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Woodward, Inc. - Quarter Report: 2023 March (Form 10-Q)

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, 2023

or

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

For the transition period from _____ to _____

Commission file number 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-1984010

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

1081 Woodward Way, Fort Collins, Colorado

 

80524

(Address of principal executive offices)

 

(Zip Code)

 

(970) 482-5811

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

 

 

Common Stock, par value $0.001455 per share

WWD

NASDAQ Global Select Market

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large Accelerated Filer Accelerated Filer Non-accelerated Filer Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Yes No

As of May 3, 2023, 60,035,492 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

Item 1.

 

Financial Statements

 

1

 

 

Condensed Consolidated Statements of Earnings

 

1

 

 

Condensed Consolidated Statements of Comprehensive Earnings

 

2

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

29

 

 

Forward Looking Statements

 

29

 

 

Overview

 

30

 

 

Results of Operations

 

31

 

 

Liquidity and Capital Resources

 

35

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

Item 4.

 

Controls and Procedures

 

41

PART II – OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

Item 6.

 

Exhibits

 

42

 

 

Signatures

 

43

 

 

 

 


 

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,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

718,214

 

 

$

586,839

 

 

$

1,336,833

 

 

$

1,128,425

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

559,149

 

 

 

453,425

 

 

 

1,051,812

 

 

 

872,576

 

Selling, general and administrative expenses

 

 

75,578

 

 

 

44,124

 

 

 

138,765

 

 

 

106,430

 

Research and development costs

 

 

37,777

 

 

 

32,384

 

 

 

66,411

 

 

 

57,776

 

Restructuring charges

 

 

5,172

 

 

 

 

 

 

5,172

 

 

 

 

Interest expense

 

 

12,845

 

 

 

8,197

 

 

 

23,987

 

 

 

16,503

 

Interest income

 

 

(508

)

 

 

(500

)

 

 

(874

)

 

 

(1,141

)

Other (income) expense, net

 

 

(12,040

)

 

 

(4,887

)

 

 

(20,430

)

 

 

(15,561

)

Total costs and expenses

 

 

677,973

 

 

 

532,743

 

 

 

1,264,843

 

 

 

1,036,583

 

Earnings before income taxes

 

 

40,241

 

 

 

54,096

 

 

 

71,990

 

 

 

91,842

 

Income tax expense

 

 

4,730

 

 

 

6,190

 

 

 

6,873

 

 

 

13,631

 

Net earnings

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.59

 

 

$

0.77

 

 

$

1.09

 

 

$

1.24

 

Diluted earnings per share

 

$

0.58

 

 

$

0.74

 

 

$

1.07

 

 

$

1.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

59,807

 

 

 

62,550

 

 

 

59,736

 

 

 

62,825

 

Diluted

 

 

61,227

 

 

 

64,618

 

 

 

61,083

 

 

 

64,863

 

See accompanying Notes to Condensed Consolidated Financial Statements

1


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

 

 

Three-Months Ended

 

 

Six-Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net earnings

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

8,495

 

 

 

(4,621

)

 

 

38,722

 

 

 

(7,059

)

Net (loss) gain on foreign currency transactions designated as hedges of net investments in foreign subsidiaries

 

 

(807

)

 

 

673

 

 

 

(4,432

)

 

 

1,744

 

Taxes on changes in foreign currency translation adjustments

 

 

928

 

 

 

(463

)

 

 

2,272

 

 

 

(1,449

)

Foreign currency translation and transactions adjustments, net of tax

 

 

8,616

 

 

 

(4,411

)

 

 

36,562

 

 

 

(6,764

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on fair value adjustment of derivative instruments

 

 

(2,096

)

 

 

12,411

 

 

 

(34,684

)

 

 

24,780

 

Reclassification of net realized loss (gain) on derivatives to earnings

 

 

7,620

 

 

 

(6,256

)

 

 

45,806

 

 

 

(16,331

)

Taxes on changes in derivative transactions

 

 

(221

)

 

 

(215

)

 

 

(334

)

 

 

(295

)

Derivative adjustments, net of tax

 

 

5,303

 

 

 

5,940

 

 

 

10,788

 

 

 

8,154

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension and other postretirement plan:

 

 

 

 

 

 

 

 

 

 

 

 

Net prior service cost

 

 

181

 

 

 

251

 

 

 

360

 

 

 

502

 

Net (gain) loss

 

 

(204

)

 

 

187

 

 

 

(403

)

 

 

374

 

Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities

 

 

70

 

 

 

592

 

 

 

511

 

 

 

622

 

Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes

 

 

48

 

 

 

(292

)

 

 

127

 

 

 

(406

)

Pension and other postretirement benefit plan adjustments, net of tax

 

 

95

 

 

 

738

 

 

 

595

 

 

 

1,092

 

Total comprehensive earnings

 

$

49,525

 

 

$

50,173

 

 

$

113,062

 

 

$

80,693

 

See accompanying Notes to Condensed Consolidated Financial Statements

2


 

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

March 31,

 

 

September 30,

 

 

 

2023

 

 

2022

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

129,427

 

 

$

107,844

 

Accounts receivable, less allowance for uncollectible amounts of $9,949 and $3,922, respectively

 

 

663,419

 

 

 

609,964

 

Inventories

 

 

567,784

 

 

 

514,287

 

Income taxes receivable

 

 

33,287

 

 

 

5,179

 

Other current assets

 

 

76,770

 

 

 

74,695

 

Total current assets

 

 

1,470,687

 

 

 

1,311,969

 

Property, plant and equipment, net

 

 

919,672

 

 

 

910,472

 

Goodwill

 

 

799,147

 

 

 

772,559

 

Intangible assets, net

 

 

483,884

 

 

 

460,580

 

Deferred income tax assets

 

 

25,052

 

 

 

23,447

 

Other assets

 

 

313,091

 

 

 

327,419

 

Total assets

 

$

4,011,533

 

 

$

3,806,446

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Short-term debt

 

$

130,500

 

 

$

66,800

 

Current portion of long-term debt

 

 

75,978

 

 

 

856

 

Accounts payable

 

 

220,386

 

 

 

230,519

 

Income taxes payable

 

 

33,692

 

 

 

34,655

 

Accrued liabilities

 

 

206,388

 

 

 

206,283

 

Total current liabilities

 

 

666,944

 

 

 

539,113

 

Long-term debt, less current portion

 

 

652,119

 

 

 

709,760

 

Deferred income tax liabilities

 

 

138,863

 

 

 

127,195

 

Other liabilities

 

 

541,553

 

 

 

529,256

 

Total liabilities

 

 

1,999,479

 

 

 

1,905,324

 

Commitments and contingencies (Note 22)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

106

 

 

 

106

 

Additional paid-in capital

 

 

321,441

 

 

 

293,540

 

Accumulated other comprehensive losses

 

 

(44,618

)

 

 

(92,563

)

Deferred compensation

 

 

3,319

 

 

 

6,781

 

Retained earnings

 

 

2,767,813

 

 

 

2,727,233

 

 

 

3,048,061

 

 

 

2,935,097

 

Treasury stock at cost, 13,022 shares and 13,207 shares, respectively

 

 

(1,032,688

)

 

 

(1,027,194

)

Treasury stock held for deferred compensation, at cost, 67 shares and 139 shares, respectively

 

 

(3,319

)

 

 

(6,781

)

Total stockholders' equity

 

 

2,012,054

 

 

 

1,901,122

 

Total liabilities and stockholders' equity

 

$

4,011,533

 

 

$

3,806,446

 

See accompanying Notes to Condensed Consolidated Financial Statements

3


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

65,117

 

 

$

78,211

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

59,257

 

 

 

61,331

 

Net loss (gain) on sales of assets and businesses

 

 

890

 

 

 

(1,541

)

Stock-based compensation

 

 

15,538

 

 

 

13,957

 

Deferred income taxes

 

 

545

 

 

 

(55

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Trade accounts receivable

 

 

(26,467

)

 

 

(1,562

)

Unbilled receivables (contract assets)

 

 

(18,015

)

 

 

(48,742

)

Costs to fulfill a contract

 

 

(4,193

)

 

 

(10,884

)

Inventories

 

 

(42,408

)

 

 

(67,263

)

Accounts payable and accrued liabilities

 

 

5,426

 

 

 

15,454

 

Contract liabilities

 

 

9,769

 

 

 

9,779

 

Income taxes

 

 

(34,886

)

 

 

(725

)

Retirement benefit obligations

 

 

(615

)

 

 

(2,495

)

Other

 

 

10,192

 

 

 

4,643

 

Net cash provided by operating activities

 

 

40,150

 

 

 

50,108

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Payments for purchase of property, plant, and equipment

 

 

(44,046

)

 

 

(24,150

)

Proceeds from sale of assets

 

 

199

 

 

 

5

 

Business acquisition, net of cash acquired

 

 

878

 

 

 

 

Payments for short-term investments

 

 

 

 

 

(8

)

Proceeds from sales of short-term investments

 

 

7,733

 

 

 

11,305

 

Net cash (used in) investing activities

 

 

(35,236

)

 

 

(12,848

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Cash dividends paid

 

 

(24,537

)

 

 

(22,134

)

Proceeds from sales of treasury stock

 

 

14,067

 

 

 

19,399

 

Payments for repurchases of common stock

 

 

(26,369

)

 

 

(273,535

)

Borrowings on revolving lines of credit and short-term borrowings

 

 

1,031,800

 

 

 

11,500

 

Payments on revolving lines of credit and short-term borrowings

 

 

(968,100

)

 

 

(11,500

)

Payments of debt financing costs

 

 

(2,236

)

 

 

 

Payments of long-term debt and finance lease obligations

 

 

(288

)

 

 

(564

)

Net cash provided by (used in) financing activities

 

 

24,337

 

 

 

(276,834

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(7,668

)

 

 

(533

)

Net change in cash and cash equivalents

 

 

21,583

 

 

 

(240,107

)

Cash and cash equivalents, including restricted cash, at beginning of year

 

 

107,844

 

 

 

448,462

 

Cash and cash equivalents, including restricted cash, at end of period

 

$

129,427

 

 

$

208,355

 

See accompanying Notes to Condensed Consolidated Financial Statements

4


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

Number of shares

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 January 1, 2022

 

72,960

 

 

 

(9,877

)

 

 

(167

)

 

$

106

 

 

$

274,366

 

 

$

(35,257

)

 

$

(23,383

)

 

$

(6,764

)

 

 

(65,404

)

 

$

7,960

 

 

$

2,620,571

 

 

$

(606,207

)

 

$

(7,960

)

 

$

2,223,432

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,906

 

 

 

 

 

 

 

 

 

47,906

 

Other comprehensive earnings (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,411

)

 

 

5,940

 

 

 

738

 

 

 

2,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,267

 

Cash dividends paid ($0.1900 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,887

)

 

 

 

 

 

 

 

 

(11,887

)

Sales of treasury stock

 

 

 

 

347

 

 

 

 

 

 

 

 

 

734

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,551

 

 

 

 

 

 

16,285

 

Common shares issued for benefit plans

 

 

 

 

150

 

 

 

 

 

 

 

 

 

10,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,567

 

 

 

 

 

 

17,168

 

Purchase of treasury stock

 

 

 

 

(2,047

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(245,357

)

 

 

 

 

 

(245,357

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,065

 

Purchases/transfers of stock by/to deferred compensation

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68

 

 

 

 

 

 

 

 

 

(68

)

 

 

 

Distribution of stock from deferred compensation plan

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,350

)

 

 

 

 

 

 

 

 

1,350

 

 

 

 

Balances as of March 31, 2022

 

72,960

 

 

 

(11,427

)

 

 

(140

)

 

$

106

 

 

$

287,766

 

 

$

(39,668

)

 

$

(17,443

)

 

$

(6,026

)

 

$

(63,137

)

 

$

6,678

 

 

$

2,656,590

 

 

$

(829,446

)

 

$

(6,678

)

 

$

2,051,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of January 1, 2023

 

72,960

 

 

 

(13,460

)

 

 

(122

)

 

$

106

 

 

$

305,100

 

 

$

(58,548

)

 

$

(730

)

 

$

646

 

 

 

(58,632

)

 

$

5,975

 

 

$

2,745,484

 

 

$

(1,052,623

)

 

$

(5,975

)

 

$

1,939,435

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,511

 

 

 

 

 

 

 

 

 

35,511

 

Other comprehensive earnings (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,616

 

 

 

5,303

 

 

 

95

 

 

 

14,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,014

 

Cash dividends paid ($0.2200 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,182

)

 

 

 

 

 

 

 

 

(13,182

)

Sales of treasury stock

 

 

 

 

251

 

 

 

 

 

 

 

 

 

1,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,488

 

 

 

 

 

 

12,747

 

Common shares issued for benefit plans

 

 

 

 

187

 

 

 

 

 

 

 

 

 

10,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,447

 

 

 

 

 

 

19,307

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

4,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,222

 

Purchases/transfers of stock by/to deferred compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

(42

)

 

 

 

Distribution of stock from deferred compensation plan

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,698

)

 

 

 

 

 

 

 

 

2,698

 

 

 

 

Balances as of March 31, 2023

 

72,960

 

 

 

(13,022

)

 

 

(67

)

 

$

106

 

 

$

321,441

 

 

$

(49,932

)

 

$

4,573

 

 

$

741

 

 

$

(44,618

)

 

$

3,319

 

 

$

2,767,813

 

 

$

(1,032,688

)

 

$

(3,319

)

 

$

2,012,054

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2021

 

72,960

 

 

 

(9,702

)

 

 

(167

)

 

$

106

 

 

$

261,735

 

 

$

(32,904

)

 

$

(25,597

)

 

$

(7,118

)

 

$

(65,619

)

 

$

7,949

 

 

$

2,600,513

 

 

$

(581,954

)

 

$

(7,949

)

 

$

2,214,781

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78,211

 

 

 

 

 

 

 

 

 

78,211

 

Other comprehensive earnings (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,764

)

 

 

8,154

 

 

 

1,092

 

 

 

2,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,482

 

