WOODWARD, INC. OVERVIEW
Woodward enhances the global quality of life and sustainability by optimizing energy use through improved efficiency and lower emissions. We are an independent designer, manufacturer, and service provider of control solutions for the aerospace and industrial markets. We design, produce and service reliable, efficient, low-emission, and high-performance energy control products for diverse applications in challenging environments. We have production and assembly facilities primarily inthe United States ,Europe andAsia , and promote our products and services through our worldwide locations. Our strategic focus is providing energy control and optimization solutions for the aerospace and industrial markets. The precise and efficient control of energy, including motion, fluid, combustion and electrical energy, is a growing requirement in the markets we serve, and we have developed and are executing on strategies to leverage the macro trends of eliminating greenhouse gases, commercializing space, and accelerating the digital age. To facilitate a cleaner, decarbonized world, we are partnering with our customers to enable their equipment to be more efficient, capable of utilizing clean burning fuels, advancing fuel cells, and the integration of renewable power in both commercial and defense operations. Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation and electronic systems. We focus primarily on serving OEMs and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications. We also provide aftermarket repair, maintenance, replacement and other service support for our installed products. Our components and integrated systems optimize performance of commercial aircraft, defense aircraft, military ground vehicles and other equipment, gas and steam turbines, industrial diesel, gas, bio-diesel and dual-fuel reciprocating engines, and electrical power systems. Our innovative motion, fluid, combustion and electrical energy control systems help our customers offer more cost-effective, cleaner, and more reliable equipment.
Management's discussion and analysis should be read together with the Consolidated Financial Statements and Notes included in this report. Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts.
COVID-19 Pandemic
In
significant volatility in financial markets, commodities (including oil and gas) and other markets and industries (including the aviation industry) and has negatively affected the business and results of operations of the Company. As the COVID-19 pandemic progressed, we reacted quickly to navigate the uncertain market environment, reduce our cost structure, increase our focus on operational excellence, and prioritize diligent cash management. The aggressive actions we implemented continue to drive strong cash flow, improve our liquidity and overall financial position, and enable greater investment to organically and inorganically grow our business. The ongoing rollout of vaccines across many countries is driving optimism for economic recovery, but the enduring turbulence caused by the COVID-19 pandemic, including significantly reduced global passenger travel and new viral variants continue to cloud near-term forecasts. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business, including our operational performance, results of operations, financial position, and the achievement of our strategic objectives. We will continue to actively monitor the situation and may potentially take further actions to alter our business operations if we determine such actions are in the best interests of our shareholders, employees, customers, communities, business partners, and suppliers, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business in future periods, including the effects on the Company's customers, employees, and prospects, or on our financial results.
Divestiture of the Renewables business and related businesses
In fiscal year 2020, Woodward's board of directors (the "Board") approved a plan to divest our renewable power systems business, protective relay business, and other businesses within the Industrial segment (collectively, the "disposal group"). The assets of the disposal group were primarily located inGermany ,Poland andBulgaria , and the transactions consummating the sale of the disposal group were completed onApril 30, 2020 (the "Closing"). Financial information for the disposal group is reflected in our financial statements prior to the date of Closing. 23
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BUSINESS ENVIRONMENT AND TRENDS
We serve the aerospace and industrial markets.
Aerospace Markets
Our aerospace products and systems are primarily used to provide propulsion, actuation and motion control in both commercial and defense fixed-wing aircraft, rotorcraft, guided weapons, and other defense systems. Commercial and Civil Aircraft - In the commercial aerospace markets, the global COVID-19 pandemic and associated mitigation efforts had a significant impact on global air traffic in fiscal year 2021, reducing total global passenger air miles flown to nearly one-half of 2019 (pre-COVID) levels. Commercial aircraft production, which was reduced in fiscal year 2020 in response to the significant decrease in demand from airlines and aircraft manufacturers, stabilized in fiscal year 2021 and has begun to slowly increase. Reductions in build rates ranging from twenty-five to forty percent of pre-COVID levels were seen in most aircraft models at all aircraft OEMs. As a result of the decline in demand, governments offered various financial support and stimulus to airlines and aircraft manufactures that, in some cases, incentivized the production of more fuel efficient and lower emission aircraft. The trend toward the newer generation of aircraft that have recently entered service or are scheduled to go into production over the next several years favors our product offerings because we have more content on those more fuel efficient and lower emission aircraft. While production levels remain lower than pre-COVID levels, order backlogs have begun to grow with increased new orders and fewer cancellations and deferrals. We expect production levels to remain stable in the short-term and ramp up over the next few years to reach pre-pandemic levels in fiscal year 2023 due to solid order backlogs for the new aircraft models. The business and general aviation market demand was also impacted in fiscal year 2021 as business jet deliveries were down as a result of the COVID-19 pandemic and increased availability of used aircraft, which was partially offset by the ramp of some newer models. Turboprop and helicopter deliveries weakened again in fiscal year 2021. We expect business jet, turboprop and helicopter deliveries to improve when economic stability returns and aircraft flight operations recover. We have content on the Airbus A220, A320neo, A330neo, and A380, Bell 429, Boeing 737 MAX, 777, 787, and 747-8. We have been awarded content on the 777X, Comac C919, Irkut MS-21 and a variety of business jet platforms, among others. We continue to explore opportunities on new engine and aircraft programs that are under consideration or have been recently announced. The grounding of the Boeing 737 MAX was lifted by theFAA and other regulators beginning inNovember 2020 , which allowed deliveries of that aircraft to resume in fiscal year 2021. Customer orders resumed as demand for the aircraft began to return during fiscal year 2021. As the aircraft's return to service progresses, we anticipate a large majority of the deliveries missed in fiscal year 2019 and 2020 will be fulfilled in future periods, although at a slower rate than previously estimated. In fiscal year 2021, the return to service of the 737 MAX aircraft in many jurisdictions contributed to positive impacts on OEM sales, while there was continuing unfavorable impact on initial provisioning sales related to the 737 MAX aircraft and CFM LEAP engine. We anticipate a slow recovery of the OEM sales and a slightly better recovery of the initial provisioning sales in fiscal year 2022. However, build rates are expected to improve further in fiscal year 2022 based on announced increased and the anticipated certification of the 737 Max inChina . Defense - In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016. The National Defense Authorization Act for Fiscal Year 2019, which was signed into law inAugust 2018 , resulted in slightly higher levels of funding for both procurement and research and development, and we believe budget increases in recent years will support modest growth in fiscal year 2022, with the exception of our guided tactical weapons programs. Our involvement with a wide variety of defense programs in fixed-wing aircraft, rotorcraft and weapons systems has provided relative stability for our defense market sales, as some newer programs increase (e.g., F-35 Lightning II, KC-46A Tanker, and T-7A Trainer) while some legacy programs are reduced (e.g., F/A-18E/F Super Hornet and V-22 Osprey). Other programs are relatively steady (e.g., UH-60 Black Hawk and A-64 Apache helicopter programs) and some legacy programs, such as the F-15, will maintain or potentially increase production. Weapons programs for which we have significant sales include the Joint Direct Attack Munition ("JDAM"), Small Diameter Bomb ("SDB") and AIM-9X guided tactical weapon systems. We expect overall production rates to remain flat or decrease for some of these weapons programs due to anticipated decline in demand, compared to the very strong production rates in recent years. 