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:
•plans and expectations related to our proposed merger with Hexcel Corporation,
including expected benefits of the merger, the business of the combined company,
and the future operating or financial performance of Woodward, or the combined
company, and the anticipated timing for closing of the transaction and the
timing thereof;
•future sales, earnings, cash flow, uses of cash, and other measures of
financial 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;
•our expectations with regard to the grounding of the Boeing 737 MAX aircraft,
the related impact on our original equipment manufacturer and initial provision
sales, and the aircraft's return to service;
•plans and expectations relating to the performance of our joint venture with
General Electric Company;
•investments in new campuses, business sites and related business developments;
•the effect of economic trends or growth;
•the expected 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;
•new business opportunities;
•restructuring and alignment costs and savings;
•our plans, objectives, expectations and intentions with respect to business
opportunities that may be available to us;
•our liquidity, including our ability to meet capital spending requirements and
operations;
•future repurchases of common stock;
•future levels of indebtedness and capital spending;
•the stability of financial institutions, including those lending to us;
•pension and other postretirement plan assumptions and future contributions; and
•our tax rate and other effects of the changes in U.S. federal tax law.
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.
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OVERVIEW
Proposed Merger with Hexcel
On January 12, 2020, Woodward entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Hexcel Corporation ("Hexcel") and Genesis Merger Sub,
Inc., a wholly owned subsidiary of Woodward ("Merger Sub"). The Merger Agreement
provides that, upon the terms and subject to the conditions set forth therein,
Merger Sub will merge with and into Hexcel (the "Merger"), with Hexcel surviving
the Merger as a wholly owned subsidiary of Woodward. Hexcel develops,
manufactures, and markets lightweight, high-performance structural materials,
including carbon fibers, specialty reinforcements, prepregs and other
fiber-reinforced matrix materials, honeycomb, adhesives, RF/EMI and microwave
absorbing materials, and engineered honeycomb and composite structures, for use
in commercial aerospace, space and defense and industrial markets. Hexcel's
products are used in a wide variety of end applications, such as commercial and
military aircraft, space launch vehicles and satellites, wind turbine blades,
automotive, recreational products and other industrial applications. Following
the anticipated closing of the Merger, the combined company will focus on
technology-rich innovations to deliver smarter, cleaner and safer customer
solutions for the aerospace and industrial sectors.
The transaction is subject to the approval of the shareholders of both Woodward
and Hexcel and the issuance of shares of Woodward common stock in the Merger is
subject to the approval of Woodward shareholders, as well as other customary
closing conditions, including required regulatory approvals. The parties expect
the merger to close in the third calendar quarter of 2020, subject to
satisfaction of these conditions.
Operational Highlights
Net sales for the first quarter of fiscal year 2020 were $720,355, an increase
of 10.3% from $652,811 for the first quarter of the prior fiscal year. Foreign
currency exchange rates had an unfavorable impact on net sales of $3,664 for the
first quarter of fiscal year 2020 as compared to the same period of the prior
year. Aerospace segment net sales for the first quarter of fiscal year 2020 were
up 20.6% to $473,925, compared to $392,887 for the first quarter of the prior
fiscal year. Industrial segment net sales for the first quarter of fiscal year
2020 were $246,430, down 5.2% compared to $259,924 for the first quarter of
fiscal year 2019.
Net earnings for the first quarter of fiscal year 2020 were $53,373, or $0.83
per diluted share, compared to $49,120, or $0.77 per diluted share, for the
first quarter of fiscal year 2019. Adjusted net earnings for the first quarter
of fiscal year 2020 were $71,214, or adjusted earnings per share of $1.10 per
diluted share, compared to $61,646, or $0.96 per diluted share, for the first
quarter of fiscal year 2019.
The effective tax rate in the first quarter of fiscal year 2020 was 13.3%,
compared to 20.1% for the first quarter of the prior fiscal year.
EBIT for the first quarter of fiscal year 2020 was $70,070, down 4.0% from
$73,022 in the same period of fiscal year 2019. EBITDA for the first quarter of
fiscal year 2020 was $102,521, down 8.2% from $111,663 for the same period of
fiscal year 2019. Adjusted EBIT for the first quarter of fiscal year 2020 was
$94,450, up 5.5% from $89,496 for the first quarter of fiscal year 2019.
