

6.0 

-

8.7

 

 

 

n/a

 

 

 

6.0 

-

8.7

 

 

 

6.3 

-

8.7

 

Estimated volatility

 

31.5% 

-

33.7%

 

 

 

n/a

 

 

 

31.5% 

-

33.7%

 

 

 

34.5% 

-

35.1%

 

Estimated dividend yield

 

0.7%

 

 

 

n/a

 

 

 

0.7%

 

 

 

1.0%

 

Risk-free interest rate

 

2.2% 

-

2.5%

 

 

 

n/a

 

 

 

2.2% 

-

2.5%

 

 

 

1.7% 

-

2.0%

 





The following is a summary of the activity for stock option awards during the three and six-months ended March 31, 2017:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31, 2017

 

March 31, 2017



 

Number of options

 

Weighted-Average Exercise Price per Share

 

Number of options

 

Weighted-Average Exercise Price per Share

Options, beginning balance

 

 

4,792 

 

$

35.35 

 

 

4,944 

 

$

35.35 

Options granted

 

 

780 

 

 

62.64 

 

 

780 

 

 

62.64 

Options exercised

 

 

(236)

 

 

33.21 

 

 

(375)

 

 

33.81 

Options forfeited

 

 

(5)

 

 

42.73 

 

 

(18)

 

 

42.34 

Options, ending balance

 

 

5,331 

 

 

39.43 

 

 

5,331 

 

 

39.43 



25


 

Changes in non-vested stock options during the three and six-months ended March 31, 2017 were as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31, 2017

 

March 31, 2017



 

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

 

 

1,304 

 

$

14.70 

 

 

2,075 

 

$

14.90 

Options granted

 

 

780 

 

 

25.05 

 

 

780 

 

 

25.05 

Options vested

 

 

(3)

 

 

18.27 

 

 

(761)

 

 

15.25 

Options forfeited

 

 

(5)

 

 

14.77 

 

 

(18)

 

 

14.56 

Options outstanding, ending balance

 

 

2,076 

 

 

18.58 

 

 

2,076 

 

 

18.58 



Information about stock options that have vested, or are expected to vest, and are exercisable at March 31, 2017 was as follows: 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Number

 

Weighted- Average Exercise Price

 

Weighted- Average Remaining Life in Years

 

Aggregate Intrinsic Value

Options outstanding

 

 

5,331 

 

$

39.43 

 

 

6.4 

 

$

151,901 

Options vested and exercisable

 

 

3,254 

 

 

32.80 

 

 

5.0 

 

 

114,271 

Options vested and expected to vest

 

 

5,224 

 

 

39.18 

 

 

6.3 

 

 

150,155 



Restricted Stock

In the first quarter of fiscal year 2014, Woodward granted an award of 24 shares of restricted stock under the 2006 Plan to its Chief Executive Officer and President, Thomas A. Gendron.  Subject to Mr. Gendron’s continued employment by the Company, 100% of these shares of restricted stock will vest 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 for that period, all shares of restricted stock will be forfeited by Mr. Gendron.  As of March 31, 2017, Woodward determined it is not probable that the restricted shares will vest.  The shares of restricted stock were awarded to Mr. Gendron pursuant to a form restricted stock agreement approved by Woodward’s Compensation Committee of the Board of Directors.

A summary of the activity for restricted stock awards in the three and six-months ended March 31, 2017 follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31, 2017

 

March 31, 2017



 

 

Number

 

 

Fair Value per Share

 

 

Number

 

 

Fair Value per Share

Beginning balance

 

 

24 

 

$

39.43 

 

 

24 

 

$

39.43 

Shares granted

 

 

 -

 

 

n/a

 

 

 -

 

 

n/a

Shares vested

 

 

 -

 

 

n/a

 

 

 -

 

 

n/a

Shares forfeited

 

 

 -

 

 

n/a

 

 

 -

 

 

n/a

Ending balance

 

 

24 

 

 

39.43 

 

 

24 

 

 

39.43 

Stock-based compensation cost

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, 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 on the date of grant.

At March 31, 2017, there was approximately $12,622 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, both stock options and restricted stock awards, granted under the 2006 Plan (for

26


 

which no further grants will be made) and stock options granted under the 2017 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 2.3 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 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 21.  Segment information

Woodward serves the aerospace, industrial and energy 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 costs, 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,



 

2017

 

2016

 

2017

 

2016

Segment external net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

320,526 

 

$

290,690 

 

$

587,206 

 

$

559,289 

Industrial

 

 

179,855 

 

 

188,692 

 

 

356,069 

 

 

365,203 

Total consolidated net sales

 

$

500,381 

 

$

479,382 

 

$

943,275 

 

$

924,492 

Segment earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

58,227 

 

$

50,578 

 

$

105,104 

 

$

94,064 

Industrial

 

 

17,089 

 

 

19,469 

 