Cash dividends paid ($0.3525 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,134

)

 

 

 

 

 

 

 

 

(22,134

)

Sales of treasury stock

 

 

 

 

405

 

 

 

 

 

 

 

 

 

1,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,040

 

 

 

 

 

 

19,513

 

Common shares issued for benefit plans

 

 

 

 

150

 

 

 

 

 

 

 

 

 

10,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,567

 

 

 

 

 

 

17,168

 

Purchase of treasury stock

 

 

 

 

(2,280

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(272,099

)

 

 

 

 

 

(272,099

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

13,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,957

 

Purchases/transfers of stock by/to deferred compensation

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

115

 

 

 

 

 

 

 

 

 

(115

)

 

 

 

Distribution of stock from deferred compensation plan

 

 

 

 

 

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,386

)

 

 

 

 

 

 

 

 

1,386

 

 

 

 

Balances as of March 31, 2022

 

72,960

 

 

 

(11,427

)

 

 

(140

)

 

$

106

 

 

$

287,766

 

 

$

(39,668

)

 

$

(17,443

)

 

$

(6,026

)

 

$

(63,137

)

 

$

6,678

 

 

$

2,656,590

 

 

$

(829,446

)

 

$

(6,678

)

 

$

2,051,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of September 30, 2022

 

72,960

 

 

 

(13,207

)

 

 

(139

)

 

$

106

 

 

$

293,540

 

 

$

(86,494

)

 

$

(6,215

)

 

$

146

 

 

$

(92,563

)

 

$

6,781

 

 

$

2,727,233

 

 

$

(1,027,194

)

 

$

(6,781

)

 

$

1,901,122

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,117

 

 

 

 

 

 

 

 

 

65,117

 

Other comprehensive earnings (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,562

 

 

 

10,788

 

 

 

595

 

 

 

47,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,945

 

Cash dividends paid ($0.4100 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,537

)

 

 

 

 

 

 

 

 

(24,537

)

Sales of treasury stock

 

 

 

 

270

 

 

 

 

 

 

 

 

 

1,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,351

 

 

 

 

 

 

13,771

 

Common shares issued for benefit plans

 

 

 

 

189

 

 

 

 

 

 

 

 

 

10,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,524

 

 

 

 

 

 

19,467

 

Purchase of treasury stock

 

 

 

 

(274

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,369

)

 

 

 

 

 

(26,369

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

15,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,538

 

Purchases/transfers of stock by/to deferred compensation

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

 

(112

)

 

 

 

Distribution of stock from deferred compensation plan

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,574

)

 

 

 

 

 

 

 

 

3,574

 

 

 

 

Balances as of March 31, 2023

 

72,960

 

 

 

(13,022

)

 

 

(67

)

 

$

106

 

 

$

321,441

 

 

$

(49,932

)

 

$

4,573

 

 

$

741

 

 

$

(44,618

)

 

$

3,319

 

 

$

2,767,813

 

 

$

(1,032,688

)

 

$

(3,319

)

 

$

2,012,054

 

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, 2023 and for the three and six-months ended March 31, 2023 and 2022, included herein, have not been audited by an independent registered public accounting firm. These unaudited Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of March 31, 2023, 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, 2023 and 2022 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these unaudited Condensed Consolidated Financial Statements are in thousands, except per share amounts, unless otherwise noted.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the unaudited Condensed Consolidated Financial Statements included herein. Significant estimates in these unaudited Condensed Consolidated Financial Statements include allowances for credit losses; net realizable value of inventories; variable consideration including customer rebates earned and payable and early payment discounts; warranty reserves; useful lives of property and identifiable intangible assets; the evaluation of impairments of property, intangible assets, and goodwill; the provision for income tax and related valuation reserves; the valuation of derivative instruments; assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans; the valuation of stock compensation instruments granted to employees, board members and any other eligible recipients; estimates of incremental borrowing rates used when estimating the present value of future lease payments; assumptions used when including renewal options or non-exercise of termination options in lease terms; estimates of total lifetime sales used in the recognition of revenue of deferred material rights and balance sheet classification of the related contract liability; estimates of total sales contract costs when recognizing revenue under the cost-to-cost method; and contingencies. Actual results could vary from Woodward’s estimates.

Global Business Conditions

We continue to monitor a variety of external issues impacting our business, including the ongoing global supply chain and labor disruptions, rising labor costs, and material inflation, which together have led to a challenging industry-wide operating environment.

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 the time since the Company filed its most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2022, no new accounting standards have been issued, or are pending issuance, that are expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.

7


 

Note 3. Revenue

The amount of revenue recognized as point in time or over time follows:

 

 

Three-Months Ended March 31, 2023

 

 

Three-Months Ended March 31, 2022

 

 

 

Aerospace

 

 

Industrial

 

 

Consolidated

 

 

Aerospace

 

 

Industrial

 

 

Consolidated

 

Point in time

 

$

188,248

 

 

$

177,660

 

 

$

365,908

 

 

$

148,244

 

 

$

122,219

 

 

$

270,463

 

Over time

 

 

248,769

 

 

 

103,537

 

 

 

352,306

 

 

 

224,513

 

 

 

91,863

 

 

 

316,376

 

Total net sales

 

$

437,017

 

 

$

281,197

 

 

$

718,214

 

 

$

372,757

 

 

$

214,082

 

 

$

586,839

 

 

 

 

Six-Months Ended March 31, 2023

 

 

Six-Months Ended March 31, 2022

 

 

 

Aerospace

 

 

Industrial

 

 

Consolidated

 

 

Aerospace

 

 

Industrial

 

 

Consolidated

 

Point in time

 

$

358,088

 

 

$

317,499

 

 

$

675,587

 

 

$

273,889

 

 

$

247,211

 

 

$

521,100

 

Over time

 

 

474,614

 

 

 

186,632

 

 

 

661,246

 

 

 

435,303

 

 

 

172,022

 

 

 

607,325

 

Total net sales

 

$

832,702

 

 

$

504,131

 

 

$

1,336,833

 

 

$

709,192

 

 

$

419,233

 

 

$

1,128,425

 

Accounts Receivable

Accounts receivable consisted of the following:

 

 

March 31, 2023

 

 

September 30, 2022

 

Billed receivables

 

 

 

 

 

 

Trade accounts receivable

 

$

405,246

 

 

$

359,364

 

Other (Chinese financial institutions)

 

 

3,654

 

 

 

9,405

 

Total billed receivables

 

 

408,900

 

 

 

368,769

 

Current unbilled receivables (contract assets)

 

 

264,468

 

 

 

245,117

 

Total accounts receivable

 

 

673,368

 

 

 

613,886

 

Less: Allowance for uncollectible amounts

 

 

(9,949

)

 

 

(3,922

)

Total accounts receivable, net

 

$

663,419

 

 

$

609,964

 

As of March 31, 2023, “Other assets” on the Condensed Consolidated Balance Sheets includes $9,558 of unbilled receivables not expected to be invoiced and collected within a period of twelve months, compared to $6,649 as of September 30, 2022.

Accounts receivable in Woodward’s Condensed Consolidated Financial Statements represent the net amount expected to be collected, and an allowance for uncollectible amounts related to credit losses is established based on expected losses. Expected losses are estimated by reviewing specific customer accounts, taking into consideration accounts receivable aging, credit risk of the customers, and historical payment history, as well as current and forecasted economic conditions and other relevant factors.

8


 

The allowance for uncollectible amounts and change in expected credit losses for trade accounts receivable and unbilled receivables (contract assets) consisted of the following:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Balance, beginning

 

$

4,203

 

 

$

3,309

 

 

$

3,922

 

 

$

3,664

 

Changes in estimates

 

 

6,042

 

 

 

192

 

 

 

6,470

 

 

 

427

 

Write-offs

 

 

(247

)

 

 

(26

)

 

 

(330

)

 

 

(43

)

Other1

 

 

(49

)

 

 

(334

)

 

 

(113

)

 

 

(907

)

Balance, ending

 

$

9,949

 

 

$

3,141

 

 

$

9,949

 

 

$

3,141

 

(1)
Includes effects of foreign exchange rate changes during the period.

Contract liabilities

Contract liabilities consisted of the following:

 

 

March 31, 2023

 

 

September 30, 2022

 

 

 

Current

 

 

Noncurrent

 

 

Current

 

 

Noncurrent

 

Deferred revenue from material rights from GE joint venture formation

 

$

5,950

 

 

$

237,179

 

 

$

5,754

 

 

$

234,516

 

Deferred revenue from advanced invoicing and/or prepayments from customers

 

 

3,570

 

 

 

63

 

 

 

4,120

 

 

 

38

 

Liability related to customer supplied inventory

 

 

14,779

 

 

 

 

 

 

12,442

 

 

 

 

Deferred revenue from material rights related to engineering and development funding

 

 

5,249

 

 

 

172,020

 

 

 

8,347

 

 

 

161,791

 

Net contract liabilities

 

$

29,548

 

 

$

409,262

 

 

$

30,663

 

 

$

396,345

 

Woodward recognized revenue of $5,299 in the three-months and $14,184 in the six-months ended March 31, 2023 from contract liabilities balances recorded as of October 1, 2022, compared to $4,426 in the three-months ended and $13,219 in the six-months ended March 31, 2022 from contract liabilities balances recorded as of October 1, 2021.

Remaining performance obligations

Remaining performance obligations related to the aggregate amount of the total contract transaction price of firm orders for which the performance obligation has not yet been recognized in revenue as of March 31, 2023 was $1,916,470, compared to $1,558,588 as of September 30, 2022, the majority of which relates to Woodward’s Aerospace segment in both periods. Woodward expects to recognize almost all of these remaining performance obligations within two years after March 31, 2023.

Remaining performance obligations related to material rights that have not yet been recognized in revenue as of March 31, 2023 was $474,767, compared to $448,370 as of September 30, 2022, of which $6,876 is expected to be recognized in the remainder of fiscal year 2023, $14,985 is expected to be recognized in fiscal year 2024, and the remaining balance is expected to be recognized thereafter. Woodward expects to recognize revenue from performance obligations related to material rights over the life of the underlying programs, which may be as long as forty years.

Disaggregation of Revenue

Woodward designs, produces, and services reliable, efficient, low-emission, and high-performance energy control products for diverse applications in markets throughout the world. Woodward reports financial results for each of its Aerospace and Industrial reportable segments. Woodward further disaggregates its revenue from contracts with customers by primary market as Woodward believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

Revenue by primary market for the Aerospace reportable segment was as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Commercial OEM

 

$

159,271

 

 

$

122,889

 

 

$

298,146

 

 

$

227,715

 

Commercial aftermarket

 

 

139,445

 

 

 

108,554

 

 

 

266,088

 

 

 

194,640

 

Defense OEM

 

 

87,807

 

 

 

97,812

 

 

 

177,569

 

 

 

203,187

 

Defense aftermarket

 

 

50,494

 

 

 

43,502

 

 

 

90,899

 

 

 

83,650

 

Total Aerospace segment net sales

 

$

437,017

 

 

$

372,757

 

 

$

832,702

 

 

$

709,192

 

 

9


 

Revenue by primary market for the Industrial reportable segment was as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Reciprocating engines

 

$

209,238

 

 

$

156,663

 

 

$

370,615

 

 

$

314,997

 

Industrial turbines

 

 

71,959

 

 

 

57,419

 

 

 

133,516

 

 

 

104,236

 

Total Industrial segment net sales

 

$

281,197

 

 

$

214,082

 

 

$

504,131

 

 

$

419,233

 

The customers who each account for approximately 10% or more of net sales of each of Woodward’s reportable segments are as follows:

 

 

Three-Months Ended March 31, 2023

 

Three-Months Ended March 31, 2022

Aerospace

 

Raytheon Technologies, General Electric Company, The Boeing Company

 

Raytheon Technologies, The Boeing Company, General Electric Company

Industrial

 

Rolls-Royce PLC, Caterpillar, Inc.

 

Rolls-Royce PLC, Caterpillar, Inc., Wartsila

 

 

 

Six-Months Ended March 31, 2023

 

Six-Months Ended March 31, 2022

Aerospace

 

Raytheon Technologies, General Electric, The Boeing Company

 

Raytheon Technologies, The Boeing Company, General Electric Company

Industrial

 

Rolls-Royce PLC, Caterpillar, Inc., Wartsila

 

Rolls-Royce PLC, Wartsila

 

Note 4. Earnings per share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and restricted stock.

The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

 

59,807

 

 

 

62,550

 

 

 

59,736

 

 

 

62,825

 

Dilutive effect of stock options and restricted stock

 

 

1,420

 

 

 

2,068

 

 

 

1,347

 

 

 

2,038

 

Diluted shares outstanding

 

 

61,227

 

 

 

64,618

 

 

 

61,083

 

 

 

64,863

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.59

 

 

$

0.77

 

 

$

1.09

 

 

$

1.24

 

Diluted earnings per share

 

$

0.58

 

 

$

0.74

 

 

$

1.07

 

 

$

1.21

 

The following stock option grants were outstanding but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Options

 

 

1,560

 

 

 

464

 

 

 

1,592

 

 

 

466

 

Weighted-average option price

 

$

102.01

 

 

$

117.92

 

 

$

101.95

 

 

$

117.95

 

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 March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Weighted-average treasury stock shares held for deferred compensation obligations

 

 

94

 

 

 

153

 

 

 

109

 

 

 

158

 

 

10


 

 

Note 5. Leases

Lessee arrangements

Woodward has entered into operating leases for certain facilities and equipment with terms in excess of one year under agreements that expire at various dates. Some leases require the payment of property taxes, insurance, maintenance costs, or other similar costs in addition to rental payments. Woodward has also entered into finance leases for equipment with terms in excess of one year under agreements that expire at various dates.

