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.
Global Business Conditions
We continue to monitor a variety of external issues impacting our business, including ongoing global supply chain and labor disruptions, rising labor and material inflation, and unfavorable foreign currency exchange rates which together have led to a challenging industry-wide operating environment.
During fiscal year 2022, we continued to see recovery across our end markets with the exception ofChina . Our financial performance was adversely impacted by ongoing global supply chain and labor disruptions, rising labor and material inflation, and unfavorable foreign currency exchange rates. We are actively implementing strategies to mitigate our supply chain risk to better position us for future success. We also continue to assess the environment and are taking appropriate price actions in response to rising costs; however, the timing of many price increases can be delayed due to certain pre-existing contractual arrangements. We remain focused on operational excellence initiatives, talent development and innovation to help drive the company forward and create value for our shareholders. We are unable to predict the full extent to which these issues will continue to adversely impact our business, including our operational performance, results of operations, cash flows, financial position, and the achievement of our strategic objectives. Such uncertainty may affect our ability to accurately predict our future performance and financial results. We continue to actively monitor the situation and may take further actions to alter our business operations if we determine such actions are in the best interests of our stockholders, employees, customers, communities, business partners, and suppliers. It is not currently clear what the potential effects of any such alterations or modifications may have on our business in future periods, including the effects on our customers, employees and prospects, or on our financial results. The Russia-Ukraine Conflict InFebruary 2022 , in response to the military conflict betweenRussia andUkraine ,the United States , otherNorth Atlantic Treaty Organization ("NATO") members, and certain non-member countries announced targeted economic sanctions onRussia and Russian enterprises. The continuation of the conflict may trigger additional economic and other sanctions enacted bythe United States , otherNATO member states, and other countries. Sales toRussia were less than 1% of our total sales during fiscal years 2022, 2021, and 2020, respectively. While the impact of any additional bans, sanction 23 -------------------------------------------------------------------------------- programs, and boycotts is uncertain at the current time due to the fluid nature of the military conflict as it continues to unfold, the impacts of the conflict have included and could continue to include supply chain and logistics disruptions, volatility in foreign exchange rates and interest rates, inflationary pressures on raw materials and energy, heightened cybersecurity threats, and other potential impacts.
PM Control Acquisition
OnAugust 2, 2022 , we entered into a series of Purchase Agreements with one of ourAsia pacific channel partners,PM Control PLC (the "PM Agreements"). Pursuant to the PM Agreements, we agreed to acquire business assets and shares of stock ofPM Control PLC and its affiliates (collectively "PM Control"), for a total consideration (excluding cash acquired from the acquisition and including the settlement of pre-existing relationships) of$22,299 (the "PM Acquisition"). The PM Acquisition closed on the end of business dayAugust 31, 2022 (the "PM Closing") and PM Control became a wholly owned subsidiary of the Company. Financial information for PM Control is reflected in our financial statements from the date of the PM Closing. The comparison of results for fiscal year 2022 to fiscal years 2021 and 2020 will not be affected, as the amounts included in our financial statements for fiscal year 2022 are immaterial.
