2020
ANNUAL
REPORT
DEAR SHAREHOLDERS
2020 was a challenging year for Woodward
and the world...
improved efficiency which is what our products deliver in
natural gas, diesel and alternative fuel applications.
Sales declined 14% to $2.5 billion and adjusted
earnings per share* decreased 19% to $3.96
Adjusted free cash flow* improved to $314 million,
an 8% increase
COVID-19 PANDEMIC
We successfully navigated through one of the most
challenging times our company has seen over its 150-year
history. Our exceptional team acted swiftly in the face of
a growing global pandemic. We implemented rigorous
health and safety protocols, reduced expenses, enhanced
our operational performance and focused on optimization
of cash and liquidity. As a result, adjusted free cash flow
increased from the prior year, liquidity improved, and we
further strengthened our balance sheet. We believe the
actions we have taken will position us for longer-term
growth and a return to our capital deployment strategy,
while continuing to preserve our financial strength
through this period of global uncertainty.
OUR MARKETS
The Aerospace market took the brunt of the impact
from the pandemic. Global flight hours declined as
much as 80 percent on some platforms and OEM build
rates plummeted. Flight traffic is starting to show some
improvement and OEM production rates are slowly
stabilizing. However, we anticipate a slow recovery in
commercial aerospace over the next couple years with
commercial aftermarket recovering first. When the market
does recover, the fleet that will be in service will have
greater Woodward content, resulting in a positive fleet
dynamic for Woodward, favorably impacting both our
earnings and cash flow.
Our Industrial markets were impacted both by the
pandemic and the sharp decline in oil and gas prices.
The decline in global economic activity is reducing demand
for new equipment as well as aftermarket for power
generation, transportation and oil and gas products.
Looking forward, increasing emissions regulations
continue to drive demand for cleaner burning fuels and
TRUE NORTH OPERATIONAL EXCELLENCE
In challenging economic times, operational excellence
becomes even more critical. We made significant
progress in 2020 driving improved safety, quality
and delivery, with lower working capital, all of which
contributed to improved customer satisfaction and
higher free cash flow. We will continue to accelerate our
True North initiatives to enhance safety, performance,
earnings, cash flow and shareholder value.
MAKING OUR MARK
We celebrated our 150th anniversary in 2020! Woodward’s
innovations, service and expertise have helped change
the world. As we celebrate this milestone, we are mindful
of the connection between our past and our future, and
how our innovative spirit, technological leadership and
the continuous improvement of our products has built
a market-leading reputation and pedigree within our
industry. We look forward to continuing our legacy over
the next 150 years!
LOOKING TO FY2021
While we anticipate continued pandemic pressure on our
business through fiscal 2021, we remain confident in our
market position and growth opportunities, as well as
the long-term strength of our markets. We will continue
to invest in new technology and operational excellence,
pillars of our business that have enabled Woodward to
successfully navigate numerous past economic cycles.
Woodward has faced many challenges over our 150-year
history and, as with previous downturns, we believe we
can emerge from this crisis an even stronger company,
delivering exceptional shareholder value.
I especially want to thank our members for their hard
work and dedication during this challenging year and also
our board of directors, for their support and commitment
to delivering value to our shareholders.
THOMAS A. GENDRON
Chairman, CEO & President
NET SALES
DOLLARS IN BILLIONS
ADJUSTED EARNINGS PER SHARE *
DILUTED
ADJUSTED FREE CASH FLOW *
DOLLARS IN MILLIONS
$2.9
$2.5
$2.3
$2.1
$4.88
$3.96
$3.85
$3.16
$315
$292
$215
$172
‘20
‘19
‘18
‘17
‘20
‘19
‘18
‘17
‘20
‘19
‘18
‘17
*Adjusted earnings per share and adjusted free cash flow are defined in our 2020 annual report on Form 10-K.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-08408
WOODWARD, INC.
(Exact name of registrant as specified in its charter)
Delaware
36-1984010
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1081 Woodward Way, Fort Collins, Colorado
(Address of principal executive offices)
80524
(Zip Code)
(970) 482-5811
(Registrant’s telephone number, including area code)
Title of each class
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of exchange on which registered
Common Stock, par value $0.001455 per share
WWD
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-accelerated Filer Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the
registrant’s common stock on March 31, 2020 as reported on The NASDAQ Global Select Market on that date: $2,549,208,540. For purposes of
this calculation, shares of common stock held by (i) persons holding more than 5% of the outstanding shares of stock, (ii) officers and directors of
the registrant, and (iii) the Woodward Governor Company Profit Sharing Trust, Woodward Governor Company Deferred Shares Trust, or the
Woodward Charitable Trust, as of March 31, 2020, are excluded in that such persons may be deemed to be affiliates. This determination is not
necessarily conclusive of affiliate status.
As of November 18, 2020, 62,792,228 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statement for the Annual Meeting of Stockholders to be held virtually on January 27, 2021, are incorporated by
reference into Parts II and III of this Form 10-K, to the extent indicated.
TABLE OF CONTENTS
PART I
Forward Looking Statements
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.
Certain Relationship and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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Forward Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” contains forward-looking statements regarding future events and our future results within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are
statements that are deemed forward-looking statements. These statements are based on current expectations, estimates,
forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words
such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecast,” “intend,” “continue,” “outlook,”
“plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and
similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, our anticipated growth and trends in our businesses, and other
characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include,
among others, statements relating to:
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plans and expectations related to the now-terminated merger with Hexcel Corporation (“Hexcel”);
the impacts on our business relating to the global COVID-19 pandemic, including the impacts thereof to supply and
demand, and measures taken by governments and private industry in response;
plans and expectations related to our acquisition of L’Orange GmbH and its affiliate, Fluid Mechanics LLC, and
their related operations in Germany, the United States and China, including: a long-term supply agreement entered
into with MTU, a subsidiary of Rolls-Royce, in connection with the acquisition; the opportunity to further develop
sales opportunities with new customers and achieve other synergies, including supply chain savings; and the
liability recognized by the Company in connection with the various pension plans assumed as part of the
acquisition;
future sales, earnings, cash flow, uses of cash, and other measures of financial performance;
trends in our business and the markets in which we operate, including expectations in those markets in future
periods;
our expected expenses in future periods and trends in such expenses over time;
descriptions of our plans and expectations for future operations;
our expectations with regard to the return to service of the Boeing 737 MAX aircraft, the related impact on our
original equipment manufacturer (“OEM”) and initial provisioning sales, and the aircraft’s return to service;
plans and expectations relating to the performance of our joint venture with General Electric Company;
investments in new campuses, business sites and related business developments;
the effect of economic trends or growth;
the expected levels of activity in particular industries or markets and the effects of changes in those levels;
the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;
the research, development, production, and support of new products and services;
new business opportunities;
restructuring and alignment costs and savings;
our plans, objectives, expectations and intentions with respect to business opportunities that may be available to
us;
our liquidity, including our ability to meet capital spending requirements and operations;
future repurchases of common stock;
future levels of indebtedness and capital spending;
the stability of financial institutions, including those lending to us;
pension and other postretirement plan assumptions and future contributions; and
our tax rate and other effects of the changes in U.S. federal tax law.
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All these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that
are difficult to predict and are subject to a number of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Factors that could cause actual results and the timing of
certain events to differ materially from the forward-looking statements include the factors described in the Risk Factor
Summary below as well as the risks detailed in Item 1A, Risk Factors. We undertake no obligation to revise or update any
forward-looking statements for any reason, except as required by applicable law.
Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-K to “Woodward,”
“the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries.
Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-K are
in thousands, except per share amounts.
1
Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in
this section when making investment decisions regarding our securities.
Summary of Material Risks
COVID-19 Pandemic Risks
• We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our
business operations, financial performance, results of operations, financial position and the achievement of our
strategic objectives;
• Unforeseen events, such as the COVID-19 pandemic, may occur that significantly reduce commercial aviation,
•
which could adversely affect our business, financial condition and results of operations;
Instability in the financial markets and global or regional economic weakness or uncertainty could have a material
adverse effect on the ability of our customers to perform their obligations to us and on their demand for our
products and services;
Industry Specific Risks
• A significant portion of our revenue is concentrated among a relatively small number of customers;
• The long sales cycle, customer evaluation process and implementation period of our products and services may
•
increase the costs of obtaining orders and reduce the predictability of sales cycles and our inventory requirements;
If we are unable to compete effectively in one or more of our markets, our business, financial condition and results
of operations may be adversely affected;
• Our participation in a strategic joint venture with GE may make it more difficult to secure long-term sales in certain
•
aerospace markets;
Industry consolidation trends could reduce our sales opportunities, decrease sales prices, and drive down demand
for our products.
General Commercial, Financial, and Regulatory Risks
• Our profitability may suffer if we are unable to manage our expenses in connection with sales increases, sales
decreases, or impacts of capital expansion projects, or if we experience change in product mix;
• The U.S. Government may change acquisition priorities and/or reduce spending, which could adversely affect our
business, financial condition and results of operations;
• Our business may be adversely affected by government contracting risks;
•
Suppliers may be unable to provide us with materials of sufficient quality or quantity required to meet our
production needs at favorable prices or at all;
Subcontractors may fail to perform contractual obligations, or we may have disputes with subcontractors, which
could adversely affect our ability to meet our obligations to our customers;
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• We may not be able to obtain financing, on acceptable terms or at all, to implement our business plans, complete
acquisitions, or otherwise take advantage of business opportunities, or to respond to business needs or competitive
pressures;
• Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to
operate our business or pursue our business strategies, could adversely affect our business, financial condition,
results of operations, and cash flows, and could significantly reduce stockholder benefits from a change of control
event;
• Additional tax expense or additional tax exposures could affect our future profitability;
• We derive a significant portion of our revenues from sales to countries outside the United States and purchase raw
materials and components from suppliers outside of the United States; therefore, we are subject to the risks inherent
in doing business in other countries;
Political and economic uncertainty in the European Union could adversely impact our business, results of
operations, financial condition and prospects;
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• Changes in the estimates of fair value of reporting units or of long-lived assets, particularly goodwill, may result in
future impairment charges, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows;
• Our financial and operating performance depends on continued access to a stable workforce and on favorable labor
relations with our employees;
• Our operations and suppliers may be subject to physical and other risks, including natural disasters that could
disrupt production and have a material adverse effect on our business, financial condition, results of operations and
cash flows;
2
• Our intellectual property rights may not be sufficient to protect all our products or technologies and we may,
regardless of intent, infringe on the intellectual property rights of others;
• Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately
resolved;
• We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-
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bribery and anti-corruption laws and regulations;
Pension and postretirement benefit obligation funding and expenses are dependent on several economic
assumptions, which if changed could require us to make additional and/or unexpected cash contributions to our
pension plans, increase the amount of postretirement benefit expenses, affect our liquidity or affect our ability to
comply with the terms of our outstanding debt arrangements;
• Our business operations may be adversely affected by information systems interruptions or intrusion;
• Our financial statements are subject to changes in accounting standards that could adversely impact our profitability
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or financial position;
Increasing emission standards that drive certain product sales may be eased or delayed, which could reduce our
competitive advantage;
• Natural gas prices may increase significantly and disproportionately to other sources of fuels used for power
generation, which could reduce our sales and adversely affect our business, financial condition and results of
operations;
• Long-term reduced commodity prices for oil, natural gas, and other minerals may depress the markets for certain of
our products and services, particularly those from our Industrial segment;
• Changes in government subsidy programs and regulatory requirements may result in decreased demand for our
products;
• Our stock price may fluctuate, and the historic market price of our common stock may not be indicative of future
market prices;
• The typical daily trading volume of our common stock may affect an investor’s ability to sell significant stock
holdings in the future without negatively affecting stock price; and
• Certain anti-takeover provisions of our charter documents and under Delaware law could discourage or prevent
others from acquiring our company.
Business Specific Risks
• Our product development activities may not be successful, may be more costly than currently anticipated, or we
may not be able to produce newly developed products at a cost that meets the anticipated product cost structure;
Product liability claims, product recalls or other liabilities associated with the products and services we provide
may force us to pay substantial damage awards and other expenses that could exceed our accruals and insurance
coverage;
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• We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as
planned;
• We have engaged in restructuring and alignment activities from time to time and may need to implement further
restructurings or alignments in the future, and there can be no assurance that our restructuring or alignment efforts
will have the intended effects;
• Our manufacturing activities may result in future environmental costs or liabilities; and
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Failure of our production lines, or those of our subcontractors, to meet required certification standards could disrupt
production and have a material adverse effect on our business.
For a more complete discussion of the material risks facing our business, see Item 1A – Risk Factors.
3
Item 1.
Business
General
We are an independent designer, manufacturer, and service provider of control solutions for the aerospace and industrial
markets. Our innovative fluid energy, combustion control, electrical energy, and motion control systems help customers
offer cleaner, more reliable, and more efficient equipment. Our customers include leading original equipment manufacturers
and end users of their products. We have production and assembly facilities in the United States, Europe and Asia, 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. Our customers look to us to optimize the efficiency, emissions and operation of power equipment 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 original equipment manufacturers (“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 aerospace systems components optimize performance of fixed wing and rotorcraft platforms in commercial,
business and military aircraft, missiles and weapons, ground vehicles and other equipment. Our industrial systems and
components enhance the performance of gas and steam turbines, reciprocating engines, compressors, generator sets and other
energy-related industrial equipment.
Woodward was established in 1870, incorporated in 1902, and is headquartered in Fort Collins, Colorado. The mailing
address of our world headquarters is 1081 Woodward Way, Fort Collins, Colorado 80524. Our telephone number at that
location is (970) 482-5811, and our website is www.woodward.com. None of the information contained on our website is
incorporated into this document by reference.
Markets and Principal Lines of Business
We serve the aerospace and industrial markets through our two reportable segments – Aerospace and Industrial. Our
customers require technological solutions to meet their needs for performance, efficiency, and reliability, and to reduce their
costs of operation.
Within the aerospace market, we provide systems, components and solutions for both commercial and defense
applications. Our key focus areas within this market are:
• Propulsion and combustion control solutions for turbine powered aircraft; and
• Fluid and motion control solutions for critical aerospace and defense applications.
Within the industrial market, our key focus areas are:
• Applications and control solutions for machines that produce electricity utilizing conventional or alternative energy
sources; and
• Fluid, motion, and combustion control solutions for complex oil and gas, industrial, power generation, and
transportation applications.
Products, Services and Applications
Aerospace
Our Aerospace segment designs, manufactures and services systems and products for the management of fuel, air, and
combustion and motion control. These products include fuel pumps, metering units, actuators, air valves, specialty valves,
fuel nozzles, and thrust reverser actuation systems for turbine engines and nacelles, as well as flight deck controls, actuators,
servocontrols, motors and sensors for aircraft. These products are used on commercial and private aircraft and rotorcraft, as
well as on military fixed-wing aircraft and rotorcraft, guided weapons, and other defense systems.
We have significant content on a wide variety of commercial aircraft, rotorcraft and business jet platforms, such as the
Airbus A320neo, Boeing 737 MAX and 787, Bell 429 and Gulfstream G650. We also have significant content on defense
applications such as Blackhawk and Apache helicopters, F/A-18 and F-35 fighter jets, and guided tactical weapons (for
example, the Joint Direct Attack Munition (“JDAM”)).
4
Revenues from the Aerospace segment are generated by sales to OEMs, tier-one suppliers, and prime contractors, and
through aftermarket sales of components, such as provisioning spares or replacements, and spare parts. We also provide
aftermarket maintenance, repair and overhaul, as well as other services to commercial airlines, repair facilities, military
depots, third party repair shops, and other end users.
Industrial
Our Industrial segment designs, produces and services systems and products for the management of fuel, air, fluids,
gases, motion, combustion and electricity. These products include actuators, valves, pumps, fuel injection systems,
solenoids, ignition systems, speed controls, electronics and software, and sensors. Our products are used on industrial gas
turbines (including heavy frame, aeroderivative and small industrial gas turbines), steam turbines, compressors, and
reciprocating engines (including low speed, medium speed and high speed engines, that operate on various fuels, including
natural gas, diesel, heavy fuel oil and dual-fuel). The equipment on which our products are found is used to generate power;
to extract and distribute fossil fuels; in the mining of other commodities; and to convert fuel to work in transportation and
freight (both marine and locomotives), mobile, and industrial equipment applications.
Revenues from our Industrial segment are generated primarily by sales to OEMs and by providing aftermarket products
and other related services to our OEM customers. Our Industrial segment also sells products through an independent network
of distributors and, in some cases, directly to end users.
Customers
Sales to our five largest customers represented approximately 45% of our consolidated net sales for the fiscal year
ended September 30, 2020 and approximately 47% of our consolidated net sales for the fiscal year ended September 30,
2019.
Sales to our largest customer in fiscal year ended September 30, 2020, The Boeing Company, accounted for
approximately 14% of our consolidated net sales, and 15% in the fiscal year ended September 30, 2019. Accounts receivable
from The Boeing Company represented approximately 13% of accounts receivable at September 30, 2020 and 14% at
September 30, 2019. Sales to our second largest customer in the fiscal year ended September 30, 2020, General Electric
Company, accounted for approximately 11% of our consolidated net sales, and 14% in the fiscal years ended September 30,
2019. Accounts receivable from General Electric Company totaled approximately 9% of accounts receivable at
September 30, 2020, and 8% at September 30, 2019. We believe The Boeing Company, General Electric Company, and our
other significant customers are creditworthy and will be able to satisfy their credit obligations to us.
The following customers account for approximately 10% or more of sales to each of our reportable segments for the
fiscal year ended September 30, 2020.
Aerospace
Industrial
Competitive Environment
Customer
The Boeing Company, General Electric Company, Raytheon Technologies
Rolls-Royce PLC, Weichai Westport, General Electric Company
Our products and product support services are sold worldwide into a variety of markets. In all markets, we compete on
the basis of differentiated technology and design, product performance and conformity with customer specifications.
Additional factors are customer service and support, including on-time delivery and customer partnering, product quality,
price, reputation and local presence. Both of our segments operate in uniquely competitive environments.
We believe that new competitors face significant barriers to entry into many of our markets, including various
government mandated certification requirements to compete in the aerospace and industrial markets in which we participate.
Aerospace has significant product certification requirements to meet safety regulations, which form a basis for
competition as well as a barrier to entry. Technological innovation and design, product performance including increased
efficiency and thrust, conformity with customer specifications, and product quality and reliability are of utmost importance in
the aerospace and defense industry. In addition, on-time delivery, pricing, and joint development capabilities with customers
are points of competition within this market.
Our customers include airframe and aircraft engine OEM manufacturers and suppliers to these manufacturers. We
supply these customers with technologically innovative system and component solutions and align our technology roadmaps
with our customers. We focus on responding to needs for reduced cost and weight, emission control and reliability
improvements.
5
We compete with numerous companies around the world that specialize in fuel and air management, combustion,
electronic control, aircraft motion control, flight deck control, and thrust reverser products. Our competitors in aerospace
include divisions of Eaton, Honeywell, Moog, Parker Hannifin, and Raytheon Technologies. In addition, some of our OEM
customers are capable of developing and manufacturing similar products internally. Several competitors are also customers
for our products, such as Honeywell, Parker Hannifin, and Raytheon Technologies.
We believe our products offer high levels of field reliability, which provides end users with an advantage in life-cycle
cost. We address competition in aftermarket service through responsiveness to our customers’ needs, providing short
turnaround times, greater performance such as longer time between repairs, and maintaining a global presence.
Some of our customers are affiliated with our competitors through ownership or joint venture agreements. For example,
Pratt and Whitney, one of our customers, is affiliated with Raytheon Technologies, one of our competitors. Similarly, GE
Aviation has a joint venture with Parker Hannifin for the supply of fuel nozzles. In the past, we also have partnered with our
customers. During fiscal year 2016, we entered into a strategic joint venture (“JV”) with one of our largest customers,
General Electric Company (“GE”), acting through its GE Aviation business unit. The JV primarily develops, manufactures
and supports fuel systems for twin aisle aircraft engines and is described further in Note 7, Joint venture, in the Notes to the
Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data.”