Lease-related assets and liabilities were as follows:

 

 

Classification on the Condensed Consolidated Balance Sheets

 

March 31, 2023

 

 

September 30, 2022

 

Assets:

 

 

 

 

 

 

 

 

Operating lease

 

Other assets

 

$

24,363

 

 

$

25,144

 

Finance lease

 

Property, plant and equipment, net

 

 

5,263

 

 

 

5,474

 

Total lease assets

 

 

 

 

29,626

 

 

 

30,618

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Operating lease

 

Accrued liabilities

 

 

4,686

 

 

 

4,587

 

Finance lease

 

Current portion of long-term debt

 

 

978

 

 

 

856

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

Operating lease

 

Other liabilities

 

 

20,863

 

 

 

21,443

 

Finance lease

 

Long-term debt, less current portion

 

 

3,960

 

 

 

4,405

 

Total lease liabilities

 

 

 

$

30,487

 

 

$

31,291

 

Lease-related expenses were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Operating lease expense

 

$

1,586

 

 

$

1,653

 

 

$

3,073

 

 

$

3,260

 

Amortization of finance lease assets

 

 

156

 

 

 

95

 

 

 

412

 

 

 

174

 

Interest on finance lease liabilities

 

 

40

 

 

 

8

 

 

 

74

 

 

 

16

 

Variable lease expense

 

 

245

 

 

 

203

 

 

 

455

 

 

 

606

 

Short-term lease expense

 

 

51

 

 

 

50

 

 

 

108

 

 

 

90

 

Sublease (income)1

 

 

 

 

 

 

 

 

 

 

 

(192

)

Total lease expense

 

$

2,078

 

 

$

2,009

 

 

$

4,122

 

 

$

3,954

 

(1)
Relates to two separate subleases Woodward entered into for a leased manufacturing building in Niles, Illinois, each of which expired during fiscal year 2022.

Lease-related supplemental cash flow information was as follows:

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows for operating leases

 

$

2,621

 

 

$

2,776

 

Operating cash flows for finance leases

 

 

74

 

 

 

16

 

Financing cash flows for finance leases

 

 

284

 

 

 

574

 

Right-of-use assets obtained in exchange for recorded lease obligations:

 

 

 

 

 

Operating leases

 

 

714

 

 

 

7,999

 

Finance leases

 

 

43

 

 

 

1,260

 

 

11


 

Lessor arrangements

Woodward has assessed its manufacturing contracts and concluded that certain of the contracts for the manufacture of customer products met the criteria to be considered a leasing arrangement (“embedded leases”) with Woodward as the lessor. The specific manufacturing contracts that met the criteria were those that utilized Woodward property, plant, and equipment and which are substantially (more than 90%) dedicated to the manufacturing of the product(s) for a single customer. Woodward has dedicated manufacturing lines with four of its customers representing embedded leases, all of which qualified as operating leases with undefined quantities of future customer purchase commitments.

Although Woodward expects to allocate some portion of future net sales to these customers to embedded lessor arrangements, it cannot provide expected future undiscounted lease payments from property, plant, and equipment leased to customers as of March 31, 2023. If, in the future, customers reduce purchases of related products from Woodward, the Company believes it will derive additional value from the underlying equipment by repurposing its use to support other customer arrangements.

Revenue from contracts with customers that included embedded operating leases, which is included in “Net sales” in the Condensed Consolidated Statements of Earnings, was $1,398 for the three-months and $2,786 for the six-months ended March 31, 2023, compared to $1,323 for the three-months and $2,666 for the six-months ended March 31, 2022.

The carrying amount of property, plant, and equipment leased to others through embedded leasing arrangements, included in “Property, plant, and equipment, net” on the Condensed Consolidated Balance Sheets, follows:

 

 

March 31, 2023

 

 

September 30, 2022

 

Property, plant and equipment leased through embedded leasing arrangements

 

$

47,391

 

 

$

44,912

 

Less accumulated depreciation

 

 

(28,195

)

 

 

(25,508

)

Property, plant and equipment leased through embedded leasing arrangements, net

 

$

19,196

 

 

$

19,404

 

 

Note 6. Joint venture

In fiscal year 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to develop, manufacture, and support fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

Unamortized deferred revenue from material rights in connection with the JV formation included:

 

 

March 31, 2023

 

 

September 30, 2022

 

Accrued liabilities

 

$

5,950

 

 

$

5,754

 

Other liabilities

 

 

237,179

 

 

 

234,516

 

Amortization of the deferred revenue (material right) recognized as an increase to sales was $1,203 for the three-months and $2,034 for the six-months ended March 31, 2023, and $791 for the three-months and $1,727 for the six-months ended March 31, 2022.

As part of the JV formation, GE pays contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year, which began in the second quarter of fiscal year 2017, subject to certain claw-back conditions. Woodward received its annual payments of $4,894 during the three-months ended March 31, 2023 and 2022, which were recorded as deferred income and included in “Net cash provided by operating activities” on the Condensed Consolidated Statements of Cash Flows.

Other income related to Woodward’s equity interest in the earnings of the JV was as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Other income

 

$

8,468

 

 

$

4,140

 

 

$

13,041

 

 

$

8,815

 

Cash distributions to Woodward from the JV, recognized in “Other, net” in “Net cash provided by operating activities” on the Condensed Consolidated Statements of Cash Flows, were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cash distributions

 

$

5,500

 

 

$

6,500

 

 

$

10,000

 

 

$

9,000

 

 

12


 

Net sales to the JV were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales1

 

$

7,320

 

 

$

5,273

 

 

$

13,797

 

 

$

12,547

 

(1)
Net sales included a reduction of $12,888 for the three-months and $20,458 for the six-months ended March 31, 2023 related to royalties owed to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to a reduction to sales of $7,200 for the three-months and $13,146 for the six-months ended March 31, 2022.

The Condensed Consolidated Balance Sheets include “Accounts receivable” related to amounts the JV owed Woodward, “Accounts payable” related to amounts Woodward owed the JV, and “Other assets” related to Woodward’s net investment in the JV, as follows:

 

 

March 31, 2023

 

 

September 30, 2022

 

Accounts receivable

 

$

4,427

 

 

$

4,172

 

Accounts payable

 

 

4,155

 

 

 

4,069

 

Other assets

 

 

11,223

 

 

 

8,181

 

 

Note 7. Financial instruments and fair value measurements

The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value as defined by the U.S. GAAP fair value hierarchy.

 

 

At March 31, 2023

 

 

At September 30, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in term deposits with foreign banks

 

$

41,909

 

 

$

 

 

$

 

 

$

41,909

 

 

$

37,605

 

 

$

 

 

$

 

 

$

37,605

 

Equity securities

 

 

26,171

 

 

 

 

 

 

 

 

 

26,171

 

 

 

22,800

 

 

 

 

 

 

 

 

 

22,800

 

Cross-currency interest rate swaps

 

 

 

 

 

7,546

 

 

 

 

 

 

7,546

 

 

 

 

 

 

38,168

 

 

 

 

 

 

38,168

 

Total financial assets

 

$

68,080

 

 

$

7,546

 

 

$

 

 

$

75,626

 

 

$

60,405

 

 

$

38,168

 

 

$

 

 

$

98,573

 

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions. Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings. The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities. The trading securities are reported at fair value, with realized gains and losses recognized in “Other (income) expense, net” on the Condensed Consolidated Statements of Earnings. The trading securities are included in “Other assets” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

Cross-currency interest rate swaps: Woodward holds cross-currency interest rate swaps, which are accounted for at fair value. The swaps in an asset position are included in “Other current assets” and “Other assets,” and swaps in a liability position are included in “Accrued liabilities” and “Other liabilities” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s cross currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors.

Cash, trade accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value.

13


 

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, 2023

 

 

At September 30, 2022

 

 

 

Fair Value
Hierarchy
Level

 

Estimated
Fair Value

 

 

Carrying
Cost

 

 

Estimated
Fair Value

 

 

Carrying
Cost

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from municipalities

 

2

 

$

8,992

 

 

$

8,716

 

 

$

9,010

 

 

$

8,992

 

Investments in short-term time deposits

 

2

 

 

101

 

 

 

102

 

 

 

8,026

 

 

 

7,893

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

2

 

 

678,164

 

 

 

729,410

 

 

 

646,696

 

 

 

712,054

 

In connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado, Woodward received long-term notes from municipalities within the states of Illinois and Colorado. The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to Woodward at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the long-term notes were 2.4% at March 31, 2023 and 3.5% at September 30, 2022.

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit. Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity. This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the short-term time deposits were 6.3% at March 31, 2023 and 6.1% at September 30, 2022.

The fair value of long-term debt was estimated based on the prices of debt of comparable type and maturity available to Woodward at the end of the period, 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 5.3% at March 31, 2023 and 5.6% at September 30, 2022.

Woodward does not have expected credit losses related to any financial assets that are not required to be remeasured at fair value.

Note 8. Derivative instruments and hedging activities

Derivative instruments not designated or qualifying as hedging instruments

In May 2020, Woodward entered into a floating-rate cross-currency interest rate swap (the “2020 Floating-Rate Cross-Currency Swap”), with a notional value of $45,000, and five fixed-rate cross-currency interest rate swap agreements (the “2020 Fixed-Rate Cross-Currency Swaps”), with an aggregate notional value of $400,000, which effectively reduced the interest rates on the underlying fixed and floating-rate debt, respectively, under the 2018 Notes (as defined in Note 15, Credit Facilities, short-term borrowings and long-term debt, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of Woodward’s most recently filed Form 10-K) and Woodward’s then existing revolving credit agreement.

The net interest income of the cross-currency interest rate swaps is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings. As of March 31, 2023, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and the 2020 Fixed-Rate Cross-Currency Swaps was $3,750 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements for the related fair value of the derivative instruments as of March 31, 2023.

Derivatives instruments in fair value hedging relationships

In May 2020, Woodward entered into a US dollar denominated intercompany loan payable with identical terms and notional value as the 2020 Floating-Rate Cross-Currency Swap, together with a reciprocal intercompany floating-rate cross-currency interest rate swap. The agreements were entered into by Woodward Barbados Euro Financing SRL (“Euro Barbados”), a wholly owned subsidiary of Woodward. The US dollar denominated intercompany loan and reciprocal intercompany floating-rate cross-currency interest rate swap are designated as a fair value hedge under the criteria prescribed in ASC 815. The objective of the derivative instrument is to hedge against the foreign currency exchange risk

14


 

attributable to the spot remeasurement of the US dollar denominated intercompany loan, as Euro Barbados maintains a Euro functional currency.

For each floating-rate intercompany cross-currency interest rate swap, only the change in the fair value related to the cross-currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated other comprehensive income (“OCI”). The remaining change in the fair value of the derivative instrument is recognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings. The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro and US dollar denominated loans. Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the cross-currency basis spread. The initial cost of the cross-currency basis spread is recorded in earnings each period through the swap accrual process. There are no credit-risk-related contingent features associated with the intercompany floating-rate cross-currency interest rate swap.

Derivative instruments in cash flow hedging relationships

In May 2020, Woodward entered into five US dollar intercompany loans payable, with identical terms and notional values of each tranche of the 2020 Fixed-Rate Cross-Currency Swaps, together with reciprocal fixed-rate intercompany cross-currency interest rate swaps. The agreements were entered into by Euro Barbados and are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the US dollar denominated intercompany loans over a thirteen-year period, as Euro Barbados maintains a Euro functional currency.

For each of the fixed-rate intercompany cross-currency interest rate swaps, changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings. Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro and US dollar denominated intercompany loans, including associated interest. Hedge effectiveness is assessed based on the fair value changes of the derivative instruments and such hedges are deemed to be highly effective in offsetting exposure to variability in foreign exchange rates. There are no credit-risk-related contingent features associated with these fixed-rate cross-currency interest rate swaps.

Derivatives instruments in net investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026 (the “Series M Notes”). Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. Related to the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings are net foreign exchange losses of $807 for the three-months and $4,432 for the six-months ended March 31, 2023, compared to net foreign exchange gains of $673 for the three-months and $1,744 for the six-months ended March 31, 2022.

Impact of derivative instruments designated as qualifying hedging instruments

The following table discloses the amount of (income) expense recognized in earnings on derivative instruments designated as qualifying hedging instruments:

 

 

 

 

Three-months ended March 31,

 

 

Six-months ended March 31,

 

Derivatives in:

 

Location

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cross-currency interest rate swap agreement designated as fair value hedges

 

Selling, general and administrative expenses

 

$

36

 

 

$

(297

)

 

$

937

 

 

$

(919

)

Cross-currency interest rate swap agreements designated as cash flow hedges

 

Selling, general and administrative expenses

 

 

7,584

 

 

 

(5,959

)

 

 

44,869

 

 

 

(15,412

)

 

 

 

 

$

7,620

 

 

$

(6,256

)

 

$

45,806

 

 

$

(16,331

)

 

15


 

The following table discloses the amount of (gain) loss recognized in accumulated OCI on derivative instruments designated as qualifying hedging instruments:

 

 

 

 

Three-months ended March 31,

 

 

Six-months ended March 31,

 

Derivatives in:

 

Location

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cross-currency interest rate swap agreement designated as fair value hedges

 

Selling, general and administrative expenses

 

$

21

 

 

$

(557

)

 

 

917

 

 

$

(1,057

)

Cross-currency interest rate swap agreements designated as cash flow hedges

 

Selling, general and administrative expenses

 

 

2,075

 

 

 

(11,854

)

 

 

33,767

 

 

 

(23,723

)

 

 

 

 

$

2,096

 

 

$

(12,411

)

 

$

34,684

 

 

$

(24,780

)

The following table discloses the amount of (gain) loss reclassified from accumulated OCI into earnings on derivative instruments designated as qualifying hedging instruments:

 

 

 

 

Three-months ended March 31,

 

 

Six-months ended March 31,

 

Derivatives in:

 

Location

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cross-currency interest rate swap agreement designated as fair value hedges

 

Selling, general and administrative expenses

 

$

36

 

 

$

(297

)

 

$

937

 

 

$

(919

)

Cross-currency interest rate swap agreements designated as cash flow hedges

 

Selling, general and administrative expenses

 

 

7,584

 

 

 

(5,959

)

 

 

44,869

 

 

 

(15,412

)

 

 

 

 

$

7,620

 

 

$

(6,256

)

 

$

45,806

 

 

$

(16,331

)

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI, were net gains of $4,783 as of March 31, 2023 and losses of $6,338 as of September 30, 2022.