Adjusted EBITDA for the first quarter of fiscal year 2020 was $126,901, up 7.0%
from $118,626 for the first quarter of fiscal year 2019.
Aerospace segment earnings as a percent of segment net sales increased to 19.6%
in the first quarter of fiscal year 2020 from 18.5% in the first quarter of the
prior fiscal year. Industrial segment earnings as a percent of segment net sales
in the first quarter of fiscal year 2020 increased to 11.5% from 11.2% in the
first quarter of the prior fiscal year. There were no adjustments to Industrial
segment earnings as a percent of segment net sales for the first quarter of
fiscal year 2020, which were down compared to adjusted Industrial segment
earnings as a percent of segment net sales of 14.9% for the first quarter of
fiscal year 2019.
Adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT,
EBITDA, adjusted EBITDA, and adjusted Industrial segment earnings 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 closest U.S.
GAAP financial measures can be found under the caption "Non-U.S. GAAP Measures"
in this Item 2 - Management's Discussion and Analysis of Financial Conditions
and Results of Operations.
Liquidity Highlights
Net cash provided by operating activities for the first quarter of fiscal year
2020 was $27,445, compared to $84,712 for the first quarter of fiscal year 2019.
The decrease in net cash provided by operating activities in the first quarter
of fiscal year 2020 compared to the first quarter of the prior fiscal year is
primarily attributable to higher working capital.
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For the first quarter of fiscal year 2020, free cash flow, which we define as
net cash flows from operating activities less payments for property, plant and
equipment, was $10,213, compared to $53,366 for the first quarter of fiscal year
2019. Adjusted free cash flow, which we define as free cash flow plus the
proceeds from the sale of real property at our former Duarte, California
operations, was $28,980 for the first quarter of fiscal year 2020. A
reconciliation of free cash flow and adjusted free cash flow, both non-U.S. GAAP
financial measures, to the closest U.S. GAAP financial measures can be found
under the caption "Non-U.S. GAAP Measures" in this Item 2 - Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
At December 31, 2019, we held $148,008 in cash and cash equivalents, and had
total outstanding debt of $1,113,942. We have additional borrowing availability
of $705,433, net of outstanding letters of credit, under our revolving credit
agreement. At December 31, 2019, we also had additional borrowing capacity of
$7,554 under various foreign lines of credit and foreign overdraft facilities.
RESULTS OF OPERATIONS
The following table sets forth consolidated statements of earnings data as a
percentage of net sales for each period indicated:
Three-Months Ended
December 31, December 31,
2019 % of Net Sales 2018 % of Net Sales
Net sales $ 720,355 100 % $ 652,811 100 %
Costs and expenses:
Cost of goods sold 534,917 74.3 492,174 75.4
Selling, general, and
administrative expenses 62,045 8.6 51,927 8.0
Research and development costs 36,846 5.1 38,867 6.0
Impairment of assets held for
sale 37,902 5.3 - -
Interest expense 9,009 1.3 11,878 1.8
Interest income (487) (0.1) (371) (0.1)
Other (income) expense, net (21,425) (3.0) (3,179) (0.5)
Total costs and expenses 658,807 91.5 591,296 90.6
Earnings before income taxes 61,548 8.5 61,515 9.4
Income tax expense 8,175 1.1 12,395 1.9
Net earnings $ 53,373 7.4 $ 49,120 7.5
Other select financial data:
December 31, September 30,
2019 2019
Working capital $ 537,152 $ 563,792
Short-term borrowings 283,168 220,000
Current portion of long-term debt 101,598 -
Total debt 1,113,942 1,084,899
Total stockholders' equity 1,798,603 1,726,741
Net Sales
Consolidated net sales for the first quarter of fiscal year 2020 increased by
$67,544, or 10.3%, compared to the same period of fiscal year 2019.
