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EX-10.2 - EX-10.2 - Woodward, Inc.wwd-20180331xex10_2.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 March 31, 2018

or

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

For the transition period from _____ to _____



 



 



 

Commission file number 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)



Delaware

 

36-1984010



(State or other jurisdiction of incorporation or organization)

 

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



1081 Woodward Way, Fort Collins, Colorado

 

80524



(Address of principal executive offices)

 

(Zip Code)

(970) 482-5811

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes     No 

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

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 April 20, 2018, 61,519,613 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.


 









 

 

TABLE OF CONTENTS



 

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements



Condensed Consolidated Statements of Earnings



Condensed Consolidated Statements of Comprehensive Earnings



Condensed Consolidated Balance Sheets



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Stockholders’ Equity



Notes to Condensed Consolidated Financial Statements

Item 2.

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

31 



Forward Looking Statements

31 



Overview

33 



Results of Operations

35 



Liquidity and Capital Resources

40 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45 

Item 4.

Controls and Procedures

46 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

46 

Item 1A.

Risk Factors

46 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47 

Item 6.

Exhibits

47 



Signatures

49 

1


 

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended

 

Six-Months Ended



March 31,

 

March 31,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Net sales

$

548,249 

 

$

500,381 

 

$

1,018,397 

 

$

943,275 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

    Cost of goods sold

 

401,331 

 

 

367,099 

 

 

748,115 

 

 

696,247 

    Selling, general and administrative expenses

 

39,486 

 

 

47,660 

 

 

85,762 

 

 

85,960 

    Research and development costs

 

37,169 

 

 

30,385 

 

 

71,955 

 

 

56,925 

    Restructuring charges

 

17,013 

 

 

 -

 

 

17,013 

 

 

 -

    Interest expense

 

6,687 

 

 

6,790 

 

 

13,437 

 

 

13,630 

    Interest income

 

(471)

 

 

(474)

 

 

(834)

 

 

(879)

    Other (income) expense, net (Note 16)

 

(1,613)

 

 

(1,315)

 

 

(3,185)

 

 

(5,903)

Total costs and expenses

 

499,602 

 

 

450,145 

 

 

932,263 

 

 

845,980 

Earnings before income taxes

 

48,647 

 

 

50,236 

 

 

86,134 

 

 

97,295 

Income tax expense

 

10,158 

 

 

12,131 

 

 

29,385 

 

 

12,642 

Net earnings

$

38,489 

 

$

38,105 

 

$

56,749 

 

$

84,653 



 

 

 

 

 

 

 

 

 

 

 

Earnings per share (Note 3):

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.63 

 

$

0.62 

 

$

0.93 

 

$

1.38 

Diluted earnings per share

$

0.60 

 

$

0.60 

 

$

0.89 

 

$

1.33 



 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding (Note 3):

 

 

 

 

 

 

 

 

 

 

 

Basic

 

61,401 

 

 

61,310 

 

 

61,323 

 

 

61,436 

Diluted

 

63,750 

 

 

63,499 

 

 

63,730 

 

 

63,593 

Cash dividends per share paid to Woodward common stockholders

$

0.1425 

 

$

0.1250 

 

$

0.2675 

 

$

0.2350 





See accompanying Notes to Condensed Consolidated Financial Statements

2


 



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)





































 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three-Months Ended

 

Six-Months Ended



March 31,

 

March 31,



2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

38,489 

 

$

38,105 

 

$

56,749 

 

$

84,653 



 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

9,584 

 

 

7,741 

 

 

14,687 

 

 

(10,894)

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

 

(1,268)

 

 

(945)

 

 

(2,011)

 

 

2,885 

Taxes on changes in foreign currency translation adjustments

 

(450)

 

 

(180)

 

 

(263)

 

 

(486)

Foreign currency translation and transactions adjustments, net of tax

 

7,866 

 

 

6,616 

 

 

12,413 

 

 

(8,495)



 

 

 

 

 

 

 

 

 

 

 

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

 

(18)

 

 

(18)

 

 

(36)

 

 

(36)

Taxes on changes in derivative transactions

 

 

 

 

 

13 

 

 

14 

Derivative adjustments, net of tax

 

(12)

 

 

(11)

 

 

(23)

 

 

(22)



 

 

 

 

 

 

 

 

 

 

 

Curtailment of postretirement benefit plan arising during the period

 

 -

 

 

 -

 

 

59 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

Amortization of pension and other postretirement plan:

 

 

 

 

 

 

 

 

 

 

 

Net prior service cost

 

139 

 

 

