Woodward, Inc. - FORM 10-Q

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EX-10.2 - EX-10.2 - Woodward, Inc.	wwd-20150630ex10208e4c5.htm
EX-31.1 - EX-31.1 - Woodward, Inc.	wwd-20150630xex311.htm
EX-32.1 - EX-32.1 - Woodward, Inc.	wwd-20150630xex321.htm
EX-31.2 - EX-31.2 - Woodward, Inc.	wwd-20150630xex312.htm
EX-10.4 - EX-10.4 - Woodward, Inc.	wwd-20150630ex104a0546d.htm
EX-10.3 - EX-10.3 - Woodward, Inc.	wwd-20150630ex103d5fe1f.htm
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EX-10.1 - EX-10.1 - Woodward, Inc.	wwd-20150630ex101d2d007.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

☐ 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.)

1000 East Drake Road, Fort Collins, Colorado

80525

(Address of principal executive offices)

(Zip Code)

(970) 482-5811

(Registrant’s telephone number, including area code)

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

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

Yes ☒ No ☐

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

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

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

Yes ☐ No ☒

As of July 17, 2015, 63,580,865 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	2
	Condensed Consolidated Statements of Earnings	2
	Condensed Consolidated Statements of Comprehensive Earnings	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Forward Looking Statements	27
	Overview	30
	Results of Operations	31
	Liquidity and Capital Resources	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6.	Exhibits	38
	Signatures	38

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				Nine-Months Ended
	June 30,				June 30,
	2015		2014		2015		2014

Net sales	$	494,810	$	524,284	$	1,475,678	$	1,435,793
Costs and expenses:
Cost of goods sold		351,421		372,571		1,050,783		1,028,065
Selling, general and administrative expenses		39,305		40,468		117,598		113,079
Research and development costs		33,555		34,990		97,912		100,219
Amortization of intangible assets		7,224		8,357		22,026		25,498
Interest expense		6,077		5,972		17,355		18,219
Interest income		(219)		(73)		(567)		(189)
Other (income) expense, net (Note 16)		(112)		(469)		(1,651)		(1,266)
Total costs and expenses		437,251		461,816		1,303,456		1,283,625
Earnings before income taxes		57,559		62,468		172,222		152,168
Income tax expense		13,806		16,467		40,830		37,986
Net earnings	$	43,753	$	46,001	$	131,392	$	114,182

Earnings per share (Note 3):
Basic earnings per share	$	0.68	$	0.70	$	2.02	$	1.71
Diluted earnings per share	$	0.66	$	0.69	$	1.98	$	1.68

Weighted Average Common Shares Outstanding (Note 3):
Basic		64,781		65,845		65,088		66,736
Diluted		66,227		67,147		66,504		68,030
Cash dividends per share paid to Woodward common stockholders	$	0.10	$	0.08	$	0.28	$	0.24

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)



	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2015		2014		2015		2014

Net earnings	$	43,753	$	46,001	$	131,392	$	114,182
Other comprehensive earnings:
Foreign currency translation adjustments		6,990		(72)		(27,955)		4,159
Taxes on changes in foreign currency translation adjustments		240		74		1,500		368
		7,230		2		(26,455)		4,527
Reclassification of net realized losses on derivatives to earnings		25		24		74		73
Taxes on changes in derivative transactions		(10)		(9)		(28)		(27)
		15		15		46		46
Minimum retirement benefit liability adjustments (Note 18)
Net gain (loss) arising during the period		-		1,193		-		1,193
Curtailment arising during the period		-		(915)		-		(915)
Amortization of:
Net prior service cost (benefit)		56		(22)		169		(66)
Net loss		128		199		385		588
Foreign currency exchange rate changes on minimum retirement benefit liabilities		(604)		(263)		454		(483)
Taxes on changes in minimum retirement liability adjustments, net of foreign currency exchange rate changes		141		31		(368)		(14)
		(279)		223		640		303
Total comprehensive earnings	$	50,719	$	46,241	$	105,623	$	119,058

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)



	June 30,		September 30,
	2015		2014
ASSETS
Current assets:
Cash and cash equivalents	$	87,384	$	115,287
Accounts receivable, less allowance for uncollectible amounts of $5,127 and $7,078, respectively		274,902		346,858
Inventories		485,903		451,944
Income taxes receivable		24,529		6,574
Deferred income tax assets		49,653		40,774
Other current assets		47,003		47,207
Total current assets		969,374		1,008,644
Property, plant and equipment, net		688,336		513,279
Goodwill		558,439		559,724
Intangible assets, net		232,617		254,772
Deferred income tax assets		10,306		6,292
Other assets		52,664		54,491
Total assets	$	2,511,736	$	2,397,202
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings	$	3,186	$	-
Accounts payable		188,280		160,683
Income taxes payable		8,483		6,130
Deferred income tax liabilities		428		472
Accrued liabilities		114,320		172,731
Total current liabilities		314,697		340,016
Long-term debt, less current portion		875,000		710,000
Deferred income tax liabilities		99,227		85,031
Other liabilities		95,541		101,211
Total liabilities		1,384,465		1,236,258
Commitments and contingencies (Note 20)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued		-		-
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued		106		106
Additional paid-in capital		127,737		112,491
Accumulated other comprehensive earnings (losses)		(29,302)		(3,533)
Deferred compensation		4,314		3,915
Retained earnings		1,451,575		1,338,468
		1,554,430		1,451,447
Treasury stock at cost, 9,380 shares and 7,397 shares, respectively		(422,845)		(286,588)
Treasury stock held for deferred compensation, at cost, 173 shares and 198 shares, respectively		(4,314)		(3,915)
Total stockholders' equity		1,127,271		1,160,944
Total liabilities and stockholders' equity	$	2,511,736	$	2,397,202