Details of the changes in consolidated net sales are as follows:
Three-Month Period
Consolidated net sales for the period ended December 31, 2018 $ 652,811
Aerospace volume 69,054
Industrial volume (10,039)
Noncash consideration 6,032
Effects of changes in price and sales mix 6,161
Effects of changes in foreign currency rates (3,664)
Consolidated net sales for the period ended December 31, 2019 $ 720,355
The increase in consolidated net sales for the first quarter of fiscal year 2020
is primarily attributable to continued strength across commercial and defense
original equipment manufacturer ("OEM") and aftermarket sales in the Aerospace
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segment. In the Industrial segment, the decrease in net sales volumes is
primarily attributable to softness in oil and gas and the associated
aftermarket, partially offset by improved sales in renewable power systems.
Costs and Expenses
Cost of goods sold increased by $42,743 to $534,917, or 74.3% of net sales, for
the first quarter of fiscal year 2020, from $492,174, or 75.4% of net sales, for
the first quarter of fiscal year 2019. The increase in cost of goods sold in the
first quarter of fiscal year 2020 as compared to the same period of the prior
year is primarily attributable to higher sales volume and higher manufacturing
costs to support higher production levels in our Aerospace segment. The increase
in costs of goods sold was partially offset by costs recognized in the first
quarter of fiscal year 2019 associated with the relocation of our Duarte,
California operations to the Company's newly renovated Drake Campus in Fort
Collins, Colorado (the "Duarte move-related costs") and the purchase accounting
impacts related to the amortization of the backlog intangible acquired in
connection with the acquisition of Woodward L'Orange, whereas there were no such
Duarte move-related costs or similar purchase accounting impacts recognized in
the first quarter of fiscal year 2020.
Gross margin (as measured by net sales less cost of goods sold, divided by net
sales) was 25.7% for the first quarter of fiscal year 2020, compared to 24.6%
for the first quarter of fiscal year 2019. The increase in gross margin is
primarily attributable to Duarte move-related costs and purchase accounting
impacts related to the amortization of the backlog intangible acquired in
connection with the acquisition of Woodward L'Orange that were recognized in the
first quarter of fiscal year 2019, whereas there were no such costs recognized
in the first quarter of fiscal year 2020.
Selling, general and administrative expenses increased by $10,118, or 19.5%, to
$62,045 for the first quarter of fiscal year 2020, compared to $51,927 for the
first quarter of fiscal year 2019. Selling, general, and administrative expenses
as a percentage of net sales increased to 8.6% for the first quarter of fiscal
year 2020, compared to 8.0% for the first quarter of fiscal year 2019. The
increase in selling, general and administrative expenses both in dollars and as
a percentage of sales is primarily due to an increase in certain expenses to
support ongoing company growth and an increase in the amortization expense
related to the Woodward L'Orange customer relationship and contracts intangible
asset.
Research and development costs decreased by $2,021, or 5.2%, to $36,846 for the
first quarter of fiscal year 2020, as compared to $38,867 for the first quarter
of fiscal year 2019. Research and development costs as a percentage of net sales
decreased to 5.1% for the first quarter of fiscal year 2020, as compared to 6.0%
for the first quarter of fiscal year 2019. Our research and development
activities extend across almost all of our customer base, and we anticipate
ongoing variability in research and development due to the timing of customer
business needs on current and future programs.
Impairment of assets held for sale was a charge of $37,902 recognized in the
first quarter of fiscal year 2020. In the first quarter of fiscal year 2020,
Woodward's board of directors approved a plan to divest Woodward's renewable
power systems portfolio, which resulted in the recognition of the associated
assets and liabilities as held for sale. Concurrently, Woodward determined that
the assets held for sale, net of any liabilities held for sale, were impaired
and recognized a non-cash impairment charge of $37,902, representing the write
down of the associated net assets held for sale to their fair market value as of
December 31, 2019. Refer to Note 10, Impairment of assets held for sale, for
further details.
Interest expense decreased by $2,869, or 24.2%, to $9,009 for the first quarter
of fiscal year 2020, compared to $11,878 for the first quarter of fiscal year
2019. Interest expense decreased as a percentage of net sales to 1.3% for the
first quarter of fiscal year 2020, as compared to 1.8% for the first quarter of
fiscal year 2019. Since the first quarter of fiscal year 2019, we have paid the
entire balance of two series of private placement notes totaling $143,000
primarily using proceeds from our revolving credit facility. The revolving
credit facility bears interest at a substantially lower rate than the private
placement notes that were paid.