Note 9. Supplemental statement of cash flows information

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

Interest paid, net of amounts capitalized

 

$

17,689

 

 

$

12,458

 

Income taxes paid

 

 

44,589

 

 

 

20,914

 

Income tax refunds received

 

 

1,392

 

 

 

6,517

 

Non-cash activities:

 

 

 

 

 

 

Purchases of property, plant and equipment on account

 

 

3,743

 

 

 

1,072

 

Common shares issued from treasury to settle benefit obligations

 

 

19,467

 

 

 

17,168

 

Purchases of treasury stock on account

 

 

 

 

 

11,080

 

 

Note 10. Acquisitions

On August 2, 2022, we entered into a series of Purchase Agreements with one of our Asia pacific channel partners, PM Control PLC (the “PM Agreements”). Pursuant to the PM Agreements, we agreed to acquire business assets and shares of stock of PM Control PLC and its affiliates (collectively, “PM Control”), for a total consideration (net of a working capital adjustment, excluding cash acquired from the acquisition, and including the settlement of pre‐existing relationships) of $21,421 (the “PM Acquisition”). The PM Acquisition closed on August 31, 2022 (the “PM Closing”), and PM Control PLC became a wholly owned subsidiary of the Company.

ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions under U.S. GAAP. The purchase price of PM Control, prepared consistent with the required ASC 805 framework, is allocated as follows:

Cash paid to Sellers

 

$

22,890

 

Working capital adjustment

 

 

(878

)

Less acquired cash and restricted cash

 

 

(1,341

)

Plus settlement of pre-existing relationships

 

 

750

 

Total purchase price

 

$

21,421

 

 

16


 

The allocation of the purchase price to the assets acquired and liabilities assumed was recorded as of the end of business on August 31, 2022 using the purchase method of accounting in accordance with ASC 805. Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. Woodward’s allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate.

The following table summarizes, as of August 31, 2022, the estimated fair values of the assets acquired and liabilities assumed at the PM Closing.

Accounts receivable

 

$

4,334

 

Inventories

 

 

2,464

 

Other current assets

 

 

386

 

Property, plant, and equipment

 

 

2,488

 

Goodwill

 

 

8,705

 

Intangible assets

 

 

8,874

 

Total assets acquired

 

 

27,251

 

Other current liabilities

 

 

(2,703

)

Deferred income tax liabilities

 

 

(1,842

)

Other noncurrent liabilities

 

 

(1,285

)

Total liabilities assumed

 

 

(5,830

)

Net assets acquired

 

$

21,421

 

During the first quarter of fiscal year 2023, we made certain measurement period adjustments to the acquired assets and the assumed liabilities due to clarification of information utilized to determine fair value during the measurement period. The measurement period adjustment was related to the PM Control trade name. Management determined that the PM Control trade name would no longer be used after calendar year 2023, thus resulting in a measurement period adjustment of $1,042, which reduced intangible assets and increased goodwill. Additionally, in the first quarter of 2023, a working capital adjustment was made that resulted in a reduction of goodwill of $863.

The fair values assigned to tangible and intangible assets acquired, and liabilities assumed, are based on management’s estimates and assumptions and may be subject to change as additional information is received. Additional information that existed as of the closing date but not known at the time of this filing may become known to the Company during the remainder of the 12-month measurement period. The Company will continue to collect information and re-evaluate these estimates and assumptions quarterly.

The preliminary purchase price allocation resulted in the recognition of $8,705 of goodwill, which is expected to be non‐deductible for tax purposes. The Company has included all the goodwill in its Industrial segment. The goodwill represents the estimated value of potential expansion with new customers, the opportunity to further develop sales opportunities with new customers, and other synergies expected to be achieved through the integration of PM Control with Woodward’s Industrial segment.

A summary of the intangible assets acquired, weighted‐average useful lives, and amortization methods follows:

 

 

Estimated
Amounts

 

 

Weighted-
Average
Useful Life

 

Amortization
Method

Intangible assets with finite lives:

 

 

 

 

 

 

 

Customer relationships and contracts

 

$

8,332

 

 

11 years

 

Straight-line

Trade name

 

 

542

 

 

15 months

 

Straight-line

Total

 

$

8,874

 

 

 

 

 

Future amortization expense associated with the acquired intangibles for the fiscal year ended September 30, 2023, is expected to be $1,191, $865 for the fiscal year ended September 30, 2024, and $757 for the next three fiscal years ended.

We have not presented pro forma results because the PM Acquisition was not deemed significant at the date of PM Closing.

17


 

Note 11. Inventories

 

 

March 31, 2023

 

 

September 30, 2022

 

Raw materials

 

$

146,695

 

 

$

126,264

 

Work in progress

 

 

130,962

 

 

 

123,005

 

Component parts(1)

 

 

343,456

 

 

 

329,962

 

Finished goods

 

 

89,392

 

 

 

70,019

 

Customer supplied inventory

 

 

14,779

 

 

 

12,442

 

On-hand inventory for which control has transferred to the customer

 

 

(157,500

)

 

 

(147,405

)

 

$

567,784

 

 

$

514,287

 

(1)
Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

Note 12. Property, plant, and equipment

 

 

March 31, 2023

 

 

September 30, 2022

 

Land and land improvements

 

$

86,174

 

 

$

84,057

 

Buildings and building improvements

 

 

582,574

 

 

 

555,387

 

Leasehold improvements

 

 

20,814

 

 

 

19,392

 

Machinery and production equipment

 

 

795,173

 

 

 

779,514

 

Computer equipment and software

 

 

119,439

 

 

 

122,670

 

Office furniture and equipment

 

 

41,513

 

 

 

39,749

 

Other

 

 

20,152

 

 

 

20,162

 

Construction in progress

 

 

60,818

 

 

 

58,789

 

 

 

1,726,657

 

 

 

1,679,720

 

Less accumulated depreciation

 

 

(806,985

)

 

 

(769,248

)

Property, plant, and equipment, net

 

$

919,672

 

 

$

910,472

 

For the three and six-months ended March 31, 2023 and 2022, Woodward had depreciation expense as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Depreciation expense

 

$

20,535

 

 

$

21,023

 

 

$

40,661

 

 

$

42,056

 

 

Note 13. Goodwill

 

 

 

September 30,
2022

 

 

Additions

 

 

Effects of Foreign
Currency
Translation

 

 

March 31,
2023

 

Aerospace

 

$

455,423

 

 

$

 

 

$

 

 

$

455,423

 

Industrial

 

 

317,136

 

 

 

180

 

 

 

26,408

 

 

 

343,724

 

Consolidated

 

$

772,559

 

 

$

180

 

 

$

26,408

 

 

$

799,147

 

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year and at any time there is an indication that goodwill is more-likely-than-not impaired (commonly referred to as a triggering event). Woodward’s goodwill impairment test in the fourth quarter of fiscal year 2022 resulted in no impairment.

18


 

Note 14. Intangible assets, net

 

 

 

March 31, 2023

 

 

September 30, 2022

 

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

 

Gross
Carrying
Value

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships and contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

281,683

 

 

$

(229,858

)

 

$

51,825

 

 

$

281,683

 

 

$

(223,565

)

 

$

58,118

 

Industrial

 

 

390,123

 

 

 

(82,639

)

 

 

307,484

 

 

 

352,917

 

 

 

(66,812

)

 

 

286,105

 

Total

 

$

671,806

 

 

$

(312,497

)

 

$

359,309

 

 

$

634,600

 

 

$

(290,377

)

 

$

344,223

 

Intellectual property:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Industrial

 

 

12,428

 

 

 

(12,428

)

 

 

 

 

 

12,361

 

 

 

(12,361

)

 

 

 

Total

 

$

12,428

 

 

$

(12,428

)

 

$

 

 

$

12,361

 

 

$

(12,361

)

 

$

 

Process technology:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

76,370

 

 

$

(70,410

)

 

$

5,960

 

 

$

76,370

 

 

$

(69,471

)

 

$

6,899

 

Industrial

 

 

85,596

 

 

 

(30,543

)

 

 

55,053

 

 

 

78,524

 

 

 

(27,464

)

 

 

51,060

 

Total

 

$

161,966

 

 

$

(100,953

)

 

$

61,013

 

 

$

154,894

 

 

$

(96,935

)

 

$

57,959

 

Other intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Industrial

 

 

571

 

 

 

(255

)

 

 

316

 

 

 

1,560

 

 

 

 

 

 

1,560

 

Total

 

$

571

 

 

$

(255

)

 

$

316

 

 

$

1,560

 

 

$

 

 

$

1,560

 

Intangible asset with indefinite life:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tradename:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Industrial

 

 

63,246

 

 

 

 

 

 

63,246

 

 

 

56,838

 

 

 

 

 

 

56,838

 

Total

 

$

63,246

 

 

$

 

 

$

63,246

 

 

$

56,838

 

 

$

 

 

$

56,838

 

Total intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

358,053

 

 

$

(300,268

)

 

$

57,785

 

 

$

358,053

 

 

$

(293,036

)

 

$

65,017

 

Industrial

 

 

551,964

 

 

 

(125,865

)

 

 

426,099

 

 

 

502,200

 

 

 

(106,637

)

 

 

395,563

 

Consolidated Total

 

$

910,017

 

 

$

(426,133

)

 

$

483,884

 

 

$

860,253

 

 

$

(399,673

)

 

$

460,580

 

Woodward tests the indefinite lived tradename intangible asset for impairment during the fourth quarter of each fiscal year and at any time there is an indication the indefinite lived tradename intangible asset is more-likely-than-not impaired (commonly referred to as a triggering event). Woodward’s impairment test for the indefinite lived tradename intangible asset in the fourth quarter of fiscal year 2022 resulted in no impairment.

For the three and six-months ended March 31, 2023 and 2022, Woodward recorded amortization expense associated with intangibles of the following:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Amortization expense

 

$

9,418

 

 

$

9,587

 

 

$

18,596

 

 

$

19,275

 

Future amortization expense associated with intangibles is expected to be:

Year Ending September 30:

 

 

 

2023 (remaining)

 

$

19,075

 

2024

 

 

33,282

 

2025

 

 

28,132

 

2026

 

 

28,073

 

2027

 

 

28,020

 

Thereafter

 

 

284,056

 

 

$

420,638

 

 

19


 

Note 15. Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent, which provides for the option to increase available borrowings up to $1,500,000, subject to lenders’ participation (as amended in November 2021, the “Amended and Restated Revolving Credit Agreement”). On October 21, 2022, Woodward amended the Amended and Restated Revolving Credit Agreement (the “Second Amended and Restated Revolving Credit Agreement”) to, among other things, (i) extend the termination date of the revolving loan commitments of all the lenders from June 19, 2024 to October 21, 2027, (ii) remove the covenants restricting investments, acquisitions, dividends, and distributions, and (iii) subject to removal from the Company’s existing note purchase agreements or the termination or maturation of such note purchase agreements, remove the minimum consolidated net worth covenant. Borrowings under the Second Amended and Restated Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S. dollars or in foreign currencies other than the U.S. dollar and generally bear interest at the Euro Interbank Offered Rate (“Euribor”), Sterling Overnight Index Average (“SONIA”), Tokyo Interbank Offered Rate (“TIBOR”), and Secured Overnight Financing Rate (“SOFR”) base rates plus 0.875% to 1.75%.

Under the Second Amended and Restated Revolving Credit Agreement, there were $130,500 in principal amount of borrowings outstanding as of March 31, 2023 at an effective interest rate of 5.88%. As of March 31, 2023, all of the borrowings outstanding were classified as short-term borrowings based on Woodward's intent and ability to pay this amount in the next twelve months. As of September 30, 2022, there were $66,800 in principal amount of borrowings outstanding under the Amended and Restated Revolving Credit Agreement at an effective interest rate of 4.24%.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were no borrowings outstanding on Woodward’s foreign lines of credit and foreign overdraft facilities as of March 31, 2023 and September 30, 2022.

Debt issuance costs

In connection with the Second Amended and Restated Revolving Credit Agreement, Woodward incurred $2,236 in debt issuance costs, which are deferred and are being amortized using the straight-line method over the life of the agreement. As of March 31, 2023, Woodward also had $1,046 of deferred debt issuance costs remaining that were incurred in connection with the Amended and Restated Credit Agreement, which have been combined with the deferred debt issuance costs associated with the Second Amended and Restated Revolving Credit Agreement and are being amortized using the straight-line method over the life of the Second Amended and Restated Revolving Credit Agreement. Unamortized debt issuance costs of $1,313 associated with these revolving credit agreements as of March 31, 2023 and $1,046 as of September 30, 2022 were recorded as “Other current assets” and “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.

20


 

Note 16. Accrued liabilities

 

 

 

March 31, 2023

 

 

September 30, 2022

 

Salaries and other member benefits

 

$

70,768

 

 

$

75,665

 

Product warranties and related liabilities(1)

 

 

46,492

 

 

 

40,042

 

Interest payable

 

 

13,599

 

 

 

13,481

 

Accrued retirement benefits

 

 

2,889

 

 

 

2,779

 

Net current contract liabilities

 

 

29,548

 

 

 

30,663

 

Current portion of restructuring charges

 

 

2,336

 

 

 

1,083

 

Taxes, other than income

 

 

18,273

 

 

 

21,159

 

Other

 

 

22,483

 

 

 

21,411

 

 

$

206,388

 

 

$

206,283

 

(1)
Product warranties and related liabilities includes estimates related to product liabilities expected to be fully recoverable from insurance.

Product warranties and related liabilities

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements. Accruals are established for specifically identified warranty issues and related liabilities for which are probable to result in future costs. Warranty costs are accrued as revenue is recognized on a non-specific basis whenever past experience indicates a normal and predictable pattern exists.