 

35,087 

 

 

41,020 

Nonsegment expenses

 

 

(18,764)

 

 

(9,888)

 

 

(30,145)

 

 

(40,508)

Interest expense, net

 

 

(6,316)

 

 

(5,793)

 

 

(12,751)

 

 

(12,254)

Consolidated earnings before income taxes

 

$

50,236 

 

$

54,366 

 

$

97,295 

 

$

82,322 



27


 

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, 2017

 

September 30, 2016

Segment assets:

 

 

 

 

 

 

Aerospace

 

$

1,655,431 

 

$

1,637,522 

Industrial

 

 

681,722 

 

 

705,169 

Unallocated corporate property, plant and equipment, net

 

 

91,904 

 

 

89,988 

Other unallocated assets

 

 

178,103 

 

 

209,683 

Consolidated total assets

 

$

2,607,160 

 

$

2,642,362 



28


 



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:

·

future sales, earnings, cash flow, uses of cash, and other measures of financial performance;

·

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 level of activity in particular industries or markets and the effects of changes in those levels;

·

the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;

·

the research, development, production, and support of new products and services;

·

new business opportunities;

·

restructuring and alignment costs and savings;

·

our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;

·

our liquidity, including our ability to meet capital spending requirements and operations;

·

future repurchases of common stock;

·

future levels of indebtedness and capital spending;

·

the stability of financial institutions, including those lending to us; and

·

pension and other postretirement plan assumptions and future contributions.

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;

29


 

·

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 successfully manage regulatory, tax, and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act, international trade regulations, and product liability, patent, and intellectual property matters);

·

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, 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;

·

our operations may be adversely affected by information systems interruptions or intrusions; 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 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.  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.

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.

30


 

OVERVIEW

Operational Highlights

Second Quarter Highlights

Net sales for the second quarter of fiscal year 2017 were $500,381, an increase of $20,999, or 4.4% from $479,382 for the second quarter of the prior year.  Aerospace segment sales for the second quarter of fiscal year 2017 were up $29,836, or 10.3% to $320,526, compared to $290,690 for the second quarter of the prior fiscal year.  Industrial segment sales for the second quarter of fiscal year 2017 were down $8,837, or 4.7% to $179,855, compared to $188,692 for the second quarter of the prior fiscal year. 

Net earnings for the second quarter of fiscal year 2017 were $38,105, or $.60 per diluted share, a decrease of $2,719, compared to $40,824, or $0.65 per diluted share, for the second quarter of fiscal year 2016. 

The effective tax rate in the second quarter of fiscal year 2017 was 24.1%, compared to 24.9% for the second quarter of the prior fiscal year.

Earnings before interest and taxes (“EBIT”) for the second quarter of fiscal year 2017 were  $56,552, down 6.0% from $60,159 in the second quarter of fiscal year 2016.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the second quarter of fiscal year 2017 were  $76,646, up 1.2% from $75,718 for the second quarter of fiscal year 2016

Aerospace segment earnings as a percent of segment net sales increased to 18.2% in the second quarter of fiscal year 2017 from 17.4% in the second quarter of the prior fiscal year.  Industrial segment earnings as a percent of segment net sales decreased to 9.5% in the second quarter of fiscal year 2017 from 10.3% in the second quarter of the prior fiscal year.

Year to Date Highlights

Net sales for the first half of fiscal year 2017 were $943,275, an increase of 2.0% from $924,492 for the first half of the prior fiscal year.  Aerospace segment sales for the first half of fiscal year 2017 were up 5.0% to $587,206, compared to $559,289 for the first half of the prior fiscal year.  Industrial segment sales for the first half of fiscal year 2017 were down 2.5% to $356,069 compared to $365,203 for the first half of the prior fiscal year.

Net earnings for the first half of fiscal year 2017 were $84,653, or $1.33 per diluted share, an increase of $18,009, or 27.0% compared to $66,644, or $1.05 per diluted share, for the first half of fiscal year 2016.  Net earnings for the first half of fiscal year 2016 included approximately $9,900 ($16,100 pre-tax), or $0.16 per diluted share, of special charges related to our initiatives to consolidate facilities, reduce costs and address market conditions.

The effective tax rate in the first half of fiscal year 2017 was 13.0%, compared to 19.0% for the first half of the prior fiscal year.

EBIT for the first half of fiscal year 2017 was $110,046, up 16.4% from $94,576 in the same period of fiscal year 2016.  EBITDA for the first half of fiscal year 2017 was $149,053, up 17.2% from $127,197 for the same period of fiscal year 2016.  EBIT and EBITDA for the first half of fiscal year 2016 include the special charges of approximately $16,100 discussed above.

Aerospace segment earnings as a percent of segment net sales increased to 17.9% in the first half of fiscal year 2017 from 16.8% in the prior fiscal year.  Industrial segment earnings as a percent of segment net sales decreased to 9.9% in the first half of fiscal year 2017 from 11.2% in the prior fiscal year.