Other income increased by $18,246 to $21,245 for the first quarter of fiscal
year 2020, compared to $3,179 for the first quarter of fiscal year, primarily
due to a gain on the sale of a portion of our property in Duarte, California.
The gain on sale in the amount of $13,552 was recognized in the first quarter of
fiscal year 2020.
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Income taxes were provided at an effective rate on earnings before income taxes
of 13.3% for the first quarter and 20.1% for the first quarter of fiscal year
2019. The changes in components of our effective tax rate (as a percentage of
earnings before income taxes) were attributable to the following:
Three-Month
Period
Effective tax rate for the period ended December 31, 2018 20.1 %
State and local taxes 0.5
Taxes on international activities 0.7
Research and experimentation credit 0.4
Adjustment of prior period tax items (1.3)
Net excess income tax benefit from stock-based compensation (4.6)
Impairment of assets held for sale
(2.5)
Effective tax rate for the period ended December 31, 2019 13.3 %
The decrease in the effective tax rate for the three-months ended December 31,
2019, compared to the three-months ended December 31, 2018 is primarily
attributable to a larger favorable increase in the net excess income tax
benefits from stock-based compensation, the tax benefit associated with the
impairment of assets held for sale, and smaller unfavorable adjustment to prior
period tax items. This decrease is partially offset by increased earnings in
higher taxed jurisdictions and the impact of increased pre-tax earnings when
compared to tax incentives such as the research credit.
Within the calculation of our annual effective tax rate, we have used
assumptions and estimates that may change as a result of future guidance,
interpretation, and rule-making from the Internal Revenue Service, the
Securities and Exchange Commission, the Financial Accounting Standards Board
("FASB"), and/or various other taxing jurisdictions. Changes in corporate tax
rates, the net deferred tax assets and/or liabilities relating to our U.S.
operations, the taxation of foreign earnings, and the deductibility of expenses
contained in the Tax Act or other future tax reform legislation could have a
material impact on our future U.S. tax expense.
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. Woodward's fiscal
years remaining open to examination for U.S. Federal income taxes include fiscal
years 2017 and thereafter. Woodward is currently under examination by the
Internal Revenue Service for fiscal year 2017, which included a foreign tax
credit carryback to fiscal year 2016. Woodward's fiscal years remaining open to
examination for significant U.S. state income tax jurisdictions include fiscal
years 2015 and thereafter. Woodward's fiscal years remaining open to examination
in significant foreign jurisdictions include 2016 and thereafter.
Segment Results
The following table presents sales by segment:
Three-Months Ended December 31,
2019 2018
Net sales:
Aerospace $ 473,925 65.8 % $ 392,887 60.2 %
Industrial 246,430 34.2 259,924 39.8
Consolidated net sales $ 720,355 100.0 % $ 652,811 100.0 %
The following table presents earnings by segment and reconciles segment earnings
to consolidated net earnings:
Three-Months Ended December 31,
2019 2018
Aerospace $ 92,911 $ 72,854
Industrial 28,230 29,169
Nonsegment expenses (51,071) (29,001)
Interest expense, net (8,522) (11,507)
Consolidated earnings before income taxes 61,548 61,515
Income tax expense (8,175) (12,395)
Consolidated net earnings $ 53,373 $ 49,120
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The following table presents segment earnings as a percent of segment net sales:
Three-Months Ended December 31,
2019 2018
Aerospace 19.6% 18.5%
Industrial 11.5% 11.2%
Aerospace
Aerospace segment net sales increased by $81,038, or 20.6%, to $473,925 for the
first quarter of fiscal year 2020, compared to $392,887 for the first quarter of
fiscal year 2019. The increase in segment net sales for the first quarter of
fiscal year 2020 as compared to the same periods of fiscal year 2019 was driven
by increased sales volume across commercial and military OEM and aftermarket
programs as a result of higher defense spending, increased aircraft utilization,
and continued momentum in next generation aircraft production.