See accompanying Notes to Condensed Consolidated Financial Statements.

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine-Months Ended June 30,
	2015		2014
Cash flows from operating activities:
Net earnings	$	131,392	$	114,182
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		55,754		57,680
Net (gain) loss on sales of assets		(766)		116
Stock-based compensation		11,086		8,739
Excess tax benefits from stock-based compensation		(4,170)		(2,638)
Deferred income taxes		1,623		(5,749)
Loss on derivatives reclassified from accumulated comprehensive earnings into earnings		74		73
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable		65,345		57,151
Inventories		(44,630)		(38,860)
Accounts payable and accrued liabilities		(41,868)		(6,434)
Current income taxes		(10,897)		16,130
Retirement benefit obligations		(3,365)		(2,676)
Other		7,742		(13,824)
Net cash provided by operating activities		167,320		183,890
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(190,865)		(104,530)
Proceeds from sale of assets		2,486		258
Net cash used in investing activities		(188,379)		(104,272)
Cash flows from financing activities:
Cash dividends paid		(18,285)		(16,021)
Proceeds from sales of treasury stock		7,936		8,380
Payments for repurchases of common stock		(157,118)		(141,488)
Excess tax benefits from stock compensation		4,170		2,638
Borrowings on revolving lines of credit and short-term borrowings		869,970		356,071
Payments on revolving lines of credit and short-term borrowings		(701,610)		(191,069)
Proceeds from issuance of long-term debt		-		250,000
Payments of long-term debt		-		(300,000)
Payments of debt financing costs		(2,359)		(1,297)
Net cash provided by (used in) financing activities		2,704		(32,786)
Effect of exchange rate changes on cash and cash equivalents		(9,548)		454
Net change in cash and cash equivalents		(27,903)		47,286
Cash and cash equivalents at beginning of period		115,287		48,556
Cash and cash equivalents at end of period	$	87,384	$	95,842

See accompanying Notes to Condensed Consolidated Financial Statements.

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Number of shares				Stockholders' equity
									Accumulated other comprehensive (loss) earnings
	Preferred stock	Common stock	Treasury stock	Treasury stock held for deferred compensation	Common stock		Additional paid-in capital		Foreign currency translation adjustments		Unrealized derivative gains (losses)		Minimum retirement benefit liability adjustments			Total accumulated other comprehensive (loss) earnings			Deferred compensation			Retained earnings			Treasury stock at cost			Treasury stock held for deferred compensation			Total stockholders' equity


Balances as of October 1, 2013	-	72,960	(4,883)	(232)	$	106	$	101,147	$	25,742	$	43	$	(10,670)	$		15,115	$		4,007	$		1,193,887	$		(167,710)	$		(4,007)	$		1,142,545
Net earnings	-	-	-	-		-		-		-		-		-			-			-			114,182			-			-			114,182
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		4,527		46		303			4,876			-			-			-			-			4,876
Cash dividends paid	-	-	-	-		-		-		-		-		-			-			-			(16,021)			-			-			(16,021)
Purchases of treasury stock	-	-	(3,309)	-		-		-		-		-		-			-			-			-			(143,073)			-			(143,073)
Sales of treasury stock	-	-	455	-		-		(4,949)		-		-		-			-			-			-			14,042			-			9,093
Common shares issued from treasury stock for benefit plans	-	-	260	-		-		2,837		-		-		-			-			-			-			8,356			-			11,193
Tax benefit attributable to exercise of stock options	-	-	-	-		-		2,463		-		-		-			-			-			-			-			-			2,463
Stock-based compensation	-	-	-	-		-		8,739		-		-		-			-			-			-			-			-			8,739
Purchases of stock by deferred compensation plan	-	-	-	(7)		-		-		-		-		-			-			324			-			-			(324)			-
Distribution of stock from deferred compensation plan	-	-	-	41		-		-		-		-		-			-			(453)			-			-			453			-
Balances as of June 30, 2014	-	72,960	(7,477)	(198)	$	106	$	110,237	$	30,269	$	89	$	(10,367)	$		19,991	$		3,878	$		1,292,048	$		(288,385)	$		(3,878)	$		1,133,997