Liquidity Highlights

Net cash provided by operating activities for the first half of fiscal year 2017 was $129,994, compared to $361,682 for the first half of fiscal year 2016.  Net cash provided by operating activities for the first half of fiscal year 2016 included $250,000 of cash received related to the formation of a strategic joint venture (the “JV”) between Woodward and General Electric Company (the “JV Proceeds”).  For further discussion of the JV, see Note 4, Joint venture in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.

For the first half of fiscal year 2017, adjusted free cash flow, which we define as net cash flows provided by operating activities less payments for property, plant and equipment and less the JV Proceeds, was $86,941, compared to $12,366 for the first half of fiscal year 2016.  The increase is primarily attributable to higher net earnings and lower payments for property, plant and equipment in the first half of fiscal year 2017 as compared to the first half of fiscal year 2016.

At March 31, 2017, we held $78,953 in cash and cash equivalents, and had total outstanding debt of $696,345 with additional borrowing availability of $855,541, net of outstanding letters of credit, under our revolving credit agreement.  At March 31, 2017, we had additional borrowing capacity of $7,554 under various foreign lines of credit and foreign overdraft facilities. 

31


 

RESULTS OF OPERATIONS

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31, 2017

 

% of Net Sales

 

March 31, 2016

 

% of Net Sales

 

March 31, 2017

 

% of Net Sales

 

March 31, 2016

 

% of Net Sales

Net sales

 

$

500,381 

 

100 

%

 

$

479,382 

 

100 

%

 

$

943,275 

 

100 

%

 

$

924,492 

 

100 

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

365,156 

 

73.0 

 

 

 

346,139 

 

72.2 

 

 

 

692,350 

 

73.4 

 

 

 

679,516 

 

73.5 

 

Selling, general, and administrative expenses

 

 

43,172 

 

8.6 

 

 

 

36,823 

 

7.7 

 

 

 

76,968 

 

8.2 

 

 

 

77,605 

 

8.4 

 

Research and development costs

 

 

30,385 

 

6.1 

 

 

 

31,762 

 

6.6 

 

 

 

56,925 

 

6.0 

 

 

 

63,359 

 

6.9 

 

Amortization of intangible assets

 

 

6,431 

 

1.3 

 

 

 

6,926 

 

1.4 

 

 

 

12,889 

 

1.4 

 

 

 

13,872 

 

1.5 

 

Interest expense

 

 

6,790 

 

1.4 

 

 

 

6,234 

 

1.3 

 

 

 

13,630 

 

1.4 

 

 

 

13,142 

 

1.4 

 

Interest income

 

 

(474)

 

(0.1)

 

 

 

(441)

 

(0.1)

 

 

 

(879)

 

(0.1)

 

 

 

(888)

 

(0.1)

 

Other (income) expense, net

 

 

(1,315)

 

(0.3)

 

 

 

(2,427)

 

(0.5)

 

 

 

(5,903)

 

(0.6)

 

 

 

(4,436)

 

(0.5)

 

Total costs and expenses

 

 

450,145 

 

90.0 

 

 

 

425,016 

 

88.7 

 

 

 

845,980 

 

89.7 

 

 

 

842,170 

 

91.1 

 

Earnings before income taxes

 

 

50,236 

 

10.0 

 

 

 

54,366 

 

11.3 

 

 

 

97,295 

 

10.3 

 

 

 

82,322 

 

8.9 

 

Income tax expense

 

 

12,131 

 

2.4 

 

 

 

13,542 

 

2.8 

 

 

 

12,642 

 

1.3 

 

 

 

15,678 

 

1.7 

 

Net earnings

 

$

38,105 

 

7.6 

 

 

$

40,824 

 

8.5 

 

 

$

84,653 

 

9.0 

 

 

$

66,644 

 

7.2 

 

Other select financial data:









 

 

 

 

 



 

 

 

 

 



March 31,

 

September 30,



2017

 

2016

Working capital

$

489,469 

 

$

463,811 

Short-term borrowings and current portion of long-term debt

 

134,300 

 

 

150,000 

Total debt

 

696,345 

 

 

727,153 

Total stockholders' equity

 

1,254,792 

 

 

1,212,595 





Net Sales

Consolidated net sales for the second quarter of fiscal year 2017 increased by $20,999, or 4.4%, compared to the same period of fiscal year 2016.  Consolidated net sales for the first half of fiscal year 2017 increased by $18,783, or 2.0%, compared to the same period of fiscal year 2016.  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, 2016

 

$

479,382 

 

$

924,492 

Aerospace volume

 

 

26,496 

 

 

22,159 

Industrial volume

 

 

(5,828)

 

 

(3,645)

Effects of changes in price and sales mix

 

 

2,808 

 

 

2,917 

Effects of changes in foreign currency rates

 

 

(2,477)

 

 

(2,648)

Consolidated net sales for the period ended March 31, 2017

 

$

500,381 

 

$

943,275 

The increase in net sales for the second quarter and first half of fiscal year 2017 was primarily attributable to increased defense sales for aftermarket and original equipment manufacturer (“OEM”), and increased commercial OEM sales in the Aerospace segment,  partially offset by decreased industrial gas turbine aftermarket sales and wind turbine converter sales in our Industrial segment.