We compete in part by establishing relationships with our customers’ engineering organizations, and by offering
innovative technical and commercial solutions to meet their market requirements. Our ability to design, develop and test an
integrated system with a customer is a competitive differentiator, offering the customer savings in both resources and time.
Industrial operates in the global markets for industrial turbines and reciprocating engines, applied in power generation
systems, transportation, and oil and gas markets. Many of these markets are subject to regulatory product and performance
certifications to meet emissions and safety requirements, which form a basis for competition as well as a barrier to entry.
We compete with numerous companies that specialize in various engine, turbine, and power management products, and
our OEM customers are often capable of developing and manufacturing similar products internally. Many of our customers
are large global OEMs that require suppliers to support them around the world and to meet increasingly higher requirements
in terms of safety, quality, delivery, reliability and cost.
Competitors include Emerson, EControls, Heinzmann GmbH & Co., Hoerbiger, Meggitt, Robert Bosch AG, and
Triconix. OEM customers with internal capabilities for similar products include Caterpillar, Cummins, General Electric,
Rolls-Royce Power Systems, Wärtsilä, and Weichai.
We believe we are a market leader in providing our customers advanced technology and superior product performance
at a competitive price. We focus on developing and maintaining close relationships with our OEM customers’ engineering
teams. Competitive success is based on the development of innovative components and systems that are aligned with the
OEMs’ technology roadmaps to achieve future reliability, emission, efficiency, and fuel flexibility targets.
Government Contracts and Regulation
Portions of our business, particularly in our Aerospace segment, are heavily regulated. We contract with numerous U.S.
Government agencies and entities, including all of the branches of the U.S. military, the National Aeronautics and Space
Administration (“NASA”), and the Departments of Defense, Homeland Security, and Transportation. We also contract with
similar government authorities outside the United States, subject in all cases to applicable law.
The U.S. Government, and potentially other governments, may terminate any of our government contracts, or any
government contracts under which we are a subcontractor, at their convenience, as well as for default based on specified
performance measurements. If any of our U.S. government contracts were to be terminated for convenience, we generally
would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our U.S.
government contracts were to be terminated for our default, the U.S. Government generally would pay only for the work
accepted, and could require us to pay the difference between the original contract price and the cost to re-procure the contract
items, net of the work accepted from the original contract. The U.S. Government could also hold us liable for damages
resulting from the default.
6
We must comply with, and are affected by, laws and regulations relating to the formation, administration and
performance of U.S. Government contracts. These laws and regulations, among other things:
•
•
•
•
•
require accurate, complete and current disclosure and certification of cost and pricing data in connection with
certain contracts;
impose specific and unique cost accounting practices that may differ from accounting principles generally accepted
in the United States (“U.S. GAAP”), and therefore require robust systems to reconcile;
impose regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement
under certain cost-based U.S. Government contracts;
impose manufacturing specifications and other quality standards that may be more restrictive than for non-
government business activities; and
restrict the use and dissemination of information classified for national security purposes due to the regulations of
the U.S. Government and foreign governments pertaining to the export of certain products and technical data.
Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers utilizing
Woodward parts and subassemblies, collectively represented 28% of our sales for fiscal year 2020, and 23% for each of the
fiscal years 2019 and 2018. The level of U.S. spending for defense, alternative energy and other programs, and the mix of
programs to which such funding is allocated, is subject to periodic congressional appropriation actions, and is subject to
change, including elimination, at any time.
U.S. Government related sales from our reportable segments for fiscal years 2020, 2019 and 2018 were as follows:
Year ended September 30, 2020
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Year ended September 30, 2019
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Year ended September 30, 2018
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Seasonality
Direct U.S.
Government
Sales
Indirect U.S.
Government
Sales
Commercial
Sales
Total
$
$
$
$
$
$
149,416
5,867
155,283
$
$
536,424
17,473
553,897
$
905,123
881,362
$ 1,786,485
$ 1,590,963
904,702
$ 2,495,665
6 %
22 %
72 %
100 %
118,334
4,491
122,825
$
$
545,306
13,810
559,116
$ 1,216,880
1,001,376
$ 2,218,256
$ 1,880,520
1,019,677
$ 2,900,197
4 %
19 %
76 %
100 %
84,252
2,547
86,799
$
$
429,386
8,658
438,044
$ 1,044,350
756,680
$ 1,801,030
$ 1,557,988
767,885
$ 2,325,873
4 %
19 %
77 %
100 %
We do not believe our sales, in total or in either business segment, are subject to significant seasonal variation.
However, our sales have generally been lower in the first quarter of our fiscal year as compared to the immediately preceding
quarter due to fewer working days resulting from the observance of various holidays and scheduled plant shutdowns for
annual maintenance.
7
Sales Order Backlog
Beginning in fiscal year 2019, for each of our reportable segments, we have elected to quantify backlog in a manner
consistent with the definition of remaining performance obligations. Our remaining performance obligations by segment,
excluding material rights, as of October 31, 2020 and 2019 is shown in the table below.
Aerospace
Industrial
% Expected
to be satisfied
by September
30, 2021
October 31,
2020
1,160,486
209,302
1,369,788
$
$
October 31,
2019
67 % $
97
71 % $
949,520
353,983
1,303,503
Our remaining performance obligations relate to the aggregate amount of the total contract transaction price of firm
orders for which the performance obligation has not yet been recognized in revenue.
Manufacturing
We operate manufacturing and assembly plants in the United States, Europe and Asia. Our products consist of
mechanical, electronic and electromechanical systems and components.
Aluminum, iron and steel are primary raw materials used to produce our mechanical components. Other commodities,
such as gold, copper and nickel, are also used in the manufacture of our products, although in much smaller quantities. We
purchase various goods, including component parts and services used in production, logistics and product development
processes from third parties. Generally, there are numerous sources for the raw materials and components used in our
products, which we believe are sufficiently available to meet current requirements.
We maintain global strategic sourcing models to meet our global facilities' production needs while building long-term
supplier relationships and efficiently managing our overall supply costs. We expect our suppliers to maintain adequate levels
of quality raw materials and component parts, and to deliver such parts on a timely basis to support production of our various
products. We use a variety of agreements with suppliers intended to protect our intellectual property and processes and to
monitor and mitigate risks of disruption in our supply base that could cause a business disruption to our production schedules
or to our customers. The risks monitored include supplier financial viability, business continuity, quality, delivery and
protection of our intellectual property and processes.
Our customers expect us to maintain adequate levels of certain finished goods and certain component parts to support
our warranty commitments and sales to our aftermarket customers, and to deliver such parts on a timely basis to support our
customers’ standard and customary needs. We carry certain finished goods and component parts in inventory to meet these
rapid delivery requirements of our customers.
We are subject to rules promulgated by the Securities and Exchange Commission (“SEC”) regarding disclosure related
to a company’s use of tantalum, tin, tungsten, and gold or their derivatives (collectively referred to as “conflict minerals”) in
their products, with substantial supply chain verification requirements in the event the conflict minerals come or may come
from the Democratic Republic of Congo or adjoining countries. The European Union has adopted similar reporting
obligations that will be effective in calendar year 2021. Our conflict minerals report for calendar year 2019 was filed with
the SEC on May 30, 2020. We may face reputational challenges with our customers, stockholders and other stakeholders if
we use and/or are unable to sufficiently verify the origins of the conflict minerals used in our products. Further, due to the
complexity of our supply chain, the implementation of the existing U.S. requirements and any additional European
requirements could affect the sourcing and availability of metals used in the manufacture of a number of parts contained in
our products. We have and will continue to incur costs associated with compliance, including time-consuming and costly
efforts to determine the source of conflict minerals that may be used in our products.
8
Research and Development
We finance our research and development activities primarily with our own independent research and development
funds. Our research and development costs include basic research, applied research, component and systems development,
and other concept formulation studies.
Company funded expenditures related to new product development activities are expensed as incurred and are
separately reported in the Company’s Consolidated Statements of Earnings. Across both of our segments, research and
development costs totaled $133,134 in fiscal year 2020 and $159,107 in fiscal year 2019. Research and development costs
were 5.3% of consolidated net sales in fiscal year 2020 compared to 5.5% in fiscal year 2019. See “Research and
development costs” in Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial
Statements in “Item 8 – Financial Statements and Supplementary Data.”
Aerospace is focused on developing systems and components that we believe will be instrumental in helping our
customers achieve their objectives of lower fuel consumption, lighter weight, more efficient performance, reduced emissions,
and improved operating economics. We support our engine and airframe customers as they develop next generation designs
across the commercial aviation, general aviation, civil private and military markets. Our development efforts support
technology for a wide range of:
•
•
aerospace turbine engine applications, which include commercial, business and military turbofan engines of various
thrust classes, turboshaft engines and turboprop engines;
electromechanical and hydraulic actuation systems for flight deck-to-flight surface control of fixed-wing aircraft
and rotorcraft, and turbine engine nacelles, as well as guidance for weapon systems; and
• motion control components for integration into comprehensive actuation systems.
The aerospace industry has moved toward more electric (“fly-by-wire”), lighter weight aircraft, while demanding
increased reliability and redundancy. In response, we are developing an expanded family of intelligent flight deck control
products (including throttle and rudder controls) with both conventional and fly-by-wire technology, as well as motor driven
actuation systems.
We collaborate closely with our customers as they develop their technology plans, which leads to new product concepts.
We believe this collaboration allows us to develop technology that is aligned with our customers’ needs and therefore,
increases the likelihood that our systems and components will be selected for inclusion in the platforms developed by our
customers. Further, we believe our close collaboration with our customers during preliminary design stages allows us to
provide products that deliver the component and system performance necessary to bring greater value to our customers. This
preliminary work may include opportunities to test new products in order to validate concepts and demonstrate performance
in challenging environments.
Most technology development programs begin years before an expected entry to service, such as those for the next
generation of commercial aircraft. Other development programs result in nearer-term product launches associated with new
OEM offerings, product upgrades, or product replacements on existing programs. Some of the major projects/programs we
are developing are noted below.
We developed the fuel system, air management system, and actuation hardware for CFM International’s LEAP engine
program. We also developed actuation system, combustion system and oil system components for Pratt & Whitney’s Geared
Turbo Fan (“GTF” or “PurePower”) engine program. These programs target applications in the single aisle and regional
aircraft markets with entry into service in the 2016 to 2022 timeframe. Both the LEAP engine and the GTF engine (later
named the PurePower engine) have been selected by Airbus as options to power its A320neo aircraft, which entered service
in 2016. In addition, the LEAP engine was selected by Boeing exclusively for its 737 MAX, which entered service in 2017,
and by Comac for its C919 aircraft, which is currently in flight test. The PurePower engine was selected by Bombardier
exclusively for its CSeries aircraft (now majority owned by Airbus and renamed the A220), which entered service in 2016.
The PurePower engine was also chosen by Embraer for its EJets E2 aircraft family, which entered service in 2018, by
Mitsubishi for the MRJ regional aircraft (now renamed SpaceJet) and by Irkut for the MS-21 aircraft. The SpaceJet and MS-
21 aircraft are currently in flight test.
The JV with GE primarily develops, manufactures and supports fuel systems for twin aisle aircraft engines. The JV is
developing the fuel system for the GE9X engine (which was certified in 2020 and will power the Boeing 777X). We have
been selected as the JV’s supplier of this fuel system.
We are the supplier for the thrust reverser actuation system (“TRAS”) for the Boeing 737 MAX and the CFM LEAP-
engined Airbus A320neo and the A330neo. We are developing the TRAS for the Boeing 777X, which is projected to enter
service in late 2021.
9
We developed the fuel system, air management components, and actuation hardware for the Passport engine program,
as well as the TRAS for the integrated propulsion system. Passport is the next generation GE Aviation engine for the large
business aviation market and has been selected by Bombardier to power its Global 7500 long-range business aircraft, which
entered service in 2018.
In addition, we developed sensor solutions for the Airbus A350 high lift system, an actuation sub-system for the Boeing
787-9 that improves fuel burn, flight deck control components for the Airbus A220 and control and sensing solutions for the
Boeing KC-46A refueling tanker boom subsystem. We developed flight deck control components for the Bombardier Global
7500 aircraft, as well as many other business aviation aircraft.
Industrial is focused on developing innovative technologies, including integrated control systems and system
components, that enable our customers to cost-effectively meet mandated emissions regulations and fuel efficiency demands,
allow for usage of a wider range of fuel sources, increase reliability (particularly in harsh environments), and reduce total cost
of ownership. Our development efforts support technology for a wide range of:
•
•
products that improve the quality of combustion processes and provide more precise flow of various fuels and gases
in our customers’ gas turbines and industrial reciprocating engines;
electronic devices and software solutions that provide improved control and protection of reciprocating engines, gas
turbines, steam turbines, and engine- and turbine-powered equipment; and
•
advanced prognostic and predictive intelligence that is integrated into many of our complex products and systems.
These development efforts support our strategy of being the recognized market leader for:
•
•
application and control solutions for any machine that produces electricity utilizing conventional sources; and
control solutions for complex oil and gas, industrial and transportation applications.
We collaborate closely with our customers to jointly align our technology roadmaps. This collaboration allows us to
develop new systems, products and technologies consistent with our customers’ future needs for performance, emissions and
efficiency to deliver greater value. We strive to stay ahead of the competition through our modeling, prototyping, and state
of the art test capabilities.
We partner with our customers on programs that can take months or years of development before being fully validated
and launched into production. We also work with our customers on shorter term application programs for product and
system upgrades. Some of the major projects/programs we are developing include:
•
•
•
•
•
high pressure common rail diesel fuel injection systems;
natural gas metering and combustion systems;
comprehensive electronic control and air management solutions for natural gas and diesel engines;
emission certified stationary and mobile gas engine systems;
heavy frame and aeroderivative electric actuation systems enabling turbine electrification with cyber secure
products; and
•
steam turbine controls and valves that greatly simplify installation and significantly improve reliability
Human Capital
We consider our employees to be the most valuable resource for current and future success and we seek to provide a
work environment that fosters growth, encourages self-development, and provides meaningful work. We make significant
investments in training and professional development, and provide competitive pay, benefits, and other incentives. Notable
programs we offer to our full-time employees include:
•
•
•
•
•
•
employer sponsored health insurance;
employer 401(k) matching contributions;
annual Woodward stock contributions for U.S. employees with two years of employment;
a tuition assistance program;
training and professional development courses through our Woodward University curriculum; and
other values-based and technical development training
10
In addition to our comprehensive investment in our employees’ success, we strive to maintain an inclusive environment
that values and leverages the uniqueness of each member to the benefit of all our stakeholders. We view the combination of
diverse perspectives and backgrounds as a powerful force for innovation. To promote diversity and our core principles, we
emphasize dignity, value, and equality of all employees, regardless of race, color, religion, age, gender or sexual orientation,
through our actions and the workplace training programs we provide. We continually strive to harness the diversity of our
global workforce by cultivating a climate that permits all our employees to bring their authentic selves to work.
The health and safety of our employees is also a top priority. We have implemented appropriate procedures and
precautions to ensure the continued safety and well-being of employees is a dedicated concern, and we not only strive to
comply with all federal and local workplace laws and regulations where we do business, but continue to look for ways to
exceed compliance standards by utilizing continuous improvement discipline to proactively eliminate risk to our employees.
The global economic effects associated with the COVID-19 pandemic have been unprecedented in their scope and
depth. We have been and will continue to be following recommendations of the U.S. Center for Disease Control and other
applicable agencies to maximize the safety and well-being of our employees. We have implemented measures to mitigate
exposure risks and support operations. With respect to job roles that can be performed remotely, we initiated a global policy
to facilitate social distancing and further reduce total occupancy in facilities. We have implanted temperature and symptom
screening procedures at each U.S. location, and we have continuously communicated to all our members that if they are not
comfortable coming to work, regardless of role, then they do not have to do so. Throughout this crisis, our unwavering focus
has been on keeping our workplace as safe as possible, while ensuring we stabilize our business and position ourselves well
for the future.
As of October 31, 2020, we employed approximately 7,100 full-time employees of which approximately 2,200 were
located outside of the United States, with the majority of such employees located in Germany, Poland and China.
Approximately 56% of our full-time employees support our Aerospace segment and 39% support our Industrial segment,
while we have 5% of our full-time workforce included in our Corporate support function. We believe that our relationships
with our employees are good.
Approximately 15% of our total full-time workforce were union employees as of October 31, 2020, all of whom work
for our Aerospace segment and are located in the United States. The collective bargaining agreements with our union
employees are generally renewed through contract renegotiation near the contract expiration dates. The MPC Employees
Representative Union contract, which covers 591 employees as of October 31, 2020, expires October 1, 2021. The Local
Lodge 727-N International Association of Machinists and Aerospace Workers agreement, which covers 501 employees as of
October 31, 2020, expires April 22, 2021. The International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America and Local No. 509 agreement, which covered no employees as of October 31, 2020, expires
June 4, 2021. We believe that our relationships with our union employees and the representative unions are good.
Almost all of our other employees in the United States were at-will employees as of October 31, 2020, and therefore,
not subject to any type of employment contract or agreement. Our executive officers each have change-in-control
agreements which have been filed with the SEC.
Outside of the United States, we enter into employment contracts and agreements in those countries in which such
relationships are mandatory or customary, including coordination through local works’ councils. The provisions of these
agreements correspond in each case with the required or customary terms in the subject jurisdiction.
Patents, Intellectual Property, and Licensing
We own numerous patents and other intellectual property, and have licenses for the use of patents and other intellectual
property owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of
intellectual property, we also license intellectual property to and from third parties. For example, the U.S. Government has
certain rights in our patents and other intellectual property developed in performance of certain government contracts, and it
may use or authorize others to use the inventions covered by such patents for government purposes as allowed by law.
Intellectual property not covered by patents (or patent applications) includes trade secrets and other technological know-
how that is not patentable or for which we have elected not to seek patent protection, including intellectual property relating
to our manufacturing processes and engineering designs. Such unpatented technology, including research, development and
engineering technical skills and know-how, as well as unpatented software, is important to our overall business and to the
operations of each of our segments.
While our intellectual property assets taken together are important, we do not believe our business or either of our
segments would be materially affected by the expiration of any particular intellectual property right or termination of any
particular intellectual property patent license agreement.
11
As of September 30, 2020, our Consolidated Balance Sheets includes $606,711 of net intangible assets. This value
represents the carrying values, net of amortization, of certain assets acquired in various business acquisitions and does not
purport to represent the fair value of our acquired intellectual property as of September 30, 2020.
U.S. GAAP requires that research and development costs be expensed as incurred; therefore, as we develop new
intellectual property in the normal course of business, the costs of developing such assets are expensed as incurred, with no
corresponding intangible asset recorded. Customers sometimes pay consideration to Woodward for product engineering and
development activities that do not result in the immediate transfer of distinct products or services to the customer. For
Woodward’s accounting policy with regards customer funded product engineering and development activities, see Note 3,
Revenue, to the Notes to the Consolidated Financial Statements included in “Item 8 – Financial Statements and
Supplementary Data.”
Environmental Matters and Climate Change
The Company is regulated by federal, state and international environmental laws governing our use, transport and
disposal of substances and control of emissions. Compliance with these existing laws has not had a material impact on our
capital expenditures, earnings or global competitive position.
We use hazardous materials and/or regulated materials in our manufacturing operations. We also own, operate, have
acquired, and may in the future acquire facilities that were formerly owned and operated by others that used such materials.