Defense OEM sales increased in the first quarter of fiscal year 2020 compared to
the first quarter of fiscal year 2019, driven primarily by increased military
budgets and spending for smart weapons and fixed wing aircraft. Our defense
aftermarket has also increased as the U.S. Government has prioritized the combat
readiness of existing military programs on which we have content. Global
conflicts and growing international demand for various other military programs
continue to drive demand for defense aircraft, including fighter jets,
transports, and both utility and attack rotorcraft, supported by our products
and systems. Although we expect some ongoing variability in defense aftermarket
sales due to the timing of continued maintenance needs and upgrade programs, we
expect U.S. government funding for defense platforms on which we have content to
be strong under the recently enacted defense budget.
Commercial aerospace sales increased in the first quarter of fiscal year 2020
compared to the first quarter of fiscal year 2019, driven by strong aircraft
utilization trends and sustained global passenger growth, which are driving
narrowbody production rates as well as robust aftermarket activity on legacy
platforms. Despite uncertainty around the 737 MAX return to service, initial
provisioning improved in the first quarter of fiscal year 2020 compared to the
first quarter of fiscal year 2019.
Aerospace segment earnings increased by $20,057, or 27.5%, to $92,911 for the
first quarter of fiscal year 2020, compared to $72,854 for the first quarter of
fiscal year 2019.
The net increase in Aerospace segment earnings for the first quarter of fiscal
year 2020 was due to the following:
Three-Month
Period
Earnings for the period ended December 31, 2018 $ 72,854
Sales volume
30,243
Price, sales mix and productivity 3,294
Manufacturing expansion costs (7,129)
Other, net (6,351)
Earnings for the period ended December 31, 2019 $ 92,911
Aerospace segment earnings as a percentage of segment net sales were 19.6% for
the first quarter of fiscal year 2020, compared to 18.5% for the first quarter
of fiscal year 2019. Aerospace segment earnings in the first quarter of fiscal
year 2020 benefitted from higher sales volume and favorable product mix, which
was partially offset by higher manufacturing costs to support increased
production levels.
Industrial
Industrial segment net sales decreased by $13,494, or 5.2%, to $246,430 for the
first quarter of fiscal year 2020, compared to $259,924 for the first quarter of
fiscal year 2019.
The decrease in Industrial segment net sales in the first quarter of fiscal year
2020 was primarily attributable to softness in the oil and gas market and the
associated aftermarket, partially offset by increased renewables sales.
The demand for diesel fuel systems was negatively impacted by a softening of the
oil and gas market amid a slowing global economy, pricing volatility and
decreased capital investments related to reduced drilling activity, particularly
within the North American fracking market. Although the near-term oil and gas
market is softening, we believe the long-term oil and gas market remains
promising, driven by growing demand from developing countries.
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Our renewables business was favorably impacted by the continuing ramp up of
platforms on which we have content. Sales of fuel systems for compressed natural
gas ("CNG") trucks in Asia were strong in the first quarter of fiscal year 2020
as production rates for China 6 compliant trucks recovered from the large
pre-buy of China 5 compliant trucks, which negatively impacted sales in previous
quarters. We anticipate the market demand for natural gas trucks to continue as
the Chinese government continues to enforce China 6 regulations and continues to
incentivize the use of natural gas rather than diesel, and as Chinese access to
natural gas improves. The industrial gas turbine market continues to stabilize
as global power demand increases and domestic upgrade initiatives transition
from planning to execution. Industrial gas turbine sales in the first quarter of
fiscal year 2020 benefitted from the depletion of inventory levels in the market
and increased Woodward content on certain newer industrial gas turbines.
Woodward expects modest industrial gas turbine sales growth to continue as we
expand our content on new turbine programs, which is increasing our market share
and driving revenue growth.
On January 31, 2020, we entered into an agreement to divest the renewable power
systems portfolio (see Note 24, Subsequent events, to the Notes to the Condensed
Consolidated Financial Statements).
Industrial segment earnings decreased by $939, or 3.2%, to $28,230 for the first
quarter of fiscal year 2020, compared to $29,169 for the first quarter of fiscal
year 2019. There were no adjustments to Industrial segment earnings in the first
quarter of fiscal year 2020, which were down compared to adjusted Industrial
segment earnings of $38,680 for the first quarter of fiscal year 2019.