24 -------------------------------------------------------------------------------- Aftermarket - The substantial reduction in global air passenger traffic due to the COVID-19 pandemic, with corresponding reduction in required airliner capacity, significantly impacted our commercial aftermarket business in fiscal year 2021, as airlines continued to park approximately 25% of the active fleet. Although improving, airliner capacity is anticipated to remain below 2019 levels until approximately 2023 or later, with single aisle aircraft and domestic flights expected to return to normal volumes sooner than twin aisle and international flights. As airline revenues and profitability continue to be impacted, operators may elect to defer maintenance where possible, which will continue to pressure our aftermarket sales even as capacity recovers. We anticipate newer aerospace platforms, which include cleaner and more reliable systems, and contain more of our products, will be preferred as aircrafts return to service. With the entry into service of the new single aisle aircraft (Boeing 737 MAX and Airbus A320neo), we have seen a significant increase in initial provisioning sales to the operators of these new aircraft. Initial provisioning sales have slowed significantly, however, as airline profitability suffered during the COVID-19 pandemic, although they are anticipated to return as the industry continues to recover. Among legacy aircraft, the A320 family and 737NG will continue to be in demand in current operating fleets, which will support demand for repairs and spare parts for older engine programs remaining in service. Our defense aftermarket was flat during fiscal year 2021 as the combat readiness of existing military programs on which we have content continues to be prioritized by theU.S. Government , even amid troop withdrawals in foreign combat zones. Global conflicts and growing international demand for various other military programs continue to drive demand for operations of defense aircraft, including fighter jets, transports and both utility and attack rotorcraft, supported by our products and systems. Although we expect variability, which is generally attributable to the cycling of various maintenance and upgrade programs, as well as actual usage, our outlook for defense aftermarket is strong. This is due primarily to the service lives of existing military programs being extended and increased demand for repairs and spare parts for older military aircraft programs remaining in service.
Industrial Markets
Our industrial products are used worldwide in various types of turbine and
reciprocating engine-powered equipment, including electric power generation and
distribution systems, ships, locomotives, compressors, pumps, and other mobile
and industrial machines.
Industrial Turbines - The demand for industrial gas turbines for power
generation, which consists mainly of heavy frames, aero derivatives and steam,
declined slightly in fiscal year 2021 due to the ongoing effects of the COVID-19
pandemic on the global economy. Start reliability, fuel flexibility, safety, and
part-load efficiency are all key drivers of the turbine market as the conversion
from coal to natural gas usage continues, and we believe Woodward continues to
be well positioned to meet these market needs on the existing and next
generation turbines. We project continued growth as demand for electricity is
met through a balance of renewable power sources and newer industrial gas
turbines for which Woodward has been awarded increased content.
Reciprocating Engines - Woodward's key markets for engine control technologies
are power generation, transportation (including compressed natural gas ("CNG")
and liquified natural gas ("LNG") trucks in Asia , mining, and marine shipping),
and oil and gas. We continue to expect the market demand for natural gas trucks
to remain favorable over the long-term as the Chinese government continues to
implement more stringent emissions standards and encourage natural gas usage
under its initiative on air quality improvement. The demand for large
reciprocating engines used in marine, oil and gas, and prime power generation
applications was impacted by the COVID-19 pandemic and the drop in oil prices
during fiscal year 2021. The demand from internet traffic and data storage is
driving demand for data center power generation. We anticipate some continued
softening and stabilization of the large reciprocating engine market in fiscal
year 2022 due to a more stable market environment. Government emissions
requirements across many regions and new engine applications are driving demand
for more sophisticated control systems, as is customer demand for improved
engine efficiencies and increased reliability. We expect market share gains by
our customers and increased scope on the latest generation reciprocating engines
as energy policies in some countries encourage the use of CNG, LNG, and other
alternative fuels over carbon-rich petroleum fuels, which we expect will drive
increased demand for our alternative fuel clean engine control technologies.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS Financial Highlights Net sales for fiscal year 2021 were$2,245,832 , a decrease of$249,833 , or 10.0%, from$2,495,665 for the prior fiscal year. Foreign currency exchange rates had a favorable impact on net sales of$36,641 for fiscal year 2021, as compared to the same period of the prior year. There were no sales for the disposal group for fiscal year 2021 as compared to$67,663 for the prior fiscal year, as the disposal group was divested onApril 30, 2020 . Net sales excluding the disposal group for fiscal year 2020 were$2,428,002 . Aerospace segment net sales for the fiscal year 2021 were down 11.7% to$1,404,117 , compared to$1,590,963 for the prior fiscal year. Industrial segment net sales for fiscal year 2021 were down 7.0% to$841,715 , compared to$904,702 for the prior fiscal year. Industrial segment net sales excluding the disposal group for fiscal year 2020 were$837,040 . Foreign currency exchange rates had a favorable impact of$32,734 on Industrial segment net sales for fiscal year 2021 as compared to the prior fiscal year. Net earnings for the fiscal year 2021 were$208,649 , or$3.18 per diluted share, compared to$240,395 , or$3.74 per diluted share for the prior fiscal year. Adjusted net earnings for the fiscal year 2021 were$212,385 or$3.24 , per diluted share and$254,037 , or$3.96 , per diluted share, for the prior fiscal year. Net earnings excluding the disposal group for fiscal year 2020 were not materially different from reported net earnings for the same period. The effective tax rate in fiscal year 2021 was 15.1%, compared to 14.7% in the prior fiscal year. The adjusted effective tax rate was 15.3%, compared to 17.8% in the prior fiscal year. Earnings before interest and taxes ("EBIT") for the fiscal year 2021 were$278,586 , a decrease of 11.8% from$315,928 in the prior fiscal year. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for the fiscal year 2021 were$408,110 , down 8.7% from$447,086 for the prior fiscal year. Adjusted EBIT and adjusted EBITDA for fiscal year 2021 were$283,594 and$413,118 , respectively, compared to$343,158 and$474,316 , respectively, for the prior fiscal year. Aerospace segment earnings as a percent of segment net sales were 16.7% in fiscal year 2021, compared to 19.5% in the prior fiscal year. Industrial segment earnings as a percent of segment net sales were 12.9% in the fiscal year 2021, compared to 11.1% in the prior fiscal year. Industrial segment earnings excluding the disposal group were 11.6% of Industrial segment net sales for fiscal year 2020. Net sales excluding the disposal group, adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, Industrial segment sales excluding the disposal group, and Industrial segment earnings excluding the disposal group 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 closestU.S. GAAP financial measures can be found under the caption "Non-U.S. GAAP Measures" in this Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operations.