We believe that the risk that a significant release of regulated materials has occurred in the past or will occur in the future
cannot be completely eliminated or prevented. From time to time we engage in environmental remedial activities, generally
in coordination with other companies, pursuant to federal and state laws. In addition, we may be exposed to other
environmental costs including participation in superfund sites or other similar jurisdictional initiatives. When it is reasonably
probable, we will pay remediation costs at a site, and those costs can be reasonably estimated, we accrue a liability for such
future costs with a related charge against our earnings. In formulating that estimate and recognizing those costs, we do not
consider amounts expected to be recovered from insurance companies, or others, until such recovery is assured. Currently,
we have no sites undergoing remediation.
Our manufacturing facilities generally do not produce significant volumes or quantities of byproducts, including
greenhouse gases, that would be considered hazardous waste or otherwise harmful to the environment. We do not expect
legislation currently pending or expected in the next several years to have a significant negative impact on our operations in
any of our segments.
Domestic and foreign legislative initiatives on emissions control, renewable energy, and climate change tend to
favorably impact the sale of our energy control products. For example, our Industrial segment produces inverters for wind
turbines and energy control products that help our customers maximize engine efficiency and minimize wasteful emissions,
including greenhouse gases.
Executive Officers of the Registrant
Information about our executive officers as of October 31, 2020 is provided below. There are no family relationships
between any of the executive officers listed below.
Thomas A. Gendron, Age 59. Chairman of the Board since January 2008; Chief Executive Officer, President, and
Director since July 2005; Chief Operating Officer and President September 2002 through June 2005; Vice President and
General Manager of Industrial Controls June 2001 through September 2002; Vice President of Industrial Controls April 2000
through May 2001; and Director of Global Marketing and Industrial Controls’ Business Development February 1999 through
March 2000.
Robert F. Weber, Jr., Age 66. Vice Chairman since October 2011; Chief Financial Officer from August 2005 until
September 2019 and since April 2020; and Treasurer from August 2005 through November 2018. Prior to August 2005, Mr.
Weber was employed at Motorola, Inc. for 17 years, where he held various positions, including Corporate Vice President and
General Manager, EMEA Auto. Prior to this role, Mr. Weber served in a variety of financial positions at both a corporate
and operating unit level with Motorola.
Thomas G. Cromwell Age 51. Vice Chairman, Chief Operating Officer since February 2019. Prior to February 2019,
Mr. Cromwell was employed at Kohler Co., Inc. for 10 years, most recently serving as Group President, Power from 2014
through February 2019.
12
Sagar A. Patel, Age 54. President, Aerospace Aftermarket and Hydraulic Systems since December 2019; Business Unit
President, Fuel Systems and Controls from April 2019 through November 2019; and President, Aircraft Turbine Systems
from June 2011 through April 2019. Prior to this role, Mr. Patel was employed at General Electric for 18 years, most
recently serving as President, Mechanical Systems, GE Aviation, from March 2009 through June 2010. He served as
President, Aerostructures, GE Aviation from July 2008 through July 2009 and as President and General Manager, MRS
Systems, Inc., GE Aircraft Engines, from October 2005 through June 2008.
Chad R. Preiss, Age 55. President, Engine Systems since April 2020; Business Unit President, Engine & Turbine
Controls from April 2019 through April 2020; President, Industrial Control Systems from November 2016 through April
2019; President, Engine Systems October 2009 through November 2016; Group Vice President, Engine Systems October
2008 through September 2009; Vice President, Sales, Service, and Marketing, Engine Systems December 2007 through
September 2008; and Vice President, Industrial Controls September 2004 through December 2007. Prior to this role, Mr.
Preiss served in a variety of engineering and marketing/sales management roles, including Director of Business
Development, since joining Woodward in 1988. On November 6, 2020, Mr. Preiss announced his intention to retire from
Woodward effective January 8, 2021.
A. Christopher Fawzy, Age 51. Corporate Vice President, General Counsel, Corporate Secretary and Chief Compliance
Officer since October 2009; Vice President, General Counsel, and Corporate Secretary June 2007 through September 2009.
Mr. Fawzy became the Company’s Chief Compliance Officer in August 2009. Prior to joining Woodward, Mr. Fawzy was
employed by Mentor Corporation, a global medical device company. He joined Mentor in 2001 and served as Corporate
Counsel, then was promoted to General Counsel in 2003, and was appointed Vice President, General Counsel and Secretary
in 2004.
Other Corporate Officers of the Registrant
Information about our other corporate officers as of October 31, 2020 is provided below. There are no family
relationships between any of the corporate officers listed below or between any of the corporate officers listed below and the
aforementioned executive officers.
Paul P. Benson, Age 56. Corporate Vice President, Human Resources since September 2019. Prior to September 2019,
Mr. Benson was employed at Esterline Technologies Corporation from 2014 through September 2019, where he served as
Executive Vice President and Chief Human Resources Officer. Prior to 2014, Mr. Benson was employed at Hewlett Packard
Enterprise Company from 2006 through 2014, most recently serving as Senior Human Resources Director, Transformation.
John D. Tysver, Age 58. Corporate Vice President, Technology since October 2016; Vice President, Aircraft Turbine
Systems’ Programs, Systems and Research & Development July 2015 through October 2016; Vice President and General
Manager of Aircraft Turbine Systems’ Fuel Systems COE April 2011 through July 2015; Vice President of Turbine Systems’
Systems & Engineering October 2009 through April 2011; Director of Turbine Systems’ Systems & Engineering November
2006 through October 2009. Prior to November 2006, Mr. Tysver served in a variety of engineering leadership roles since
joining Woodward in March 1991. Prior to joining Woodward, Mr. Tysver served in engineering roles at Sundstrand (now
UTC Aerospace Systems).
Daniel M. Bowman, Age 55. Corporate Vice President, Strategy and Business Development since August 2017; and
Vice President, Sales, Marketing, and Commercial Operations for Aircraft Turbine Systems April 2007 through August 2017.
Prior to joining Woodward, Mr. Bowman served as the Vice President of Sales, Marketing and Service at Fairbanks Morse
Engine and held a variety of sales, marketing, and business development leadership roles at GE Aviation.
Matteo R. Pisciotta, Age 48. Corporate Vice President, Global Sourcing since August 2019. Prior to August 2019, Mr.
Pisciotta was employed at Polaris Industries, Inc., serving as Vice President, Global Procurement and Supply Chain from
2016 through August 2019. Prior to 2016, Mr. Pisciotta was employed at Oshkosh Corporation for nine years, most recently
serving as Vice President, Global Procurement and Supply Chain from 2009 through 2016.
Information available on Woodward’s Website and Social Media
Through a link on the Investor Information section of our website, www.woodward.com, we make available, free of
charge, the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on
Schedule 14A, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as well as Section 16 reports of our officers and directors. The SEC also maintains a website that
contains our SEC filings. The address of the site is www.sec.gov. We provide notifications of news or announcements
regarding our financial performance, including SEC filings, investor events, press and earnings releases as part of our
investor relations website. We have used, and intend to continue to use, our investor relations website, as well as the
13
following as of the date of this filing, as means of disclosing material non-public information and for complying with the
disclosure obligations under Regulation FD:
• Twitter: @woodward_inc
• Facebook: Facebook.com/woodwardinc
• LinkedIn: Linkedin.com/company/woodward
• YouTube: YouTube.com/user/woodwardinc
None of the information contained on our website, or the above-mentioned social media sites, is incorporated into this
document by reference.
Stockholders may obtain, without charge, a single copy of Woodward’s 2020 Annual Report on Form 10-K upon
written request to the Corporate Secretary, Woodward, Inc., 1081 Woodward Way, Fort Collins, Colorado 80524.
Item 1A. Risk Factors
The following summarizes important factors that could individually, or together with one or more other factors, affect
our business, results of operations, financial condition, and/or cash flows:
COVID-19 Pandemic Risks
The global COVID-19 pandemic has led to significant volatility in financial, commodities (including oil and gas) and
other markets and industries (including the aviation industry) and has negatively affected the business and results of
operations. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely
affect our business operations, financial performance, results of operations, financial position and the achievement of
our strategic objectives.
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has led to
significant volatility in financial, commodities (including oil and gas) and other markets and industries (including the aviation
industry) and has negatively affected the business and results of operations for the Company. We have taken steps to align
our business with the unfavorable economic conditions, including the implementation of enhanced measures through our
operations management teams and global supply chain to ensure the Company is efficiently utilizing inventory on hand, as
well as our internal processing capabilities. In addition, the Company has implemented staff reductions, reductions in
employee hours, furloughs, and/or temporary layoffs, at many of its various locations. Given the ongoing and dynamic
nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and there is no
guarantee that efforts by the Company to address the adverse impacts of COVID-19 will be effective.
We serve international markets through manufacturing facilities, sales offices and representatives located in the
Americas, Asia Pacific, Europe, and India and we rely on third-party suppliers in those areas. Outbreaks of COVID-19, as
well as resurgences, in various parts of the United States and the world have resulted in the extended shutdown of certain
businesses in these regions, which has resulted in disruptions or delays to our supply chain. These include disruptions from
the temporary closure of third-party suppliers, interruptions in product supply and restrictions on the export or shipment of
our products. Furthermore, performance delays or interruptions, payment defaults or bankruptcies of our third-party
suppliers have adversely affected our business.
The significant disruption or default by our suppliers has adversely impacted our sales and operating results, and we are
unable to predict the magnitude of such impacts in the future. In addition, the pandemic has resulted in a widespread health
crisis which has adversely affected the global economy, resulting in an economic downturn that has impacted demand for the
products and services we provide, which may continue until the COVID-19 pandemic is effectively contained.
We are heavily dependent on net sales to customers in the commercial aerospace industry. Approximately 64% of
Woodward’s net sales for its fiscal year ended September 30, 2020 were derived from sales to customers in the aerospace
industry, with 22% of such sales to Boeing. Actions by U.S. federal, state and foreign governments to address the pandemic,
including lockdowns, quarantines, border controls, travel restrictions and business venue closures, as well as changes in the
propensity for the general public to travel by air, have had and are expected to continue to have, a significant adverse effect
on the commercial aircraft markets and the demand for the products and services we provide. Furthermore, payment
deferrals or defaults or bankruptcy of our customers may adversely affect our business, and may lead to additional charges,
impairments and other adverse financial impacts.
14
In addition, the COVID-19 pandemic and resulting market volatility could have significant impacts on our liquidity,
which could adversely affect our ability to remain in compliance with our debt covenants, satisfy our debt obligations,
declare dividends or other distributions, and conduct share buybacks. Conditions in the financial and credit markets may also
limit the availability of funding or increase the cost of funding, which could adversely affect our business, financial position
and results of operations.
The ultimate impact of the COVID-19 pandemic on our operations and financial performance will depend on many
factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that
have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce
pressures); the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic
activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global
markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery
when the COVID-19 pandemic subsides.
Unforeseen events, such as the COVID-19 pandemic, may occur that significantly reduce aerospace and industrial end
use markets, which could adversely affect our business, financial condition and results of operations.
A significant portion of our business is related to commercial aviation. A global economic downturn and uncertainty in
the marketplace, such as we have experienced in fiscal year 2020, has led to a general reduction in demand for air
transportation services, leading some airlines to withdraw aircraft from service, which has negatively affected sales of our
aerospace products and services. These economic conditions have similarly affected our sales of systems and components for
new business jet aircraft. The commercial airline industry tends to be cyclical and capital spending by airlines and aircraft
manufacturers may be influenced by a variety of factors, including current and projected future traffic levels, aircraft fuel
pricing, labor issues, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns,
general economic conditions, worldwide airline profits and backlog levels. In the event these economic factors continue to
stagnate or worsen, or other adverse economic conditions arise, market demand for our components and systems could be
further negatively affected by renewed reductions in demand for air transportation services or commercial airlines’ financial
difficulties, which could have a material adverse effect on our business, financial condition, results of operations, and cash
flows.
Instability in the financial markets and global or regional economic weakness or uncertainty could have a material
adverse effect on the ability of our customers to perform their obligations to us and on their demand for our products
and services.
As a result of volatility in the credit and capital markets and ongoing global economic uncertainty, our current or
potential customers may experience cash flow problems and, as a result, may modify, delay or cancel plans to purchase our
products. Additionally, if our customers face financial distress or are unable to secure necessary financing, they may not be
able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current or potential customers
to pay us for our products may adversely affect our earnings and cash flows.
The general economic environment significantly affects demand for our products and services. Periods of continued
slowing economic activity currently impacting some of our markets, may cause additional global or regional slowdowns in
spending on infrastructure development in the markets in which we operate, and customers may reduce their purchases of our
products and services. In addition, weakness or uncertainty in any of our global markets, such as that most recently caused
by the imposition and reciprocation of tariffs and duties and the global COVID-19 pandemic, may materially adversely affect
one or more areas of our business.
There can be no assurance that any market and economic uncertainty in the U.S. or internationally would not have a
material adverse effect on our business, financial condition, results of operations, and cash flows.
Industry Specific Risks
A significant portion of our revenue is concentrated among a relatively small number of customers. A decline in our
customers’ business, or in our business with, or financial distress of, such customers could decrease our consolidated
net sales or impair our ability to collect amounts due and payable and have a material adverse effect on our business,
financial condition, results of operations and cash flows.
A significant portion of our revenue is concentrated among a relatively small number of customers. We have fewer
customers than many companies with similar sales volumes. For the fiscal year ended September 30, 2020, approximately
45% of our consolidated net sales were made to our five largest customers. Sales to our five largest customers for the fiscal
year ended September 30, 2019 represented approximately 47% of our consolidated net sales. Sales to our largest customer
in the fiscal year ended September 30, 2020, The Boeing Company (“Boeing”), accounted for approximately 14% of our
consolidated net sales, and 15% in the fiscal year ended September 30, 2019. Accounts receivable from Boeing represented
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approximately 13% of accounts receivable at September 30, 2020 and 14% at September 30, 2019. Sales to our second
largest customer in the fiscal year ended September 30, 2020, General Electric Company (“GE”), accounted for
approximately 11% of our consolidated net sales in the fiscal year ended September 30, 2020, and 14% in fiscal year ended
September 30, 2019. Accounts receivable from GE represented approximately 9% of accounts receivable at September 30,
2020 and 8% at September 30, 2019. If any of our significant customers were to change suppliers, in-source production,
institute significant restructuring or cost-cutting measures, or experience financial distress, these significant customers may
substantially reduce, or otherwise be unable to pay for, purchases from us. Accordingly, our consolidated net sales could
decrease significantly, or we may experience difficulty collecting, or be unable to collect, amounts due and payable, which
could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
In October 2018 and March of 2019, two commercial aircraft accidents led to the grounding by the Federal Aviation
Administration (“FAA”) and other regulators of the Boeing 737 MAX aircraft, on which we have significant content. The
continued grounding of the Boeing 737 MAX by the FAA and other regulators, which started in March of 2019, caused
deliveries of that aircraft to be zero in fiscal year 2020. The customer orders and demand for the aircraft began to erode over
the course of fiscal year 2020 in response to the COVID-19 pandemic, although long-term prospects have not changed
significantly. On November 18, 2020, the FAA approved the Boeing 737 MAX to return to commercial service and we
believe the aircraft will resume flying as early as the first quarter of our fiscal year 2021. As the aircraft 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. Although we anticipate a slow recovery of the OEM and a
slightly better recovery of the initial provisioning sales in the periods following the aircraft’s return to service, further
prolonged grounding of the Boeing 737 MAX could substantially decrease our OEM and initial provisioning sales for the 737
MAX and CFM LEAP engines in the near term, which could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
The long sales cycle, customer evaluation process and implementation period of our products and services may
increase the costs of obtaining orders and reduce the predictability of sales cycles and our inventory requirements.
Our products and services are technologically complex and require significant capital commitments. Prospective
customers generally must commit significant resources to test and evaluate our products and to install and integrate them into
larger systems. Orders expected in one quarter may shift to another quarter or be cancelled with little advance notice as a
result of customers’ budgetary constraints, internal acceptance reviews and other factors affecting the timing of customers’
purchase decisions. In addition, customers often require a significant number of product presentations and demonstrations
before reaching a sufficient level of confidence in the product’s performance and compatibility with the approvals that
typically accompany capital expenditure approval processes. The difficulty in forecasting demand increases the challenge in
anticipating sales cycles and our inventory requirements, which may cause us to over-produce finished goods and could result
in inventory write-offs, or could cause us to under-produce finished goods. Any such over-production or under-production
could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We operate in a highly competitive industry and, if we are unable to compete effectively in one or more of our
markets, our business, financial condition and results of operations may be adversely affected.
We face intense competition from a number of established competitors in the United States and abroad, some of which
are larger in size or are divisions of large diversified companies with substantially greater financial resources. In addition,
global competition continues to increase. Companies compete on the basis of providing products that meet the needs of
customers, as well as on the basis of price, quality, reliability, design and engineering capabilities, innovation, conformity to
customers' specifications, timeliness of delivery, effectiveness of the distribution organization, and quality of customer
support after the sale. Changes in competitive conditions, including the availability of new products and services, the
introduction of new channels of distribution, and changes in OEM and aftermarket pricing, could impact our relationships
with our customers and may adversely affect future sales, which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
Further, the markets in which we operate experience rapidly changing technologies and frequent introductions of new
products and services. The technological expertise we have developed and maintained could become less valuable if a
competitor were to develop a breakthrough technology that would allow it to match or exceed the performance of existing
technologies at a lower cost. If we are unable to develop competitive technologies, future sales or earnings could be lower
than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash
flows.
In all of our markets, customers frequently develop new supply chain initiatives and/or sourcing models which could
create new opportunities, but also could apply pressure to our customer relationships and/or strategic position with those
customers.
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Our participation in a strategic joint venture with GE may make it more difficult to secure long-term sales in certain
aerospace markets.
In January 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit,
consummated the formation of a strategic joint venture between Woodward and GE (the “JV”). The JV agreement does not
restrict Woodward from entering into any market, however, consolidation in the aircraft engine market is increasingly
prevalent, resulting in fewer engine manufacturers, and thus it may become more difficult for Woodward to secure new
business with GE competitors on similar product applications both within and outside the specific JV market space.
Additionally, if GE fails to win new content in the market space covered by the JV, Woodward may be prevented from
expanding content on future commercial aircraft engines in those markets.
Industry consolidation trends could reduce our sales opportunities, decrease sales prices, and drive down demand for
our products.
There has been consolidation and there may be further consolidation in the aerospace, power, and process industries.
The consolidation in these industries has resulted in customers with vertically integrated operations, including increased in-
sourcing capabilities, which may result in economies of scale for those companies. If our customers continue to seek to
control more aspects of vertically integrated projects, cost pressures resulting in further integration or industry consolidation
could reduce our sales opportunities, decrease sales prices, and drive down demand for our products, which could have a
material adverse effect on our business, financial condition, results of operations, and cash flows.
General Commercial, Financial, and Regulatory Risks
Our profitability may suffer if we are unable to manage our expenses in connection with sales increases, sales
decreases, or impacts of capital expansion projects, or if we experience change in product mix.