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, global air traffic continued to recover and grow in fiscal year 2022, though it remains below the historically high levels of pre-pandemic years. Commercial aircraft production has slowly increased, as aircraft OEMs continued to ramp from post-COVID production levels. We expect commercial aircraft production to continue to increase and to exceed pre-COVID production levels in the coming years. Aircraft operators are taking delivery of next generation aircraft models to meet the growing demand for passenger air travel, the need to replace aging aircraft, and the demand for 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 aircraft. We expect production levels to continue to grow due to solid OEM order backlogs for the new aircraft models and pent-up demand. Demand in the business and general aviation market improved in fiscal year 2022 as business jet deliveries were up because of the introduction of some new models, reduced availability of used aircraft, and improving corporate profitability. Turboprop and helicopter deliveries also improved in fiscal year 2022 in part due to increasing oil prices and overall financial market improvements. We expect business jet, turboprop and helicopter deliveries to further improve in fiscal year 2023 as aircraft operations continue to recover. We have content on the Airbus A220, A320neo, and A330neo, Bell 429, Boeing 737 MAX, 777, 787, and 747-8. We have been awarded content on the 777-9, the Comac C919, 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 Boeing 737 MAX has returned to service in every jurisdiction exceptChina . As the aircraft's return to service progresses, we anticipate a large majority of the deliveries missed in fiscal year 2019 through 2022 will be fulfilled in future periods, although at a slower rate than previously estimated. The continuing return to service of the 737 MAX aircraft in many jurisdictions contributed to positive impacts on OEM sales, and initial provisioning sales related to the 737 MAX aircraft and CFM LEAP engine have begun to come through. We anticipate further recovery of OEM 737 MAX sales in fiscal year 2023. Defense - In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016. The conflict inUkraine and its influence on European defense postures are pressuring global defense budgets upward. TheU.S. National Defense Authorization Act for fiscal year 2022 resulted in higher levels of funding for both procurement and research and development, and we believe budget increases in recent years will support growth in fiscal year 2023, 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), some legacy programs are 24 -------------------------------------------------------------------------------- decreased (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 decrease for some of these weapons programs due to anticipated decline in demand, compared to the very strong production rates in recent years. Aftermarket - Our commercial aftermarket business has increased in fiscal year 2022, as global air traffic continued to recover and grow from its pandemic lows in fiscal year 2020, and because our products have been selected for new aerospace platforms and our content has increased across existing platforms. 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. As new aircraft production levels increase to accommodate rising passenger demand and to mitigate higher operating costs driven largely by higher fuel costs on older and less fuel-efficient aircraft, we expect airlines will retire older generation aircraft as they reach certain age thresholds (typically around twenty-five years on average). However, in the past few years, aircraft retirements have decreased because passenger demand has outpaced deliveries of next generation aircraft, forcing older generation legacy aircraft to remain in service longer than anticipated. This has led to increased demand-for repairs and spare parts for older engine programs remaining in service-consistent with air traffic recovery from the post-COVID-19 low levels. This dynamic applies to commercial aftermarket related to repairs and spare parts for mature legacy programs with large in-service fleets, such as the Airbus A320 and the Boeing 777. Our defense aftermarket was down during fiscal year 2022 due to global supply chain and labor disruptions. 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, which are all 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 the defense aftermarket is strong. This is due primarily to growing fleets, 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.
Space - Many new space launches and mission equipment opportunities are being driven by commercial space launch and satellite providers, who are rapidly increasing their investment and participation in these markets.
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, increased in fiscal year 2022 due to increased new unit build rates and high utilization of the in-service fleet driving the current and future marine aftermarket activity, and strong demand for power generation and process industries, particularly inAsia . 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 industrial engine control technologies and fuel system equipment are power generation, transportation (including compressed natural gas and liquified natural gas trucks inAsia , mining, and marine shipping), and oil and gas. Due to higher gas prices and global supply chain and labor disruptions, powerplant operations have transitioned to higher liquid fuel use, thereby increasing the demand for our products. The demand from internet traffic and data storage is driving demand for data center power generation. While demand growth for reciprocating engines in fiscal year 2022 was supported by aftermarket demand and investment into new highspeed equipment, we anticipate strong demand in fiscal year 2023 for new highspeed engines and new marine engines. We expect market share gains by our customers and increased scope on the next generation reciprocating engines as energy policies in some countries encourage the use of compressed natural gas, liquefied natural gas, and other alternative fuels over carbon-rich petroleum fuels, which we expect will drive increased demand for our alternative fuel clean engine control technologies. 25 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Financial Highlights
Year Ended September 30,
2022 2021
Net sales:
Aerospace segment $ 1,519,322 $ 1,404,117
Industrial segment 863,468 841,715
Consolidated net sales $ 2,382,790 $ 2,245,832
Earnings:
Aerospace segment $ 230,933 $ 234,356
Segment earnings as a percent of segment net sales 15.2 % 16.7 %
Industrial segment $ 82,788 $ 108,672
Segment earnings as a percent of segment net sales 9.6 % 12.9 % Consolidated net earnings$ 171,698 $ 208,649 Adjusted net earnings$ 173,823 $ 212,385 Effective tax rate 14.1 % 15.1 % Adjusted effective tax rate 14.3 % 15.3 % Consolidated diluted earnings per share$ 2.71 $
3.18
Consolidated adjusted diluted earnings per share
3.24
Earnings before interest and taxes ("EBIT") $ 232,629 $ 278,586
Adjusted EBIT$ 235,463 $
283,594
Earnings before interest, taxes, depreciation, and
amortization ("EBITDA") $ 353,257 $ 408,110
Adjusted EBITDA $ 356,091 $ 413,118
Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate,
EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA 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 7 -
Management's Discussion and Analysis of Financial Conditions and Results of
Operations.