Liquidity Highlights
Net cash provided by operating activities for fiscal year 2021 was$464,669 , compared to$349,491 for fiscal year 2020. The increase in net cash provided by operating activities in fiscal year 2021 compared to fiscal year 2020 is primarily attributable to the timing of cash payments to suppliers and certain tax payments, as well as improved working capital utilization. This increase was partially offset by the net impact of cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, each of which occurred in fiscal year 2020, while no such activity occurred in fiscal year 2021. For fiscal year 2021, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was$426,980 , compared to$302,404 for the fiscal year 2020. The increase in free cash flow for fiscal year 2021 as compared to prior fiscal year is primarily due to effective working capital management and lower payments for property, plant and equipment, partially offset by lower net earnings. Adjusted free cash flow, which we define as free cash flow, plus the proceeds from the sale of real property at our formerDuarte, California operations and excluding cash paid for merger and divestiture transaction costs, cash paid for restructuring charges, and net cash proceeds received from settlement of our cross-currency interest rate swaps, was$315,220 for fiscal year 2020. No adjustments were made to free cash flow for fiscal year 2021. Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closestU.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. 26
-------------------------------------------------------------------------------- AtSeptember 30, 2021 , we held$448,462 in cash and cash equivalents, including restricted cash of$1,907 , and had total outstanding debt of$734,850 with additional borrowing availability of$989,039 , net of outstanding letters of credit, under our revolving credit agreement. AtSeptember 30, 2021 , we also had additional borrowing capacity of$7,413 under various foreign lines of credit and foreign overdraft facilities.
Consolidated Statements of Earnings and Other Selected Financial Data
The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:
Year Ended September 30,
2021 2020
% of Net Sales % of Net Sales
Net sales $ 2,245,832 100 % $ 2,495,665 100 %
Costs and expenses:
Cost of goods sold 1,694,774 75.5 1,855,422 74.3
Selling, general, and administrative
expenses 186,866 8.3 217,710 8.7
Research and development costs 117,091 5.2 133,134 5.3
Impairment of assets sold - 0.0 37,902 1.5
Restructuring charges 5,008 0.2 22,216 0.9
Gain on cross-currency interest rate
swaps, net - - (30,481 ) (1.2 )
Interest expense 34,282 1.5 35,811 1.4
Interest income (1,495 ) (0.1 ) (1,764 ) (0.1 )
Other expense (income), net (36,493 ) (1.6 ) (56,166 ) (2.3 )
Total costs and expenses 2,000,033 89.1 2,213,784 88.7
Earnings before income taxes 245,799 10.9 281,881 11.3
Income tax expense 37,150 1.7 41,486 1.7
Net earnings $ 208,649 9.3 $ 240,395 9.6
Other select financial data:
September 30, 2021 September 30, 2020
Working capital $ 1,098,466 $ 818,533
Total debt 734,850 838,483
Total stockholders' equity 2,214,781 1,992,677
2021 RESULTS OF OPERATIONS
2021 Net Sales Compared to 2020
Consolidated net sales for fiscal year 2021 decreased by
Details of the changes in consolidated net sales are as follows:
Consolidated net sales for the year ended
(193,387 )
Industrial volume (29,125 )
Disposal group divestiture impact (67,663 )
Noncash consideration (10,341 )
Effects of changes in price and sales mix 16,042
Effects of changes in foreign currency rates 34,641
Consolidated net sales for the year ended
In the Aerospace segment, the decrease in net sales for fiscal year 2021 as compared to fiscal year 2020 is primarily attributable to a decrease in commercial sales resulting from the secular decline in global passenger traffic and OEM production rates as a result of the global COVID-19 pandemic. In the Industrial segment, the decrease in net sales for fiscal year 2021 as compared to fiscal year 2020 is primarily attributable to the divestiture of the disposal group, and continued weakness in the oil and gas market and the associated aftermarket due to the ongoing impact of the COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates.