Changes in accrued product warranties and related liabilities were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Beginning of period

 

$

49,526

 

 

$

13,203

 

 

$

40,042

 

 

$

17,481

 

Additions, net of recoveries

 

 

3,413

 

 

 

984

 

 

 

20,423

 

 

 

222

 

Reductions for settlement

 

 

(6,501

)

 

 

(1,190

)

 

 

(14,203

)

 

 

(4,669

)

Foreign currency exchange rate changes

 

 

54

 

 

 

(13

)

 

 

230

 

 

 

(50

)

End of period

 

$

46,492

 

 

$

12,984

 

 

$

46,492

 

 

$

12,984

 

Restructuring charges

During the second quarter of fiscal year 2023, the Company committed to a cost reduction plan ("Cost Reduction Plan") to better align the cost structure and recorded $5,172 of restructuring charges. The charges recognized under the Cost Reduction Plan consist of workforce management costs primarily related to aligning the cost structure of the Company’s Industrial segment with the current market conditions. All of the restructuring charges were recorded as nonsegment expenses and are expected to be paid within twelve months.

In fiscal year 2022, the Company determined to implement a streamlined Aerospace and Industrial organizational and leadership structure designed to enhance the sales experience for customers, simplify operations, and increase profitability through improved execution. In connection with leadership changes arising from such reorganization, we recorded $1,083 of restructuring charges as nonsegment expenses, which were paid as of December 31, 2022.

In fiscal year 2021, the Company recorded aggregate restructuring charges totaling $5,008 as nonsegment expenses for two separate workforce management actions, one in our hydraulics systems business and one in our engine systems business. In fiscal year 2022, we experienced a challenging operating environment that included the ongoing impact of global supply chain and labor disruptions, along with high inflation, which resulted in changed business conditions compared to when we initially recorded the restructuring charges in fiscal year 2021. We adapted to the changed business conditions by, among other initiatives, (i) developing and implementing plans to insource select machined components, (ii) redeploying talent and adding indirect resources to our factories to stabilize the production environment, and (iii) determining to retain employees that otherwise would have been impacted by the planned restructuring activities to support a stable workforce and effectively manage through attrition. As such, the previously remaining unpaid accrued restructuring charges, which amounted to $4,503, were no longer needed and were reversed in fiscal year 2022.

21


 

The summary of activity in accrued restructuring charges are as follows:

 

 

 

 

 

Period Activity

 

 

 

 

 

 

Balances as of September 30, 2022

 

 

Charges

 

 

Payments

 

 

Non-cash
activity

 

 

Balances as of March 31, 2023

 

Workforce management costs associated with:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost reduction plan

 

$

 

 

$

5,172

 

 

$

(2,836

)

 

$

 

 

$

2,336

 

Aerospace

 

 

139

 

 

 

 

 

 

(139

)

 

 

 

 

 

 

Industrial

 

 

944

 

 

 

 

 

 

(944

)

 

 

 

 

 

 

Total

 

$

1,083

 

 

$

5,172

 

 

$

(3,919

)

 

$

 

 

$

2,336

 

 

 

 

 

 

 

Period Activity

 

 

 

 

 

 

Balances as of September 30, 2021

 

 

Charges

 

 

Payments

 

 

Non-cash
activity

 

 

Balances as of March 31, 2022

 

Workforce management costs associated with:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hydraulics Systems Realignment

 

$

3,758

 

 

$

 

 

$

(505

)

 

$

 

 

$

3,253

 

Engine Systems Realignment

 

 

1,250

 

 

 

 

 

 

 

 

 

 

 

 

1,250

 

Total

 

$

5,008

 

 

$

 

 

$

(505

)

 

$

 

 

$

4,503

 

 

Note 17. Other liabilities

 

 

March 31, 2023

 

 

September 30, 2022

 

Net accrued retirement benefits, less amounts recognized within accrued liabilities

 

$

76,616

 

 

$

70,168

 

Total unrecognized tax benefits

 

 

7,672

 

 

 

9,757

 

Noncurrent income taxes payable

 

 

10,714

 

 

 

14,329

 

Deferred economic incentives (1)

 

 

6,451

 

 

 

7,029

 

Noncurrent operating lease liabilities

 

 

20,863

 

 

 

21,443

 

Net noncurrent contract liabilities

 

 

409,262

 

 

 

396,345

 

Other

 

 

9,975

 

 

 

10,185

 

 

 

$

541,553

 

 

$

529,256

 

(1)
Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

Note 18. Other (income) expense, net

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Equity interest in the earnings of the JV

 

$

(8,468

)

 

$

(4,140

)

 

$

(13,041

)

 

$

(8,815

)

Net loss (gain) on sales of assets and businesses

 

 

857

 

 

 

(3

)

 

 

890

 

 

 

(1,541

)

Rent income

 

 

(93

)

 

 

(69

)

 

 

(181

)

 

 

(412

)

Net (gain) loss on investments in deferred compensation program

 

 

(1,679

)

 

 

2,451

 

 

 

(2,870

)

 

 

1,376

 

Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense

 

 

(2,675

)

 

 

(2,935

)

 

 

(5,160

)

 

 

(5,836

)

Other

 

 

18

 

 

 

(191

)

 

 

(68

)

 

 

(333

)

 

$

(12,040

)

 

$

(4,887

)

 

$

(20,430

)

 

$

(15,561

)

 

Note 19. Income taxes

The determination of the estimated annual effective tax rate is based upon a number of significant estimates and judgments. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax

22


 

rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, issuance of future guidance, interpretation, and rule-making, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Earnings before income taxes

 

$

40,241

 

 

$

54,096

 

 

$

71,990

 

 

$

91,842

 

Income tax expense

 

 

4,730

 

 

 

6,190

 

 

 

6,873

 

 

 

13,631

 

Effective tax rate

 

 

11.8

%

 

 

11.4

%

 

 

9.5

%

 

 

14.8

%

The increase in the effective tax rate for the three-months ended March 31, 2023 compared to the three-months ended March 31, 2022 is primarily attributable to a smaller stock-based compensation tax benefit, primarily offset by larger state income tax credits and Foreign Derived Intangible Income benefit.

The decrease in the effective tax rate for the six-months ended March 31, 2023 compared to the six-months ended March 31, 2022 is primarily attributable to the release of uncertain tax positions, larger state income tax credits, and a larger Foreign Derived Intangible Income benefit, partially offset by a smaller stock-based compensation tax benefit.

Gross unrecognized tax benefits were $10,102 as of March 31, 2023, and $11,938 as of September 30, 2022. At March 31, 2023, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $6,470. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,522 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward’s tax expense includes accruals for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitation may result in changes to tax expense. Generally, Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2019 and thereafter. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2018 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2017 and thereafter.

Note 20. Retirement benefits

Woodward provides various retirement benefits to eligible members of the Company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits, and postretirement life insurance benefits. Eligibility requirements and benefit levels vary depending on employee location.

Defined contribution plans

Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan. The U.S. defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal 401(k) accounts. The Company makes matching contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes. Certain non-U.S. employees are also eligible to participate in similar non-U.S. plans.

Woodward’s U.S. employees receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 187 shares of common stock for a value of $19,307 in the second quarter of fiscal year 2023, compared to a total of 150 shares of common stock for a value of $17,168 in the second quarter of fiscal year 2022.

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

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Company costs

 

$

11,838

 

 

$

9,499

 

 

$

21,940

 

 

$

20,450

 

 

23


 

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, Japan, and Germany. Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits. Postretirement medical benefits are provided to certain current and retired employees, their covered dependents, and beneficiaries in the United States. Life insurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees. A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2022, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

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

 

 

Three-Months Ended March 31,

 

 

 

United States

 

 

Other Countries

 

 

Total

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Service cost

 

$

224

 

 

$

388

 

 

$

332

 

 

$

609

 

 

$

556

 

 

$

997

 

Interest cost

 

 

1,825

 

 

 

1,321

 

 

 

778

 

 

 

422

 

 

 

2,603

 

 

 

1,743

 

Expected return on plan assets

 

 

(2,075

)

 

 

(2,714

)

 

 

(573

)

 

 

(640

)

 

 

(2,648

)

 

 

(3,354

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss (gain)

 

 

73

 

 

 

64

 

 

 

(153

)

 

 

146

 

 

 

(80

)

 

 

210

 

Prior service cost

 

 

175

 

 

 

245

 

 

 

6

 

 

 

6

 

 

 

181

 

 

 

251

 

Net periodic retirement pension cost (benefit)

 

$

222

 

 

$

(696

)

 

$

390

 

 

$

543

 

 

$

612

 

 

$

(153

)

Contributions paid

 

$

 

 

$

 

 

$

736

 

 

$

811

 

 

$

736

 

 

$

811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six-Months Ended March 31,

 

 

 

United States

 

 

Other Countries

 

 

Total

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Service cost

 

$

447

 

 

$

777

 

 

$

652

 

 

$

1,230

 

 

$

1,099

 

 

$

2,007

 

Interest cost

 

 

3,649

 

 

 

2,641

 

 

 

1,528

 

 

 

848

 

 

 

5,177

 

 

 

3,489

 

Expected return on plan assets

 

 

(4,149

)

 

 

(5,427

)

 

 

(1,124

)

 

 

(1,285

)

 

 

(5,273

)

 

 

(6,712

)

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss (gain)

 

 

146

 

 

 

129

 

 

 

(301

)

 

 

292

 

 

 

(155

)

 

 

421

 

Prior service cost

 

 

349

 

 

 

490

 

 

 

11

 

 

 

12

 

 

 

360

 

 

 

502

 

Net periodic retirement pension cost (benefit)

 

$

442

 

 

$

(1,390

)

 

$

766

 

 

$

1,097

 

 

$

1,208

 

 

$

(293

)

Contributions paid

 

$

 

 

$

 

 

$

1,298

 

 

$

1,499

 

 

$

1,298

 

 

$

1,499

 

The components of net periodic retirement pension costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net”, and the interest component is included in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.

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

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Service cost

 

$

 

 

$

 

 

$

 

 

$

 

Interest cost

 

 

226

 

 

 

145

 

 

 

452

 

 

 

289

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial gain

 

 

(124

)

 

 

(23

)

 

 

(248

)

 

 

(47

)

Prior service cost

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic other postretirement cost

 

$

102

 

 

$

122

 

 

$

204

 

 

$

242

 

Contributions paid

 

$

444

 

 

$

457

 

 

$

885

 

 

$

928

 

The components of net periodic other postretirement benefit costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net”, and the interest cost component is included in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.

24


 

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 2023 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2023 will be as follows:

Retirement pension benefits:

 

 

 

United States

 

$

 

United Kingdom

 

 

481

 

Japan

 

 

 

Germany

 

 

401

 

Other postretirement benefits

 

 

1,931

 

 

Note 21. Stockholders’ equity

Stock repurchase program

In November 2019, the Woodward board of directors (the “Board”) had authorized a program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that was scheduled to expire in November 2022 (the “2019 Authorization”). During the first six months of fiscal year 2022, Woodward repurchased 233 shares of its common stock for $26,742 under the 2019 Authorization.

In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a new program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”). During the first six months of fiscal year 2023, Woodward repurchased 274 shares of its common stock for $26,369 under the 2022 Authorization, compared to 2,047 shares of its common stock for $245,357 during the first six months of fiscal year 2022.

Stock-based compensation

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan, as amended from time to time (the “2017 Plan”) and the 2006 Omnibus Incentive Plan (the “2006 Plan”), as applicable.

The 2017 Plan was first approved by Woodward’s stockholders in January 2017 and is the successor plan to the 2006 Plan. As of September 14, 2016, the effective date of the 2017 Plan, the Board delegated authority to administer the 2017 Plan to the Compensation Committee of the Board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 26, 2022 and January 25, 2023, Woodward’s stockholders approved an additional 800 and 500 shares, respectively, of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 2,709 shares of Woodward’s common stock available for future grants as of March 31, 2023 and 2,938 shares as of September 30, 2022.

Stock options

Woodward believes that stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ten-year term, and generally have a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation model. 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.

25


 

The following is a summary of the activity for stock option awards:

 

 

Three-Months Ended March 31, 2023

 

 

Six-Months Ended March 31, 2023

 

 

 

Number of
options

 

 

Weighted-Average
Exercise Price
per Share

 

 

Number of
options

 

 

Weighted-Average
Exercise Price
per Share

 

Beginning balance

 

 

5,836

 

 

$

75.27

 

 

 

5,339

 

 

$

74.40

 

Granted

 

 

4

 

 

 

100.49

 

 

 

522

 

 

 

83.76

 

Exercised

 

 

(251

)

 

 

50.82

 

 

 

(270

)

 

 

51.14

 

Forfeited

 

 

(15

)

 

 

90.71

 

 

 

(17

)

 

 

91.90

 

Ending balance

 

 

5,574

 

 

$

76.35

 

 

 

5,574

 

 

$

76.35

 

Changes in non-vested stock options were as follows:

 

 

Three-Months Ended March 31, 2023

 

 

Six-Months Ended March 31, 2023

 

 

 

Number of
options

 

 

Weighted-Average
Grant Date Fair
Value per Share

 

 

Number of
options

 

 

Weighted-Average
Grant Date Fair
Value Per Share

 

Beginning balance

 

 

1,751

 

 

$

30.98

 

 

 

1,812

 

 

$

30.03

 

Granted

 

 

4

 

 

 

40.23

 

 

 

522

 

 

 

33.67

 

Exercised

 

 

(65

)

 

 

22.13

 

 

 

(642

)

 

 

29.07

 

Forfeited

 

 

(15

)

 

 

32.89

 

 

 

(17

)

 

 

33.23

 

Ending balance

 

 

1,675

 

 

$

31.39

 

 

 

1,675

 

 

$

31.39

 

Information about stock options that have vested, or are expected to vest, and are exercisable at March 31, 2023 was as follows:

 

 

Number of options

 

 

Weighted-Average
Exercise Price

 

 

Weighted-Average
Remaining Life in Years

 

 

Aggregate Intrinsic
Value

 

Options outstanding

 

 

5,574

 

 

$

76.35

 

 

 

5.6

 

 

$

130,942

 

Options vested and exercisable

 

 

3,899

 

 

 

71.14

 

 

 

4.5

 

 

 

107,908

 

Options vested and expected to vest

 

 

5,503

 

 

 

76.16

 

 

 

5.6

 

 

 

130,216

 

Restricted stock

The Company has granted restricted stock units (“RSUs”) to certain employees under its form attraction and retention RSU agreement, which is generally used for new hires and specific retention purposes, and under its form RSU agreement, which is generally used for annual grants and promotional awards. The RSUs granted under these programs are generally scheduled to fully vest on the third or fourth anniversary of the respective grant dates, subject to continued employment.