Some of our expenses are relatively fixed in relation to changes in sales volume and are difficult to adjust in the short
term. Expenses driven by business activity other than sales level and other long-term expenditures, such as fixed
manufacturing overhead, capital expenditures and research and development costs, may be difficult to reduce in a timely
manner in response to a reduction in sales. Expenses such as depreciation or amortization, which are the result of past capital
expenditures or business acquisitions, or interest expense, which is the result of the incurrence of debt primarily to finance
our growth or business acquisitions, are generally fixed regardless of sales levels. In addition, the achievement of
manufacturing efficiencies associated with capital expansion projects may not meet management’s current expectations. Due
to our long sales cycle, in periods of sales increases it may be difficult to rapidly increase our production of finished goods,
particularly if such sales increases are unanticipated. An increase in the production of our finished goods requires increases
in both the purchases of raw materials and components and in the size of our workforce. If a sudden, unanticipated need for
raw materials, components and labor arises in order to meet unexpected sales demand, we could experience difficulties in
sourcing raw materials, components and labor at a favorable cost or to meet our production needs. These factors could result
in delays in fulfilling customer sales contracts, damage to our reputation and relationships with our customers, an inability to
meet the demands of the markets that we serve, which in turn could prevent us from taking advantage of business
opportunities or responding to competitive pressures, and result in an increase in variable and fixed costs leading to a
decrease in net earnings or even net losses. In addition, we sell products that have varying profit margins, and increases or
decreases in sales of our various products may change the mix of products that we sell during any period. Any of these
events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
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The U.S. Government may change acquisition priorities and/or reduce spending, which could adversely affect our
business, financial condition and results of operations.
Sales made directly to U.S. Government agencies and entities were 6% of total net sales during fiscal year 2020 and 4%
during fiscal year 2019, primarily in the aerospace market. Sales made directly to U.S. Government agencies and entities, or
indirectly through third party manufacturers, such as tier-one prime contractors, utilizing Woodward parts and subassemblies,
accounted for approximately 28% of total sales in fiscal year 2020 and 23% in fiscal year 2019.
• The level of U.S. defense spending is subject to periodic congressional authorization and appropriation actions and
is subject to change at any time. The mix of programs to which such funding is allocated is also uncertain, and the
level of U.S defense spending may be impacted by numerous factors out of our control such as the political
environment, U.S. foreign policy, and macroeconomic conditions. We can provide no assurance that an increase in
defense spending will be allocated to programs that would benefit our business. If the amount of spending were to
decrease, or there was a shift from certain aerospace and defense programs on which we have content to other
programs on which we do not, our sales could decrease. In addition, one or more of the aerospace or defense
programs that we currently support could be phased-out or terminated. Any such reductions in U.S. Government
needs under these existing aerospace and defense programs, unless offset by other aerospace and defense programs
and opportunities, could have a material adverse effect on our sales.
• The U.S. Government participates in a wide variety of operations, including homeland defense, counterinsurgency,
counterterrorism, and other defense-related operations that employ our products and services. U.S. defense
spending has historically been cyclical in nature, and defense budgets tend to rise when perceived threats to
national security increase the level of concern over the country’s safety. The U.S. Government continues to adjust
its funding priorities in response to changes in the perceived threat environment, the political environment, and
changes in budgetary priorities. In addition, defense spending currently faces pressures due to the overall economic
and political environment, budget deficits, and competing budget priorities. A decrease in U.S. Government
defense spending or changes in the spending allocation could result in one or more of our programs being reduced,
delayed, or terminated.
• Shifts in domestic and international spending and tax policy, changes in security, defense, and intelligence
priorities, changes in government budget appropriations, general and political economic conditions and
developments, and other factors may affect a decision to fund, or the level of funding for, existing or proposed
programs. If the priorities of the U.S. Government change and/or defense spending is reduced, this may adversely
affect our business, financial condition, results of operations, and cash flows.
Our business may be adversely affected by government contracting risks.
Our contracts with the U.S. Government are subject to certain unique risks, including the risks set forth below, some of
which are beyond our control, which could have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
• Our U.S. Government contracts and the U.S. Government contracts of our customers are subject to modification,
curtailment or termination by the government, either for the convenience of the government or for default as a
result of a failure by us or our customers to perform under the applicable contract. If any of our contracts are
terminated by the U.S. Government, our backlog would be reduced, in accordance with contract terms, by the
expected value of the remaining work under such contracts. In addition, we are not the prime contractor on most of
our contracts for supply to the U.S. Government, and the U.S. Government could terminate a prime contract under
which we are a subcontractor, irrespective of the quality of our products and services as a subcontractor.
• We must comply with procurement laws and regulations relating to the formation, administration and performance
of our U.S. Government contracts and the U.S. Government contracts of our customers. The U.S. Government may
change procurement laws and regulations from time to time. A violation of U.S. Government procurement laws or
regulations, a change in U.S. Government procurement laws and regulations, or a termination arising out of our
default could expose us to liability, debarment, or suspension and could have an adverse effect on our ability to
compete for future contracts and orders.
• We are subject to government inquiries, audits and investigations due to our business relationships with the U.S.
Government and the heavily regulated industries in which we do business. In addition, our contract costs are
subject to audits by the U.S. Government. U.S. Government agencies, including the Defense Contract Audit
Agency and the Defense Contract Management Agency, routinely audit government contractors and subcontractors.
These agencies review our performance under contracts, cost structure and compliance with applicable laws,
regulations, and standards, as well as the adequacy of and our compliance with our internal control systems and
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policies. Any costs found to be misclassified or inaccurately allocated to a specific contract would be deemed non-
reimbursable, and to the extent already reimbursed, would be refunded. Any inadequacies in our systems and
policies could result in withholds on billed receivables, penalties and reduced future business. Any inquiries or
investigations, including those related to our contract pricing, could potentially result in civil and criminal penalties
and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines,
suspension, and/or debarment from participating in future business opportunities with the U.S. Government. Such
actions could harm our reputation, even if such allegations are later determined to be unfounded, and could have a
material adverse effect on our business, results of operations, financial condition and cash flows.
Suppliers may be unable to provide us with materials of sufficient quality or quantity required to meet our production
needs at favorable prices or at all.
We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our
customers, and our raw material costs are subject to commodity market fluctuations. We may experience an increase in costs
for parts or raw materials that we source from our suppliers, or we may experience a shortage of parts or raw materials for
various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we
use, financial distress, work stoppages, natural disasters, fluctuations in commodity prices, the imposition of tariffs or other
duties, or production or distribution difficulties that may affect one or more of our suppliers. In particular, current or future
global economic uncertainty may affect the financial stability of our key suppliers or their access to financing, which may in
turn affect their ability to perform their obligations to us. In some instances, we depend upon a single source of supply,
manufacturing, or logistics support or participate in commodity markets that may be subject to allocations of limited supplies
by suppliers. If one or more of our suppliers experiences financial difficulties, delivery delays or other performance
problems, we may be unable to meet commitments to our customers or incur additional costs. Our customers rely on us to
provide on-time delivery and have certain rights if our delivery standards are not maintained. We believe our supply
management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of
alternative practices. Nonetheless, a significant increase in our supply costs, including for raw materials that are subject to
commodity price fluctuations and the imposition of tariffs, or a protracted interruption of supplies for any reason, could result
in the delay of one or more of our customer contracts or could damage our reputation and relationships with customers. In
addition, quality and sourcing issues that our suppliers may experience can also adversely affect the quality and effectiveness
of our products and services and may result in liability or reputational harm to us. Any of these events could have a material
adverse effect on our business, financial condition, results of operations, and cash flows.
Subcontractors may fail to perform contractual obligations, or we may have disputes with subcontractors, which
would adversely affect our ability to meet our obligations to our customers.
We frequently subcontract portions of work due under contracts with our customers and are dependent on the continued
availability and satisfactory performance by these subcontractors. Nonperformance or underperformance by subcontractors
could materially impact our ability to perform obligations to our customers. A subcontractor’s failure to perform could result
in a customer terminating our contract for default, expose us to liability, substantially impair our ability to compete for future
contracts and orders, and limit our ability to enforce fully all of our rights under these agreements, including any rights to
indemnification. In addition, we may have disputes with our subcontractors, including disputes regarding the quality and
timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing
task orders or issue new task orders under a subcontract, or our hiring of personnel of a subcontractor. Any of these events
could have a material adverse effect on our business, reputation, financial condition, results of operations, and cash flows.
We may not be able to obtain financing, on acceptable terms or at all, to implement our business plans, complete
acquisitions, or otherwise take advantage of business opportunities or respond to competitive pressures.
During the last several years, global financial markets, including the credit and debt and equity capital markets, and
economic conditions have been volatile. These issues, along with significant write-offs in the financial services sector, the
re-pricing of credit risk, and the global economic uncertainty, have in the past made, and may in the future make, it difficult
to obtain financing. In addition, as a result of concerns about the stability of financial markets generally and the solvency of
counterparties specifically, the cost of obtaining money from the credit markets may increase as many lenders and
institutional investors have or may increase interest rates, enact tighter lending standards, refuse to refinance existing debt at
maturity either at all or on terms similar to existing debt, and reduce and, in some cases, cease to provide financing to
borrowers. Due to these factors, we cannot be certain that financing, to the extent needed, will be available on acceptable
terms or at all. If financing is not available when needed, or is available only on unacceptable terms, we may be unable to
implement our business plans, complete acquisitions, fund significant capital expenditures, or otherwise take advantage of
business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our
business, financial condition, results of operations, and cash flows.
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Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to
operate our business or pursue our business strategies, could adversely affect our business, financial condition, results
of operations, and cash flows, and could significantly reduce stockholder benefits from a change of control event.
As of September 30, 2020, our total debt was $838,483, excluding unamortized debt issuance costs, and including
$650,000 in unsecured notes denominated in U.S. dollars issued in private placements and $187,847 of unsecured notes
denominated in Euros issued in private placements. We had no borrowing on our revolving credit facility as of September
30, 2020. Our debt obligations could require us to dedicate a portion of our cash flow from operations to payments on our
indebtedness, reducing the availability of our cash flow for other purposes, including business development efforts and
mergers and acquisitions. We are contractually obligated under the agreements governing our long-term debt to make
principal payments of $100,000 in fiscal year 2021, $0 in fiscal year 2022, $0 in fiscal year 2023, $75,000 in fiscal year 2024,
$85,000 in fiscal year 2025, and the remaining $577,846 in subsequent fiscal years. Interest on our long-term notes is
payable semi-annually, with the exception of the Series J Notes which is payable quarterly, each year until all principal is
paid. Our debt obligations could make us more vulnerable to general adverse economic and industry conditions and could
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, thereby
placing us at a disadvantage to our competitors that have less indebtedness.
Our existing revolving credit facility and note purchase agreements impose financial covenants on us and our
subsidiaries that require us to maintain certain leverage ratios and minimum levels of consolidated net worth. Certain of
these agreements require us to repay outstanding borrowings with portions of the proceeds we receive from certain sales of
property or assets and specified future debt offerings.
These financial covenants place certain restrictions on our business that may affect our ability to execute our business
strategy successfully or take other actions that we believe would be in the best interests of our Company. These restrictions
include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries to:
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pay dividends or make distributions on our capital stock or certain other restricted payments or investments;
purchase or redeem stock;
issue stock of our subsidiaries;
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engage in transactions with affiliates;
transfer and sell assets;
effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets;
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create liens on our assets to secure debt.
These agreements contain certain customary events of default, including certain cross-default provisions related to other
outstanding debt arrangements. Any breach of the covenants under these agreements or other event of default could cause a
default under these agreements and/or a cross-default under our other debt arrangements, which could restrict our ability to
borrow under our revolving credit facility. If there were an event of default under certain provisions of our debt
arrangements that was not cured or waived, the holders of the defaulted debt may be able to cause all amounts outstanding
with respect to the debt instrument, plus any required settlement costs, to be due and payable immediately. Our assets and
cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an
event of default. If we are unable to repay, refinance, or restructure our indebtedness as required, or amend the covenants
contained in these agreements, the lenders or note holders may be entitled to obtain a lien or institute foreclosure proceedings
against our assets. Any of these events could have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
The Company, at its option, is permitted at any time to prepay all or any part of the then-outstanding principal amount
of any series of our private placement notes, together with interest accrued on such amount to be prepaid to the date of
prepayment, plus any applicable prepayment compensation amount. The prepayment compensation amount for the Euro
denominated private placement notes includes any net gain or loss realized by the lenders on swap transactions entered into
by the lenders under which the lenders would receive payment in U.S. dollars in exchange for scheduled Euro payments of
principal and interest on the Euro denominated private placement notes by the Company to the lenders, adjusted for
theoretical lender returns foregone on hypothetical reinvestments in U.S. Treasury securities.
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However, in the case of an event of default as defined in the loan documents, including a change in control event, the
prepayment compensation amount will not be less than zero. Depending on the movement of foreign exchange rates over the
terms of the Euro denominated private placement notes, such payments could have a material adverse effect on our business,
financial condition, results of operations, and cash flows and could significantly reduce stockholder benefits from a change of
control event.
Additional tax expense or additional tax exposures could affect our future profitability.
Approximately 36%, in fiscal year 2020, and 34%, in fiscal year 2019, of our earnings before income taxes was earned
in jurisdictions outside the United States. Accordingly, we are subject to income taxes in both the United States and
jurisdictions outside of the United States. Our tax liabilities are dependent upon the distribution mix of operating income
among these different jurisdictions. Our tax expense includes estimates of additional tax that may be incurred and reflects
various estimates, projections, and assumptions that could impact the valuation of our deferred tax assets and liabilities. Our
future operating results could be adversely affected by changes in the effective tax rate, which could be caused by, among
other things:
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changes in the mix of earnings in countries with differing statutory tax rates;
changes in our overall profitability;
changes in rules or interpretations of existing tax laws;
changes in U.S. federal tax legislation and tax rates;
changes in state or non-U.S. government tax legislation and tax rates, particularly in response to the “The Tax Cuts
and Jobs Act” enacted in December 2017 (the “Tax Act”);
changes in tax incentives;
changes in U.S. GAAP;
changes in the projected realization of deferred tax assets and liabilities;
changes in management’s assessment of the amount of earnings indefinitely reinvested offshore;
changes in management’s intentions regarding the amount of earnings reinvested offshore; and
the results of audits and examinations of previously filed tax returns and continuing assessments of our tax
exposures.
We derive a significant portion of our revenues from sales to countries outside the United States and purchase raw
materials and components from suppliers outside of the United States; therefore, we are subject to the risks inherent
in doing business in other countries.
In fiscal year 2020, approximately 43% of our total sales were made to customers in jurisdictions outside of the United
States (including products manufactured in the United States and sold outside the United States as well as products
manufactured in international locations), including approximately 10% of our total sales to Brazil, Russia, India and China,
known as the “BRIC” countries. We also purchase raw materials and components from suppliers outside the United States.
Accordingly, our business and results of operations are subject to risks associated with doing business internationally,
including:
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fluctuations in foreign exchange rates;
limitations on repatriation of earnings;
transportation delays and interruptions;
political, social and economic instability and disruptions;
government embargos or trade restrictions;
the imposition of taxes, import and export controls, duties and tariffs, embargoes, sanctions and other trade barriers;
changes in labor conditions;
changes in regulatory environments;
the potential for nationalization of enterprises;
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difficulties in staffing and managing multi-national operations;
limitations on the Company’s ability to enforce legal rights and remedies, including protection of intellectual
property;
difficulty of enforcing agreements and collecting receivables through some foreign legal systems;
acts of terrorism or war;
potentially adverse tax consequences; and
difficulties in implementing restructuring actions on a timely basis.
The imposition of tariffs can have significant implications on the cost and supply of certain commodities used in both of
our reporting segments. Over the longer term, if tariffs were to remain in place, there could be significant impact on costs
and our ability to pass increased costs along to our customers, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
We are also subject to U.S. laws prohibiting companies from doing business in certain countries, or restricting the type
of business that may be conducted in these countries. The cost of compliance with increasingly complex and often
conflicting regulations governing various matters worldwide, including foreign investment, employment, import, export,
business acquisitions, environmental and taxation matters, land use rights, property, and other matters, can also impair our
flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to
improve productivity and maintain acceptable operating margins. We must also comply with restrictions on exports imposed
under the U.S. Export Control Laws and Sanctions Programs. These laws and regulations change from time to time and may
restrict foreign sales.
In fiscal year 2020, our operations in China contributed to approximately 8% of our total net sales. Certain of our
independent registered public accounting firm’s audit documentation related to their audit report, included in this annual
report, may be located in China. The Public Company Accounting Oversight Board (“PCAOB”) currently cannot inspect
audit documentation located in China and, as such, prevents the PCAOB from regularly evaluating audit work of any auditors
that was performed in China, including that performed by our independent auditors in China. As a result, investors may be
deprived of the full benefits of PCAOB oversight of our global audits via their inspections. The inability of the PCAOB to
conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our Chinese
independent auditor’s audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections
on all of their work.
Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the
U.S. dollar. These exposures may change over time as our business and business practices evolve, and they could have a
material adverse effect on our financial results and cash flows. An increase in the value of the U.S. dollar could increase the
real cost to our customers of our products in those markets outside the United States where we sell in U.S. dollars, and a
weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials to the extent that
we must purchase components in foreign currencies. Foreign currency exchange rate risk is reduced through several means,
including the maintenance of local production facilities in the markets served, invoicing of customers in the same currency as
the source of the products, and prompt settlement of inter-company balances utilizing a global netting system. While we
monitor our exchange rate exposures and seek to reduce the risk of volatility, our actions may not be successful in
significantly mitigating such volatility.
Of the $153,270 of cash and cash equivalents held at September 30, 2020, $127,997 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
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 whole or in part, by
foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and
other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the
income tax liability that might be incurred if these funds were to be repatriated. The additional uncertainty associated with
the Tax Act increases the impracticality of determining this income tax liability.
In addition, uncertain global economic conditions arising from circumstances such as slowing growth in emerging
regions could result in reduced customer confidence and decreased demand for our products and services, disruption in
payment patterns and higher default rates, a tightening of credit markets, increased risk regarding supplier performance,
increased counterparty risk with respect to the financial institutions with which we do business, and exchange rate
fluctuations.
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While we employ comprehensive controls regarding global cash management to guard against cash or investment loss
and to ensure our ability to fund our operations and commitments, a material disruption to the financial institutions with
whom we transact business could have a material adverse effect on our international operations or on our business, financial
condition, results of operations, and cash flows.
Political and economic uncertainty in the European Union could adversely impact our business, results of operations,
financial condition and prospects.
Credit rating downgrades in certain European countries and/or speculation regarding changes to the composition or
viability of the European Union (“EU”) create uncertain global economic conditions. On June 23, 2016, the United Kingdom
(“UK”) voted to leave the EU. The UK’s vote to voluntarily exit from the EU, generally referred to as the “Brexit,” triggered
short-term financial volatility, including a decline in the value of the Great Britain Pound (“GBP”) in comparison to both the
U.S. dollar (“USD”) and the European Union countries’ Euro (“EUR”). On January 31, 2020, the UK officially left the EU
pursuant to Brexit, with a transitional period during which the UK remains bound to the EU’s rules and regulations, which is
set to expire on December 31, 2020. Brexit has created an uncertain political and economic environment in the United
Kingdom and other European Union countries. Following the transition period, the United Kingdom will lose access to the
EU single market and to EU trade deals negotiated with other jurisdictions, so the long-term effects of Brexit will depend on
the agreements or arrangements with the EU for the United Kingdom to retain access to EU markets either during the
transitional period or more permanently. The ongoing uncertainty could have a negative economic impact and result in
further volatility in the markets for several years. The impact of the Brexit referendum and such ongoing uncertainty may
result in various economic and financial consequences for businesses operating in the UK, the EU and beyond.
We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks inherent in doing
business in other countries, including the UK. During fiscal year 2020, approximately 3% of our consolidated net sales were
invoiced to customers in the UK through both our Aerospace and Industrial reportable segments. Approximately 23% of our
consolidated net sales were invoiced to customers in Europe overall. Woodward and its various subsidiaries hold financial
assets and liabilities denominated in GBP and EUR, including cash and cash equivalents, accounts receivable, postretirement
defined benefit pension plan assets and liabilities, and accounts payable, and the future impacts of the Brexit and the
continued uncertainty surrounding the EU could have a material impact on our business, financial condition, results of
operations and cash flows.