57 

 

 

276 

 

 

113 

Net loss

 

248 

 

 

640 

 

 

494 

 

 

1,281 

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

 

(583)

 

 

(312)

 

 

(682)

 

 

943 

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

 

60 

 

 

(152)

 

 

(72)

 

 

(845)

Pension and other postretirement benefit plan adjustments, net of tax

 

(136)

 

 

233 

 

 

75 

 

 

1,492 

Total comprehensive earnings

$

46,207 

 

$

44,943 

 

$

69,214 

 

$

77,628 



See accompanying Notes to Condensed Consolidated Financial Statements

3


 

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)







 

 

 

 

 



 

 

 

 

 



March 31,

 

September 30,



2018

 

2017

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

100,147 

 

$

87,552 

Accounts receivable, less allowance for uncollectible amounts of $3,675 and $3,776, respectively

 

365,351 

 

 

402,182 

Inventories

 

508,971 

 

 

473,505 

Income taxes receivable

 

24,269 

 

 

19,376 

Other current assets

 

30,512 

 

 

38,574 

Total current assets

 

1,029,250 

 

 

1,021,189 

Property, plant and equipment, net

 

943,433 

 

 

922,043 

Goodwill

 

557,981 

 

 

556,545 

Intangible assets, net

 

159,448 

 

 

171,882 

Deferred income tax assets

 

20,705 

 

 

19,950 

Other assets

 

74,934 

 

 

65,500 

Total assets

$

2,785,751 

 

$

2,757,109 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

$

41,930 

 

$

32,600 

Accounts payable

 

195,917 

 

 

232,788 

Income taxes payable

 

2,691 

 

 

6,774 

Accrued liabilities

 

111,442 

 

 

155,072 

Total current liabilities

 

351,980 

 

 

427,234 

Long-term debt, less current portion

 

588,461 

 

 

580,286 

Deferred income tax liabilities

 

22,254 

 

 

33,408 

Other liabilities

 

366,146 

 

 

344,798 

Total liabilities

 

1,328,841 

 

 

1,385,726 

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

 

185,598 

 

 

163,836 

Accumulated other comprehensive losses

 

(40,721)

 

 

(53,186)

Deferred compensation

 

8,222 

 

 

7,135 

Retained earnings

 

1,860,595 

 

 

1,820,268 



 

2,013,800 

 

 

1,938,159 

Treasury stock at cost, 11,440  shares and 11,739 shares, respectively

 

(548,668)

 

 

(559,641)

Treasury stock held for deferred compensation, at cost, 200 shares and 186 shares, respectively

 

(8,222)

 

 

(7,135)

Total stockholders' equity

 

1,456,910 

 

 

1,371,383 

Total liabilities and stockholders' equity

$

2,785,751 

 

$

2,757,109 



 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)











 

 

 

 

 



 

 

 

 

 



Six-Months Ended March 31,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Net earnings

$

56,749 

 

$

84,653 

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

 

 

 

 

 

Depreciation and amortization

 

43,082 

 

 

39,007 

Gain due to curtailment of postretirement plan

 

(330)

 

 

 -

Net gain on sales of assets

 

(454)

 

 

(3,662)

Stock-based compensation

 

14,434 

 

 

13,763 

Deferred income taxes

 

(11,686)

 

 

4,589 

Gain on derivatives reclassified from accumulated comprehensive earnings into earnings

 

(36)

 

 

(36)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

42,391 

 

 

61,324 

Inventories

 

(32,346)

 

 

(48,022)

Accounts payable and accrued liabilities

 

(63,673)

 

 

(23,834)

Income taxes

 

14,836 

 

 

3,339 

Retirement benefit obligations

 

(2,712)

 

 

(1,715)

Other

 

(3,537)

 

 

588 

Net cash provided by operating activities

 

56,718 

 

 

129,994 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property, plant, and equipment

 

(58,478)

 

 

(43,053)

Proceeds from sale of assets

 

1,198 

 

 

3,682 

Proceeds from sales of short-term investments

 

8,970 

 

 

4,994 

Payments for purchases of short-term investments

 

(808)

 

 

 -

Net cash used in investing activities

 

(49,118)

 

 

(34,377)

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid

 

(16,422)

 

 

(14,415)

Proceeds from sales of treasury stock

 

3,560 

 

 

11,223 

Payments for repurchases of common stock

 

 -

 

 

(61,782)

Borrowings on revolving lines of credit and short-term borrowings

 

809,680 

 

 

684,200 

Payments on revolving lines of credit and short-term borrowings

 

(800,350)

 