32


 

Costs and Expenses

Costs and expenses for the first half of fiscal year 2016 included special charges totaling approximately $16,100 ($13,300 included in cost of goods sold, $1,700 included in selling, general and administrative expenses, and $1,100 included in research and development costs) related to our efforts to consolidate facilities, reduce costs and address current market conditions in fiscal year 2016.  There were no comparable costs and expenses recorded in the first half of fiscal year 2017.

Cost of goods sold increased by $19,017 to $365,156, or 73.0% of net sales, for the second quarter of fiscal year 2017 from $346,139, or 72.2% of net sales, for the second quarter of fiscal year 2016.  Cost of goods sold increased by  $12,834 to $692,350, or 73.4% of net sales, for the first half of fiscal year 2017 from $679,516, or 73.5% of net sales, for the first half of fiscal year 2016.  The increase in cost of goods sold for the second quarter and first half of fiscal year 2017 as compared to the same periods of fiscal year 2016 is primarily attributable to higher sales volume and planned facility ramp-up costs in our Aerospace segment, and planned new facility expenses for our new Colorado facilities.  This year-over-year change was partially offset by the inclusion of special charges in the first half of fiscal year 2016 of approximately $13,300, as described above, for which no such similar charge was recorded in fiscal year 2017.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 27.0% for the second quarter of fiscal year 2017, compared to 27.8% for the second quarter of fiscal year 2016.  Gross margin for the second quarter of fiscal year 2017 was lower as compared to the second quarter of fiscal year 2016 due to quarterly variability of costs and planned facility ramp-up costs in both our Aerospace and Industrial segments.

Gross margin was 26.6% for the first half of fiscal year 2017, compared to 26.5% for the first half of fiscal year 2016.  Gross margin for the first half of fiscal year 2017 was comparable to the first half of fiscal year 2016, as the inclusion in cost of goods sold of approximately $13,300 of special charges in the first half of fiscal year 2016 was offset by planned facility ramp-up costs for the current year period in both our Aerospace and Industrial segments.

Selling, general, and administrative expenses increased by $6,349, or 17.2%, to $43,172 for the second quarter of fiscal year 2017 as compared to $36,823 for the second quarter of fiscal year 2016.  Selling, general, and administrative expenses as a percentage of net sales was 8.6% for the second quarter of fiscal year 2017 as compared to 7.7% for the second quarter of fiscal year 2016.  The increase in selling, general and administrative expenses for the second quarter of fiscal year 2017 was primarily due to timing of the recognition of stock-based compensation expenses.

 Selling, general, and administrative expenses decreased by $637, or 0.8%, to $76,968 for the first half of fiscal year 2017 as compared to $77,605 for the first half of fiscal year 2016.  Selling, general, and administrative expenses as a percentage of net sales was 8.2% for the first half of fiscal year 2017, as compared to 8.4% for the first half of fiscal year 2016.  The decrease in selling, general and administrative expenses for the first half of fiscal year 2017 was primarily due to the inclusion in the first quarter of fiscal year 2016 of special charges of approximately $1,700 described above.    

Research and development costs decreased by $1,377, or 4.3%, to $30,385 for the second quarter of fiscal year 2017, as compared to $31,762 for the second quarter of fiscal year 2016.  Research and development costs decreased as a percentage of net sales to 6.1% for the second quarter of fiscal year 2017, as compared to 6.6% for the second quarter of fiscal year 2016.  Research and development costs decreased by $6,434, or 10.2%, to $56,925 for the first half of fiscal year 2017, as compared to $63,359 for the first half of fiscal year 2016.  Research and development costs decreased as a percentage of net sales to 6.0% for the first half of fiscal year 2017, as compared to 6.9% for the first half of fiscal year 2016.  Research and development costs in the second quarter and first half of fiscal year 2017 were lower due to less net spend on Aerospace programs as well as variability in the timing of projects and expenses.  In addition, the first quarter of fiscal year 2016 included the special charges of approximately $1,100 described above.  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 $6,431 for the second quarter and $12,889 for the first half of fiscal year 2017, compared to $6,926 for the second quarter and $13,872 for the first half of fiscal year 2016.  As a percentage of net sales, amortization of intangible assets were 1.3% for the second quarter and 1.4% for the first half of fiscal year 2017, as compared to 1.4% for the second quarter and 1.5% for the first half of fiscal year 2016.  The decrease in amortization expense was primarily related to certain intangible assets becoming fully amortized during fiscal year 2016.