During fiscal year 2021, consolidated net sales were negatively impacted by
approximately
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--------------------------------------------------------------------------------2021 Costs and Expenses Compared to 2020
Cost of goods sold decreased by$160,648 to$1,694,774 , or 75.5% of net sales, for fiscal year 2021, from$1,855,422 , or 74.3% of net sales, for fiscal year 2020. The decrease in cost of goods sold in fiscal year 2021, as compared to the same period of the prior year, is primarily attributable to lower sales aerospace volume as a result of continued global disruption from the COVID-19 pandemic. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 24.5% for fiscal year 2021, compared to 25.7% for fiscal year 2020. The decrease in gross margin for fiscal year 2021 is primarily attributable to lower aerospace sales volume as a result of global disruption caused by the COVID-19 pandemic. Selling, general and administrative expenses decreased by$30,844 , or 14.2%, to$186,866 for fiscal year 2021, compared to$217,710 for fiscal year 2020. Selling, general, and administrative expenses as a percentage of net sales decreased to 8.3% for fiscal year 2021, compared to 8.7% for fiscal year 2020. The decrease in selling, general and administrative expenses, both in dollars and as a percentage of sales, for fiscal year 2021 compared to the same period of the prior year is primarily due to a decrease in certain expenses related to merger and divestiture activities, fees incurred on termination of the cross-currency interest rate swaps and acceleration of stock compensation expense related to restructuring activities, none of which repeated in the current fiscal year. Research and development costs decreased by$16,043 , or 12.1%, to$117,091 for fiscal year 2021, as compared to$133,134 for fiscal year 2020. Research and development costs as a percentage of net sales decreased to 5.2% for fiscal year 2021, as compared to 5.3% for fiscal year 2020. The decrease in research and development costs, both in dollars and as a percentage of net sales, for fiscal year 2021 as compared to the same periods of the prior year is primarily due to savings from cost reduction initiatives. 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 sold of$37,902 recognized in fiscal year 2020 related to a non-cash impairment charge for the net assets sold of the disposal group, representing the write down of the associated net assets held for sale to their fair market value as ofDecember 31, 2019 . No non-cash impairment charges were recognized during fiscal year 2021. Refer to Note 10, Sale of businesses in the Notes to the Consolidated Financial Statements in "Item 8 - Financial Statements and Supplementary Data" for further details. Restructuring charges decreased by$17,208 , or 77.5%, to$5,008 for fiscal year 2021, compared to$22,216 for fiscal year 2020. Charges for fiscal year 2021 related primarily to workforce management costs associated with business realignments in the Aerospace and Industrial segments to support growth opportunities, while charges recorded in fiscal year 2020 primarily related to workforce management actions as a result of volume and demand declines due to the global COVID-19 pandemic. All of the restructuring charges in fiscal years 2021 and 2020 were recorded as nonsegment expenses. Gain on cross-currency interest rate swaps, net of$30,481 recognized in fiscal year 2020 related to settlement and termination of our cross-currency interest rate swaps designated in foreign currency hedging relationships. In the third quarter of fiscal year 2020, as a result of the COVID-19 pandemic and future cash flow uncertainties, we elected to terminate and settle our existing cross-currency interest rate swap derivative instruments. No gains on cross-currency interest rate swaps were recognized during fiscal year 2021. Refer to Note 8, Derivative instruments and hedging activities, in the Notes to the Consolidated Financial Statements in "Item 8 - Financial Statements and Supplementary Data" for further details. Interest expense decreased by$1,529 , or 4.3%, to$34,282 , for fiscal year 2021, compared to$35,811 for fiscal year 2020. Interest expense increased as a percentage of net sales to 1.5% for fiscal year 2021, as compared to 1.4% for fiscal year 2020. During fiscal year 2021, we paid the entire balance of two series of private placement notes totaling$100,000 primarily using free cash flow and proceeds from our revolving credit facility. We did not borrow from the revolving credit facility during the second, third, or fourth quarters of fiscal year 2021. Other income, net was$36,493 for fiscal year 2021, compared to$56,166 for fiscal year 2020. The decrease in other income in fiscal year 2021 compared to fiscal year 2020 was primarily due to a gain on the sale of a portion of our property inDuarte, California in the amount of$22,323 and a gain on the sale of our property inLoveland, Colorado in the amount of$2,330 that were each recognized in fiscal year 2020 and did not repeat again in the current fiscal year.
Income taxes were provided at an effective rate on earnings before income taxes of 15.1% for fiscal year 2021, compared to 14.7% for fiscal year 2020.
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The increase in the effective tax rate for fiscal year 2021 compared to fiscal
year 2020 is primarily attributable to (i) decreased current fiscal year foreign
earnings in lower tax jurisdictions when compared to the prior fiscal year, and
(ii) decreased Research and Development Credit in the current fiscal year when
compared to the prior fiscal year. This increase is partially offset by (i) a
larger favorable net excess income tax benefit from stock-based compensation,
(ii) a favorable U.S. current fiscal year state earnings mix when compared to
the prior fiscal year, and (iii) a smaller detrimental adjustment to prior
period tax items when compared to the prior fiscal year.
Segment Results
The following table presents sales by segment:
Year Ended September 30,
2021 2020
Net sales:
Aerospace $ 1,404,117 62.5% $ 1,590,963 63.7%
Industrial 841,715 37.5% 904,702 36.3%
Consolidated net sales $ 2,245,832 100% $ 2,495,665 100%
The following table presents earnings by segment and reconciles segment earnings
to consolidated net earnings:
Year Ended September 30,
2021 2020
Aerospace $ 234,356 $ 310,137
Industrial 108,672 100,321
Nonsegment expenses (64,442 ) (94,530 )
Interest expense, net (32,787 ) (34,047 )
Consolidated earnings before income taxes 245,799 281,881
Income tax expense 37,150 41,486
Consolidated net earnings $ 208,649 $ 240,395
The following table presents segment earnings as a percent of segment net sales:
Year Ended September 30,
2021 2020
Aerospace 16.7% 19.5%
Industrial 12.9% 11.1%
2021 Segment Results Compared to 2020
Aerospace
Aerospace segment net sales decreased by$186,846 , or 11.7% to$1,404,117 for fiscal year 2021, compared to$1,590,963 for fiscal year 2020. The decrease in segment net sales for fiscal year 2021 as compared to fiscal year 2020 was primarily driven by lower commercial sales due to the substantial reduction in global passenger traffic, reduction in required airliner capacity, and OEM production rates, all as a result of the global COVID-19 pandemic. Defense OEM sales decreased in fiscal year 2021 compared to fiscal year 2020, driven primarily by lower sales for guided weapons and ground transportation. Our defense aftermarket sales decreased in fiscal year 2021 compared to fiscal year 2020 primarily due to the timing ofU.S. government spending for maintenance needs and upgrade programs on which we have content. Although we expect some ongoing variability in defense aftermarket sales due to the global COVID-19 pandemic and the timing of continued maintenance needs and upgrade programs, we expectU.S. government funding for defense platforms on which we have content to remain stable under the current defense budget.