Changes in the estimates of fair value of reporting units or of long-lived assets, particularly goodwill, may result in
future impairment charges, which could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Over time, the fair values of long-lived assets change. At September 30, 2020, we had $808,252 of goodwill,
representing 21% of our total assets. We test goodwill for impairment at the reporting unit level on an annual basis as of July
31 of each year and more often if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Future goodwill impairment charges may occur if estimates of fair
values decrease, which would reduce future earnings. We test our indefinite lived intangible asset on an annual basis and
more often if an event occurs or circumstances change that would more likely than not reduce the fair value of the indefinite
lived intangible asset below its carrying amount. We also test property, plant, and equipment and other intangibles for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Future
asset impairment charges may occur if asset utilization declines, if customer demand decreases, or for a number of other
reasons, which would reduce future earnings. Any such impairment charges could have a material adverse effect on our
business, financial condition, results of operations, and cash flows. Impairment charges would also reduce our consolidated
stockholders’ equity and increase our debt-to-total-capitalization ratio, which could negatively impact our credit rating and
access to the debt and equity markets.
During the fourth quarter of fiscal year 2020, we completed our fiscal year 2020 annual goodwill impairment test. We
use the income approach based on a discounted cash flow method that incorporates various estimates and assumptions. The
results of our fiscal year 2020 annual goodwill impairment test performed as of July 31, 2020 indicated the estimated fair
values of each of our reporting units were in excess of their carrying amounts, and accordingly, no impairment existed. There
can be no assurance that our estimates and assumptions of the fair value of our reporting units, the current economic
environment, or the other inputs used in forecasting the present value of forecasted cash flows used to estimate the fair value
of our reporting units will prove to be accurate projections of future performance, and any material error in our estimates and
assumptions, could result in us needing to take a material impairment charge, which would have the effects discussed above.
As part of our ongoing monitoring efforts, we will continue to consider the global economic environment and its
potential impact on our businesses, as well as other factors, in assessing goodwill and other long-lived assets for possible
indications of impairment.
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Our financial and operating performance depends on continued access to a stable workforce and on favorable labor
relations with our employees.
Certain of our operations in the United States and internationally involve different employee/employer relationships and
the existence of works’ councils. In addition, approximately 15% of our workforce in the United States is unionized, and is
expected to remain unionized for the foreseeable future. Competition for technical personnel in the industries in which we
compete is intense. Due to the specialized nature of our business, our future performance is highly dependent upon our
ability to maintain a workforce with the requisite skills in multiple areas including engineering, manufacturing, information
technology, cybersecurity, business development and strategy, and management. Additionally, as we expand our operations
internationally, it is increasingly important to hire and retain personnel with relevant experience in local laws, regulations,
customs, traditions and business practices. Our future success depends in part on our continued ability to hire, train,
assimilate, and retain qualified personnel. There is no assurance that we will continue to be successful in recruiting qualified
employees in the future. Further, we periodically need to renegotiate our collective bargaining agreements, and any failure to
negotiate new agreements or extensions in a timely manner could result in work stoppages or slowdowns. Any significant
increases in labor costs, deterioration of employee relations, including any conflicts with works’ councils or unions, or
slowdowns or work stoppages at any of our locations, whether due to employee turnover, changes in availability of qualified
technical personnel, or otherwise, could have a material adverse effect on our business, our relationships with customers, and
our financial condition, results of operations, and cash flows.
Our operations and suppliers may be subject to physical and other risks, including natural disasters that could
disrupt production and have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Our operations include principal facilities in the United States, China, Germany, and Poland. In addition, we operate
sales and service facilities in Brazil, Bulgaria, India, Japan, the Netherlands, the Republic of Korea and the UK. We also have
suppliers for materials and parts inside and outside the United States. Our operations and sources of supply could be
disrupted by unforeseen events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods and other forms of
severe weather in countries in which we operate or in which our suppliers are located, any of which could adversely affect
our operations and financial performance. Natural disasters, public health concerns, war, political unrest, terrorist activity,
equipment failures, power outages, or other unforeseen events could result in physical damage to, and complete or partial
closure of, one or more of our manufacturing facilities, or could cause temporary or long-term disruption in the supply of
component products from some local and international suppliers, disruption in the transport of our products and significant
delays in the shipment of products and the provision of services, which could in turn cause the loss of sales and
customers. Existing insurance arrangements may not provide protection for all of the costs that may arise from such
events. Accordingly, disruption of our operations or the operations of a significant supplier could have a material adverse
effect on our business, financial condition, results of operations, and cash flows.
Our intellectual property rights may not be sufficient to protect all our products or technologies and we may,
regardless of intent, infringe on the intellectual property rights of others.
Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets and know-how, and
prevent others from infringing on our patents, trademarks, and other intellectual property rights. We cannot be certain that
our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past
or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or
sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and
patent applications. Some of our intellectual property is not covered by patents (or patent applications) and includes trade
secrets and other know-how that is not patentable or for which we have elected not to seek patent protection, including
intellectual property relating to our manufacturing processes and engineering designs. We will be able to protect our
intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable
patents, trademarks, licenses or other valid intellectual property rights. Patent protection generally involves complex legal
and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that
we own or license from others may not provide us with adequate protection against competitors. Moreover, the laws of
certain foreign jurisdictions do not recognize intellectual property rights or protect them to the same extent as do the laws of
the United States. Additionally, our commercial success depends significantly on our ability to operate without infringing
upon the patent and other proprietary rights of others. Our current or future technologies may, regardless of our intent,
infringe upon the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we
may face expensive litigation or indemnification obligations and may be prevented from selling existing products and
pursuing product development or commercialization. If we are unable to sufficiently protect our patent and other proprietary
rights or if we infringe on the patent or proprietary rights of others, our business, financial condition, results of operations,
and cash flows could be materially adversely affected.
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Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately
resolved.
In addition to intellectual property and product liability matters, we are currently involved or may become involved in
claims, pending or threatened litigation or other legal proceedings, investigations or regulatory proceedings regarding
employment or other regulatory, legal, or contractual matters arising in the ordinary course of business. There is no certainty
that the results of these matters will be favorable to the Company. We accrue for known individual matters if we believe it is
probable that the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.
There may be additional losses that have not been accrued, or liabilities may exceed our estimates, which could have a
material adverse effect on our business, financial condition, results of operations, and cash flows.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-
bribery and anti-corruption laws and regulations.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery and anti-corruption laws and regulations in
other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government
officials for the purpose of obtaining or retaining business or securing an improper business advantage. The FCPA applies to
companies, individual directors, officers, employees and agents. Companies also may be held liable for actions taken by
strategic or local partners or representatives. The FCPA also imposes accounting standards and requirements on U.S.
corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of
bribes and other improper payments. Our policies mandate compliance with these anti-bribery laws. However, we operate in
many parts of the world and sell to industries that have experienced corruption to some degree. If we are found to be liable
for FCPA or other similar anti-bribery law or regulatory violations, whether due to our or others’ actions or inadvertence, we
could be subject to civil and criminal penalties or other sanctions that could have a material adverse impact on our business,
financial condition, results of operations and cash flows.
Pension and postretirement benefit obligation funding and expenses are dependent on several economic assumptions,
which if changed could require us to make additional and/or unexpected cash contributions to our pension plans,
increase the amount of postretirement benefit expenses, affect our liquidity or affect our ability to comply with the
terms of our outstanding debt arrangements.
Accounting for retirement, pension and postretirement benefit obligations and related expense requires the use of
assumptions, including a weighted-average discount rate, an expected long-term rate of return on assets, a net healthcare cost
trend rate, and projected mortality rates, among others. Benefit obligations and benefit costs are sensitive to changes in these
assumptions. As a result, assumption changes could result in increases in our obligation amounts and expenses. If interest
rates decline, the present value of our postretirement benefit plan liabilities may increase faster than the value of plan assets,
resulting in significantly higher unfunded positions in some of our pension plans. As of September 30, 2020, we had
$266,709 in invested pension plan assets. Investment losses may result in decreases to our pension plan assets.
Funding estimates are based on certain assumptions, including discount rates, interest rates, mortality, fair value of
assets and expected return on plan assets and are subject to changes in government regulations in the countries in which our
employees work. Volatility in the financial markets may impact future discount and interest rate assumptions. Significant
changes in investment performance or a change in the portfolio mix of invested assets can result in increases or decreases in
the valuation of plan assets or in a change of the expected rate of return on plan assets. Also, new accounting standards on
fair value measurement may impact the calculation of future funding levels. We periodically review our assumptions, and
any such revision can significantly change the present value of future benefits, and in turn, the funded status of our pension
plans and the resulting periodic pension expense. Changes in our pension benefit obligations and the related net periodic
costs or credits may occur as a result of variances of actual results from our assumptions, and we may be required to make
additional cash contributions in the future beyond those which have been estimated.
In addition, our revolving credit facility and note purchase agreements contain continuing covenants and events of
default regarding our pension plans, including provisions regarding the unfunded liabilities related to those pension plans.
See the discussion above concerning “Our debt obligations and the restrictive covenants in the agreements governing our
debt could limit our ability to operate our business or pursue our business strategies, and could adversely affect our business,
financial condition, results of operations, and cash flows.”
To the extent that the present values of benefits incurred for pension obligations are greater than values of the assets
supporting those obligations or if we are required to make additional or unexpected contributions to our pension plans for any
reason, our ability to comply with the terms of our outstanding debt arrangements, and our business, financial condition,
results of operations, and cash flows may be adversely affected.
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Our business operations may be adversely affected by information systems interruptions or intrusion.
We are dependent on various information systems throughout our company and third parties to administer, store and
support multiple business activities. Furthermore, we may have access to sensitive, confidential or otherwise protected
information that may be subject to privacy and security laws and controls. If these systems are damaged, cease to function
properly or are subject to cybersecurity attacks, such as unauthorized access, malicious software and other violations, we
could experience production downtimes, operational delays, other detrimental impacts on our operations or ability to provide
products and services to our customers, the compromising of confidential or otherwise protected information, destruction or
corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from
remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material
adverse effect on our business, financial condition, results of operations, and cash flows.
Cyber-based risks, in particular, are evolving and include, but are not limited to, both attacks on our information
technology (“IT”) infrastructure and attacks on the IT infrastructure of third parties (both on premises and in the cloud)
attempting to gain unauthorized access to our confidential or other proprietary information, classified information, or
information relating to our employees, customers and other third parties. The threats we face vary from attacks common to
most industries to more advanced and persistent, highly organized adversaries, including nation states, which target us and
other defense contractors because we protect national security information. If we are unable to protect sensitive information,
including complying with evolving data privacy regulations, our customers or governmental authorities could question the
adequacy of our threat mitigation and detection processes and procedures, and depending on the severity of the incident, our
customers’ data, our employees’ data, our intellectual property, and other third party data (such as subcontractors, suppliers
and vendors) could be compromised. As a consequence of their persistence, sophistication and volume, we may not be
successful in defending against all such attacks. Due to the evolving nature of these security threats and the national security
aspects of much of the data we protect, the impact of any future incident cannot be predicted. While we attempt to mitigate
these risks by employing a number of measures, including technical security controls, employee training, comprehensive
monitoring of our networks and systems, and maintenance of backup and protective systems, our systems, networks,
products, solutions and services remain potentially vulnerable to additional known or unknown threats.
Our financial statements are subject to changes in accounting standards that could adversely impact our profitability
or financial position.
Our financial statements are subject to the application of U.S. GAAP, which are periodically revised and/or expanded.
Accordingly, from time to time, we are required to adopt new or revised accounting standards issued by recognized
authoritative bodies, including the Financial Accounting Standards Board (“FASB”). Recently, the FASB revised the
accounting standards related to revenue recognition and lease accounting. We adopted the new accounting standard related
to revenue recognition on October 1, 2018 and adopted the new accounting standard related to lease accounting on October 1,
2019. The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual
and quarterly reports on Form 10-K and Form 10-Q to the extent the impact is known. An assessment of proposed standards
is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our
financial statements cannot be fully assessed at this time. It is possible that future accounting standards we are required to
adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such
changes could have a material adverse effect on our reported results of operations and financial position. Additionally, any
inability by the Company to timely and properly implement such changes could have a material adverse effect on our ability
to timely file future financial statements upon adoption of, and in accordance with, such new accounting standards, which
could have a material adverse effect on our business and negatively affect our share price.
Increasing emission standards that drive certain product sales may be eased or delayed, which could reduce our
competitive advantage.
We sell components and systems that have been designed to meet strict emission standards, including standards that
have not yet been implemented but are expected to be implemented soon. If these emission standards are eased, developed
products may become unnecessary and/or our future sales could be lower as potential customers select alternative products or
delay adoption of our products, which would have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
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Prices for fossil fuels may increase significantly and disproportionately to other sources of fuels used for power
generation, which could reduce our sales and adversely affect our business, financial condition and results of
operations.
Commercial producers of electricity use many of our components and systems, most predominately in their power
plants that use natural gas as their fuel source. Commercial producers of electricity are often in a position to manage the use
of different power plant facilities and make decisions based on operating costs. Compared to other sources of fuels used for
power generation, natural gas prices have increased slower than fuel oil, but about the same as coal. This increase in natural
gas prices and any future increases, whether in absolute dollars or relative to other fuel costs such as oil, could impact the
sales mix of our components and systems, which could have a material adverse effect on our business, financial condition,
results of operations, and cash flows.
Long-term reduced commodity prices for oil, natural gas, and other minerals may depress the markets for certain of
our products and services, particularly those from our Industrial segment.
Many of our Industrial segment OEM and aftermarket customers and our Aerospace segment rotorcraft product lines’
customers provide goods and services that support various industrial extraction activities, including mining, oil and gas
exploration and extraction, and transportation of raw materials from extraction sites to refineries and/or processing facilities.
Long-term lower prices for commodities such as oil, natural gas, gold, tin, and various other minerals could reduce
exploration activities and place downward pressure on demand for our goods and services that support exploration and
extraction activities.
Changes in government subsidy programs and regulatory requirements may result in decreased demand for our
products.
The U.S. Government, as well as various foreign governments, provide for various stimulus programs or subsidies, such
as grants, loan guarantees and tax incentives, relating to renewable energy, alternative energy, energy efficiency and electric
power infrastructure. Some of these programs have expired, which may affect the economic feasibility or timing of future
projects. Additionally, while a significant amount of stimulus funds and subsidies are available to support various projects,
we cannot predict the timing and scope of any investments to be made by our customers under stimulus funding and subsidies
or whether stimulus funding and subsidies will result in increased demand for our products. Investments for renewable
energy, alternative energy and electric power infrastructure under stimulus programs and subsidies may not occur, may be
less than anticipated or may be delayed, any of which would negatively impact demand for our products.
Other current and potential regulatory initiatives may not result in increased demand for our products. It is not certain
whether existing regulatory requirements will create sufficient incentives for new projects, when or if proposed regulatory
requirements will be enacted, or whether any potentially beneficial provisions will be included in the regulatory requirement.
Uncertainty with respect to government subsidy programs and regulatory requirements could cause decreased demand
for our products as investments are delayed or become economically unfeasible, which could have a material adverse effect
on our business, financial condition, results of operations, and cash flows.
Our stock price may fluctuate and the historic market price of our common stock may not be indicative of future
market prices.
The market price of our common stock has fluctuated over time. Stock markets in general have experienced extreme
price and volume volatility particularly over the past few years. The closing price of our common stock on the NASDAQ
Global Select Market ranged from a high of $127.84 per share to a low of $50.24 per share during the twelve months ended
September 30, 2020. The following factors, among others, could cause the price of our common stock in the public market to
fluctuate significantly:
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general economic conditions, particularly in the aerospace, power generation and process and transportation
industries;
• market volatility caused by macroeconomic factors, such as a global pandemic;
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variations in our quarterly results of operation and whether or not we meet our guidance or the expectations of
analysts and investors;
a change in sentiment in the market regarding our operations or business prospects or the prospects of our
competitors and the markets in which we operate;
the addition or departure of key personnel; and
announcements by us or our competitors of new business, acquisitions or joint ventures.
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Fluctuations in our stock price often occur without regard to specific operating performance. The price of our common
stock could fluctuate based upon the above factors or other factors, including those that have little to do with our company,
and these fluctuations could be material.
The typical daily trading volume of our common stock may affect an investor’s ability to sell significant stock holdings
in the future without negatively affecting stock price.
As of September 30, 2020, we had 72,960 shares of common stock issued, of which 10,277 shares were held as treasury
shares. In addition, stockholders who each own 5% or greater of our shares hold a total of approximately 26% of the
outstanding shares of our common stock. During the fourth quarter of fiscal year 2020, the average daily trading volume of
our stock was approximately 342 shares. While the level of trading activity will vary each day, our typical daily trading
volume is relatively low and represents only a small percentage of total shares of stock outstanding. As a result, a
stockholder who sells a significant number of shares of stock in a short period of time could negatively affect our share price.
Certain anti-takeover provisions of our charter documents and under Delaware law could discourage or prevent
others from acquiring our company.
Our certificate of incorporation and bylaws contain provisions that:
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provide for a classified board;
provide that directors may be removed only for cause by holders of at least two-thirds of the outstanding shares of
common stock;
authorize our board of directors to fill vacant directorships or to increase or decrease the size of our board of
directors;
permit us to issue, without stockholder approval, up to 10,000 shares of preferred stock, in one or more series and,
with respect to each series, to fix the designation, powers, preferences and rights of the shares of the series;
require special meetings of stockholders to be called by holders of at least two-thirds of the outstanding shares of
common stock;
prohibit stockholders from acting by written consent;
require advance notice for stockholder proposals and nominations for election to the board of directors to be acted
upon at meetings of stockholders; and
require the affirmative vote of two-thirds of the outstanding shares of our common stock for amendments to our
certificate of incorporation and certain business combinations, including mergers, consolidations, sales of all or
substantially all of our assets or dissolution.
In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more
than 15% of our stock that have not been approved by the board of directors. These provisions and other similar provisions
make it more difficult for a third party to acquire us without negotiation. Our board of directors could choose not to negotiate
a potential acquisition that it does not believe to be in our best interest. Accordingly, the potential acquirer could be
discouraged from offering to acquire us, or could be prevented by the anti-takeover measures, from successfully completing a
hostile acquisition.
Business Specific Risks
Our product development activities may not be successful, may be more costly than currently anticipated, or we may
not be able to produce newly developed products at a cost that meets the anticipated product cost structure.
Our business involves a significant level of product development activities, generally in connection with our customers’
development activities. Industry standards, customer expectations, or other products may emerge that could render one or
more of our products or services less desirable or obsolete. Additionally, our competitors may develop new technology, or
more efficient ways to produce their existing products that could cause our existing products or services to become less
desirable or obsolete. Maintaining our market position requires continued investment in research and development. During
an economic downturn or a subsequent recovery, we may need to maintain our investment in research and development,
which may limit our ability to reduce these expenses in proportion to a sales shortfall.
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In addition, increased investments in research and development may divert resources from other potential investments
in our business, such as acquisitions or investments in our facilities, processes and operations. If these activities are not as
successful as currently anticipated, are not completed on a timely basis, or are more costly than currently anticipated, or if we
are not able to produce newly developed products at a cost that meets the anticipated product cost structure, then our future
sales, margins and/or earnings could be lower than expected, which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
Product liability claims, product recalls or other liabilities associated with the products and services we provide may
force us to pay substantial damage awards and other expenses that could exceed our accruals and insurance coverage.
The manufacture and sale of our products and the services we provide expose us to risks of product and other tort
claims, and any resulting liability. We currently have and have had in the past product liability claims relating to our
products, and we will likely be subject to additional product liability claims in the future for past, current and future products.