Interest expense was $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, compared to $6,234, or 1.3% of net sales, for the second quarter and $13,142, or 1.4% for the first half of fiscal year 2016.  The slight increase in interest expense is primarily attributable to lower amounts of capitalized interest in the second quarter and first half of fiscal year 2017 as compared to the second quarter and first half of fiscal year 2016, as capital projects have been completed, partially offset by a decrease in higher interest debt due to the retirement of $57,000 of 7.81% Series E notes in fiscal year 2016. 

33


 

Income taxes were provided at an effective rate on earnings before income taxes of 24.1% for the second quarter and 13.0% for the first half of fiscal year 2017, compared to 24.9% for the second quarter and 19.0% for the first half of fiscal year 2016.  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, 2016

 

24.9 

%

 

19.0 

%

Retroactive benefit of research and experimentation credit

 

0.0 

 

 

7.0 

 

State and local taxes

 

(0.6)

 

 

(0.6)

 

Adjustment of prior period tax items

 

(0.4)

 

 

0.3 

 

Taxes on international activities

 

2.0 

 

 

(11.4)

 

Net excess income tax benefit from stock-based compensation

 

(1.7)

 

 

(1.1)

 

Other

 

(0.1)

 

 

(0.2)

 

Effective tax rate for the period ended March 31, 2017

 

24.1 

%

 

13.0 

%

The decrease in the year-over-year effective tax rate for the second quarter of fiscal year 2017 is primarily attributable to a larger favorable adjustment for the net excess income tax benefits from stock-based compensation and favorable changes to state apportionment in the current quarter.  These decreases in the year-over-year effective tax rate were partially offset by smaller net favorable resolutions of tax matters in the current quarter compared to the prior year quarter and the release of foreign valuation allowances in the second quarter of fiscal year 2016 that did not repeat in the current quarter.   

The decrease in the year-over-year effective tax rate for the six-months ended March 31, 2017 is primarily attributable to the impact of the repatriation to the U.S. of certain net foreign profits and losses in the first quarter of fiscal year 2017 and a larger favorable adjustment for the net excess income tax benefit from stock-based compensation in the current fiscal year.  This combined decrease was partially offset by the retroactive benefit of the U.S. research and experimentation credit pursuant to the December 18, 2015 enactment of the Protecting Americans from Tax Hikes Act of 2015, which was included in the effective tax rate for the first quarter of fiscal year 2016 but did not repeat in the first quarter of fiscal year 2017. 

Segment Results

The following table presents sales by segment:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended March 31,

 

Six-Months Ended March 31,



 

2017

 

2016

 

2017

 

2016

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

320,526 

 

64.1 

%

 

$

290,690 

 

60.6 

%

 

$

587,206 

 

62.3 

%

 

$

559,289 

 

60.5 

%

Industrial

 

 

179,855 

 

35.9 

 

 

 

188,692 

 

39.4 

 

 

 

356,069 

 

37.7 

 

 

 

365,203 

 

39.5 

 

Consolidated net sales

 

$

500,381 

 

100.0 

%

 

$

479,382 

 

100.0 

%

 

$

943,275 

 

100.0 

%

 

$

924,492 

 

100.0 

%

The following table presents earnings by segment:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended March 31,

 

Six-Months Ended March 31,



2017

 

2016

 

2017

 

2016

Aerospace

$

58,227 

 

$

50,578 

 

$

105,104 

 

$

94,064 

Industrial

 

17,089 

 

 

19,469 

 

 

35,087 

 

 

41,020 

Nonsegment expenses

 

(18,764)

 

 

(9,888)

 

 

(30,145)

 

 

(40,508)

Interest expense, net

 

(6,316)

 

 

(5,793)

 

 

(12,751)

 

 

(12,254)

Consolidated earnings before income taxes

 

50,236 

 

 

54,366 

 

 

97,295 

 

 

82,322 

Income tax expense

 

(12,131)

 

 

(13,542)

 

 

(12,642)

 

 

(15,678)

Consolidated net earnings

$

38,105 

 

$

40,824 

 

$

84,653 

 

$

66,644 



34


 

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





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended March 31,

 

Six-Months Ended March 31,



 

2017

 

 

2016

 

 

2017

 

 

2016

Aerospace

 

18.2% 

 

 

17.4% 

 

 

17.9% 

 

 

16.8% 

Industrial

 

9.5% 

 

 

10.3% 

 

 

9.9% 

 

 

11.2% 

Aerospace

Aerospace segment net sales were $320,526 for the second quarter of fiscal year 2017, up 10.3% compared to $290,690 for the same period of fiscal year 2016.  Aerospace segment net sales were $587,206 for the first half of fiscal year 2017, up 5.0% compared to $559,289 for the same period of fiscal year 2016.  The increase in segment net sales for the second quarter and first half of fiscal year 2017 as compared to the same period of fiscal year 2016 was driven primarily by increased defense sales for aftermarket and original equipment manufacturer (“OEM”), and increased commercial OEM sales in the current periods.  Commercial aftermarket sales also increased in the second quarter of fiscal year 2017 as compared to the same period of the prior fiscal year, benefitting from both the initial provisioning for new platforms and increased utilization of existing fleets.  While commercial aftermarket sales are up in the second quarter of fiscal year 2017 as compared to the second quarter of fiscal year 2016, on year-to-date basis commercial aftermarket sales are generally unchanged, reflecting strong commercial aftermarket sales in the first quarter of fiscal year 2016.