During fiscal year 2021, Aerospace segment net sales were negatively impacted by
approximately
29
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Aerospace segment earnings decreased by
The net decrease in Aerospace segment earnings for fiscal year 2021 was due to the following:
Earnings for the period ended
(94,353 )
Price, sales mix and productivity (18,016 )
Savings from cost reduction initiatives 22,069
Other, net 14,519
Earnings for the period ended
Aerospace segment earnings as a percentage of segment net sales were 16.7% for fiscal year 2021 and 19.5% fiscal year 2020. Aerospace segment earnings in fiscal year 2021 decreased primarily due to lower sales volume, including a significant decline in commercial aftermarket, as a result of the COVID-19 pandemic, partially offset by savings from cost reduction initiatives.
Industrial
Industrial segment net sales decreased by$62,987 , or 7.0%, to$841,715 for fiscal year 2021, compared to$904,702 for fiscal year 2020. Industrial segment net sales for fiscal year 2021 were relatively flat compared to Industrial segment net sales excluding the disposal group of$837,039 for fiscal year 2020. There were no sales for the disposal group in fiscal year 2021 because the divestiture of the disposal group preceded the period. Foreign currency exchange rates had a favorable impact on segment net sales of$32,734 for fiscal year 2021. The decrease in Industrial segment net sales in fiscal year 2021 was primarily attributable to the divestiture of the disposal group, and lower sales volumes as a result the ongoing impacts of the global COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates. The demand for diesel fuel systems was negatively impacted by a softening of the oil and gas market amid a recovering global economy, pricing volatility and decreased capital investments related to reduced drilling activity, particularly within the North American fracking market. Although there was a slight decline in industrial gas turbine sales in fiscal year 2021 as a result of the ongoing COVID-19 pandemic, the market is anticipated to stabilize during fiscal year 2022 as global power demand increases and domestic upgrade initiatives transition from planning to execution. We expect Industrial gas turbine sales to benefit from the depletion of inventory in the market and increased Woodward content on certain newer industrial gas turbines. During fiscal year 2021, Industrial segment net sales were negatively impacted by approximately$16,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for shipment during the fiscal year. Industrial segment earnings increased by$8,351 , or 8.3%, to$108,672 for fiscal year 2021, compared to$100,321 for fiscal year 2020. There were no earnings for the disposal group in fiscal year 2021 because the divestiture of the disposal group preceded the period. Industrial segment earnings excluding the disposal group for fiscal year 2020 were$96,719 .
The net increase in Industrial segment earnings for fiscal year 2021 was due to the following:
Earnings for the period ended
(21,400 )
Price, sales mix and productivity (1,180 )
Research and development costs 4,831
Savings from cost reduction initiatives 15,427
Effects of changes in foreign currency rates 6,024
Other, net 4,649
Earnings for the period ended
Industrial segment earnings as a percentage of segment net sales were 12.9% for
fiscal year 2021, compared to 11.1% for fiscal year 2020. Industrial segment
earnings as a percentage of segment net sales, excluding the disposal group,
were 11.6% for fiscal year 2020. The increase in Industrial segment earnings for
fiscal year 2021 was primarily due to savings from cost reduction initiatives,
favorable effects from changes in foreign currency rates, and lower research and
development costs, partially offset by lower sales volume.
30
--------------------------------------------------------------------------------Nonsegment
Nonsegment expenses decreased to$64,442 for fiscal year 2021, compared to$94,530 for fiscal year 2020. Included in nonsegment expenses for fiscal year 2021 was a restructuring charge of$5,008 . Included in nonsegment expenses for fiscal year 2020 were the impairment charge on assets held for sale associated with the divestiture of the disposal group in the amount of$37,902 , restructuring charges of$22,216 , and merger and divestiture transaction costs of$16,355 , partially offset by the net gain on settlement of our cross-currency interest rate swaps of$27,481 , and a gain on the sale of a portion of our property inDuarte, California in the amount of$22,323 . Excluding all of these charges and gains from each of fiscal year 2021 and fiscal year 2020, nonsegment expenses decreased in fiscal year 2021 compared to fiscal year 2020 primarily due to savings from cost reduction initiatives. For a discussion of the 2020 Results of Operations, including a discussion of the financial results for the fiscal year endedSeptember 30, 2020 compared to the fiscal year endedSeptember 30, 2019 , refer to Part I, Item 7 of our Form 10-K filed with theSEC onNovember 20, 2020 .
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. 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 next 12 months and the foreseeable future. Our aggregate cash and cash equivalents were$448,462 atSeptember 30, 2021 and$153,270 atSeptember 30, 2020 , and our working capital was$1,098,466 atSeptember 30, 2021 and$818,533 atSeptember 30, 2020 . Of the cash and cash equivalents held atSeptember 30, 2021 ,$172,761 was held by our foreign locations. 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 inthe United States , then they could be repatriated and their repatriation intothe United States may cause us to incur additionalU.S. income taxes or foreign withholding taxes. Any additionalU.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. Our revolving credit facility, as amended, provides a borrowing capacity of up to$1,000,000 with the option to increase total available borrowings to up to$1,500,000 , subject to lenders' participation. We can borrow against our revolving credit facility as long as we are in compliance with all of our debt covenants. Borrowings under the revolving credit facility can be made inU.S. dollars or in foreign currencies other than theU.S. dollar provided that theU.S. dollar equivalent of any foreign currency borrowings andU.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility. Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our common stock, payments of dividends, acquisitions, and facility expansions. 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 Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. AtSeptember 30, 2021 , we had total outstanding debt of$734,850 consisting of various series of unsecured notes due between 2023 and 2033, and amounts borrowed under our revolving credit facility, and our finance leases. OnNovember 15, 2020 , we paid the entire principal balance of$100,000 on our Series G and J Notes using primarily free cash flow and proceeds from borrowings under our existing revolving credit facility. AtSeptember 30, 2021 , we had additional borrowing availability of$989,039 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of$7,413 under various foreign credit facilities. 31 --------------------------------------------------------------------------------
At
Maximum daily balance during the period$ 20,100 Average daily balance during the period$ 716
Weighted average interest rate on average daily balance 1.26 %