Liquidity Highlights
Net cash provided by operating activities for fiscal year 2022 was$193,638 , compared to$464,669 for fiscal year 2021. The decrease in net cash provided by operating activities in fiscal year 2022 compared to fiscal year 2021 is primarily attributable to production delays from global supply chain disruptions as well as increases in working capital (excluding cash) to support the growth we anticipate in the next fiscal year. For fiscal year 2022, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was$140,770 , compared to$426,980 for fiscal year 2021. Adjusted free cash flow, which we define as free cash flow, plus the payments for costs related to business development activities and restructuring activities, was$144,257 . No adjustments were made to free cash flow for fiscal year 2021. The decrease in free cash flow for fiscal year 2022 as compared to the prior fiscal year was primarily due to production delays from supply chain disruptions as well as increases in working capital (excluding cash) to support the growth we anticipate in the next fiscal year, higher payments for property, plant and equipment and lower earnings. 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. AtSeptember 30, 2022 , we held$107,844 in cash and cash equivalents and had total outstanding debt of$777,416 with additional borrowing availability of$923,506 , net of outstanding letters of credit, under our revolving credit agreement. AtSeptember 30, 2022 , we also had additional borrowing capacity of$27,266 under various foreign lines of credit and foreign overdraft facilities. 26 --------------------------------------------------------------------------------
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
2022 2021
% of Net Sales % of Net Sales
Net sales $ 2,382,790 100 % $ 2,245,832 100 %
Costs and expenses:
Cost of goods sold 1,857,485 78.0 1,694,774 75.5
Selling, general, and administrative expenses 203,005 8.5 186,866 8.3
Research and development costs 119,782 5.0 117,091 5.2
Restructuring charges (3,420 ) (0.1 ) 5,008 0.2
Interest expense 34,545 1.4 34,282 1.5
Interest income (1,814 ) (0.1 ) (1,495 ) (0.1 )
Other expense (income), net (26,691 ) (1.1 ) (36,493 ) (1.6 )
Total costs and expenses 2,182,892 91.6 2,000,033 89.1
Earnings before income taxes 199,898 8.4 245,799 10.9
Income tax expense 28,200 1.2 37,150 1.7
Net earnings $ 171,698 7.2 $ 208,649 9.3
Other select financial data:
September 30, 2022 September 30, 2021
Working capital $ 772,856 $ 1,098,466
Total debt 777,416 734,122
Total stockholders' equity 1,901,122 2,214,781
2022 RESULTS OF OPERATIONS
2022 Net Sales Compared to 2021
Consolidated net sales for fiscal year 2022 increased by
Details of the changes in consolidated net sales are as follows:
Consolidated net sales for the year ended
65,302
Industrial volume 64,007
Noncash consideration (5,816 )
Effects of changes in price and sales mix 67,683
Effects of changes in foreign currency rates (54,218 )
Consolidated net sales for the year ended
The increase in consolidated net sales for fiscal year 2022 compared to the prior fiscal year is primarily due to an increase in Aerospace sales volume, the impact of price increases, as well as increases in Industrial volume, partially offset by unfavorable foreign currency impacts. In the Aerospace segment, the increase in net sales for fiscal year 2022 as compared to fiscal year 2021 was primarily attributable to a significant increase in commercial OEM and aftermarket sales driven by higher OEM aircraft production rates and increasing aircraft utilization, partially offset by lower defense aftermarket sales primarily driven by global supply chain and labor disruptions. As ofSeptember 30, 2022 , Aerospace segment net sales were negatively impacted by approximately$40 million due to ongoing global supply chain and labor disruptions. In the Industrial segment, the increase in net sales for fiscal year 2022 as compared to fiscal year 2021 was primarily attributable to higher industrial turbomachinery sales supporting increasing demand for power generation and process industries as well as higher marine sales driven by increased utilization of the in-service fleet, partially offset by weakness in natural gas engines inChina and by unfavorable foreign currency impacts. Industrial segment net sales were negatively impacted by approximately$45 million due to ongoing global supply chain and labor disruptions. 27 --------------------------------------------------------------------------------