 U.S. government funds continue to be prioritized for defense platforms on which we have content.  Defense sales, for both aftermarket and OEM, continued to increase in the second quarter and first half of fiscal year 2017.  Defense OEM increased sales were driven by sales of smart weapons, as demand has remained strong.  Increased aftermarket sales were up due to continued maintenance needs.  

Commercial OEM sales were up for the second quarter and first half of fiscal year 2017 as compared to the second quarter and first half of fiscal year 2016 due to next generation aircraft programs driving strong commercial OEM sales, reflecting Woodward’s increased content on certain next generation aircraft, partially offset by continuing weakness in business jets and rotorcraft. 

Aerospace segment earnings increased by $7,649, or 15.1%, to $58,227 for the second quarter of fiscal year 2017, compared to $50,578 for the second quarter of fiscal year 2016.  Aerospace segment earnings increased by $11,040, or 11.7%, to $105,104 for the first half of fiscal year 2017, compared to $94,064 for the first half of fiscal year 2016.  The change in Aerospace segment earnings for the second quarter and first half of fiscal year 2017 were due to the following:





 

 

 

 

 

 



 

 

 

 

 

 



   

Three-Month

 

Six-Month



   

Period

 

Period

Earnings for the period ended March 31, 2016

 

$

50,578 

 

$

94,064 

Sales volume

 

 

13,272 

 

 

11,144 

Price, sales mix and productivity

 

 

(1,793)

 

 

(1,000)

Decrease in research and development expenses

 

 

2,481 

 

 

5,977 

New facility costs

 

 

(3,671)

 

 

(6,085)

Other, net 

 

 

(2,640)

 

 

1,004 

Earnings for the period ended March 31, 2017

 

$

58,227 

 

$

105,104 



Aerospace segment earnings as a percentage of segment net sales were 18.2% for the second quarter and 17.9% for the first half of fiscal year 2017, compared to 17.4% for the second quarter and 16.8% for the first half of fiscal year 2016.  The increase in aerospace segment earnings was primarily attributable to higher sales volume and lower research and development expenses, partially offset by new facility costs.



Industrial

Industrial segment net sales decreased by 4.7% to $179,855 for the second quarter of fiscal year 2017, compared to $188,692 for the second quarter of fiscal year 2016.  Segment net sales were $356,069 for the first half of fiscal year 2017, compared to $365,203 for the same period of fiscal year 2016.  Industrial gas turbine aftermarket sales and wind turbine converter sales declined in both the second quarter and first half of fiscal year 2017 as compared to the same periods of the  prior fiscal year.  Sales of fuel systems for both Compressed Natural Gas (“CNG”) trucks in Asia and reciprocating engine power generation applications were up compared to the prior year.

35


 

Industrial segment earnings  decreased by $2,380, or 12.2%, to $17,089 for the second quarter of fiscal year 2017, compared to $19,469 for the second quarter of fiscal year 2016. Segment earnings decreased by $5,933, or 14.5% to $35,087 for the first half of fiscal year 2017 compared to $41,020 for the same period of 2016.  The net decrease in Industrial segment earnings for the second quarter and first half of fiscal year 2017 was due to the following:





 

 

 

 

 

 



 

 

 

 

 

 



   

Three-Month

 

Six-Month



   

Period

 

Period

Earnings for the period ended March 31, 2016

 

$

19,469 

 

$

41,020 

Sales volume

 

 

(3,864)

 

 

(3,233)

Price, sales mix and productivity

 

 

(1,287)

 

 

(5,268)

Savings from cost reductions initiatives

 

 

3,719 

 

 

6,581 

New facility costs

 

 

(2,297)

 

 

(4,692)

Other, net 

 

 

1,349 

 

 

679 

Earnings for the period ended March 31, 2017

 

$

17,089 

 

$

35,087 



Industrial segment earnings as a percentage of sales were 9.5% for the second quarter and 9.9% for the first half of fiscal year 2017, compared to 10.3% for the second quarter and 11.2% for the first half of fiscal year 2016.  The decrease in segment earnings for the second quarter and first half of fiscal year 2017 as compared to the same periods of fiscal year 2016 was driven by the impact of lower sales volume and the planned increase in new facility costs, which was partially offset by the savings associated with significant cost reduction initiatives previously implemented.