We believe we were in compliance with all our debt covenants as ofSeptember 30, 2021 . Additionally, we believe the current known impacts of the COVID-19 pandemic will not affect our ability to remain in compliance with our debt covenants. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in "Item 8 - Financial Statements and Supplemental Data," 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. We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable and do not currently foresee adverse impacts to financial institutions providing our capital requirements as a result of the COVID-19 pandemic. Cash Flows Year Ended September 30, 2021 2020 Net cash provided by operating activities$ 464,669 $ 349,491 Net cash used in investing activities (35,297 ) (6,880 ) Net cash used in financing activities (136,318 ) (290,242 ) Effect of exchange rate changes on cash and cash equivalents 2,138
1,828
Net change in cash and cash equivalents 295,192
54,197
Cash and cash equivalents, including restricted cash, at beginning of year
153,270 99,073
Cash and cash equivalents, including restricted cash, at end of year$ 448,462 $ 153,270
2021 Cash Flows Compared to 2020
Net cash flows provided by operating activities for fiscal year 2021 was$464,669 , compared to$349,491 for fiscal year 2020. The increase in net cash provided by operating activities in fiscal year 2021 compared to fiscal year 2020 is primarily attributable to the timing of certain cash payments to suppliers and certain tax payments, as well as cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, which occurred in fiscal year 2020, while no such activity occurred in fiscal year 2021. Net cash flows used in investing activities for fiscal year 2021 was$35,297 , compared to$6,880 in fiscal year 2020. The increase in cash used in investing activities in fiscal year 2021 compared to fiscal year 2020 is primarily due to proceeds in the amount of$30,089 from the sale of a parcel of ourDuarte, California real property and proceeds in the amount of$10,443 from divestiture of the disposal group, each of which were recognized in fiscal year 2020, while no such proceeds were received in fiscal year 2021, partially offset by lower payments for property, plant, and equipment. Net cash flows used in financing activities for fiscal year 2021 was$136,318 , compared to net cash flows used in financing activities of$290,242 in fiscal year 2020. During fiscal year 2021, we had net debt payments in the amount of$101,639 , compared to net debt payments in the amount of$264,201 in fiscal year 2020. This was partially offset by an increase in share repurchases in fiscal year 2021, in which we repurchased 294 shares of our common stock in cash for$33,344 , compared to fiscal year 2020, in which we repurchased 124 shares of our common stock for$13,346 . 32
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New Accounting Standards
From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards, in the Notes to the Consolidated Financial Statements included in "Item 8 - Financial Statements and Supplementary Data. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
Non-
Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, Industrial segment net sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, free cash flow, and adjusted free cash flow are financial measures not prepared and presented in accordance withU.S. GAAP. However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.
Industrial segment net sales excluding the disposal group
The Company presents certain sales measures excluding the disposal group net sales, which it refers to as "excluding the disposal group" to show the changes to Woodward's historical business without the businesses included in the disposal group, which occurred inApril 2020 . The Company calculates Industrial segment net sales excluding net sales attributable to the disposal group by removing the net sales of its disposal group from the net sales of its Industrial segment. The Company believes that the exclusion of the disposal group net sales for the prior fiscal year illustrates more clearly how the underlying business of its Industrial segment is performing in the current fiscal year, as the disposal group sales are no longer related to the ongoing operations of the Industrial segment business. The Company's calculation of Industrial segment earnings and Industrial segment earnings excluding the disposal group is discussed below.
The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group is shown in the table below:
Year Ended
2021 2020
Industrial segment net sales (U.S. GAAP)$ 841,715 $ 904,702 Disposal group net sales - (67,663 ) Industrial segment net sales excluding the disposal group (Non-U.S. GAAP)$ 841,715 $ 837,039
Earnings based non-
Adjusted net earnings is defined by the Company as net earnings excluding, as
applicable, (i) the gain on sale of assets associated with the sale of the
Company's real property, (ii) the charge from the impairment of assets held for
sale, and the losses from assets sold, associated with the Company's divestiture
of the disposal group, (iii) costs associated with the now-terminated merger
agreement with Hexcel, (iv) transaction costs associated with the divestiture of
the disposal group, (v) restructuring charges, (vi) acceleration of stock
compensation expense related to restructuring activities, and (vii) the net gain
on settlement of cross-currency interest rate swaps.
The Company believes that these excluded items are short-term in nature, not
directly related to the ongoing operations of the business and therefore, the
exclusion of them illustrates more clearly how the underlying business of
Woodward is performing. Management uses adjusted net earnings to evaluate the
Company's performance excluding these infrequent or unusual period expenses that
are not necessarily indicative of the Company's operating performance for the
period. Management defines adjusted earnings per share as adjusted net earnings,
as defined above, divided by the weighted-average number of diluted shares of
common stock outstanding for the period. Management uses both adjusted net
earnings and adjusted earnings per share when comparing operating performance to
other periods which may not have similar infrequent or unusual charges.
33
--------------------------------------------------------------------------------The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, for the fiscal years ended and are shown in the tables below.
Year Ended September 30,
2021 2020
Earnings Per Earnings Per
Net Earnings Share Net Earnings Share
Net earnings (U.S. GAAP) $ 208,649 $ 3.18 $ 240,395 $ 3.74
Non-U.S. GAAP adjustments:
Gain on sale of properties, net of tax - - (18,551 ) (0.29 )
Impairment from assets sold, net of tax - - 28,016 0.44
Merger and divestiture transaction
costs, net of tax - - 12,307 0.19
Restructuring charges, net of tax 3,736 0.06 16,621 0.26
Loss on sale of disposal group, net of
tax - - 365 0.01
Acceleration of stock compensation, net
of tax - - 1,788 0.03
Net gain on cross-currency interest rate
swaps, net of tax - - (26,904 ) (0.42 )
Total non-U.S. GAAP adjustments 3,736 0.06 13,642 0.22
Adjusted net earnings (Non-
Industrial segment earnings excluding the disposal group
The Company also presents certain earnings measures excluding the disposal group for the prior year period to more clearly show how the underlying business of its Industrial segment is performing in the current period. Industrial segment earnings excluding the disposal group is defined by the Company as Industrial segment earnings excluding the earnings or losses related to businesses included in the disposal group. The Company believes that these earnings or losses are no longer related to the ongoing operations of the Industrial segment business and therefore, the exclusion of these earnings illustrates more clearly how the underlying business of Woodward's Industrial segment is performing. Industrial segment earnings excluding the disposal group as a percentage of Industrial segment net sales excluding the disposal group is defined by management as the percentage of segment earnings compared to segment net sales excluding the earnings (or losses) and net sales related to businesses included in the disposal group.