 

(706,600)

Payments of long-term debt and capital lease obligations

 

(210)

 

 

(204)

Net cash used in financing activities

 

(3,742)

 

 

(87,578)

Effect of exchange rate changes on cash and cash equivalents

 

8,737 

 

 

(10,176)

Net change in cash and cash equivalents

 

12,595 

 

 

(2,137)

Cash and cash equivalents at beginning of year

 

87,552 

 

 

81,090 

Cash and cash equivalents at end of period

$

100,147 

 

$

78,953 



 

 

 

 

 



See accompanying Notes to Condensed Consolidated Financial Statements

 

5


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Number of shares

 

Stockholders' equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Preferred
stock

 

Common
stock

 

Treasury
stock

 

Treasury
stock held for
deferred
compensation

 

Common
stock

 

Additional
 paid-in
capital

 

Foreign
currency
translation
adjustments

 

Unrealized
derivative
gains
(losses)

 

Minimum
retirement
benefit
liability
adjustments

 

Total
accumulated
other
comprehensive
(loss) earnings

 

Deferred compensation

 

Retained
earnings

 

Treasury
 stock at
cost

 

Treasury
stock held for
deferred
compensation

 

Total stockholders'
equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2016

 

 -

 

72,960 

 

(11,374)

 

(157)

 

$

106 

 

$

141,570 

 

$

(25,971)

 

$

179 

 

$

(39,913)

 

$

(65,705)

 

$

5,089 

 

$

1,649,506 

 

$

(512,882)

 

$

(5,089)

 

$

1,212,595 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

84,653 

 

 

 -

 

 

 -

 

 

84,653 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(8,495)

 

 

(22)

 

 

1,492 

 

 

(7,025)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,025)

Cash dividends paid ($0.2350 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(14,415)

 

 

 -

 

 

 -

 

 

(14,415)

Purchases of treasury stock

 

 -

 

 -

 

(915)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(63,255)

 

 

 -

 

 

(63,255)

Sales of treasury stock

   

 -

 

 -

 

376 

 

 -

 

 

 -

 

 

(2,015)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

14,710 

 

 

 -

 

 

12,695 

Common shares issued from treasury stock for benefit plans

 

 -

 

 -

 

199 

 

 -

 

 

 -

 

 

6,501 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7,513 

 

 

 -

 

 

14,014 

Common shares issued from treasury stock to settle employee liabilities

 

 -

 

 -

 

26 

 

(26)

 

 

 -

 

 

740 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,767 

 

 

 -

 

 

1,027 

 

 

(1,767)

 

 

1,767 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

13,763 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,763 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

(3)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

211 

 

 

 -

 

 

 -

 

 

(211)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of March 31, 2017

 

 -

 

72,960 

 

(11,688)

 

(186)

 

$

106 

 

$

160,559 

 

$

(34,466)

 

$

157 

 

$

(38,421)

 

$

(72,730)

 

$

7,060 

 

$

1,719,744 

 

$

(552,887)

 

$

(7,060)

 

$

1,254,792 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2017

 

 -

 

72,960 

 

(11,739)

 

(186)

 

$

106 

 

$

163,836 

 

$

(27,280)

 

$

135 

 

$

(26,041)

 

$

(53,186)

 

$

7,135 

 

$

1,820,268 

 

$

(559,641)

 

$

(7,135)

 

$

1,371,383 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

56,749 

 

 

 -

 

 

 -

 

 

56,749 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

12,413 

 

 

(23)

 

 

75 

 

 

12,465 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,465 

Cash dividends paid ($0.2675 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(16,422)

 

 

 -

 

 

 -

 

 

(16,422)

Sales of treasury stock

 

 -

 

 -

 

97 

 

 -

 

 

 -

 

 

171 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

3,389 

 

 

 -

 

 

3,560 

Common shares issued from treasury stock for benefit plans

 

 -

 

 -

 

202 

 

 -

 

 

 -

 

 

7,157 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7,584 

 

 

 -

 

 

14,741 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

14,434 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

14,434 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

(14)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,093 

 

 

 -

 

 

 -

 

 

(1,093)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of March 31, 2018

 

 -

 

72,960 

 

(11,440)

 

(200)

 

$

106 

 

$

185,598 

 

$

(14,867)

 

$

112 

 

$

(25,966)

 

$

(40,721)

 

$

8,222 

 

$

1,860,595 

 

$

(548,668)

 

$

(8,222)

 

$

1,456,910 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





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, 2018 and for the three and six-months ended March 31, 2018 and March  31,  2017, included herein, have not been audited by an independent registered public accounting firm.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of March 31, 2018, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein.  The results of operations for the three and six-months ended March 31, 2018 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.  Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

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

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

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

As disclosed in Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the Condensed Consolidated Statement of Earnings for the three and six-months ended March 31, 2017 to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.  The reclassification of these amounts conforms to the current period presentation.