Nonsegment expenses

Nonsegment expenses increased to $18,764 for the second quarter of fiscal year 2017, compared to $9,888 for the second quarter of fiscal year 2016.  As a percent of consolidated net sales, nonsegment expenses increased to 3.7% of consolidated net sales for the second quarter of fiscal year 2017, compared to 2.1% of consolidated net sales for the second quarter of fiscal year 2016.  The increase in nonsegment expenses in the second quarter of fiscal year 2017 is primarily due to the timing of the recognition of stock-based compensation expenses.     

Nonsegment expenses decreased to $30,145 for the first half of fiscal year 2017, compared to $40,508 for the first half of fiscal year 2016.  As a percent of consolidated net sales, nonsegment expenses were 3.2% of consolidated net sales for the first half of fiscal year 2017, compared to 4.4% of consolidated net sales for the first half of fiscal year 2016.  The decrease in nonsegment expenses in the first half of fiscal year 2017 as compared to the first half of fiscal year 2016 is due to special charges taken in the first quarter  of fiscal year 2016 totaling approximately $16,100 related to our efforts to consolidate facilities, reduce costs and address market conditions, which did not recur in the first half of fiscal year 2017.    





LIQUIDITY AND CAPITAL RESOURCES

Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities.  Historically, we have also issued debt to supplement our cash needs or repay our other indebtedness.  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 $78,953 at March 31, 2017 and $81,090 at September 30, 2016, and our working capital was $489,469 at March 31,  2017 and $463,811 at September 30, 2016.  Of the $ 78,953 of cash and cash equivalents held at March 31, 2017, $78,745 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, 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

36


 

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 $18,618 at March 31, 2017 and $5,093 at September 30, 2016 recorded as non-customer accounts receivable on our consolidated balance sheets.  The increase in the amount of bankers’ acceptance notes is due to the higher sales of natural gas truck systems in China.  We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy as to which the credit risk associated with the bankers’ acceptance note is 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.  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, 2017, we had total outstanding debt of $698,241 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 $855,541 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,554 under various foreign credit facilities.  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, 2017, we had $134,300 of borrowings outstanding under our revolving credit facility, all of which was classified as short-term.    Revolving credit facility and short-term borrowing activity during the six-months ended March 31, 2017 were as follows:





 

 



 

 

Maximum daily balance during the period

$

317,700 

Average daily balance during the period

$

256,673 

Weighted average interest rate on average daily balance

 

1.78% 

We believe we were in compliance with all our debt covenants as of March 31, 2017See 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.

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 Directors 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 2019 (the “2016 Authorization”).  In the first half of fiscal year 2017, we purchased 886 shares of our common stock for $61,229, of which 350 shares were purchased pursuant to a 10b5-1 plan and 536 were purchased pursuant to a 10b-18 plan.

For our Aerospace segment, in fiscal year 2015 we completed construction of a manufacturing and office building on a second campus in the greater-Rockford, Illinois area.  This campus is intended to support the expected growth in our Aerospace segment over the next ten years and beyond, as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.  We have been purchasing production equipment for the second campus and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes.  

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

37


 

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,



2017

 

2016

Net cash provided by operating activities

$

129,994 

 

$

361,682 

Net cash used in investing activities

 

(34,377)

 

 

(97,204)

Net cash used in financing activities

 

(87,578)

 

 

(261,289)

Effect of exchange rate changes on cash and cash equivalents

 

(10,176)

 

 

(646)

Net change in cash and cash equivalents

 

(2,137)

 

 

2,543 

Cash and cash equivalents at beginning of year

 

81,090 

 

 

82,202 

Cash and cash equivalents at end of period

$

78,953 

 

$

84,745 

Net cash flows provided by operating activities for the first half of fiscal year 2017 was $129,994, compared to $361,682 for the same period of fiscal year 2016Net cash provided by operating activities for the first half of fiscal year 2016 included $250,000 of cash received related to the JV Proceeds.  Excluding the JV Proceeds, the remaining increase in net cash provided by operating activities is primarily attributable to increased net earnings.

Net cash flows used in investing activities for the first half of fiscal year 2017 was $34,377, compared to $97,204 in the first half of fiscal year 2016.  The decrease in cash used in investing activities compared to the same period of the prior fiscal year is due primarily to decreased payments for capital expenditures.  Payments for property, plant and equipment decreased by $56,263 to $43,053 in the first half of fiscal year 2017 as compared to $99,316 in the first half of fiscal year 2016 related mainly to lower equipment purchases associated with the our aerospace segment facility in the greater-Rockford, Illinois area and completion of our Industrial segment facility in Fort Collins, Colorado.