2022 Costs and Expenses Compared to 2021
Cost of goods sold increased by$162,711 to$1,857,485 , or 78.0% of net sales, for fiscal year 2022, from$1,694,774 , or 75.5% of net sales, for fiscal year 2021. The increase in cost of goods sold in fiscal year 2022, as compared to the same period of the prior year is primarily attributable to net inflationary impacts on material and labor costs, as well as increases in manufacturing costs related to global supply chain and labor disruptions. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 22.0% for fiscal year 2022, compared to 24.5% for fiscal year 2021. The decrease in gross margin for fiscal year 2021 is primarily attributable to net inflationary impacts on material and labor costs, increases in manufacturing costs related to global supply chain disruptions and inefficiencies related to training new members. Selling, general and administrative expenses increased by$16,139 , or 8.6%, to$203,005 for fiscal year 2022, compared to$186,866 for fiscal year 2021. Selling, general, and administrative expenses as a percentage of net sales increased to 8.5% for fiscal year 2022, compared to 8.3% for fiscal year 2021. The increase in selling, general and administrative expenses, both in dollars and as a percentage of sales, for fiscal year 2022 compared to the prior year is primarily due to the incurrence of a certain expense in fiscal year 2022 in connection with a non-recurring matter unrelated to the ongoing operations of the business, as well as certain business development activities, which in each case did not occur in the prior fiscal year period. Research and development costs increased by$2,691 , or 2.3%, to$119,782 for fiscal year 2022, as compared to$117,091 for fiscal year 2021. Research and development costs as a percentage of net sales decreased to 5.0% for fiscal year 2022, as compared to 5.2% for fiscal year 2021. The increase in research and development costs in dollars for fiscal year 2022 as compared to the prior year is primarily due to variability in the timing of projects and expenses. The decrease in research and development costs as a percentage of net sales for fiscal year 2022 as compared to the prior year is primarily due to net sales increases in fiscal year 2022 compared to fiscal year 2021. 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. Restructuring activities decreased by$8,428 , to a benefit of$3,420 for fiscal year 2022, compared to charges of$5,008 for fiscal year 2021. The decrease in restructuring activities is primarily attributable to a new organizational structure and leadership change approved during fiscal year 2022. In fiscal year 2022, due to changes in business conditions including plans to insource work from suppliers and to manage workforce levels through attrition, the remaining unpaid accrued amount of$4,503 is no longer needed and therefore reversed. Interest expense increased by$263 , or 0.8%, to$34,545 , for fiscal year 2022, compared to$34,282 for fiscal year 2021. Interest expense decreased as a percentage of net sales at 1.4% for fiscal year 2022, as compared to 1.5% for fiscal year 2021. Interest expense increased for fiscal year 2022 as compared to fiscal year 2021 primarily due to increased borrowings on our revolving credit agreement, partially offset by reduced long-term debt balances. In fiscal year 2021, we paid the entire balance of two series of private placement notes totaling$100,000 , primarily using cash from operations and borrowings from our revolving credit facility. In fiscal year 2022, we had outstanding balances on our revolving credit facility whereas in fiscal year 2021 we had no borrowings. Other income, net was$26,691 for fiscal year 2022, compared to$36,493 for fiscal year 2021. The decrease in other income in fiscal year 2022 compared to fiscal year 2021 was primarily due to a loss on investments in our deferred compensation program, whereas a gain on investments was recognized in the prior fiscal year.