Some of these claims may have a material adverse effect on our business, financial condition, results of operations and cash
flows. We also provide certain services to our customers and are subject to claims with respect to the services provided. In
providing such services, we may rely on subcontractors to perform all or a portion of the contracted services. It is possible
that we could be liable to our customers for work performed by a subcontractor. Regardless of the outcome, product liability
claims can be expensive to defend, can divert the attention of management and other personnel for significant periods of time,
and can cause reputational damage. While we believe that we have appropriate insurance coverage available to us related to
any such claims, our insurance may not cover all liabilities or be available in the future at a cost acceptable to us. An
unsuccessful result in connection with a product liability claim, where the liabilities are not covered by insurance or for
which indemnification or other recovery is not available, could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as
planned.
As part of our business strategy, we may pursue acquisitions of other companies and assets. For example, in fiscal year
2018, we acquired Woodward L’Orange. The success of these transactions will depend on, among other things, our ability to
integrate assets and personnel acquired in these transactions and to apply our internal controls process to these acquired
businesses. The integration of these acquisitions may require significant attention from our management, and the diversion
of management’s attention and resources could have a material adverse effect on our ability to manage our business. In
addition, we may incur unanticipated costs or expenses following an acquisition, including post-closing asset impairment
charges, expenses associated with eliminating duplicate facilities, and other liabilities.
The success of our acquisitions is subject to risk, including, among others, the following:
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failure to realize expected technological and product synergies, economies of scale and cost reductions;
unforeseen expenses, delays or conditions related to the acquisitions, including those due to regulations;
the assumption of unexpected liabilities or the exposure to unexpected penalties or other enforcement actions;
adverse effects on existing business relationships with suppliers and customers, including delays or cancellations of
customer purchases, as well as revenue attrition in excess of anticipated levels if existing customers alter or reduce
their historical buying patterns;
risks associated with entering into markets in which Woodward has limited or no prior experience, including
potentially less visibility into demand;
inaccurate assumptions that may have been or may be made regarding the acquired business or the integration
process;
financial and operational results that may differ materially from our assumptions and forecasts;
unforeseen difficulties that may arise in integrating operations, processes and systems;
higher than expected investments that may be required to implement necessary compliance processes and related
systems, including information technology systems, accounting systems and internal controls over financial
reporting;
fluctuations in foreign currency exchange rates that may impact the agreed upon purchase price;
the failure to retain, motivate and integrate key management and other employees of the acquired business;
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higher than expected costs that may arise due to unforeseen changes in tax, trade, environmental, labor, safety,
payroll or pension policies in any jurisdiction in which the acquired business conducts its operations; and
•
problems that we may experience in retaining customers and integrating customer bases.
Many of these factors are outside of our control and any one of them could result in increased costs, decreases in the
amount of expected revenues, and diversion of management’s time and attention. Furthermore, we may not realize the
degree or timing of benefits we anticipate when we first enter into these transactions. Failure to implement our acquisition
strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
We also may make strategic divestitures from time to time, such as the divestiture of our renewable power systems
business and related businesses. These transactions may result in continued financial involvement in the divested businesses,
such as through guarantees or other financial arrangements, following the transaction. Nonperformance by those divested
businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs,
any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We have engaged in restructuring and alignment activities from time to time and may need to implement further
restructurings or alignments in the future, and there can be no assurance that our restructuring or alignment efforts
will have the intended effects.
From time to time, we have responded to changes in our industry and the markets we serve, or other changes in our
business, by restructuring or aligning our operations. In fiscal year 2020, we announced a restructuring plan and incurred
workforce management costs primarily in connection with our responsive actions to mitigate the effects of the COVID-19
pandemic. Historically, our restructuring activities have included workforce management and other restructuring charges
related to acquired businesses, including, among others, changes associated with integrating similar operations, managing our
workforce, vacating or consolidating certain facilities and cancelling certain contracts. Due to cost reduction measures or
changes in the industry and markets in which we compete, we may decide to implement restructuring or alignment activities
in the future, such as closing plants, moving production lines, or making additions, reductions or other changes to our
management or workforce. These restructuring and/or alignment activities generally result in charges and expenditures that
may adversely affect our financial results for one or more periods.
Restructuring and/or alignment activities can create unanticipated consequences, such as instability or distraction among
our workforce, and we cannot be sure that any restructuring or alignment efforts that we undertake will be successful. A
variety of risks could cause us not to realize expected cost savings, including, among others, the following:
•
•
•
•
•
•
•
•
higher than expected severance costs related to staff reductions;
higher than expected costs of closing plants;
higher than expected retention costs for employees that will be retained;
higher costs to hire new employees or delays or difficulty hiring the employees needed;
higher than expected stand-alone overhead expenses;
higher than expected operating costs associated with moving production lines;
delays in the anticipated timing of activities related to our cost-saving plan; and
other unexpected costs associated with operating the business.
If we are unable to structure our operations in the light of evolving market conditions, it could have a material adverse
effect on our business, financial condition, results of operations, and cash flows.
Our manufacturing activities may result in future environmental costs or liabilities.
We use hazardous materials and/or regulated materials in our manufacturing operations. We also own, operate, have
acquired, and may in the future acquire facilities that were formerly owned and operated by others that used such materials.
The risk that a significant release of regulated materials has occurred in the past or will occur in the future cannot be
completely eliminated or prevented. As a result, we are subject to a substantial number of costly regulations. In particular,
we are required to comply with increasingly stringent requirements of federal, state, and local environmental, occupational
health and safety laws and regulations in the United States, the EU, and other territories, including those governing emissions
to air, discharges to water, noise and odor emissions, the generation, handling, storage, transportation, treatment and disposal
of waste materials, and the cleanup of contaminated properties and human health and safety. Compliance with these laws and
regulations results in ongoing costs and compliance with any future changes in these laws and regulations could result in the
30
incurrence of additional costs. We cannot be certain that we have been, or will at all times be, in complete compliance with
all environmental requirements, or that we will not incur additional material costs or liabilities in connection with these
requirements. In addition, we may be exposed to other environmental costs such as participation in superfund sites or other
similar jurisdictional initiatives.
As a result, we may incur material costs or liabilities or be required to undertake future environmental remediation
activities that could damage our reputation and have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
Failure of our production lines, or those of our subcontractors, to meet required certification standards could disrupt
production and have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our existing production lines, as well as the production lines of our subcontractors, are sometimes required to pass
varying levels of qualification with certain of our customers. Some of our customers require that our production lines pass
their specific qualification standards and that we, and any subcontractors that we may use, be registered under or certified to
certain U.S. or international quality standards. We may be unable to obtain, maintain, or we may experience delays in
obtaining, a certification or registration to a required quality standard. A delay in obtaining, or the failure to obtain a
necessary quality certification or registration could result in significant out-of-sequence work and increased production costs,
as well as delayed deliveries to customers, which could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2
Properties
Our principal plants are as follows:
United States
Fort Collins, Colorado (two plants) – Corporate headquarters and Aerospace and Industrial segment manufacturing and
engineering
Greenville, South Carolina (leased) –Industrial segment manufacturing and Aerospace and Industrial segments
engineering
Loveland, Colorado (leased) –Industrial segment manufacturing and Aerospace and Industrial segments engineering
Niles, Illinois – Aerospace segment manufacturing and engineering
Rockford, Illinois (two plants) – Aerospace segment manufacturing and engineering
Santa Clarita, California – Aerospace segment manufacturing and engineering
Zeeland, Michigan – Aerospace segment manufacturing and engineering
Other Countries
Aken, Germany (leased) –Industrial segment manufacturing and engineering
Glatten, Germany – Industrial segment manufacturing
Krakow, Poland – Industrial segment manufacturing and Aerospace and Industrial segments engineering
Stuttgart, Germany – (two plants; one leased) Industrial segment engineering
Tianjin, Peoples’ Republic of China (leased) –Industrial segment assembly
In addition to the principal plants listed above, we own or lease other facilities used primarily for sales, service
activities, assembly, and/or engineering activities in Brazil, Bulgaria, China, India, Japan, the Netherlands, the Republic of
Korea, Saudi Arabia, the United Kingdom, Germany, and the United States.
In the fourth quarter of fiscal year 2020, the Company announced its decision to relocate its Loveland, Colorado
operations to its existing facilities in Fort Collins, Colorado and to acquire a new facility in Windsor, Colorado.
Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and
we believe our utilization levels are generally high.
31
Item 3.
Legal Proceedings
Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations
and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product
liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and
alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the
most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and
such loss is reasonably estimable.
While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with
certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not
have a material effect on Woodward's liquidity, financial condition, or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
32
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is listed on The NASDAQ Global Select Market and is traded under the symbol “WWD.” At
November 19, 2020, there were approximately 900 holders of record.
Performance Graph
The following graph compares the cumulative 10-year total return to stockholders on our common stock relative to the
cumulative total returns of the S&P Midcap 400 index and the S&P Industrials index. The graph shows total stockholder
return assuming an investment of $100 (with reinvestment of all dividends) was made on September 30, 2010 in our common
stock and in each of the two indexes and tracks relative performance through September 30, 2020. We have used a period of
10 years as we believe that our stock performance should be reviewed over a period that is reflective of our long-term
business cycle.
Woodward, Inc.
S&P Midcap 400
S&P Industrials
9/13
9/11 9/12
9/10
$ 100.00 $ 85.21 $ 106.49 $ 129.05 $ 151.61 $ 130.58 $ 202.14 $ 252.91 $ 265.40 $ 356.22 $ 266.47
100.00 98.72 126.90 162.02 181.17 183.70 211.85 248.96 284.33 277.25 271.26
100.00 95.40 123.64 158.88 185.54 178.77 214.06 261.91 291.19 295.23 299.14
9/14
9/19
9/18
9/17
9/15
9/16
9/20
The stock price performance included in this graph is not necessarily indicative of future stock price performance
33
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)
July 1, 2020 through July 31, 2020 (2)
August 1, 2020 through August 31, 2020 (2)
September 1, 2020 through September 30, 2020 (2)
Maximum
Number (or
Approximate
Dollar
Value)
of Shares
that
may yet be
Purchased
under the
Plans or
Programs at
Period
End (1)
Total
Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Total
Number
of Shares
Purchased
Weighted
Average
Price Paid
Per Share
74.94
85.69
80.16
73 $
233
45
Programs (1)
—
—
—
486,654
486,654
486,654
(1) In November 2019, our board of directors approved a stock repurchase program for the repurchase of up to
$500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated
transactions over a three-year period that will end in November 2022.
(2) Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 73 shares of
common stock were acquired in July 2020, 42 shares of common stock were acquired in August 2020, and 45 shares
of common stock were acquired in September 2020 on the open market related to the deferral of compensation by
certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred
compensation in Woodward common stock. In addition, 191 shares of common stock were acquired in August 2020
on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred
compensation. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for
deferred compensation" in the Consolidated Balance Sheets.
Item 6.
Selected Financial Data
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and
related notes which appear in “Item 8 – Financial Statements and Supplementary Data” of this Form 10-K.
Net sales (1)(2)
Net earnings (1)(2)(3)(4)(5)(6)(7)(11)(12)(13)
Earnings per share:
Basic earnings per share
Diluted earnings per share
Cash dividends per share
Income taxes (7)
Interest expense (8)
Interest income
Depreciation expense
Amortization expense
Capital expenditures
Weighted-average shares outstanding:
Basic shares outstanding
Diluted shares outstanding
2020
Year Ended September 30,
2018
(In thousands except per share amounts)
$ 2,495,665 $ 2,900,197 $ 2,325,873 $ 2,098,685 $ 2,023,078
180,838
180,378
200,507
259,602
240,395
2017
2019
2016
3.86
3.74
0.605
41,486
35,811
1,764
91,700
39,458
47,277
4.19
4.02
0.630
61,010
44,001
1,413
85,982
56,022
99,066
2.93
2.82
0.553
39,200
40,465
1,674
71,389
44,742
127,140
3.27
3.16
0.485
52,240
35,639
1,725
55,140
25,777
92,336
2.92
2.85
0.430
45,648
26,776
2,025
41,550
27,486
175,692
62,267
64,209
61,950
64,498
61,493
63,876
61,366
63,512
61,893
63,556
34
Working capital
Total assets
Long-term debt, less current portion (9)
Total debt (9)
Total liabilities (10)
Stockholders’ equity
Full-time worker members
Notes:
2017
2019
2020
At September 30,
2018
(Dollars in thousands)
$ 818,533 $ 563,792 $ 523,619 $ 593,955 $ 463,811
3,903,336 3,956,526 3,790,649 2,757,109 2,642,362
577,153
727,153
1,910,659 2,229,785 2,252,545 1,385,726 1,429,767
1,992,677 1,726,741 1,538,104 1,371,383 1,212,595
6,852
864,899 1,092,397
736,849
838,483 1,084,899 1,246,032
580,286
612,886
8,277
7,248
9,023
6,829
2016
1. Woodward adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and
all subsequently issued supplemental and/or clarifying ASUs related to ASU 2014-09 (collectively “ASC 606”) on
October 1, 2018 and elected the modified retrospective transition method. The results for periods prior to fiscal
year 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting of $38,745
was recognized as a net increase to retained earnings at the date of adoption.
2. On June 1, 2018, Woodward and its wholly-owned subsidiary, Woodward Aken GmbH acquired from Rolls-Royce
PLC all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China
and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their
related operations (collectively, “L’Orange” and subsequent to acquisition, "Woodward L'Orange"). As Woodward
L'Orange was acquired during the third quarter of fiscal year 2018, net sales from Woodward L’Orange for fiscal
year 2019 included sales of $332,009, compared to net sales of $102,905 from Woodward L'Orange during the
period June 1, 2018 through September 30, 2018.
3.
4.
5.
6.
7.
In fiscal year 2020 and fiscal year 2018, Woodward recorded restructuring charges, net of tax, totaling $16,621 and
$12,674, respectively. Restructuring charges recognized in fiscal year 2020 primarily related to workforce
management actions related to the COVID-19 pandemic, while restructuring charges recognized in fiscal year 2018
related to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated
Drake Campus in Fort Collins, Colorado. The remaining restructuring charges recognized during fiscal year 2018
consist of workforce management costs related to aligning the Company’s industrial turbomachinery business with
current market conditions.
In fiscal year 2019, Woodward recorded total charges, net of tax, of $44,286 related to (i) move costs associated
with the relocation of our Duarte, California operations to the Company’s newly renovated Drake Campus in Fort
Collins, Colorado ("Duarte move related costs"), (ii) the purchase accounting impacts related to the amortization of
the Woodward L'Orange backlog intangible, and (iii) charges associated with the impairment of accounts
receivable, inventory and certain other assets in connection with the insolvency of Senvion, a significant customer of
the Company's renewables business.
In fiscal year 2018, Woodward recorded total charges, net of tax, of $42,018 related to (i) Duarte move related
costs (ii) the purchase accounting impacts recognized in cost of goods sold related to the revaluation of the
Woodward L’Orange inventory and the amortization of the backlog intangible, (iii) the transaction and integration
costs associated with the acquisition of Woodward L'Orange, (iv) cost associated with an at-the-money-forward
option, (v) warranty and indemnity insurance costs associated with the acquisition of Woodward L’Orange, and (vi)
German real estate transfer tax costs associated with the acquisition of Woodward L’Orange.
In fiscal year 2016, Woodward recorded special charges, net of tax, totaling approximately $10,478 related to its
efforts to consolidate facilities, reduce costs and address current market conditions.
In fiscal year 2019, Woodward recognized a tax expense of $10,588, or $0.17 per basic and diluted share, related to
final regulations issued by the Internal Revenue Service that modified the one-time repatriation tax on deferred
foreign income computation required by the change in U.S. tax regulation in December 2017. In fiscal year 2018,
Woodward recognized a tax expense of $10,860, or $0.18 and $0.17 per basic and diluted share, respectively,
related to the transition impacts of the change in U.S. tax legislation in December 2017. In fiscal year 2016,
Woodward recognized a tax benefit of $6,500, or $0.10 per basic and diluted share, related to the retroactive impact
of the permanent reinstatement of the U.S. research and experimentation credit (“R&E Credit”) pertaining to fiscal
year 2015.
35
8.
9.
Interest expense for fiscal years 2018 and 2017 includes an increase of $8,695 and $8,209, respectively, due to the
impact of retrospectively applying Accounting Standards Update ("ASU") 2017-07, “Compensation – Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost." The interest cost component of net periodic benefit costs included in interest expense for fiscal year
2019 was $9,444.
In addition to the use of cash on hand, to finance the acquisition of L’Orange, in May 2018 Woodward issued an
aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and
borrowed $167,420 under its existing revolving credit agreement.
10. On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business
unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”). Woodward
determined that the JV formation was not the culmination of an earnings event because Woodward has significant
performance obligations to support the future operations of the JV. Therefore, Woodward recorded the $250,000
consideration received from GE for its purchase of a 50% equity interest in the JV as deferred income. The
$250,000 deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales
of applicable fuel systems within the scope of the JV in a particular period as a percentage of total revenue expected
to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine
programs assigned to the JV. Total liabilities include $238,306 as of September 30, 2020, $238,905 as of
September 30, 2019, $242,387 as of September 30, 2018, $243,347 as of September 30, 2017, and $244,739 as of
September 30, 2016 of unamortized deferred income realized related to the JV.
11. Associated with our decision to relocate our Duarte, California operations to the newly renovated Drake Campus in
Fort Collins, Colorado, we closed on the sale of our Duarte real property and recorded a pre-tax gain on sale of
assets in the amount of $22,323 during fiscal year 2020.
12. In fiscal year 2020, Woodward approved a plan to divest the renewable power systems business and other related
businesses, which resulted in the recognition of the associated assets and liabilities as held for sale. Concurrently,
Woodward determined that the assets held for sale, net of any liabilities held for sale, were impaired and recognized
a non-cash impairment charge of $37,902, representing the write down of the associated net assets held for sale to
their fair market value as of December 31, 2019.
13. In 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. Concurrent with
settlement of the derivative instruments, we discontinued the related foreign currency hedging relationships
associated with the instruments. As a result of the termination of the instruments, and related hedging relationships,
we recognized a pre-tax gain of $30,481 and incurred a swap breakage fee of $3,000.
36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 in
the United States, Europe and Asia, 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. Our customers look to us to optimize the efficiency, emissions and operation of power equipment 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, wind turbines, including converters and power grid related equipment,
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 March 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a pandemic. In an effort to
contain COVID-19 or slow its spread, governments and private industry around the world have also enacted various
measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of
residence, and practice social distancing when engaging in essential activities. In an effort to protect the health and safety of
its employees, we have implemented enhanced cleaning protocols and adopted social distancing policies at all of our
locations, including working from home, reducing the number of people working in locations at any one time, and
suspending employee travel. We have taken steps to align our business with the unfavorable economic conditions, including
the implementation of enhanced measures through our global supply chain and business unit management teams to ensure we
are efficiently utilizing inventory on hand, as well as our internal processing capabilities. In addition, we have taken specific
actions to reduce costs and implemented staff reductions, reduction in employee hours and/or salaries, furloughs, temporary
layoffs, or a combination of these actions, at many of our locations.
The global health crisis caused by COVID-19 and the related responses of governments and private industry have
negatively impacted business activity across the globe. Since the end of the second quarter of fiscal year 2020, we have
experienced declining demand and both our aerospace and industrial markets have been significantly impacted economically,
which resulted in a rapid decline in orders from and shipments to customers. Outbreaks in various regions also resulted in the
extended shutdown of certain businesses in these regions, which has resulted in disruptions or delays to our supply chain.
Although we have experienced certain impacts from the global emergence of the COVID-19 pandemic, the full extent it will
have on our business is currently unknown. When COVID-19 is demonstrably contained, we anticipate an improvement in
economic activity; however, the timing and degree of such improvement will depend on the rate and pace of reopening, and
the effectiveness of the containment efforts deployed by various national, state, and local governments.
