WOODWARD : Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except per share amounts) (form 10-Q)

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. ?

                                       37

--------------------------------------------------------------------------------

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.

                                       38

--------------------------------------------------------------------------------

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

                                       39

--------------------------------------------------------------------------------

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.

                                       40

--------------------------------------------------------------------------------

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


                                       41

--------------------------------------------------------------------------------

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.

                                       42

--------------------------------------------------------------------------------

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

                                       43

--------------------------------------------------------------------------------

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.

                                       44

--------------------------------------------------------------------------------

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.

© Edgar Online, source Glimpses