Note 2.  New accounting standards

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

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.”  ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin 118 (“SAB 118”).  SAB 118 expressed views of the SEC regarding ASC 740 in the reporting period that includes the enactment date of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Company adopted SAB 118 in the first quarter of fiscal year 2018 and therefore, the Company’s subsequent adoption of ASU 2018-05 in the second quarter of fiscal year 2018 had no impact on its accounting for income taxes in the second quarter or first half of fiscal year 2018.

In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of tax reform under the Tax Act and provides guidance on the disclosure requirements regarding the stranded tax effects.  The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim

7


 

periods within those fiscal years.  Early adoption is permitted.  The amendments in ASU 2018-02 should be applied retrospectively in the period of adoption to all periods in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized.  Woodward is currently assessing the impact of the adoption of the new guidance.  When adopted, if Woodward elects to reclassify under ASU 2018-02, a portion of accumulated other comprehensive earnings would be reclassified to retained earnings.     

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 is intended to more closely align the financial statement reporting of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.  ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.  Woodward early adopted the new guidance in the first quarter of fiscal year 2018The application of the new guidance did not have any impact on Woodward’s current hedging arrangements or on the disclosures related to such arrangements.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”  ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same statement of earnings captions as other compensation costs arising from services rendered by the covered employees during the period.  The other components of net benefit cost will be presented in the statement of earnings separately from service costs.  ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward).  Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice.  The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.”  ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use.  After adoption of ASU 2016-16, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adopt the new guidance in fiscal year 2019.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  Woodward has not determined in which period it will adopt the new guidance.  Woodward currently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity, such adjustments are not expected to be significant.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”  ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years.  Woodward has not determined in which period it will adopt the new guidance but does not expect the application of the CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption.  In transition, Woodward will be required to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for the two fiscal years prior to the year of adoption.  However, during December 2017, the FASB proposed amending ASU 2016-02 such that restatement of fiscal years 2018 and 2019 would not be required upon

8


 

adoption.  Although early adoption is permitted, Woodward expects to adopt the new guidance in fiscal year 2020 and is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidance and whether other arrangements not currently classified as leases may become subject to the guidance of ASU 2016-02.  Rent expense for all operating leases in fiscal year 2017, none of which was recognized on the balance sheet, was $8,302.  As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”).  ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance.  ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a customer contract are satisfied.  ASC 606 is intended to provide more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability.  Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period.  Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.

Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606.  Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019.  As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.  

Based on Woodward’s review of its customer contracts, Woodward has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model.  Upon adoption of ASC 606, however, Woodward also believes some of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts.  As a result of recognizing some revenue over time, various balance sheet line items will be impacted.  As such, Woodward believes the adoption of ASC 606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

Woodward generally expenses costs as incurred for the engineering and development of new products.  Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales. ASC 606 requires customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer.  ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer.  Therefore, under ASC 606, Woodward expects to record both contract assets and contract liabilities related to such funded engineering and development efforts, which are expected to become material over time.  Recognized revenues and research and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities.  However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.

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

Woodward is also evaluating implications to the Company’s system of internal controls, relative to revenue recognition and the related revenue disclosures, which are based on the criteria outlined in the Committee of Sponsoring Organizations of the Treadway Commission’s 2013 Internal Control – Integrated Framework.

9


 

Note 3.  Earnings per share

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

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

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







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three-Months Ended

 

Six-Months Ended



 

March 31,

 

March 31,



 

2018

 

2017

 

2018

 

2017

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings 

 

$

38,489 

 

$

38,105 

 

$

56,749 

 

$

84,653 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Basic shares outstanding

 

 

61,401 

 

 

61,310 

 

 

61,323 

 

 

61,436 

Dilutive effect of stock options and restricted stock

 

 

2,349 

 

 

2,189 

 

 

2,407 

 

 

2,157 

Diluted shares outstanding

 

 

63,750 

 

 

63,499 

 

 

63,730 

 

 

63,593 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.63 

 

$

0.62 

 

$

0.93 

 

$

1.38 

Diluted earnings per share

 

$

0.60 

 

$

0.60 

 

$

0.89 

 

$

1.33 

The following stock option grants were outstanding during the three and six-months ended March 31, 2018 and 2017, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.