We have generally been deemed an essential business and therefore have continued to operate during the pandemic. We
will continue to actively monitor the situation and may take further actions altering our business operations that we determine
are in the best interests of our employees, customers, communities, business partners, suppliers, and shareholders, 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, including the effects on the Company's customers, employees, and prospects, or on our financial
results in future periods.
37
Divestiture of the Renewables business and related businesses
In the first quarter of fiscal year 2020, Woodward’s board of directors 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 in Germany, Poland and Bulgaria and accounted for
approximately $88,000 of sales in fiscal year 2019. The transactions consummating the sale of the disposal group were
completed on April 30, 2020 (the “Disposal Group Closing”).
Financial information for the disposal group is reflected in our financial statements prior to the date of Disposal Group
Closing.
Termination of Merger with Hexcel Corporation
On January 12, 2020, Woodward entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hexcel
Corporation (“Hexcel”) and Genesis Merger Sub, Inc., a wholly owned subsidiary of Woodward (“Merger Sub”). The
Merger Agreement provided that, upon the terms and subject to the conditions set forth therein, Merger Sub would merge
with and into Hexcel, with Hexcel surviving the merger as a wholly owned subsidiary of Woodward. On April 5, 2020, in
response to the economic uncertainties in both the aerospace and industrial sectors resulting from the global health crisis
caused by the COVID-19 pandemic, Woodward and Hexcel entered into an agreement to terminate the Merger Agreement,
with no liability to either party (the “Termination Agreement”). Neither party was required to pay the other a termination fee
as a result of the mutual decision to terminate the Merger Agreement. Merger transaction-related costs have been expensed
as incurred during fiscal year 2020.
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 2020, reducing total global passenger air miles
flown by nearly two-thirds from the prior year. Commercial aircraft production was initially paused and then reduced in
response to the significant decrease in demand from airlines and aircraft manufacturers. Reductions ranging from thirty to
fifty percent were seen in most aircraft models at all aircraft OEMs. As a result of the decline in demand, regional
governments offered various financial support and stimulus to airlines and aircraft manufactures, which in some cases,
increased the targets 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 more fuel efficient and lower emission aircraft. While the near-term
production levels are significantly reduced and order backlogs have been reduced by cancellations and deferrals, we expect
production levels to remain stable due to solid order backlogs for the new aircraft models.
The business and general aviation market demand was also impacted in fiscal year 2020 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 2020. 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 A320neo, A330neo, and A380, Bell 429, Boeing 737 MAX, 777, 787, 747-8 and
Bombardier CSeries (now majority owned by Airbus and renamed the A220). 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 extended grounding of the Boeing 737 MAX by the FAA and other regulators, which started in March of 2019,
caused deliveries of that aircraft to be zero in fiscal year 2020. The customer orders and demand for the aircraft began to
erode over the course of fiscal year 2020 in response to the COVID-19 pandemic, though long-term prospects have not
changed significantly. On November 18, 2020, the FAA approved the Boeing 737 MAX to return to commercial service and
we believe the aircraft will resume flying as early as the first quarter of our fiscal year 2021. As the aircraft 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 2020, the grounding had a significant negative
impact on OEM sales in addition to the continuing significant unfavorable impact on initial provisioning sales related to the
737 MAX aircraft and CFM LEAP engine. We anticipate a slow recovery of the OEM and a slightly better recovery of the
initial provisioning sales in the periods following the aircraft’s return to service.
38
Defense – The defense industry has been strengthening with increasing budgetary allocations since 2016. The National
Defense Authorization Act for Fiscal Year 2019, which was signed into law in August 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 2021. 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-18 E/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. We have significant
motion control system content for the refueling boom on the KC-46A, which entered low rate production in late calendar year
2018. 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. Although we expect overall production rates to
remain flat or decrease for these weapons programs in fiscal year 2021, relative to the very strong production rates in recent
years, we expect overall demand to remain favorable in the near term.
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 2020, as airlines parked nearly two-thirds of the active fleet. Airliner capacity is anticipated to remain below 2019
levels, even as it is improving, 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 will elect to defer maintenance where possible, which will continue to pressure our aftermarket sales
while capacity recovers. We anticipate newer aerospace platforms, which contain more of our products, will be preferred as
aircrafts return to service, which will provide increased content across existing platforms. With the entry into service of the
new single aisle aircraft (Boeing 737 MAX and Airbus A320neo), notwithstanding the grounding of the Boeing 737 MAX as
described above, we have seen a significant increase in initial provisioning sales to the operators of these new aircraft. The
Boeing 787 has been a successful twin aisle aircraft as well, which would also result in stronger initial provision sales.
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 has also increased as the combat readiness of existing military programs on which we have
content is prioritized by the U.S. Government. 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, as the service lives of existing military programs are extended and there is 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, stabilized in fiscal year 2020 with some industrial gas turbine sales growth compared to
fiscal year 2019, driven primarily by increased Woodward content on certain newer industrial gas turbines. 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. Though the increasing global demand for energy supports long-term growth for industrial gas
turbines, we project a short-term decline in demand due to the COVID-19 pandemic on the global economy. This short-term
decline is anticipated to be followed by a recovery and modest 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.
39
Reciprocating Engines – Woodward’s key markets for engine control technologies are power generation, transportation
(including compressed natural gas (“CNG”) 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 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 in the second half of fiscal year 2020. The demand for internet traffic and
data storage is also driving demand for data center power generation. We anticipate some softening and stabilization of the
large reciprocating engine market in fiscal year 2021 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 share gains by our customers and
increased scope on the latest generation reciprocating engines as energy policies in some countries encourage the use of
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.
RESULTS OF OPERATIONS
Operational Highlights
Net sales for fiscal year 2020 were $2,495,665, a decrease of $404,532, or 13.9%, from $2,900,197 for the prior fiscal
year. Foreign currency exchange rates had an unfavorable impact on net sales of $9,380 for fiscal year 2020, as compared to
the same period of the prior year. Net sales excluding the disposal group for fiscal year 2020 were $2,428,002, a decrease of
13.7% from $2,812,200 for the prior fiscal year. Aerospace segment net sales for the fiscal year 2020 were down 15.4% to
$1,590,963, compared to $1,880,520 for the prior fiscal year. Industrial segment net sales for fiscal year 2020 were down
11.3% to $904,702, compared to $1,019,677 for the prior fiscal year. Industrial segment net sales excluding the disposal
group for fiscal year 2020 were down 10.2% to $837,040, compared to $931,681 for the prior fiscal year.
Net earnings for the fiscal year 2020 were $240,395, or $3.74 per diluted share, compared to $259,602, or $4.02 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. Adjusted net earnings for the fiscal year 2020 were $254,037, or
adjusted earnings per share of $3.96 per diluted share, compared to $314,476, or $4.88 per diluted share, for the prior fiscal
year.
The effective tax rate in fiscal year 2020 was 14.7%, compared to 19.0% for the prior fiscal year. The adjusted effective
tax rate in fiscal year 2020 was 17.8%, compared to 17.5% for the prior fiscal year. The effective tax rate for fiscal year 2019
reflects the transition impacts of the changes in the U.S. federal tax law enacted in December 2017 with additional income
tax expense of $10,588 related to the transition impacts recognized in the fiscal year 2019.
Earnings before interest and taxes (“EBIT”) for the fiscal year 2020 were $315,928, a decrease of 13.0% from $363,200
in the prior fiscal year. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the fiscal year 2020
were $447,086, down 11.5% from $505,204 for the prior fiscal year. Adjusted EBIT and adjusted EBITDA for fiscal year
2020 were $343,158 and $474,316, respectively, compared to $423,990 and $544,894, respectively, for the prior fiscal year.
Aerospace segment earnings as a percent of segment net sales were 19.5% in fiscal year 2020, compared to 20.7% in the
prior fiscal year. Industrial segment earnings as a percent of segment net sales were 11.1% in the fiscal year 2020, compared
to 9.2% in the prior fiscal year. There were no adjustments to Industrial segment earnings as a percent of segment net sales
for fiscal year 2020, which were down compared to adjusted Industrial segment earnings as a percent of segment net sales of
11.2% for fiscal year 2019.
Net sales excluding the disposal group, adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT,
EBITDA, adjusted EBITDA, adjusted Industrial segment earnings, and adjusted 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 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.
40
Liquidity Highlights
Net cash provided by operating activities for fiscal year 2020 was $349,491, compared to $390,608 for fiscal year 2019.
The decrease in net cash provided by operating activities in fiscal year 2020 compared to fiscal year 2019 is primarily
attributable to the impact of certain cash payments for accounts payable and taxes due, partially offset by timing of cash
received from customers as well as proceeds from settlement of cross-currency interest rate swaps.
For fiscal year 2020, free cash flow, which we define as net cash flows from operating activities less payments for
property, plant and equipment, was $302,404, compared to $291,542 for the fiscal year 2019. Adjusted free cash flow, which
we define as free cash flow, plus the proceeds from the sale of real property at our former Duarte, California operations and
excluding cash paid for merger and divestiture transaction costs, cash paid for restructuring charges, and cash proceeds
received from settlement of our cross-currency interest rate swaps, was $315,220 for fiscal year 2020. (A reconciliation of
free cash flow, a non-U.S. GAAP financial measure, to the closest U.S. GAAP financial measure 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.)
At September 30, 2020, we held $153,270 in cash and cash equivalents, including restricted cash of $3,497, and had
total outstanding debt of $838,483 with additional borrowing availability of $988,229, net of outstanding letters of credit,
under our revolving credit agreement. At September 30, 2020, we also had additional borrowing capacity of $7,567 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:
Net sales
Costs and expenses:
Cost of goods sold
Selling, general, and administrative expenses
Research and development costs
Impairment of assets sold
Restructuring charges
Gain on cross-currency interest rate swaps, net
Interest expense
Interest income
Other expense (income), net
Total costs and expenses
Earnings before income taxes
Income tax expense
Net earnings
Other select financial data:
Working capital
Short-term borrowings
Total debt
Total stockholders' equity
Year Ended September 30,
2020
% of Net
Sales
2019
% of Net
Sales
$ 2,495,665
100 % $ 2,900,197
100 %
1,855,422
217,710
133,134
37,902
22,216
(30,481 )
35,811
(1,764 )
(56,166 )
2,213,784
281,881
41,486
240,395
$
74.3
8.7
5.3
1.5
0.9
(1.2 )
1.4
(0.1 )
(2.3 )
88.7
11.3
1.7
9.6
2,192,654
211,205
159,107
–
–
–
44,001
(1,413 )
(25,969 )
2,579,585
320,612
61,010
259,602
$
75.6
7.3
5.5
0.0
0.0
0.0
1.5
(0.0 )
(0.9 )
88.9
11.1
2.1
9.0
September 30,
2020
September 30,
2019
$
818,533 $
—
838,483
1,992,677
563,792
220,000
1,084,899
1,726,741
41
2020 RESULTS OF OPERATIONS
2020 Net Sales Compared to 2019
Consolidated net sales for fiscal year 2020 decreased by $404,532, or 13.9%, compared to fiscal year 2019.
Details of the changes in consolidated net sales are as follows:
Consolidated net sales for the year ended September 30, 2019
Aerospace volume
Industrial volume
Disposal group divestiture impact
Noncash consideration
Effects of changes in price and sales mix
Effects of changes in foreign currency rates
Consolidated net sales for the year ended September 30, 2020
$
$
2,900,197
(290,218 )
(68,776 )
(36,307 )
(18,318 )
18,467
(9,380 )
2,495,665
The decrease in consolidated net sales for fiscal year 2020 is primarily attributable to the decline in sales volume related
to the ongoing impact of the COVID-19 pandemic and extended grounding of the Boeing 737 MAX aircraft. In the
Aerospace segment, the decrease in net sales volumes is primarily attributable to lower commercial sales as a result of a
secular decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of the global
COVID-19 pandemic. In the Industrial segment, the decrease in net sales volumes in primarily attributable to continued
weakness in the oil and gas market and the associated aftermarket, compounded by the ongoing impact of the COVID-19
pandemic.
Our worldwide sales activities are primarily denominated in USD, EUR, GBP, Japanese Yen (“JPY”), and Chinese
Renminbi (“RMB”). As the USD, EUR, GBP, JPY and RMB fluctuate against each other and other currencies, we are
exposed to foreign currency gains or losses on sales transactions.
2020 Costs and Expenses Compared to 2019
Cost of goods sold decreased by $337,232 to $1,855,422, or 74.3% of net sales, for fiscal year 2020, from $2,192,654,
or 75.6% of net sales, for fiscal year 2019. The decrease in cost of goods sold in fiscal year 2020, as compared to the same
period of the prior year, is primarily attributable to lower sales volume as a result of global disruption from the COVID-19
pandemic, the elimination of annual bonus for fiscal year 2020, as well as Duarte move-related costs and purchase accounting
impacts related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward
L’Orange, which were recognized in fiscal year 2019, whereas there were no such costs recognized in fiscal year 2020.
Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 25.7% for fiscal year 2020,
compared to 24.4% for fiscal year 2019. The increase in gross margin for fiscal year 2020 is primarily attributable to the
elimination of annual bonus for fiscal year 2020, as well as Duarte move-related costs and purchase accounting impacts
related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward L’Orange
which were recognized in fiscal year 2019, whereas there were no such costs recognized in fiscal year 2020.
Selling, general and administrative expenses increased by $6,505, or 3.1%, to $217,710 for fiscal year 2020, compared
to $211,205 for fiscal year 2019. Selling, general, and administrative expenses as a percentage of net sales increased to 8.7%
for fiscal year 2020, compared to 7.3% for fiscal year 2019. The increase in selling, general and administrative expenses,
both in dollars and as a percentage of sales, for fiscal year 2020 compared to the same period of the prior year is primarily
due to an increase in certain expenses related to merger and divestiture activities, and fees incurred on termination of the
cross-currency interest rate swaps. The increase was partially offset by savings from cost reduction initiatives including the
elimination of annual bonus for fiscal year 2020.
Research and development costs decreased by $25,973, or 16.3%, to $133,134 for fiscal year 2020, as compared to
$159,107 for fiscal year 2019. Research and development costs as a percentage of net sales decreased to 5.3% for fiscal year
2020, as compared to 5.5% for fiscal year 2019.
The decrease in research and development costs is primarily due to savings from cost reduction initiatives including the
elimination of annual bonus for fiscal year 2020. Our research and development activities also 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.
42
Impairment of assets sold was composed entirely of a charge of $37,902 recognized in the first quarter of fiscal year
2020. Woodward’s board of directors approved a plan to divest the disposal group, which resulted in the recognition of the
associated assets and liabilities as held for sale. Concurrently, Woodward determined that the assets held for sale, net of any
liabilities held for sale, were impaired and recognized a non-cash impairment charge of $37,902, representing the write down
of the associated net assets held for sale to their fair market value as of December 31, 2019. Refer to Note 11, Sale of
businesses in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data”
for further details.
Restructuring charges of $22,216 recognized in fiscal year 2020 primarily related to workforce management as a result
of volume and demand declines due to the global COVID-19 pandemic. All of the restructuring charges recorded in fiscal
year 2020 were recorded as nonsegment expenses and there were no such restructuring charges recorded in fiscal year 2019.
Gain on cross-currency interest rate swaps, net was composed entirely of a charge of $30,481 as a result of settlement
and termination of 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. Refer to Note 9, 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 $8,190, or 18.6%, to $35,811, for fiscal year 2020, compared to $44,001 for fiscal year
2019. Interest expense decreased as a percentage of net sales to 1.4% for fiscal year 2020, as compared to 1.5% for fiscal
year 2019. Since fiscal year 2019, we have paid the entire balance of two series of private placement notes totaling $143,000
primarily using free cash flow and proceeds from our revolving credit facility. The revolving credit facility bears interest at a
substantially lower rate than the private placement notes that were paid. We have also repaid the entire balance of our
revolving credit facility as of September 30, 2020.
Other income, net was $56,166 for fiscal year 2020, compared to $25,969 for fiscal year 2019. The increase in other
income in fiscal year 2020 compared to fiscal year 2019 was primarily due to a gain on the sale of a portion of our property
in Duarte, California in the amount of $22,323 and a gain on the sale of our property in Loveland, Colorado in the amount of
$2,330.
Income taxes were provided at an effective rate on earnings before income taxes of 14.7% for fiscal year 2020,
compared to 19.0% for fiscal year 2019.
The decrease in the effective tax rate for fiscal year 2020 compared to fiscal year 2019 is primarily attributable to the
additional income tax expense resulting from Transition Tax (as defined below) regulations issued by the IRS on June 14,
2019 which did not repeat in the current fiscal year and increased foreign earnings taxed at a lower rate resulting from the net
gain on the cross-currency interest rate swap termination. This decrease was partially offset by a smaller favorable net excess
income tax benefits from stock-based compensation.
The total amount of the gross liability for worldwide unrecognized tax benefits reported in other liabilities in the
Consolidated Balance Sheets was $9,851 at September 30, 2020 and $10,305 at September 30, 2019. At September 30, 2020,
the amount of the liability for unrecognized tax benefits that would impact our effective tax rate, if recognized, was $4,730.
At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease
by as much as $84 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the
settlement of tax positions. We accrue for potential interest and penalties related to unrecognized tax benefits in tax expense.
Woodward had accrued interest and penalties of $489 as of September 30, 2020 and $437 as of September 30, 2019.
Our tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various
stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of
limitation may result in changes to tax expense. Our fiscal years remaining open to examination for U.S. Federal income
taxes include fiscal years 2018 and thereafter. In fiscal year 2020, we concluded our U.S. Federal income tax examination
through fiscal year 2017, which included a foreign tax carryback to fiscal year 2016. Our fiscal years remaining open to
examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. We closed various
audits in foreign jurisdictions in the second and third quarters of fiscal year 2020. Consequently, fiscal years remaining open
to examination in significant foreign jurisdictions include 2016 and thereafter.
43
Segment Results
The following table presents sales by segment:
Net sales:
Aerospace
Industrial
Consolidated net sales
Year Ended September 30,
2020
2019
$ 1,590,963
904,702
$ 2,495,665
63.7% $ 1,880,520
36.3% 1,019,677
100% $ 2,900,197
64.8%
35.2%
100%
The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:
Aerospace
Industrial
Nonsegment expenses
Interest expense, net
Consolidated earnings before income taxes
Income tax expense
Consolidated net earnings
Year Ended September 30,
2019
2020
310,137 $
100,321
(94,530 )
(34,047 )
281,881
41,486
240,395 $
389,126
93,521
(119,447 )
(42,588 )
320,612
61,010
259,602
$
$
The following table presents segment earnings as a percent of segment net sales:
Aerospace
Industrial
2020 Segment Results Compared to 2019
Aerospace
Year Ended September 30,
2019
2020
19.5%
11.1%
20.7%
9.2%
Aerospace segment net sales decreased by $289,557, or 15.4% to $1,590,963 for fiscal year 2020, compared to
$1,880,520 for fiscal year 2019. The decrease in segment net sales for fiscal year 2020 as compared to fiscal year 2019 was
primarily driven by lower commercial sales due to the secular decline in global passenger traffic and OEM production rates,
plant closures and furloughs, all as a result of the global COVID-19 pandemic, and the extended grounding of the Boeing 737
MAX aircraft, partially offset by higher defense aftermarket sales due to higher demand associated with upgrade and fleet
readiness defense programs.
Defense OEM sales decreased in fiscal year 2020 compared to fiscal year 2019, driven primarily by lower sales for
guided weapons and fixed wing aircraft due to supply chain challenges as a result of disruption caused by the global COVID-
19 pandemic. Our defense aftermarket has increased as the U.S. Government has prioritized the combat readiness of existing
military programs on which we have content. Global conflicts and growing international demand for various other military
programs continue to drive demand for defense aircraft, including fighter jets, transports, and both utility and attack
rotorcraft, supported by our products and systems. Although we expect some ongoing variability in defense aftermarket sales
due to the global COVID-19 pandemic and timing of continued maintenance needs and upgrade programs, we expect U.S.
government funding for defense platforms on which we have content to be strong under the current defense budget.