A summary of the activity for restricted stock units for the three and six-months ended March 31, 2023:

 

 

Three-Months Ended March 31, 2023

 

 

Six-Months Ended March 31, 2023

 

 

 

Number of
options

 

 

Weighted-Average
Grant Date
Fair Value

 

 

Number of
options

 

 

Weighted-Average
Grant Date
Fair Value

 

Beginning balance

 

 

171

 

 

$

91.96

 

 

 

59

 

 

$

98.29

 

Granted

 

 

1

 

 

 

100.55

 

 

 

113

 

 

 

88.91

 

Forfeited

 

 

(1

)

 

 

83.24

 

 

 

(1

)

 

 

83.24

 

Ending balance

 

 

171

 

 

$

92.19

 

 

 

171

 

 

$

92.19

 

 

26


 

Stock-based compensation expense

Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Pursuant to form stock option agreements and form RSU agreements used by the Company, with terms approved by the administrator of the applicable plan, the requisite service period can be less than the four-year vesting period based on grantee’s retirement eligibility. As such, the recognition of stock-based compensation expense associated with some stock option grants and RSU grants can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

In connection with an executive separation and release agreement entered into by the Company, Woodward recognized an additional $1,265 of stock compensation expense, before tax, during the three-months ended March 31, 2023.

At March 31, 2023, there was approximately $26,750 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements, including both stock options and RSUs. The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0.0% for members of the Board and 7.3% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.8 years.

Note 22. Commitments and contingencies

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims, and alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable. Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

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

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

Under the Company’s severance and change in control agreements with its current corporate officers (the “Amended and Restated Executive Separation and Change in Control Agreements”), Woodward would be required to pay termination benefits to any such officer if such officer’s employment is terminated without Cause (as defined therein). The amount of such benefits would vary depending on whether such termination occurs within a specified period prior to or after a change of control.

Note 23. Segment information

Woodward serves the aerospace and industrial markets through its two reportable segments – Aerospace and Industrial. When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments. Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments.

The accounting policies of the reportable segments are the same as those of the Company. Woodward evaluates segment profit or loss based on internal performance measures for each segment in a given period. In connection with that assessment, Woodward generally excludes matters such as certain charges for restructuring, interest income and expense, certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses.

27


 

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

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Segment external net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

437,017

 

 

$

372,757

 

 

$

832,702

 

 

$

709,192

 

Industrial

 

 

281,197

 

 

 

214,082

 

 

 

504,131

 

 

 

419,233

 

Total consolidated net sales

 

$

718,214

 

 

$

586,839

 

 

$

1,336,833

 

 

$

1,128,425

 

Segment earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

73,314

 

 

$

59,809

 

 

$

128,748

 

 

$

110,892

 

Industrial

 

 

37,571

 

 

 

17,234

 

 

 

48,973

 

 

 

40,927

 

Nonsegment expenses

 

 

(58,307

)

 

 

(15,250

)

 

 

(82,618

)

 

 

(44,615

)

Interest expense, net

 

 

(12,337

)

 

 

(7,697

)

 

 

(23,113

)

 

 

(15,362

)

Consolidated earnings before income taxes

 

$

40,241

 

 

$

54,096

 

 

$

71,990

 

 

$

91,842

 

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, 2023

 

 

September 30, 2022

 

Segment assets:

 

 

 

 

 

 

Aerospace

 

$

1,817,510

 

 

$

1,773,854

 

Industrial

 

 

1,510,413

 

 

 

1,380,446

 

Unallocated corporate property, plant and equipment, net

 

 

106,055

 

 

 

111,760

 

Other unallocated assets

 

 

577,555

 

 

 

540,386

 

Consolidated total assets

 

$

4,011,533

 

 

$

3,806,446

 

 

Note 24. Subsequent events

On April 26, 2023, the Board approved a cash dividend of $0.22 per share for the quarter, payable on June 5, 2023, for stockholders of record as of May 22, 2023.

On May 2, 2023, The Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) extended, for an additional 12-month period, the relocation benefits previously approved for Charles P. Blankenship, Jr., the Company’s Chairman and Chief Executive Officer.

Effective upon Mr. Blankenship’s appointment as CEO on May 9, 2022, and in order to accommodate a transition period for Mr. Blankenship and his family to relocate to the Fort Collins, Colorado area, the Compensation Committee previously authorized certain limited relocation benefits to Mr. Blankenship, which included the reimbursement of his commute between his current state of residence and Fort Collins, Colorado, as well as temporary housing, in each case for up to 12 months from his employment start date (the “Relocation Benefits”). To enable Mr. Blankenship to remain focused on his responsibilities to the Company, without increased distraction associated with a relocation process that has been delayed due to circumstances beyond Mr. Blankenship’s control, the Compensation Committee authorized an extension of the Relocation Benefits, which will now expire on May 9, 2024.

28


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that are deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecast,” “intend,” “continue,” “outlook,” “plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:

the impacts on our business relating to the ongoing global supply chain and labor disruptions, rising labor costs, and material inflation;
the effect of economic trends, including rising inflation and global supply chain and labor pressures;
the effect of geopolitical events, including the Russia-Ukraine conflict on our business and the markets in which we operate;
future sales, earnings, cash flow, uses of cash, and other measures of financial performance, including our ability to accurately forecast such performance;
trends in our business and the markets in which we operate, including expectations in those markets in future periods;
our expected expenses in future periods and trends in such expenses over time;
descriptions of our plans and expectations for future operations;
plans and expectations relating to the performance of our joint venture with General Electric Company;
the expected levels of activity in particular industries or markets and the effects of changes in those levels;
the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;
the research, development, production, and support of new products and services;
restructuring and alignment costs and savings;
our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;
our liquidity, including our ability to meet capital spending requirements and operations;
future repurchases of common stock;
future levels of indebtedness and capital spending;
the stability of financial institutions, including those lending to us;
pension and other postretirement plan assumptions and future contributions; and
our tax rate and other effects of changes in applicable tax laws.

These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results and the timing of certain events to differ materially from the forward-looking statements include, but are not limited to, risk factors described in Woodward's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended September 30, 2022, which was filed on November 18, 2022, and other risks described in Woodward’s filings with the Securities and Exchange Commission.

We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law. Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-Q to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries.

Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-Q are in thousands, except per share amounts.

29


 

OVERVIEW

Global Business Conditions

We continue to monitor a variety of external issues impacting our business, including the ongoing global supply chain and labor disruptions, rising labor costs, and material inflation which together have led to a challenging industry-wide operating environment. We remain focused on operational excellence initiatives, talent development, and innovation. We are unable to predict the full extent to which these issues will continue to adversely impact our business, including our operational performance, results of operations, cash flows, financial position, and the achievement of our strategic objectives. Such uncertainty may affect our ability to accurately predict our future performance and forecast our financial results.

During the first half of fiscal year 2023, we experienced continued robust demand for our products and services across aerospace and industrial markets; however, our financial performance continued to be adversely affected by the issues noted above. We are actively implementing strategies to mitigate our supply chain risk, reduce complexity, increase efficiency, and improve operational performance to better position us for future success. We remain focused on delivering further operational improvements to drive value for our shareholders. We also continue to assess the environment and are taking appropriate price actions in response to rising costs, we are executing multiple work streams to capture prices that better reflect the value we deliver.

We may take further actions with respect to our business operations if we determine such actions are in the best interests of our stockholders, employees, customers, and other stakeholders as appropriate. It is not currently clear what the potential effects of any such actions may have on our business in future periods, including the effects on our customers, employees and prospects, or on our financial results.

Operational Highlights

Quarter and Year to Date Highlights

 

 

Three-Months Ended
March 31,

 

 

Six-Months Ended
March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace segment

 

$

437,017

 

 

$

372,757

 

 

$

832,702

 

 

$

709,192

 

Industrial segment

 

 

281,197

 

 

 

214,082

 

 

 

504,131

 

 

 

419,233

 

Consolidated net sales

 

$

718,214

 

 

$

586,839

 

 

$

1,336,833

 

 

$

1,128,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace segment

 

$

73,314

 

 

$

59,809

 

 

$

128,748

 

 

$

110,892

 

Segment earnings as a percent of segment net sales

 

 

16.8

%

 

 

16.0

%

 

 

15.5

%

 

 

15.6

%

Industrial segment

 

$

37,571

 

 

$

17,234

 

 

$

48,973

 

 

$

40,927

 

Segment earnings as a percent of segment net sales

 

 

13.4

%

 

 

8.1

%

 

 

9.7

%

 

 

9.8

%

Consolidated net earnings

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

Adjusted net earnings

 

$

61,719

 

 

$

46,610

 

 

$

91,325

 

 

$

82,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

 

11.8

%

 

 

11.4

%

 

 

9.5

%

 

 

14.8

%

Adjusted effective tax rate

 

 

17.8

%

 

 

11.0

%

 

 

14.5

%

 

 

15.5

%

Consolidated diluted earnings per share

 

$

0.58

 

 

$

0.74

 

 

$

1.07

 

 

$

1.21

 

Consolidated adjusted diluted earnings per share

 

$

1.01

 

 

$

0.72

 

 

$

1.50

 

 

$

1.28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before interest and taxes ("EBIT")

 

$

52,578

 

 

$

61,793

 

 

$

95,103

 

 

$

107,204

 

Adjusted EBIT

 

$

87,454

 

 

$

60,065

 

 

$

129,979

 

 

$

113,458

 

Earnings before interest, taxes, depreciation, and amortization ("EBITDA")

 

$

82,531

 

 

$

92,403

 

 

$

154,360

 

 

$

168,535

 

Adjusted EBITDA

 

$

117,407

 

 

$

90,675

 

 

$

189,236

 

 

$

174,789

 

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

30


 

Liquidity Highlights

Net cash provided by operating activities for the first half of fiscal year 2023 was $40,150, compared to $50,108 for the first half of fiscal year 2022. The decrease in net cash provided by operating activities in the first half of fiscal year 2023 compared to the first half of the prior fiscal year is primarily attributable to the timing of tax payments and working capital increases to support this year's anticipated growth.

For the first half of fiscal year 2023, free cash flow was negative $3,896, compared to free cash flow of $25,958 for the first half of fiscal year 2022. We define free cash flow as net cash flow from operating activities less payments for property, plant and equipment. The decrease in free cash flow for the first half of fiscal year 2023 as compared to the same period of the prior fiscal year was primarily due to increased capital expenditures. Adjusted free cash flow, which we define as free cash flow plus cash payments for costs related to business development activities and restructuring charges, was negative $1,060 for the first half of fiscal year 2023, compared to $27,233 for the first half of fiscal year 2022. Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

At March 31, 2023, we held $129,427 in cash and cash equivalents and had total outstanding debt of $858,597. We have additional borrowing availability of $860,721, net of outstanding letters of credit, under our revolving credit agreement. At March 31, 2023, we also had additional borrowing capacity of $27,460 under various foreign lines of credit and foreign overdraft facilities.

RESULTS OF OPERATIONS

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

 

 

Three-Months Ended

 

 

Six-Months Ended

 

 

 

March 31,
2023

 

 

% of Net
Sales

 

 

March 31,
2022

 

 

% of Net
Sales

 

 

March 31,
2023

 

 

% of Net
Sales

 

 

March 31,
2022

 

 

% of Net
Sales

 

Net sales

 

$

718,214

 

 

 

100

%

 

$

586,839

 

 

 

100

%

 

$

1,336,833

 

 

 

100

%

 

$

1,128,425

 

 

 

100

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

559,149

 

 

 

77.9

%

 

 

453,425

 

 

 

77.3

%

 

 

1,051,812

 

 

 

78.7

%

 

 

872,576

 

 

 

77.3

%

Selling, general, and administrative expenses

 

 

75,578

 

 

 

10.5

%

 

 

44,124

 

 

 

7.5

%

 

 

138,765

 

 

 

10.4

%

 

 

106,430

 

 

 

9.4

%

Research and development costs

 

 

37,777

 

 

 

5.3

%

 

 

32,384

 

 

 

5.5

%

 

 

66,411

 

 

 

5.0

%

 

 

57,776

 

 

 

5.1

%

Restructuring charges

 

 

5,172

 

 

 

0.7

%

 

 

 

 

 

0.0

%

 

 

5,172

 

 

 

0.4

%

 

 

 

 

 

0.0

%

Interest expense

 

 

12,845

 

 

 

1.8

%

 

 

8,197

 

 

 

1.4

%

 

 

23,987

 

 

 

1.8

%

 

 

16,503

 

 

 

1.5

%

Interest income

 

 

(508

)

 

 

(0.1

)%

 

 

(500

)

 

 

(0.1

)%

 

 

(874

)

 

 

(0.1

)%

 

 

(1,141

)

 

 

(0.1

)%

Other (income) expense, net

 

 

(12,040

)

 

 

(1.7

)%

 

 

(4,887

)

 

 

(0.8

)%

 

 

(20,430

)

 

 

(1.5

)%

 

 

(15,561

)

 

 

(1.4

)%

Total costs and expenses

 

 

677,973

 

 

 

94.4

%

 

 

532,743

 

 

 

90.8

%

 

 

1,264,843

 

 

 

94.6

%

 

 

1,036,583

 

 

 

91.9

%

Earnings before income taxes

 

 

40,241

 

 

 

5.6

%

 

 

54,096

 

 

 

9.2

%

 

 

71,990

 

 

 

5.4

%

 

 

91,842

 

 

 

8.1

%

Income tax expense

 

 

4,730

 

 

 

0.7

%

 

 

6,190

 

 

 

1.1

%

 

 

6,873

 

 

 

0.5

%

 

 

13,631

 

 

 

1.2

%

Net earnings

 

$

35,511

 

 

 

4.9

%

 

$

47,906

 

 

 

8.2

%

 

$

65,117

 

 

 

4.9

%

 

$

78,211

 

 

 

6.9

%

Other select financial data:

 

 

March 31, 2023

 

 

September 30, 2022

 

Working capital

 

$

803,743

 

 

$

772,856

 

Total debt

 

 

858,597

 

 

 

777,416

 

Total stockholders' equity

 

 

2,012,054

 

 

 

1,901,122

 

 

31


 

Net Sales

Consolidated net sales for the second quarter of fiscal year 2023 increased by $131,375, or 22.4%, compared to the same period of fiscal year 2022. Consolidated net sales for the first half of fiscal year 2023 increased by $208,408, or 18.5%, compared to the same period of fiscal year 2022.