Balances as of October 1, 2014	-	72,960	(7,397)	(198)	$	106	$	112,491	$	10,819	$	105	$	(14,457)	$		(3,533)	$		3,915	$		1,338,468	$		(286,588)	$		(3,915)	$		1,160,944
Net earnings	-	-	-	-		-		-		-		-		-			-			-			131,392			-			-			131,392
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		(26,455)		46		640			(25,769)			-			-			-			-			(25,769)
Cash dividends paid	-	-	-	-		-		-		-		-		-			-			-			(18,285)			-			-			(18,285)
Purchases of treasury stock	-	-	(2,670)	-		-		-		-		-		-			-			-			-			(157,118)			-			(157,118)
Sales of treasury stock	-	-	428	-		-		(4,841)		-		-		-			-			-			-			12,777			-			7,936
Common shares issued from treasury stock for benefit plans	-	-	259	-		-		4,490		-		-		-			-			-			-			8,084			-			12,574
Tax benefit attributable to exercise of stock options	-	-	-	-		-		4,511		-		-		-			-			-			-			-			-			4,511
Stock-based compensation	-	-	-	-		-		11,086		-		-		-			-			-			-			-			-			11,086
Purchases of stock by deferred compensation plan	-	-	-	(18)		-		-		-		-		-			-			876			-			-			(876)			-
Distribution of stock from deferred compensation plan	-	-	-	43		-		-		-		-		-			-			(477)			-			-			477			-
Balances as of June 30, 2015	-	72,960	(9,380)	(173)	$	106	$	127,737	$	(15,636)	$	151	$	(13,817)	$		(29,302)	$		4,314	$		1,451,575	$		(422,845)	$		(4,314)	$		1,127,271

See accompanying Notes to Condensed Consolidated Financial Statements

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 June 30, 2015 and for the three and nine-months ended June 30, 2015 and June 30, 2014, included herein, have not been audited by an independent registered public accounting firm. These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of June 30, 2015, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The Condensed Consolidated Balance Sheet as of September 30, 2014 was derived from Woodward’s Annual Report on Form 10-K for the fiscal year then ended. The results of operations for the three and nine-months ended June 30, 2015 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the Condensed Consolidated Financial Statements included herein. Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, customer rebates earned, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, valuation of identifiable intangible assets and goodwill, the provision for income tax and related valuation reserves, the valuation of assets and liabilities acquired in business combinations, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees and board members, and contingencies. Actual results could vary materially from Woodward’s estimates.

Note 2. Recent accounting pronouncements

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

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Under ASU 2015-03 Woodward will present debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. Amortization of such costs will continue to be reported as interest expense. ASU 2015-03 is effective for fiscal years − and interim periods within those fiscal years − beginning after December 15, 2015 (fiscal year 2017 for Woodward), but early adoption is allowed. Woodward has not determined in which period it will adopt the new guidance. Retrospective adoption is required. Woodward had unamortized debt issuance costs of $5,834 as of June 30, 2015 and $4,276 as of September 30 2014. These costs will be reclassified from other assets to long-term debt upon adoption.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The amendments (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provide more useful information to users of financial statements through improved disclosure requirements, and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. In July 2015, the FASB delayed the effective date for the adoption of ASU 2014-09 by one year, and as a result, ASU 2014-09 is effective for annual reporting

periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period. Early adoption is not permitted. An entity should adopt the amendments using one of the following methods: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. Woodward has not determined what transition method it will use and is currently assessing the impact that this guidance may have on its Consolidated Financial Statements.

Note 3. Earnings per share

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

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

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



	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Numerator:
Net earnings	$	43,753	$	46,001	$	131,392	$	114,182
Denominator:
Basic shares outstanding		64,781		65,845		65,088		66,736
Dilutive effect of stock options and restricted stock		1,446		1,302		1,416		1,294
Diluted shares outstanding		66,227		67,147		66,504		68,030
Income per common share:
Basic earnings per share	$	0.68	$	0.70	$	2.02	$	1.71
Diluted earnings per share	$	0.66	$	0.69	$	1.98	$	1.68

On June 2, 2015, Woodward entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) under which Woodward repurchased shares of its common stock for an aggregate purchase price of $125,000. Upon execution of the ASR Agreement, Goldman initially delivered to Woodward 2,048 shares of common stock. The number of shares of common stock to be ultimately repurchased by Woodward under the ASR program, which is expected to be completed before December 31, 2015, will be based generally on the average daily volume-weighted average price of Woodward stock during the term of the ASR Agreement. The 2,048 shares of common stock delivered by Goldman to Woodward upon execution of the ASR Agreement are reflected in the calculation of basic shares outstanding used in the calculation of earnings per share.

The following stock option grants were outstanding during the three and nine-months ended June 30, 2015 and 2014, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive:

Woodward, Inc. - FORM 10-Q - July 20, 2015

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