The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group is shown in the table below.
Year Ended
2021 2020
Industrial segment earnings (U.S. GAAP)$ 108,672 $ 100,321 Disposal group earnings - (3,602 )Adjusted Industrial segment earnings excluding disposal group (Non-U.S. GAAP)$ 108,672
Management uses EBIT to evaluate Woodward's performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward's operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization. The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of our operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization. Further, as interest from financing, income taxes, depreciation and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability. Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) the gain on sale of assets associated with the sale of the Company's real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company's divestiture of the disposal group, (iii) costs associated with the now-terminated merger agreement with Hexcel, (iv) transaction costs associated with the divestiture of the disposal group, (v) restructuring charges related to the COVID-19 pandemic, (vi) acceleration of stock compensation expense related to restructuring activities, and (vii) the net gain on settlement of cross-currency interest rate swaps. 34 -------------------------------------------------------------------------------- As these gains and charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes that by removing these gains and charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.
EBIT and adjusted EBIT reconciled to net earnings were as follows:
Year Ended September 30,
2021 2020
Net earnings (U.S. GAAP) $ 208,649 $ 240,395
Income tax expense 37,150 41,486
Interest expense 34,282 35,811
Interest income (1,495 ) (1,764 )
EBIT (Non-U.S. GAAP) 278,586 315,928
Non-U.S. GAAP adjustments:
Gain on sale of properties - (24,653 )
Impairment from assets sold - 37,902
Merger and divestiture transaction costs - 16,355
Restructuring charges 5,008
22,216
Loss on sale of disposal group -
515
Acceleration of stock compensation -
2,376
Net gain on cross-currency interest rate swaps - (27,481 ) Total non-U.S. GAAP adjustments 5,008 27,230 Adjusted EBIT (Non-U.S. GAAP)$ 283,594 $ 343,158
EBITDA and adjusted EBITDA reconciled to net earnings were as follows:
Year Ended September 30,
2021 2020
Net earnings (U.S. GAAP) $ 208,649 $ 240,395
Income tax expense 37,150 41,486
Interest expense 34,282 35,811
Interest income (1,495 ) (1,764 )
Amortization of intangible assets 41,893 39,458
Depreciation expense 87,631 91,700
EBITDA (Non-U.S. GAAP) 408,110 447,086
Non-U.S. GAAP adjustments:
Gain on sale of properties - (24,653 )
Impairment from assets sold - 37,902
Merger and divestiture transaction costs - 16,355
Restructuring charges 5,008
22,216
Loss on sale of disposal group -
515
Acceleration of stock compensation -
2,376
Net gain on cross-currency interest rate swaps - (27,481 ) Total non-U.S. GAAP adjustments 5,008
27,230
Adjusted EBITDA (Non-U.S. GAAP)$ 413,118 $
474,316
The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance withU.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, Industrial segment sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most comparableU.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of adjusted net earnings, adjusted net earnings per share, Industrial segment sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures. 35 --------------------------------------------------------------------------------
Cash flow-based non-
Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of and cash generation by Woodward's various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow includes additional non-U.S. GAAP adjustments to free cash flow in the prior fiscal year to include cash proceeds from the sale of real property located at our former operations inDuarte, California , and exclude cash paid for merger and divestiture related transaction costs, cash paid for restructuring charges, and cash proceeds received on settlement of our cross-currency interest rate swaps. Management believes that by including or excluding these items, as applicable, in free cash flow it better portrays the cash impact of our fiscal year 2018 decision to relocate ourDuarte, California operations to the renovated Drake Campus inFort Collins, Colorado and excludes the infrequent or unusual cash payments for merger and divestiture transaction costs, restructuring charges, and proceeds from settlement of derivative instruments, which are not indicative of the Company's operating performance for the period. The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance withU.S. GAAP. Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as a comparative measure.
Free cash flow and adjusted free cash flow were as follows:
Year Ended
2021 2020
Net cash provided by operating activities (
$ 349,491 Payments for property, plant and equipment (37,689 ) (47,087 ) Free cash flow (Non-U.S. GAAP)$ 426,980 $ 302,404 Cash proceeds from the sale of the Duarte facility -
30,089
Cash paid for merger and divestiture transaction costs -
19,853
Cash paid for restructuring charges -
18,065
Net cash proceeds from cross-currency interest rate swaps - (55,191 ) Adjusted free cash flow (Non-U.S. GAAP)$ 426,980 $ 315,220
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity withU.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The estimates and assumptions described below are those that we consider to be most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. As estimates are updated or actual amounts are known, our critical accounting estimates are revised, and operating results may be affected by the revised estimates. Actual results may differ from these estimates under different assumptions or conditions. Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our disclosures in this Management's Discussion and Analysis. 36
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Revenue recognition
Revenue is recognized on contracts with customers for arrangements in which quantities and pricing are fixed and/or determinable and are generally based on customer purchase orders, often within the framework of a long-term supply arrangement with the customer. We recognize revenue for performance obligations within a customer contract when control of the associated product or service is transferred to the customer. Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations. Each product within a contract generally represents a separate performance obligation as we do not provide significant installation and integration services, the products do not customize each other, and the products can function independently of each other. A contract's transaction price is allocated to each performance obligation and recognized as revenue when, or as, the customer obtains control of the associated product or service. When there are multiple performance obligations within a contract, we generally use the observable standalone sales price for each distinct product or service within the contract to allocate the transaction price to the distinct products or services. In instances when a standalone sales price for each product or service is not observable within the contract, we allocate the transaction price to each performance obligation using an estimate of the standalone selling price for each product or service, which is generally based on incurred costs plus a reasonable margin, for each distinct product or service in the contract. When determining the transaction price of each contract, we consider contractual consideration payable by the customer and variable consideration that may affect the total transaction price. Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience. We regularly review our estimates of variable consideration on the transaction price and recognize changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract.