The net decrease in Industrial segment earnings for the first quarter of fiscal
year 2020 was due to the following:
Three-Month
Period
Earnings for the period ended December 31, 2018 $ 29,169
Sales volume
(5,454)
Price, sales mix and productivity (1,995)
L'Orange backlog amortization 6,814
Effects of changes in foreign currency rates (631)
Other, net 327
Earnings for the period ended December 31, 2019 $ 28,230
Industrial segment earnings as a percentage of segment net sales were 11.5% for
the first quarter, compared to 11.2% for the first quarter of fiscal year 2019.
The decrease in Industrial segment earnings in the first quarter of fiscal year
2020 was primarily due to lower sales volume and unfavorable sales mix,
partially offset by the amortization of the backlog intangible acquired in
connection with the L'Orange acquisition that was recognized in the first
quarter of fiscal year 2019, whereas no amortization of this backlog intangible
was recognized in the first quarter of fiscal year 2020. There were no
adjustments to Industrial segment earnings as a percentage of segment net sales
for the first quarter of fiscal year 2020, which were down compared to adjusted
Industrial segment earnings as a percentage of segment net sales of 14.9% for
the first quarter of fiscal year 2019.
Nonsegment expenses
Nonsegment expenses increased to $51,071 for the first quarter of fiscal year
2020, compared to $29,001 for the first quarter of fiscal year 2019. Included in
nonsegment expenses for the first quarter of fiscal year 2020 was the impairment
charge on assets held for sale associated with the divestiture of our renewable
power systems portfolio in the amount of $37,902 and the gain on sale of Duarte
real property in the amount of $13,522. Included in nonsegment expenses for the
first quarter of fiscal year 2019 were Duarte move-related costs in the amount
of $6,963.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital needs, as well as capital
expenditures, product development and other liquidity requirements associated
with our operations, with cash flow provided by operating activities and
borrowings under our credit facilities. Historically, we have also issued debt
to supplement our cash needs, repay our other indebtedness, or finance our
acquisitions. We 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, including
capital expansion funding for the foreseeable future.
Our aggregate cash and cash equivalents were $148,008 at December 31, 2019 and
$99,073 at September 30, 2019, and our working capital was $537,152 at December
31, 2019 and $563,792 at September 30, 2019. Of the cash and cash equivalents
held at December 31, 2019, $139,490 was held by our foreign locations and $2,630
is restricted cash held in
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escrow related to the sale of property in Duarte, California. We are not
presently aware of any significant restrictions on the repatriation of these
funds, although a portion is considered indefinitely reinvested in these foreign
subsidiaries. If these funds were needed to fund our operations or satisfy
obligations in the United States, then they could be repatriated and their
repatriation into the United States may cause us to incur additional U.S. income
taxes or foreign withholding taxes. Any additional U.S. taxes could be offset,
in part or in whole, by foreign tax credits. The amount of such taxes and
application of tax credits would be dependent on the income tax laws and other
circumstances at the time these amounts are repatriated. Based on these
variables, it is impractical to determine the income tax liability that might be
incurred if these funds were to be repatriated. The additional uncertainty
associated with the "The Tax Cuts and Jobs Act" enacted in December 2017 (the
"Tax Act") increases the impracticality of determining this income tax
liability.
We do not believe the one-time repatriation tax on deferred foreign income
resulting from the Tax Act, which is expected to be paid over an eight-year
period that began in January 2019, will have a significant impact on our cash
flows in any individual fiscal year.
Consistent with common business practice in China, our Chinese subsidiaries
accept bankers' acceptance notes from Chinese customers, in settlement of
certain customer accounts receivable. Bankers' acceptance notes are financial
instruments issued by Chinese financial institutions as part of financing
arrangements between the financial institution and a customer of the financial
institution. Bankers' acceptance notes represent a commitment by the issuing
financial institution to pay a certain amount of money at a specified future
maturity date to the legal owner of the bankers' acceptance note as of the
maturity date. The maturity date of bankers' acceptance notes varies, but it is
our policy to only accept bankers' acceptance notes with maturity dates no more
than 180 days from the date of our receipt of such draft. The issuing financial
institution is the obligor, not our customers. Upon our acceptance of a bankers'
acceptance note from a customer, such customer has no further obligation to pay
us for the related accounts receivable balance. We had bankers' acceptance notes
of $16,635 at December 31, 2019 and $42,171 at September 30, 2019 recorded as
non-customer accounts receivable in our Condensed Consolidated Balance Sheets.