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, 2022

 

$

586,839

 

 

$

1,128,425

 

Aerospace volume

 

 

41,747

 

 

 

78,727

 

Industrial volume

 

 

67,438

 

 

 

96,753

 

Noncash consideration

 

 

(3,883

)

 

 

(4,357

)

Effects of changes in price

 

 

39,882

 

 

 

70,144

 

Effects of changes in foreign currency rates

 

 

(13,809

)

 

 

(32,859

)

Consolidated net sales for the period ended March 31, 2023

 

$

718,214

 

 

$

1,336,833

 

In the Aerospace segment, the increase in net sales for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to an increase in commercial OEM and aftermarket sales driven by continued recovery in passenger traffic, increasing aircraft utilization, and price realization, partially offset by lower defense OEM sales primarily driven by reduced demand for guided weapons.

In the Industrial segment, the increase in net sales for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to volume increases across all markets, partially offset by unfavorable foreign currency impacts.

In recent quarters, we disclosed the dollar value impact of ongoing global supply chain and labor disruptions on segment net sales in our Aerospace and Industrial segments. We now are experiencing stabilization in our supply chain and labor force, and as a result, we have begun to gradually reduce our late deliveries. Because supply chain and labor disruptions are no longer creating material quarterly variability on our results, we do not intend to continue providing this measure, as it is no longer meaningful.

Costs and Expenses

Cost of goods sold increased by $105,724 to $559,149, or 77.9% of net sales, for the second quarter of fiscal year 2023, from $453,425, or 77.3% of net sales, for the second quarter of fiscal year 2022. Cost of goods sold increased by $179,236 to $1,051,812, or 78.7% of net sales, for the first half of fiscal year 2023, from $872,576, or 77.3% of net sales, for the first half of fiscal year 2022. The increase in cost of goods sold as a percentage of net sales in the second quarter and first half of fiscal year 2023 compared to the same periods of the prior fiscal year was primarily due to higher sales volume, net inflationary impacts on material and labor costs, as well as increases in manufacturing costs related to global supply chain and labor disruptions.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 22.1% for the second quarter of fiscal year 2023 and 21.3% for the first half of fiscal year 2023, compared to 22.7% for both the second quarter and the first half of fiscal year 2022. The decrease in gross margin for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to higher sales volume, net inflationary impacts on material and labor costs, increases in manufacturing costs related to global supply chain and labor disruptions, as well as non-recurring, specific charges for excess and obsolete inventory and product rationalization.

Selling, general and administrative expenses increased by $31,454, or 71.3%, to $75,578 for the second quarter of fiscal year 2023, compared to $44,124 for the second quarter of fiscal year 2022. Selling, general, and administrative expenses as a percentage of net sales increased to 10.5% for the second quarter of fiscal year 2023, compared to 7.5% for the second quarter of fiscal year 2022. Selling, general, and administrative expenses increased by $32,335, or 30.4%, to $138,765 for the first half of fiscal year 2023, compared to $106,430 for the first half of fiscal year 2022. Selling, general, and administrative expenses as a percentage of net sales increased to 10.4% for the first half of fiscal year 2023, compared to 9.4% for the first half of fiscal year 2022. The increase in selling, general and administrative expenses for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily due to increased annual variable incentive compensation costs, a non-recurring charge related to customer collections, and a product rationalization charge related to the write-off of an asset, which in each case did not occur in the prior fiscal periods.

Research and development costs increased by $5,393, or 16.7%, to $37,777 for the second quarter of fiscal year 2023, as compared to $32,384 for the second quarter of fiscal year 2022. The increase in research and development costs for the

32


 

second quarter of fiscal year 2023 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased to 5.3% for the second quarter of fiscal year 2023, as compared to 5.5% for the same period of the prior fiscal year.

Research and development costs increased by $8,635, or 14.9%, to $66,411 for the first half of fiscal year 2023, as compared to $57,776 for the first half of fiscal year 2022. The increase in research and development costs, for the first half of fiscal year 2023 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased slightly to 5.0% for the first half of fiscal year 2023, as compared to 5.1% for the first half of fiscal year 2022.

Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs.

Restructuring charges of $5,172 recognized in the second quarter of fiscal year 2023 primarily related to workforce management to better align the cost structure with the current market conditions. All of the restructuring charges recorded in fiscal year 2023 were recorded as nonsegment expenses and there were no such restructuring charges recorded in fiscal year 2022.

Interest expense increased by $4,648, or 56.7%, to $12,845 for the second quarter of fiscal year 2023, compared to $8,197 for the second quarter of fiscal year 2022. Interest expense as a percentage of net sales was 1.8% for the second quarter of fiscal year 2023, compared to 1.4% for the second quarter of fiscal year 2022. Interest expense increased by $7,484, or 45.3%, to $23,987 for the first half of fiscal year 2023, compared to $16,503 for the first half of fiscal year 2022. Interest expense as a percentage of net sales was 1.8% for the first half of fiscal year 2023, compared to 1.5% for the first half of fiscal year 2022. The increase in interest expense for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to increased borrowings on the revolving credit facility that occurred during the second quarter and first half of fiscal 2023.

Other income increased by $7,153 to $12,040 for the second quarter of fiscal year 2023, compared to $4,887 for the second quarter of fiscal year 2022. Other income increased by $4,869 to $20,430 for the first half of fiscal year 2023, compared to $15,561 for the first half of fiscal year 2022. The increase in other income for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to increased earnings in the joint venture and a gain on investments in our deferred compensation program, whereas a loss on investments were recognized in the prior fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 11.8% for the second quarter and 9.5% for the first half of fiscal year 2023, and 11.4% for the second quarter and 14.8% for the first half of fiscal year 2022. The increase in the effective tax rate for the second quarter compared to the same period of the prior year is primarily attributable to a smaller stock-based compensation tax benefit, partially offset by larger state income tax credits and Foreign Derived Intangible Income benefit. The decrease in the effective tax rate for the first half of fiscal year 2023 compared to the same period of the prior year is primarily attributable to the release of uncertain tax positions, larger state income tax credits, and a larger Foreign Derived Intangible Income benefit, partially offset by a smaller stock-based compensation tax benefit.

Segment Results

The following table presents sales by segment:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

437,017

 

 

 

60.8

%

 

$

372,757

 

 

 

63.5

%

 

$

832,702

 

 

 

62.3

%

 

$

709,192

 

 

 

62.8

%

Industrial

 

 

281,197

 

 

 

39.2

%

 

 

214,082

 

 

 

36.5

%

 

 

504,131

 

 

 

37.7

%

 

 

419,233

 

 

 

37.2

%

Consolidated net sales

 

$

718,214

 

 

 

100

%

 

$

586,839

 

 

 

100

%

 

$

1,336,833

 

 

 

100

%

 

$

1,128,425

 

 

 

100

%

 

33


 

The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Aerospace

 

$

73,314

 

 

$

59,809

 

 

$

128,748

 

 

$

110,892

 

Industrial

 

 

37,571

 

 

 

17,234

 

 

 

48,973

 

 

 

40,927

 

Nonsegment expenses

 

 

(58,307

)

 

 

(15,250

)

 

 

(82,618

)

 

 

(44,615

)

Interest expense, net

 

 

(12,337

)

 

 

(7,697

)

 

 

(23,113

)

 

 

(15,362

)

Consolidated earnings before income taxes

 

 

40,241

 

 

 

54,096

 

 

 

71,990

 

 

 

91,842

 

Income tax expense

 

 

(4,730

)

 

 

(6,190

)

 

 

(6,873

)

 

 

(13,631

)

Consolidated net earnings

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

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

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Aerospace

 

 

16.8

%

 

 

16.0

%

 

 

15.5

%

 

 

15.6

%

Industrial

 

 

13.4

%

 

 

8.1

%

 

 

9.7

%

 

 

9.8

%

Aerospace

Aerospace segment net sales increased by $64,260, or 17.2%, to $437,017 for the second quarter of fiscal year 2023, compared to $372,757 for the second quarter of fiscal year 2022. Aerospace segment net sales increased by $123,510, or 17.4%, to $832,702 for the first half of fiscal year 2023, compared to $709,192 for the first half of fiscal year 2022. The increase in Aerospace segment net sales in the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily due to higher commercial OEM and aftermarket sales as well as price realization, partially offset by the reduced demand for guided weapons.

Defense OEM sales decreased in the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year, primarily driven by the reduced demand for guided weapons. However, with the exception of guided weapons, defense OEM demand remained stable at elevated levels. Our defense aftermarket sales increased in the second quarter and first half of fiscal year 2023 compared to the same period of the prior fiscal year, primarily driven by increased defense budgets resulting in operations and maintenance upgrades.

Aerospace segment earnings increased by $13,505, or 22.6%, to $73,314 for the second quarter of fiscal year 2023, compared to $59,809 for the second quarter of fiscal year 2022. Aerospace segment earnings increased by $17,856, or 16.1%, to $128,748 for the first half of fiscal year 2023, compared to $110,892 for the first half of fiscal year 2022.

The increase in Aerospace segment earnings for the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year was due to the following:

 

 

Three-Month Period

 

 

Six-Month Period

 

Earnings for the period ended March 31, 2022

 

$

59,809

 

 

$

110,892

 

Sales volume

 

 

17,591

 

 

 

34,272

 

Price, sales mix, inflation and productivity

 

 

7,171

 

 

 

13,811

 

Manufacturing costs related to hiring and training

 

 

(5,196

)

 

 

(11,014

)

Annual variable incentive compensation costs

 

 

(4,586

)

 

 

(12,252

)

Other, net

 

 

(1,475

)

 

 

(6,961

)

Earnings for the period ended March 31, 2023

 

$

73,314

 

 

$

128,748

 

Aerospace segment earnings as a percentage of segment net sales were 16.8% for the second quarter and 15.5% for the first half of fiscal year 2023, compared to 16.0% for the second quarter and 15.6% for the first half of fiscal year 2022.

34


 

Industrial

Industrial segment net sales increased by $67,115, or 31.4%, to $281,197 for the second quarter of fiscal year 2023, compared to $214,082 for the second quarter of fiscal year 2022. Industrial segment net sales increased by $84,898, or 20.3%, to $504,131 for the first half of fiscal year 2023, compared to $419,233 for the first half of fiscal year 2022. The increase in Industrial segment net sales in the second quarter and first half of fiscal year 2023 as compared to the same periods of the prior fiscal year was primarily attributable to volume increases across all markets, partially offset by unfavorable foreign currency impacts of $11,426 in the second quarter and $28,092 in the first half of fiscal year 2023.

Industrial segment earnings increased by $20,337, or 118.0%, to $37,571 for the second quarter of fiscal year 2023, compared to $17,234 for the second quarter of fiscal year 2022. Segment earnings increased by $8,046, or 19.7%, to $48,973 for the first half of fiscal year 2023, compared to $40,927 for the first half of fiscal year 2022.

The increase in Industrial segment earnings for the second quarter and first half of fiscal year 2023 compared to the same periods of the prior fiscal year was due to the following:

 

 

Three-Month Period

 

 

Six-Month Period

 

Earnings for the period ended March 31, 2022

 

$

17,234

 

 

$

40,927

 

Sales volume

 

 

30,104

 

 

 

42,739

 

Price, sales mix, inflation and productivity

 

 

3,242

 

 

 

(3,846

)

Manufacturing costs related to hiring and training

 

 

(5,600

)

 

 

(10,193

)

Effects of changes in foreign currency rates

 

 

(3,356

)

 

 

(7,956

)

Annual variable incentive compensation costs

 

 

(3,687

)

 

 

(7,651

)

Other, net

 

 

(366

)

 

 

(5,047

)

Earnings for the period ended March 31, 2023

 

$

37,571

 

 

$

48,973

 

Industrial segment earnings as a percentage of segment net sales were 13.4% for the second quarter and 9.7% for the first half of fiscal year 2023, compared to 8.1% for the second quarter and 9.8% for the first half of fiscal year 2022.

Nonsegment

Nonsegment expenses increased by $43,057 to $58,307 for the second quarter of fiscal year 2023, compared to $15,250 for the second quarter of fiscal year 2022. Nonsegment expenses increased by $38,003 to $82,618 for the first half of fiscal year 2023, compared to $44,615 for the first half of fiscal year 2022. Nonsegment expenses for the second quarter and first half of fiscal year 2023 included a specific charge for excess and obsolete inventory of $11,995, a product rationalization charge of $10,504, a restructuring charge of $5,172, a non-recurring charge related to customer collections of $4,997, and certain non-restructuring separation costs of $2,208. Excluding these charges from 2023, nonsegment expenses increased by $8,181 and $3,127 in the second quarter and first half of fiscal year 2023, respectively, compared to the second quarter and first half of fiscal year 2022.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have satisfied our working capital needs, as well as capital expenditures, product development, and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. From time to time, we have also issued debt to supplement our cash needs, repay our other indebtedness, or finance our acquisitions. We continue to expect that cash generated from our operating activities, together with borrowings under our revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs for the foreseeable future.