Income taxes were provided at an effective rate on earnings before income taxes of 14.1% for fiscal year 2022, compared to 15.1% for fiscal year 2021.
The decrease in the effective tax rate for fiscal year 2022 compared to fiscal
year 2021 is primarily attributable to a partial release of valuation allowance
related to state credits and increased Research and Development Credit in the
current fiscal year when compared to the prior fiscal year. This decrease was
partially offset by a reduced stock-based compensation tax benefit in the
current fiscal year when compared to the prior fiscal year.
28
--------------------------------------------------------------------------------Segment Results
The following table presents sales by segment:
Year Ended September 30,
2022 2021
Net sales:
Aerospace $ 1,519,322 63.8% $ 1,404,117 62.5%
Industrial 863,468 36.2% 841,715 37.5%
Consolidated net sales $ 2,382,790 100% $ 2,245,832 100%
The following table presents earnings by segment and reconciles segment earnings
to consolidated net earnings:
Year Ended September 30,
2022 2021
Aerospace $ 230,933 $ 234,356
Industrial 82,788 108,672
Nonsegment expenses (81,092 ) (64,442 )
Interest expense, net (32,731 ) (32,787 )
Consolidated earnings before income taxes 199,898 245,799
Income tax expense 28,200 37,150
Consolidated net earnings $ 171,698 $ 208,649
The following table presents segment earnings as a percent of segment net sales:
Year Ended September 30,
2022 2021
Aerospace 15.2% 16.7%
Industrial 9.6% 12.9%
2022 Segment Results Compared to 2021
Aerospace
Aerospace segment net sales increased by$115,205 , or 8.2% to$1,519,322 for fiscal year 2022, compared to$1,404,117 for fiscal year 2021. Segment net sales increased for fiscal year 2022 as compared to fiscal year 2021 primarily due to significantly higher commercial OEM and aftermarket sales due to higher OEM aircraft production rates, continued recovery in passenger traffic, and increasing aircraft utilization. The increase in aerospace segment sales was partially offset by lower defense OEM and aftermarket sales, driven primarily by lower sales for guided weapons and global supply chain and labor disruptions.
As of
Aerospace segment earnings decreased by
The net decrease in Aerospace segment earnings for fiscal year 2022 was due to the following:
Earnings for the period ended
36,867
Price, sales mix and productivity (17,491 )
Manufacturing costs related to hiring and training (20,772 ) Annual variable incentive compensation costs
(6,809 )
Other, net 4,782
Earnings for the period ended
29
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The decrease in Aerospace segment earnings for fiscal year 2022 compared to
fiscal year 2021 was primarily due to net inflationary impacts, as well as
increases in manufacturing costs related to global supply chain disruptions and
inefficiencies related to hiring and training, partially offset by higher
commercial OEM and aftermarket sales volume. Aerospace segment earnings as a
percentage of segment net sales were 15.2% for fiscal year 2022 and 16.7% for
fiscal year 2021.
Industrial
Industrial segment net sales increased by $21,753 , or 2.6%, to $863,468 for
fiscal year 2022, compared to $841,715 for fiscal year 2021. Foreign currency
exchange rates had a negative impact on segment net sales of $50,767 for fiscal
year 2022.
The increase in Industrial segment net sales in fiscal year 2022 as compared to
fiscal year 2021 was primarily attributable to increased industrial
turbomachinery sales supporting increasing demand for power generation and
process industries as well as higher marine sales driven by increased
utilization of the in-service fleet, partially offset by lower sales of natural
gas-powered engines in China and unfavorable foreign currency exchange rates.
As of
Industrial segment earnings decreased by
The net decrease in Industrial segment earnings for fiscal year 2022 was due to the following:
Earnings for the period ended
29,229
Price, sales mix and productivity (24,222 )
Manufacturing costs related to hiring and training (19,400 ) Effects of changes in foreign currency rates
(8,809 )
Annual variable incentive compensation costs (3,762 )
Other, net 1,080
Earnings for the period ended
The decrease in Industrial segment earnings for fiscal year 2022 as compared to fiscal year 2021 was primarily due to net inflationary impacts, increases in manufacturing costs related to global supply chain disruptions and inefficiencies related to hiring and training, as well as unfavorable foreign currency impacts. Industrial segment earnings as a percentage of segment net sales were 9.6% for fiscal year 2022, compared to 12.9% for fiscal year 2021.