Point in time and over time revenue recognition
Control of the products generally transfers to the customer at a point in time,
as the customer does not control the products as they are produced. We exercise
judgment and consider the timing of right of payment, transfer of the risk and
rewards, transfers of title, transfer of physical possession, and customer
acceptance when determining when control of the product transfers to the
customer, generally upon shipment of products. Performance obligations are
satisfied and revenue is recognized over time if: (i) the customer receives the
benefits as we perform work, if the customer controls the asset as it is being
enhanced, or if the product being produced for the customer has no alternative
use to us; and (ii) we have an enforceable right to payment with a profit. When
services are provided, revenue from those services is recognized over time
because control is transferred continuously to customers as we perform the
work.
For services that are not short-term in nature, manufacturing, repair and
overhaul ("MRO"), and sales of products that have no alternative use to us and
an enforceable right to payment with a profit, we use an actual cost input
measure to determine the extent of progress towards completion of the
performance obligation. For these revenue streams, revenue is recognized over
time as work is performed based on the relationship between actual costs
incurred to-date for each contract and the total estimated costs for such
contract at completion of the performance obligation (the cost-to-cost method).
We have concluded that this measure of progress best depicts the transfer of
assets to the customer, because incurred costs are integral to our completion of
the performance obligation under the specific customer contract and correlate
directly to the transfer of control to the customer. Contract costs include
labor, material and overhead. Contract cost estimates are based on various
assumptions to project the outcome of future events. These assumptions include
labor productivity and availability; the complexity of the work to be performed;
the cost and availability of materials; the performance of subcontractors; and
the availability and timing of funding from the customer. Revenues, including
estimated fees or profits, are recorded proportionally as costs are incurred.
Inventory
Inventories are valued at the lower of cost or net realizable value. Inventory
cost is determined using methods that approximate the first-in, first-out
basis. We include product costs, labor and related fixed and variable overhead
in the cost of inventories. Inventory net realizable values are determined by
giving substantial consideration to the expected product selling price. We
estimate expected selling prices based on our historical recovery rates, general
economic and market conditions, the expected channel of disposition, and current
customer contracts and preferences. Actual results may differ from our estimates
due to changes in resale or market value and the mix of these factors.
37
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We monitor inventory for events or circumstances, such as negative margins,
recent sales history suggesting lower sales value, or changes in customer
preferences, which would indicate the net realizable value of inventory is less
than the carrying value of inventory, and management records adjustments as
necessary. When inventory is written down below cost, such reduced amount is
considered the cost for subsequent accounting purposes. Our recording of
inventory at the lower of cost or net realizable value has not historically
required material adjustments once initially established.
The carrying value of inventory was $419,971 at September 30, 2021 and $437,943
at September 30, 2020 . If economic conditions, customer product requirements, or
other factors significantly reduce future customer demand for our products from
forecast levels, then future adjustments to the carrying value of inventory may
become necessary. We attempt to maintain inventory quantities at levels
considered necessary to fill firm and expected orders in a reasonable time
frame, which we believe mitigates our exposure to future inventory carrying cost
adjustments.
Reviews for impairment of goodwill and other indefinitely lived intangible assets
At
The identification of reporting units and consideration of the aggregation of components into a single reporting unit underU.S. GAAP requires management judgment. The impairment test consists of comparing the fair value of reporting units, determined using discounted cash flows, with their carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, we compare the implied fair value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its implied fair value. During the fourth quarter, we completed our annual goodwill impairment test as ofJuly 31, 2021 for the fiscal year endedSeptember 30, 2021 . The results of our annual goodwill impairment test performed as ofJuly 31, 2021 , indicated the estimated fair value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed.
Indefinitely lived intangible asset
We have one indefinitely lived intangible asset consisting of theWoodward L'Orange trade name. AtSeptember 30, 2021 , the carrying value of theWoodward L'Orange trade name intangible asset was$67,245 , representing 2% of our total assets. TheWoodward L'Orange trade name intangible asset is tested for impairment on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of theWoodward L'Orange intangible asset may be below its carrying amount. The impairment test consists of comparing the fair value of theWoodward L'Orange trade name intangible asset, determined using discounted cash flows based on the relief from royalty method under the income approach, with its carrying amount. If the carrying amount of theWoodward L'Orange trade name intangible asset exceeds its fair value, an impairment loss would be recognized to reduce the carrying amount to its fair value. Woodward has not recorded any impairment charges associated with the indefinitely lived intangible asset. During the fourth quarter, we completed the annual impairment test, for the fiscal year endedSeptember 30, 2021 , of theWoodward L'Orange trade name intangible asset as ofJuly 31, 2021 . The results of the annual impairment test performed as ofJuly 31, 2021 indicated the estimated fair value of theWoodward L'Orange trade name intangible asset was in excess of its carrying value, and accordingly, no impairment existed. As part of our ongoing monitoring efforts to assess goodwill and theWoodward L'Orange trade name indefinite lived asset for possible indications of impairment, we will continue to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on our business. There can be no assurance that our estimates and assumptions regarding forecasted cash flows of certain reporting units or theWoodward L'Orange business, the current economic environment, or the other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance. 38 --------------------------------------------------------------------------------
Income taxes
We are subject to income taxes in
During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes. Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. Our provision for income taxes is subject to volatility and could be affected by earnings that are different than those anticipated in countries which have lower or higher tax rates; by transfer pricing adjustments; and/or changes in tax laws, regulations, and accounting principles, including accounting for uncertain tax positions, or interpretations thereof. There can be no assurance that these items will remain stable over time. Additionally, Woodward records through income tax expense all future excess tax benefits and tax deficiencies from stock options exercised. This creates unpredictable volatility in the effective tax rate because the additional expense or benefit recognized each quarter is based on the timing of the employee's election to exercise any vested stock options outstanding, which is outside Woodward's control, and the market price of Woodward's shares at the time of exercise, which is subject to market volatility. Our effective tax rates differ from theU.S. statutory rate primarily due to the tax impact of foreign operations, adjustments of valuation allowances, research tax credits, state taxes, and tax audit settlements. In addition to potential local country tax law and policy changes that could impact the provision for income taxes, management's judgment about and intentions concerning the repatriation of foreign earnings could also significantly impact the provision for income taxes. Management reassesses its judgment regularly, taking into consideration the potential tax impacts of these judgments and intentions. 39
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