We only accept bankers' acceptance notes issued by banks that are believed to be
creditworthy and to which the credit risks associated with the bankers'
acceptance notes are believed to be low.
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 in Part I, Item I of this Form 10-Q.
At December 31, 2019, we had total outstanding debt of $1,113,942 consisting of
various series of unsecured notes due between 2020 and 2033, amounts borrowed
under our revolving credit facility, and our finance leases. Our Series G and
Series J notes, both of which have an aggregate principal amount of $50,000,
mature on November 15, 2020. At December 31, 2019, we had additional borrowing
availability of $705,433 under our revolving credit facility, net of outstanding
letters of credit, and additional borrowing availability of $7,554 under various
foreign credit facilities.
At December 31, 2019, we had $283,168 of borrowings outstanding under our
revolving credit facility, all of which was classified as short-term borrowings
based on our intent and ability to pay this amount in the next twelve months. Of
these borrowings, as of December 31, 2019, $240,600 is denominated in U.S.
dollars and €38,000 is denominated in Euro. Revolving credit facility and
short-term borrowing activity during the three-months ended December 31, 2019
were as follows:
Maximum daily balance during the period $ 343,255
Average daily balance during the period $ 288,510
Weighted average interest rate on average daily balance 2.82%
We believe we were in compliance with all our debt covenants as of December 31,
2019. See Note 15, Credit facilities, short-term borrowings and long-term debt
in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our
most recent 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.
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.
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In the first quarter of fiscal year 2017, our board of directors terminated our
prior stock repurchase program and replaced it with a new program for the
repurchase of up to $500,000 of Woodward's outstanding shares of common stock on
the open market or in privately negotiated transactions over a three-year period
in November 2019 (the "2017 Authorization"). Effective upon the expiration of
the 2017 Authorization in November 2019, our board of directors approved a new
program for the repurchase of up to $500,000 of our outstanding shares of common
stock on the open market or in privately negotiated transactions over a
three-year period that will end in 2022 (the "2019 Authorization"). In the first
three-months of fiscal year 2020, we repurchased no common stock under the 2019
Authorization. We purchased no common stock in the first three-months of fiscal
year 2019 under the 2017 Authorization. Pursuant to the terms of the Merger
Agreement, we are prohibited from making any further common share repurchases
prior to the close of the Merger, except as to a prior specific determination to
repurchase approximately $17,000 of shares. Accordingly, we will not be
repurchasing as many shares in the current fiscal year as originally planned in
our outlook for fiscal 2020. However, within the 18-months following the close
of the merger, we anticipate repurchasing approximately $1.5 billion (not in
thousands) of Woodward Hexcel common stock, or approximately 10 percent of the
anticipated market capitalization of the combined entity. Also, on January 29,
2020, our board of directors declared a cash dividend of $0.28 per share for the
quarter, payable on March 3, 2020 for stockholders of record as of February 18,
2020. The $0.28 per share dividend, which was originally announced as part of
the recently announced merger transaction with Hexcel, represents a 72% increase
over the previous quarterly dividend of $0.1625 per share.
Associated with our decision to relocate our Duarte, California operations to
the our newly renovated Drake Campus in Fort Collins, Colorado, which was
finalized in fiscal year 2019, on December 30, 2019, we closed on the sale of
one of two parcels of the Duarte real property and recorded a pre-tax gain on
sale of assets in the amount of $13,522. The carrying value of the remaining
parcel of Duarte real estate is $2,520 as of December 31, 2019, all of which we
have identified as an asset held for sale as of that date. Based on an existing
real property purchase agreement and current market conditions, we expect to
record an additional gain on the subsequent sale of the remaining parcel of real
estate, which is expected to close by June 30, 2020.
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.
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