Nonsegment
Nonsegment expenses increased to$81,092 for fiscal year 2022, compared to$64,442 for fiscal year 2021. The increase in nonsegment expenses for fiscal year 2022 compared to fiscal year 2021 was primarily a result of a non-recurring matter unrelated to the ongoing operations of the business and certain business development activities, neither of which occurred in fiscal year 2021, as well as the timing of certain expenses and the return of annual variable incentive compensation costs. For a discussion of the 2021 Results of Operations, including a discussion of the financial results for the fiscal year endedSeptember 30, 2021 compared to the fiscal year endedSeptember 30, 2020 , refer to Part I, Item 7 of our Form 10-K filed with theSEC onNovember 19, 2021 .
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 for the next 12 months
and the foreseeable future.
30
--------------------------------------------------------------------------------
Our aggregate cash and cash equivalents were $107,844 at September 30, 2022 and
$448,462 at September 30, 2021 , and our working capital was $772,856 at
September 30, 2022 and $1,098,466 at September 30, 2021 . Of the cash and cash
equivalents held at September 30, 2022 , $87,639 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 certain 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.
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 in U.S.
dollars or in foreign currencies other than the U.S. dollar provided that the
U.S. dollar equivalent of any foreign currency borrowings and U.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.
At September 30, 2022 , we had total outstanding debt of $777,416 consisting of
various series of unsecured notes due between 2023 and 2033, and amounts
borrowed under our revolving credit facility, and our finance leases. On
November 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. At September 30, 2022 , we had
additional borrowing availability of $923,506 under our revolving credit
facility, net of outstanding letters of credit, and additional borrowing
availability of $27,266 under various foreign credit facilities.
At
Maximum daily balance during the period$ 264,500 Average daily balance during the period$ 86,795
Weighted average interest rate on average daily balance 2.88 %
We believe we were in compliance with all our debt covenants as ofSeptember 30, 2022 . 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. 31 --------------------------------------------------------------------------------
Cash Flows
Year Ended September 30,
2022 2021
Net cash provided by operating activities $ 193,638 $ 464,669
Net cash used in investing activities (65,449 ) (35,297 )
Net cash used in financing activities (442,378 ) (136,318 )
Effect of exchange rate changes on cash and cash
equivalents (26,429 ) 2,138
Net change in cash and cash equivalents (340,618 )
295,192
Cash and cash equivalents, including restricted cash, at beginning of year
448,462 153,270
Cash and cash equivalents, including restricted cash, at end of year$ 107,844 $ 448,462
2022 Cash Flows Compared to 2021
Net cash flows provided by operating activities for fiscal year 2022 was$193,638 , compared to$464,669 for fiscal year 2021. The decrease in net cash provided by operating activities in fiscal year 2022 compared to fiscal year 2021 is primarily attributable to production delays from global supply chain disruptions leading to increases in working capital (excluding cash) to support anticipated growth in the next fiscal year, and the timing of cash payments to suppliers. Net cash flows used in investing activities for fiscal year 2022 was$65,449 , compared to$35,297 in fiscal year 2021. The increase in cash used in investing activities in fiscal year 2022 compared to fiscal year 2021 is primarily due to the purchase of PM Control as well as increased payments for property, plant and equipment, partially offset by certain proceeds received in the third quarter of fiscal year 2022 in connection with the sale of the renewable power systems business and other related businesses. Net cash flows used in financing activities for fiscal year 2022 was$442,378 , compared to net cash flows used in financing activities of$136,318 in fiscal year 2021. The increase in net cash flows used in financing activities in fiscal year 2022 compared to fiscal year 2021 was attributable to repurchases of common stock, partially offset by the change in net debt payments. During fiscal year 2022, we made$485,300 of cash repurchases of common stock, compared to$33,344 of cash repurchases of common stock during fiscal year 2021. During fiscal year 2022, we had net debt payments in the amount of$66,003 , compared to net debt payments in the amount of$101,639 in fiscal year 2021.