In addition to our revolving credit facility, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our revolving credit facility and our other credit facilities, see Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q.

35


 

At March 31, 2023, we had total outstanding debt of $858,597 consisting of various series of unsecured notes due between 2023 and 2033 and obligations under our finance leases.

At March 31, 2023, we had $130,500 outstanding on our revolving credit facility, all of which is classified as short-term borrowings based on our intent and ability to repay this amount in the next twelve months. Revolving credit facility and short-term borrowing activity during the six-months ended March 31, 2023 were as follows:

Maximum daily balance during the period

 

$

317,800

 

Average daily balance during the period

 

$

241,014

 

Weighted average interest rate on average daily balance

 

 

5.41

%

At March 31, 2023, we had additional borrowing availability of $860,721 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $27,460 under various foreign credit facilities.

To our knowledge, we were in compliance with all our debt covenants as of March 31, 2023. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, for more information about our covenants.

In addition to utilizing our cash resources to fund the working capital needs of our business, we evaluate additional strategic uses of our funds, including the repurchase of our common stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions, and other potential uses of cash.

From time to time, the Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in an increase of approximately $1,569 in cash provided by operating activities during the six-months ended March 31, 2023, compared to an increase in cash provided by operating activities of approximately $25,759 during the six-months ended March 31, 2022.

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 November 2019, the Board had authorized a program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that was scheduled to expire in November 2022 (the “2019 Authorization”). During the first half of fiscal year 2022, we repurchased 233 shares of our common stock for $26,742 under the 2019 Authorization. We repurchased no shares under the 2019 Authorization during the first half of fiscal year 2023.

In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”). During the first half of fiscal year 2023, we repurchased 274 shares of our common stock for $26,369 under the 2022 Authorization, as compared to 2,047 shares of our common stock for $245,357 under the 2022 Authorization during the first half of fiscal year 2022.

We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable and do not currently foresee adverse impacts to financial institutions supporting our capital requirements.

36


 

Cash Flows

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

Net cash provided by operating activities

 

$

40,150

 

 

$

50,108

 

Net cash (used in) investing activities

 

 

(35,236

)

 

 

(12,848

)

Net cash provided by (used in) financing activities

 

 

24,337

 

 

 

(276,834

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(7,668

)

 

 

(533

)

Net change in cash and cash equivalents

 

 

21,583

 

 

 

(240,107

)

Cash and cash equivalents, including restricted cash, at beginning of year

 

 

107,844

 

 

 

448,462

 

Cash and cash equivalents, including restricted cash, at end of period

 

$

129,427

 

 

$

208,355

 

Net cash flows provided by operating activities for the first half of fiscal year 2023 was $40,150, compared to $50,108 for the same period of fiscal year 2022. The decrease in net cash provided by operating activities in the first half of fiscal year 2023 as compared to the first half of the prior fiscal year is primarily attributable to timing of tax payments and working capital increases to support this year's anticipated growth.

Net cash flows used in investing activities for the first half of fiscal year 2023 was $35,236, compared to $12,848 for the same period of fiscal year 2022. The increase in cash flows used in investing activities in the first half of fiscal year 2023 as compared to the first half of the prior fiscal year is primarily due to increased payments for property, plant and equipment.

Net cash flows provided by financing activities for the first half of fiscal year 2023 was $24,337, compared to net cash flows used in financing activities of $276,834 for the same period of fiscal year 2022. The increase in net cash flows provided by financing activities in the first half of fiscal year 2023 as compared to the first half of the prior fiscal year is primarily attributable to the change in net debt borrowings, partially offset by a decrease in repurchases of common stock. During the first half of fiscal year 2023, we had net debt borrowings in the amount of $63,412, while we had net debt payments of $564 in the first half of fiscal year 2022. During the first half of fiscal year 2023, we made $26,369 of cash repurchases of common stock, as compared to $273,535 of cash repurchases of common stock during the first half of fiscal year 2022.

Non-U.S. GAAP Financial Measures

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, free cash flow, and adjusted free cash flow are financial measures not prepared and presented in accordance with U.S. GAAP. However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.

Earnings based non‐U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge and partial reversal in connection with a non-recurring matter unrelated to the ongoing operations of the business, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. The Company believes that these excluded items are short‐term in nature, not directly related to the ongoing operations of the business, and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted‐average number of diluted shares of common stock outstanding for the period. Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar, infrequent or unusual charges.

37


 

The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, is shown in the tables below:

 

 

Three-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Net Earnings

 

 

Earnings Per Share

 

 

Net Earnings

 

 

Earnings Per Share

 

Net earnings (U.S. GAAP)

 

$

35,511

 

 

$

0.58

 

 

$

47,906

 

 

$

0.74

 

Non-U.S. GAAP adjustments, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Specific charge for excess and obsolete inventory

 

 

9,016

 

 

 

0.15

 

 

 

 

 

 

 

Product rationalization

 

 

7,896

 

 

 

0.13

 

 

 

 

 

 

 

Restructuring charge

 

 

3,874

 

 

 

0.06

 

 

 

 

 

 

 

Non-recurring charge related to customer collections

 

 

3,761

 

 

 

0.06

 

 

 

 

 

 

 

Certain non-restructuring separation costs

 

 

1,661

 

 

 

0.03

 

 

 

 

 

 

 

Non-recurring matter unrelated to the ongoing operations of the business

 

 

 

 

 

 

 

 

(1,296

)

 

 

(0.02

)

Business development activities

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. GAAP adjustments

 

 

26,208

 

 

 

0.43

 

 

 

(1,296

)

 

 

(0.02

)

Adjusted net earnings (Non-U.S. GAAP)

 

$

61,719

 

 

$

1.01

 

 

$

46,610

 

 

$

0.72

 

 

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Net Earnings

 

 

Earnings Per Share

 

 

Net Earnings

 

 

Earnings Per Share

 

Earnings per share (U.S. GAAP)

 

$

65,117

 

 

$

1.07

 

 

$

78,211

 

 

$

1.21

 

Non-U.S. GAAP adjustments, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Specific charge for excess and obsolete inventory

 

 

9,016

 

 

 

0.15

 

 

 

 

 

 

 

Product rationalization

 

 

7,896

 

 

 

0.13

 

 

 

 

 

 

 

Restructuring charge

 

 

3,874

 

 

 

0.06

 

 

 

 

 

 

 

Non-recurring charge related to customer collections

 

 

3,761

 

 

 

0.06

 

 

 

 

 

 

 

Certain non-restructuring separation costs

 

 

1,661

 

 

 

0.03

 

 

 

 

 

 

 

Non-recurring matter unrelated to the ongoing operations of the business

 

 

 

 

 

 

 

 

2,454

 

 

 

0.04

 

Business development activities

 

 

 

 

 

 

 

 

2,236

 

 

 

0.03

 

Total non-U.S. GAAP adjustments

 

 

26,208

 

 

 

0.43

 

 

 

4,690

 

 

 

0.07

 

Adjusted earnings per share (Non-U.S. GAAP)

 

$

91,325

 

 

$

1.50

 

 

$

82,901

 

 

$

1.28

 

Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements do not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors, and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization. The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of the Company’s operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization. Further, as interest from financing, income taxes, depreciation, and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability.

38


 

Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge and partial reversal in connection with a non-recurring matter unrelated to the ongoing operations of the business, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. As these charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes removing these gains and charges from EBIT and EBITDA improves comparability of past, present, and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

EBIT and adjusted EBIT reconciled to net earnings were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net earnings (U.S. GAAP)

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

Income tax expense

 

 

4,730

 

 

 

6,190

 

 

 

6,873

 

 

 

13,631

 

Interest expense

 

 

12,845

 

 

 

8,197

 

 

 

23,987

 

 

 

16,503

 

Interest income

 

 

(508

)

 

 

(500

)

 

 

(874

)

 

 

(1,141

)

EBIT (Non-U.S. GAAP)

 

 

52,578

 

 

 

61,793

 

 

 

95,103

 

 

 

107,204

 

Non-U.S. GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Specific charge for excess and obsolete inventory

 

 

11,995

 

 

 

 

 

 

11,995

 

 

 

 

Product rationalization

 

 

10,504

 

 

 

 

 

 

10,504

 

 

 

 

Restructuring charge

 

 

5,172

 

 

 

 

 

 

5,172

 

 

 

 

Non-recurring charge related to customer collections

 

 

4,997

 

 

 

 

 

 

4,997

 

 

 

 

Certain non-restructuring separation costs

 

 

2,208

 

 

 

 

 

 

2,208

 

 

 

 

Non-recurring matter unrelated to the ongoing operations of the business

 

 

 

 

 

(1,728

)

 

 

 

 

 

3,272

 

Business development activities

 

 

 

 

 

 

 

 

 

 

 

2,982

 

Total non-U.S. GAAP adjustments

 

 

34,876

 

 

 

(1,728

)

 

 

34,876

 

 

 

6,254

 

Adjusted EBIT (Non-U.S. GAAP)

 

$

87,454

 

 

$

60,065

 

 

$

129,979

 

 

$

113,458

 

EBITDA and adjusted EBITDA reconciled to net earnings were as follows:

 

 

Three-Months Ended March 31,

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net earnings (U.S. GAAP)

 

$

35,511

 

 

$

47,906

 

 

$

65,117

 

 

$

78,211

 

Income tax expense

 

 

4,730

 

 

 

6,190

 

 

 

6,873

 

 

 

13,631

 

Interest expense

 

 

12,845

 

 

 

8,197

 

 

 

23,987

 

 

 

16,503

 

Interest income

 

 

(508

)

 

 

(500

)

 

 

(874

)

 

 

(1,141

)

Amortization of intangible assets

 

 

9,418

 

 

 

9,587

 

 

 

18,596

 

 

 

19,275

 

Depreciation expense

 

 

20,535

 

 

 

21,023

 

 

 

40,661

 

 

 

42,056

 

EBITDA (Non-U.S. GAAP)

 

 

82,531

 

 

 

92,403

 

 

 

154,360

 

 

 

168,535

 

Non-U.S. GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Specific charge for excess and obsolete inventory

 

 

11,995

 

 

 

 

 

 

11,995

 

 

 

 

Product rationalization

 

 

10,504

 

 

 

 

 

 

10,504

 

 

 

 

Restructuring charge

 

 

5,172

 

 

 

 

 

 

5,172

 

 

 

 

Non-recurring charge related to customer collections

 

 

4,997

 

 

 

 

 

 

4,997

 

 

 

 

Certain non-restructuring separation costs

 

 

2,208

 

 

 

 

 

 

2,208

 

 

 

 

Non-recurring matter unrelated to the ongoing operations of the business

 

 

 

 

 

(1,728

)

 

 

 

 

 

3,272

 

Business development activities

 

 

 

 

 

 

 

 

 

 

 

2,982

 

Total non-U.S. GAAP adjustments

 

 

34,876

 

 

 

(1,728

)

 

 

34,876

 

 

 

6,254

 

Adjusted EBITDA (Non-U.S. GAAP)

 

$

117,407

 

 

$

90,675

 

 

$

189,236

 

 

$

174,789

 

 

39


 

The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most directly comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

Cash flow‐based non‐U.S. GAAP financial measures

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant, and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, purchasing our common stock, paying dividends, and investing in additional research and development. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to exclude the effect of cash paid for business development activities and restructuring activities. Management believes that excluding these infrequent or unusual items from free cash flow better portrays our ability to generate cash, as such items are not indicative of the Company’s operating performance for the period.

The use of these non‐U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities were as follows:

 

 

Six-Months Ended March 31,

 

 

 

2023

 

 

2022

 

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

 

$

40,150

 

 

$

50,108

 

Payments for property, plant and equipment

 

 

(44,046

)

 

 

(24,150

)

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

 

$

(3,896

)

 

$

25,958

 

Cash paid for business development activities

 

 

 

 

 

770

 

Cash paid for restructuring charges

 

 

2,836

 

 

 

505

 

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

 

$

(1,060

)

 

$

27,233

 

CRITICAL ACCOUNTING 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 in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed 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 recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, reviews for impairment of goodwill and other indefinitely lived intangible assets, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.

New Accounting Standards

From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.

40


 

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 (Charles (“Chip”) P. Blankenship, Jr., Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Mark D. Hartman, Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.

Chip P. Blankenship, Jr. and Mark D. Hartman evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluations, they concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2023.

There have not been any changes in our internal controls over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations, and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims, and alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable.

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

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.

41


 

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, 2023 through January 31, 2023 (2)

 

 

191

 

 

$

102.26

 

 

 

 

 

$

327,590

 

February 1, 2023 through February 28, 2023 (2)

 

 

226

 

 

 

99.00

 

 

 

 

 

 

327,590

 

March 1, 2023 through March 31, 2023 (2)

 

 

 

 

 

 

 

 

 

 

 

327,590

 

 

(1)
In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”).
(2)
Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 191 shares of common stock were acquired in January 2023, no shares of common stock were acquired in February 2023, and no shares of common stock were acquired in March 2023 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, 226 shares of common stock were acquired in February 2023 on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.

Item 6. Exhibits

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

WOODWARD, INC.

EXHIBIT INDEX

 

 

Exhibit

Number

Description

*

31.1

Rule 13a-14(a)/15d-14(a) certification of Charles P. Blankenship, Jr.

*

31.2

Rule 13a-14(a)/15d-14(a) certification of Mark D. Hartman

*

32.1

Section 1350 certifications

*

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statements of Comprehensive Earnings, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.

*

104

Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* Filed as an exhibit to this Report

42


 

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: May 5, 2023

 

/s/ Charles P. Blankenship, Jr.

 

 

Charles P. Blankenship, Jr.

 

 

Chairman of the Board, Chief Executive Officer, and President

(on behalf of the registrant and as the registrant’s Principal Executive Officer)

 

 

 

Date: May 5, 2023

 

/s/ Mark D. Hartman

 

 

Mark D. Hartman

 

 

Chief Financial Officer

(on behalf of the registrant and as the registrant’s Principal Financial and Accounting Officer)

43