Net cash flows used in financing activities for the first half of fiscal year 2017 was $87,578, compared to $261,289 in the first half of fiscal year 2016.  During the first half of fiscal year 2017, we had net debt payments of $22,400 compared to net debt payments of $135,596 in the first half of fiscal year 2016.  We utilized $61,229 to repurchase 886 shares of our common stock in the first half of fiscal year 2017 under the 2016 Authorization, compared to $117,374 to repurchase 2,490 shares of our common stock, under the then existing stock repurchase program, in the first half of fiscal year 2016.

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 2017.



NON-GAAP MEASURES

EBIT,  EBITDA, free cash flow, and adjusted 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”).  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

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.

38


 

EBIT and EBITDA for the three and six-months ended March 31, 2017 and March 31, 2016 were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended March 31,

 

Six-Months Ended March 31,



 

2017

 

2016

 

2017

 

2016

Net earnings (U.S. GAAP)

 

$

38,105 

 

$

40,824 

 

$

84,653 

 

$

66,644 

Income tax expense

 

 

12,131 

 

 

13,542 

 

 

12,642 

 

 

15,678 

Interest expense

 

 

6,790 

 

 

6,234 

 

 

13,630 

 

 

13,142 

Interest income

 

 

(474)

 

 

(441)

 

 

(879)

 

 

(888)

EBIT (Non-U.S. GAAP)

 

 

56,552 

 

 

60,159 

 

 

110,046 

 

 

94,576 

Amortization of intangible assets

 

 

6,431 

 

 

6,926 

 

 

12,889 

 

 

13,872 

Depreciation expense

 

 

13,663 

 

 

8,633 

 

 

26,118 

 

 

18,749 

EBITDA (Non-U.S. GAAP)

 

$

76,646 

 

$

75,718 

 

$

149,053 

 

$

127,197 

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 by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, as well as adjusted free cash flow, which is defined by the Company as free cash flow less the JV Proceeds, in reviewing the financial performance of Woodward’s various business groups and evaluating cash levels.  In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies.  The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP.  Neither free cash flow nor adjusted free cash flow necessarily represent funds available for discretionary use, and neither is necessarily a measure of our ability to fund our cash needs.  In particular, the gross proceeds received in connection with the formation of the JV was a discrete positive cash flow event not expected to recur.  Our calculations of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure.

Free cash flow and adjusted free cash flow for the six-months ended March 31, 2017  and March 31, 2016 were as follows:





 

 

 

 

 



 

 

 

 

 



Six-Months Ended March 31,



2017

 

2016

Net cash provided by operating activities (U.S. GAAP)

$

129,994 

 

$

361,682 

Payments for property, plant and equipment

 

(43,053)

 

 

(99,316)

Free cash flow (Non-U.S. GAAP)

 

86,941 

 

 

262,366 

Less:   Gross proceeds from formation of joint venture

 

 -

 

 

250,000 

Adjusted free cash flow (Non-U.S. GAAP)

$

86,941 

 

$

12,366 

 



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. 

39


 

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, New accounting standards, 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 March  31, 2017, 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, as amended (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman, 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 March 31, 2017.

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 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.  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. 

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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.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)

 

Total Number of Shares Purchased

 

Weighted Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

 

Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)

January 1, 2017 through January 31, 2017 (2)

 

186,654 

 

$

69.42 

 

186,367 

 

$

463,059 

February 1, 2017 through February 28, 2017 (2)

 

349,279 

 

 

69.54 

 

349,279 

 

 

438,771 

March 1, 2017 through March 31, 2017 (2)

 

2,271 

 

 

67.92 

 

 -

 

 

438,771 



(1)

In November 2016,  our Board of Directors 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 2019. 



(2)

Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 287 shares of common stock were acquired in January 2017, and 1,935 shares of common stock were acquired in March 2017, each on the open market related to the deferral of compensation by certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred compensation in Woodward common stock.  In addition, 336 shares of common stock were acquired on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation in March 2017.  Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.



Item 6.Exhibits

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



41


 

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.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

WOODWARD, INC.

Date:  April 19, 2017

 

 

/s/ Thomas A. Gendron



 

 

Thomas A. Gendron



 

 

Chairman of the Board, Chief Executive Officer, and President

(Principal Executive Officer)



 

 

 

Date:  April 19, 2017

 

 

/s/ Robert F. Weber, Jr.



 

 

Robert F. Weber, Jr.



 

 

Vice Chairman, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)





42


 



WOODWARD, INC.

EXHIBIT INDEX



 

 



Exhibit Number

Description

*

31.1

Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron

*

31.2

Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.

*

32.1

Section 1350 certifications

*

101.INS

XBRL Instance Document.

*

101.SCH

XBRL Taxonomy Extension Schema Document

*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document



 

 



Attached as Exhibit 101 to this report are the following materials from Woodward, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Earnings, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to the Condensed Consolidated Financial Statements.



 



 

*

Filed as an exhibit to this Report



43