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, 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.
Earnings based non-
Adjusted net earnings is defined by the Company as net earnings excluding, as
applicable, (i) a charge in connection with a non-recurring matter unrelated to
the ongoing operations of the business, (ii) costs related to business
development activities, and (iii) restructuring activities. 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.
32
--------------------------------------------------------------------------------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.
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,
2022 2021
Earnings Per Earnings Per
Net Earnings Share Net Earnings Share
Net earnings (U.S. GAAP) $ 171,698 $ 2.71 $ 208,649 $ 3.18
Non-U.S. GAAP adjustments:
Non-recurring matter unrelated to the
ongoing operations of the business, net
of tax 2,454 0.04 - -
Business development activities, net of
tax 2,236 0.04 - -
Restructuring activities, net of tax (2,565 ) (0.04 ) 3,736 0.06
Total non-U.S. GAAP adjustments 2,125 0.04 3,736 0.06
Adjusted net earnings (Non-
$ 212,385 $ 3.24 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) a charge in connection with a non-recurring matter unrelated to the ongoing operations of the business, (ii) costs related to business development activities, and (iii) restructuring activities. As these 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,
2022 2021
Net earnings (U.S. GAAP) $ 171,698 $ 208,649
Income tax expense 28,200 37,150
Interest expense 34,545 34,282
Interest income (1,814 ) (1,495 )
EBIT (Non-U.S. GAAP) 232,629 278,586
Non-U.S. GAAP adjustments:
Non-recurring matter unrelated to the ongoing
operations of the business 3,272 -
Business development activities 2,982 -
Restructuring activities (3,420 ) 5,008
Total non-U.S. GAAP adjustments 2,834 5,008 Adjusted EBIT (Non-U.S. GAAP)$ 235,463 $ 283,594 33
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EBITDA and adjusted EBITDA reconciled to net earnings were as follows:
Year Ended September 30,
2022 2021
Net earnings (U.S. GAAP) $ 171,698 $ 208,649
Income tax expense 28,200 37,150
Interest expense 34,545 34,282
Interest income (1,814 ) (1,495 )
Amortization of intangible assets 37,609 41,893
Depreciation expense 83,019 87,631
EBITDA (Non-U.S. GAAP) 353,257 408,110
Non-U.S. GAAP adjustments:
Non-recurring matter unrelated to the ongoing
operations of the business 3,272 -
Business development activities 2,982 -
Restructuring activities (3,420 ) 5,008
Total non-U.S. GAAP adjustments 2,834
5,008
Adjusted EBITDA (Non-U.S. GAAP)$ 356,091
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, 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, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.
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 represents a further non-U.S. GAAP adjustment to free cash flow to exclude the effect of cash paid for business development activities and cash paid for restructuring activities. Management believes that by excluding these infrequent or unusual items from free cash flow it better portrays our ability to generate cash, as such items 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
2022 2021
Net cash provided by operating activities (
(52,868 ) (37,689 )
Free cash flow (Non-U.S. GAAP) $ 140,770 $ 426,980
Cash paid for business development activities 2,982 -
Cash paid for restructuring activities 505
-
Adjusted free cash flow (Non-U.S. GAAP)$ 144,257 $ 426,980 34
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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. 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
35
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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. 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$514,287 atSeptember 30, 2022 and$419,971 atSeptember 30, 2021 . 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, 2022 for the fiscal year endedSeptember 30, 2022 . The results of our annual goodwill impairment test performed as ofJuly 31, 2022 , indicated the estimated fair value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed. 36 --------------------------------------------------------------------------------
Indefinitely lived intangible asset
We have one indefinitely lived intangible asset consisting of theWoodward L'Orange trade name. AtSeptember 30, 2022 , the carrying value of theWoodward L'Orange trade name intangible asset was$56,838 , 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, 2022 , of theWoodward L'Orange trade name intangible asset as ofJuly 31, 2022 . The results of the annual impairment test performed as ofJuly 31, 2022 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.
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 37 -------------------------------------------------------------------------------- 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. 38
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