Aerospace segment earnings decreased by $78,989, or 20.3%, to $310,137 for fiscal year 2020, compared to $389,126
for fiscal year 2019.
The net decrease in Aerospace segment earnings fiscal year 2020 was due to the following:
Earnings for the period ended September 30, 2019
Sales volume
Price, sales mix and productivity
Manufacturing expansion costs in the first half of fiscal year 2020
Savings from cost reduction initiatives
Other, net
Earnings for the period ended September 30, 2020
$
$
389,126
(142,992 )
22,398
(7,129 )
53,398
(4,664 )
310,137
44
Aerospace segment earnings as a percentage of segment net sales were 19.5% for fiscal year 2020 and 20.7% fiscal year
2019. Aerospace segment earnings in fiscal year 2020 decreased primarily due to impact on sales of the global spread of the
COVID-19 pandemic and extended grounding of the Boeing 737 MAX aircraft, partially offset by savings from cost
reduction initiatives, including the elimination of annual bonus for fiscal year 2020, and favorable product mix.
Industrial
Industrial segment net sales decreased by $114,975, or 11.3%, to $904,702 for fiscal year 2020, compared to
$1,019,677 for fiscal year 2019. Industrial segment net sales excluding the disposal group decreased by $94,641, or 10.2%,
to $837,039 for fiscal year 2020, compared to $931,680 for the same period of fiscal year 2019. Foreign currency exchange
rates had an unfavorable impact on segment net sales of $9,249 for fiscal year 2020.
The decrease in Industrial segment net sales in fiscal year 2020 was primarily attributable to lower sales volumes, the
ongoing impacts of the global COVID-19 pandemic across markets we serve, continued weakness in the oil and gas market,
and the divestiture of the disposal group.
The demand for diesel fuel systems was negatively impacted by a softening of the oil and gas market amid a slowing
global economy, pricing volatility and decreased capital investments related to reduced drilling activity, particularly within
the North American fracking market.
Sales of fuel systems for CNG trucks in Asia were slightly up in fiscal year 2020 as production rates for China 6
compliant trucks recovered from the large pre-buy of China 5 compliant trucks, which negatively impacted sales in previous
years. Sales were also impacted in fiscal year 2020 from temporary plant closures associated with the COVID-19 pandemic.
We anticipate the market demand for natural gas trucks to continue as the Chinese government continues to enforce China 6
regulations and continues to incentivize the use of natural gas rather than diesel.
Although the industrial gas turbine market began to stabilize during fiscal year 2020 as global power demand increases
and domestic upgrade initiatives transition from planning to execution, we expect to see volatility in demand due to the
COVID-19 pandemic. Industrial gas turbine sales in fiscal year 2020 benefitted from the depletion of inventory in the market
and increased Woodward content on certain newer industrial gas turbines. However, this was partially offset by the
weakening demand in new turbine programs due to the economic uncertainty caused by the COVID-19 pandemic and we
expect lower demand in industrial gas turbine sales until the outbreak is contained and demand stabilizes.
Industrial segment earnings increased by $6,800, or 7.3%, to $100,321 for fiscal year 2020, compared to $93,521 for
fiscal year 2019. Industrial segment earnings excluding the disposal group decreased by $590, or 0.6%, to $96,719,
compared to $97,309 for fiscal year 2019. There were no adjustments to Industrial segment earnings for fiscal year 2020 and
adjusted Industrial segment earnings for fiscal year 2019, which exclude certain purchase accounting impacts related to the
L’Orange Acquisition, were $114,621. Adjusted Industrial segment earnings for fiscal year 2019 excluding the disposal
group were $118,409.
The net increase in Industrial segment earnings for fiscal year 2020 was due to the following:
Earnings for the period ended September 30, 2019
Sales volume
Price, sales mix and productivity
L'Orange backlog amortization
Effects of changes in foreign currency rates
Disposal group divestiture impact
Savings from cost reduction initiatives
Other, net
Earnings for the period ended September 30, 2020
$
$
93,521
(34,881 )
(1,723 )
13,608
(2,827 )
590
29,980
2,053
100,321
Industrial segment earnings as a percentage of segment net sales were 11.1% for fiscal year 2020, compared to 9.2% for
fiscal year 2019. Industrial segment earnings as a percentage of segment net sales, excluding the disposal group, were 11.6%
for fiscal year 2020, compared to 10.4% for fiscal year 2019. The increase in Industrial segment earnings for fiscal year 2020
was primarily due to savings from cost reduction initiatives, including the elimination of annual bonus for fiscal year 2020,
and the amortization of the backlog intangible acquired in connection with the L’Orange acquisition that was recognized in
fiscal year 2019, whereas no amortization of this backlog intangible was recognized in fiscal year 2020. The increase in
fiscal year 2020 were partially offset by lower sales volume. There were no adjustments to Industrial segment earnings as a
percentage of segment net sales for fiscal year 2020, which were down compared to adjusted Industrial segment earnings as a
percentage of segment net sales of 11.2% for fiscal year 2019.
45
Nonsegment
Nonsegment expenses decreased to $94,530 for fiscal year 2020, compared to $119,447 for fiscal year 2019. 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 in Duarte, California in the amount of $22,323. Included in
nonsegment expenses for fiscal year 2019 were Duarte move-related costs in the amount of $27,089. Excluding all of these
charges from both 2020 and 2019, nonsegment expenses decreased in fiscal year 2020 compared to fiscal year 2019 primarily
due to savings from cost reduction initiatives, which includes the elimination of annual bonus for fiscal year 2020.
For a discussion of the 2019 Results of Operations, including a discussion of the financial results for the fiscal year
ended September 30, 2019 compared to the fiscal year ended September 30, 2018, refer to Part I, Item 7 of our Form 10-K
filed with the SEC on November 25, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and
other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings
under our credit facilities. Historically, we have also issued debt to supplement our cash needs, repay our other indebtedness,
or finance our acquisitions. We expect that cash generated from our operating activities, together with borrowings under our
revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs, including
capital expansion funding for the foreseeable future.
Our aggregate cash and cash equivalents were $153,270 at September 30, 2020 and $99,073 at September 30, 2019, and
our working capital was $818,533 at September 30, 2020 and $563,792 at September 30, 2019. Of the cash and cash
equivalents held at September 30, 2020, $127,997 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 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.
We do not believe the one-time repatriation tax on deferred foreign income resulting from the Tax Act, which is
expected to be paid over an eight year period that began in January 2019, will have a significant impact on our cash flows in
any individual fiscal year.
Consistent with common business practice in China, our Chinese subsidiaries accept bankers’ acceptance notes from
Chinese customers, in settlement of certain customer accounts receivable. Bankers’ acceptance notes are financial
instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a
customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution
to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of
the maturity date. The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’
acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft. The issuing financial
institution is the obligor, not our customers. Upon our acceptance of a bankers’ acceptance note from a customer, such
customer has no further obligation to pay us for the related accounts receivable balance. We had bankers’ acceptance notes
of $56,640 at September 30, 2020 and $42,171 at September 30, 2019 recorded as non-customer accounts receivable in our
Consolidated Balance Sheets. We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy
and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.
On June 19, 2019, we amended our revolving credit agreement to, among other things, extend the termination date of
the revolving loan commitments of the lenders thereunder from April 28, 2020 to June 19, 2024. 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.
46
On October 1, 2018, we paid the entire principal balance of $100,000 on our 6.39% Series D Notes and on April 3,
2019, we paid the entire principal balance of $43,000 on our 8.24% unsecured Series F notes using in both instances proceeds
from borrowings under our revolving credit facility.
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 16, 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, 2020, we had total outstanding debt of $838,483 consisting of various series of unsecured notes due
between 2020 and 2033, and amounts borrowed under our revolving credit facility, and our finance leases. Our Series G and
Series J notes, both of which have an aggregate principal amount of $50,000, mature on November 15, 2020. At
September 30, 2020, we had additional borrowing availability of $988,229 under our revolving credit facility, net of
outstanding letters of credit, and additional borrowing availability of $7,567 under various foreign credit facilities.
At September 30, 2020, we had no borrowings outstanding under our revolving credit facility. Revolving credit facility
and short-term borrowing activity during the fiscal year ended September 30, 2020 were as follows:
Maximum daily balance during the period
Average daily balance during the period
Weighted average interest rate on average daily balance
$
$
343,255
219,960
2.28 %
We believe we were in compliance with all our debt covenants as of September 30, 2020. 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 16, 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.
In fiscal year 2018, we entered into a share purchase agreement to acquire L’Orange (the “L’Orange Agreement”). We
completed the acquisition of L’Orange on June 1, 2018 for total consideration (including cash consideration and the
assumption of certain liabilities) of €700,000, or approximately $811,000 (the “L’Orange Acquisition”). The cash
consideration was financed through the use of cash on hand, the issuance of senior unsecured notes and $167,420 borrowed
under our revolving credit facility. In connection with these borrowings, we entered into cross currency swap transactions,
which effectively lowered the interest rate on each tranche of the senior unsecured notes, and the borrowings under our
revolving credit agreement (see Note 9, Derivative instruments and hedging activities in the Notes to the Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K for more information).
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 the current known impacts of the COVID-19 pandemic will not impact our ability to
satisfy our long-term debt obligations.
In the first quarter of fiscal year 2017, our board of directors terminated our prior stock repurchase program and
replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on
the open market or in privately negotiated transactions over a three year period that ended in November 2019 (the “2017
Authorization”). In fiscal year 2019, we repurchased 1,102 shares of our common stock for $110,311 under the 2017
Authorization pursuant to a 10b5-1 plan. Effective upon the expiration of the 2017 Authorization in November 2019, our
board of directors approved a new program for the repurchase of up to $500,000 of our outstanding shares of common stock
on the open market or in privately negotiated transactions over a three-year period that will end in 2022 (the “2019
Authorization”). In fiscal year 2020, we repurchased 124 shares of our common stock for $13,346 under the 2019
Authorization. We purchased 456 shares of our common stock for $43,253 in the first nine-months of fiscal year 2019 under
the 2017 Authorization. Under the now-terminated merger agreement with Hexcel, we had been generally prohibited from
repurchasing our common stock during the pendency of the Merger. With the termination of the merger agreement on April
5, 2020, share repurchases were no longer restricted. However, to preserve cash flow due to the economic uncertainties
caused by the COVID-19 pandemic, we did not make any additional share repurchases for the remainder of fiscal year 2020.
47
Associated with our decision to relocate our Duarte, California operations to the newly renovated Drake Campus in Fort
Collins, Colorado, which was finalized in fiscal year 2019, on December 30, 2019, we closed on the sale of one of two
parcels of the Duarte real property and recorded a pre-tax gain on sale of assets in the amount of $13,522. On August 11,
2020, we closed on the remaining parcel of the Duarte real property and recorded an additional pre-tax gain on sale of assets
in the amount of $8,801.
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. Concurrently with
settlement of the derivative instruments, we discontinued the related foreign currency hedging relationships associated with
the instruments. Upon termination of the instruments, and related hedging relationships, we recognized a pre-tax gain of
$30,481 and incurred a swap breakage fee of $3,000. We received net cash proceeds of $59,571 at the date of settlement,
which included $58,191 of proceeds related to the fair value of the instruments and $4,380 of net accrued interest, less a
$3,000 fee to terminate the cross-currency interest rate swap agreements.
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
Net cash provided by operating activities
Net cash (used in) investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, including restricted cash, at beginning of year
Cash and cash equivalents, including restricted cash, at end of period
2020 Cash Flows Compared to 2019
Year Ended September 30,
2019
2020
349,491 $
(6,880 )
(290,242 )
1,828
54,197
99,073
153,270 $
390,608
(102,527 )
(265,599 )
(7,003 )
15,479
83,594
99,073
$
$
Net cash flows provided by operating activities for fiscal year 2020 was $349,491, compared to $390,608 for fiscal year
2019. The decrease in net cash provided by operating activities in fiscal year 2020 compared to fiscal year 2019 is primarily
attributable to the timing of certain cash payments for accounts payable and taxes due, partially offset by timing of cash
received from customers as well as proceeds from settlement of cross-currency interest rate swaps during the third quarter of
fiscal year 2020.
Net cash flows used in investing activities for fiscal year 2020 was $6,880, compared to $102,527 in fiscal year 2019.
The decrease in cash used in investing activities in fiscal year 2020 compared to fiscal year 2019 is primarily due to a
decrease in payments for property plant and equipment, proceeds in the amount of $30,089 from the sale of a parcel of our
Duarte real property, and proceeds in the amount of $10,443 from divestiture of the disposal group.
Net cash flows used in financing activities for fiscal year 2020 was $290,242, compared to net cash flows used in
financing activities of $265,599 in fiscal year 2019. During fiscal year 2020, we had net debt payments in the amount of
$264,201, compared to net debt payments in the amount of $150,028 in fiscal year 2019. Also, in fiscal year 2020, we
repurchased 124 shares of our common stock for $13,346, compared to the repurchase of 1,102 shares of our common stock
for $110,311 in fiscal year 2019. The common stock repurchases in fiscal year 2020 were made under the 2019
Authorization and the common stock repurchases in fiscal year 2019 were made under the 2017 Authorization pursuant to a
Company 10b5-1 plan.
For a discussion of the 2019 Cash Flows Compared to 2018, refer to Part I, Item 7 of our Form 10-K filed with the SEC
on November 25, 2019.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of
Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial
condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or
capital resources, that are material to investors.
48
Contractual Obligations
A summary of our consolidated contractual obligations and commitments as of September 30, 2020 is as follows:
2021
2022
2023
2024
2025
Thereafter
Year Ending September 30,
(in thousands)
Long-term debt principal
Interest on debt obligations (1)
Operating leases
Finance leases
Purchase obligations (2)
Other (3)
Total
$ 100,000 $
25,147
5,667
1,687
343,480
–
– $ 75,000 $ 85,000 $ 577,846
66,835
6,313
—
1,811
9,851
–
$ 475,981 $ 77,948 $ 33,253 $ 127,237 $ 109,979 $ 662,656
– $
23,294
4,458
739
49,457
21,967
2,826
136
27,308
–
20,541
2,579
—
1,859
—
23,147
3,392
325
6,389
–
(1) Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect as
of September 30, 2020. See Note 16, Credit facilities, short-term borrowings and long-term debt, in the Notes to
the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” for further
details on our long-term debt.
(2) Purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods
and services with defined terms as to price, quantity, delivery, and termination liability.
(3) The $9,851 included in other obligations in the “Thereafter” column represents our best reasonable estimate for
uncertain tax positions at this time and may change in future periods, as the timing of the payments and whether
such payments will actually be required cannot be reasonably estimated.
The above table does not reflect the following items:
• As of September 30, 2020, there were no outstanding borrowings on our revolving credit facility. Our revolving
credit facility matures in June 2024.
• Contributions to our retirement pension benefit plans, which we estimate will total approximately $1,929 in fiscal
year 2021. As of September 30, 2020, our pension plans were net underfunded by $40,914 based on projected
benefit obligations. Statutory pension contributions in future fiscal years will vary as a result of a number of
factors, including actual plan asset returns and interest rates.
• Contributions to our other postretirement benefit plans, which total $3,113 in fiscal year 2020. Other
postretirement contributions are made on a “pay-as-you-go” basis as payments are made to healthcare providers,
and such contributions will vary as a result of changes in the future cost of postretirement healthcare benefits
provided for covered retirees. As of September 30, 2020, our other postretirement benefit plans were underfunded
by $25,445 based on projected benefit obligations.
• Business commitments made to certain customers to perform under long-term product development projects, some
of which may result in near-term financial losses. Such losses, if any, are recognized when they become likely to
occur.
Guarantees and letters of credit totaling approximately $12,027 were outstanding as of September 30, 2020, some of
which were secured by parent guarantees from Woodward, or by Woodward’s line of credit facilities.
In the event of a change in control of Woodward, as defined in change-in-control agreements with our current corporate
officers, we may be required to pay termination benefits to such officers.
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 and Note 5, Leases, 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.
49
Non-U.S. GAAP Financial Measures
Adjusted net earnings, adjusted earnings per share, adjusted Industrial segment earnings, adjusted Industrial segment
earnings excluding the renewable power systems business, Industrial segment net sales excluding net sales attributable to the
renewable power systems business, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and free cash flow are financial
measures not prepared and presented in accordance with U.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 divestitures, which occurred in April 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 businesses from the net sales of its Industrial
segment. The Company believes that the exclusion of the disposal group net sales illustrates more clearly how the underlying
business of its Industrial segment is performing, as these sales are no longer related to the ongoing operations of the
Industrial segment business. The Company’s calculation of Industrial segment net earnings and adjusted Industrial segment
net earnings excluding the disposal group is discussed below.
The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group for the
year ended September 30, 2020 and September 30, 2019 is shown in the table below:
Industrial segment net sales (U.S. GAAP)
Disposal group net sales
Industrial segment net sales excluding the disposal group (Non-U.S. GAAP)
Earnings based non-U.S. GAAP financial measures
Year Ended September 30,
2019
2020
$
$
904,702 $
(67,663 )
837,039 $
1,019,677
(87,997 )
931,680
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 its disposal group, (iii) Duarte move related costs, (iv)
the purchase accounting impacts related to the amortization of the backlog intangible acquired in connection with the
acquisition of L’Orange on June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the previously proposed
merger with Hexcel, which merger agreement was terminated on April 5, 2020 (vi) transaction costs associated with the
completed divestiture of the disposal group, (vii) restructuring charges related to the COVID-19 pandemic, (viii) acceleration
of stock compensation expense related to restructuring activities, (ix) the net gain on settlement of cross-currency interest rate
swaps, (x) costs related to the fourth quarter of fiscal year 2019 impairment of accounts receivable, inventory and certain
other assets in connection with Senvion, a significant customer of Woodward renewables business, which declared
insolvency in fiscal year 2019, and (ix) the transition impacts during fiscal year 2019 of the change in U.S. federal tax
legislation in December 2017.
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. The Company uses adjusted net earnings in evaluating 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. The
Company 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. The Company 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.
50
The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share,
respectively, for the fiscal years ended September 30, 2020 and September 30, 2019 are shown in the tables below.
Year Ended September 30,
2020
2019
Net
Earnings
Earnings Per
Share
Net
Earnings
Earnings Per
Share
$
240,395 $
3.74 $
259,602 $
4.02
Net earnings (U.S. GAAP)
Non-U.S. GAAP adjustments:
Gain on sale of properties, net of tax1
Impairment from assets sold, net of tax
Duarte move related costs, net of tax
Purchase accounting impact, net of tax2
Merger and divestiture transaction costs, net of tax3
Restructuring charges related to COVID-19, net of tax
Loss on sale of disposal group, net of tax
Acceleration of stock compensation, net of tax
Net gain on cross-currency interest rate swaps, net of tax4
Impairment of Senvion related assets, net of tax
Sub-total non-U.S. GAAP adjustments
Impact of December 2017 changes to U.S. tax law
Total non-U.S. GAAP adjustments
Adjusted net earnings (Non-U.S. GAAP)
$
(18,551 )
28,016
—
—
12,307
16,621
365
1,788
(26,904 )
—
13,642
—
13,642
254,037 $
(0.29 )
0.44
—
—
0.19
0.26
0.01
0.03
(0.42 )
—
0.22
—
0.22
3.96 $
—
—
20,385
14,964
—
—
—
—
—
8,937
44,286
10,588
54,874
314,476 $
—
—
0.32
0.23
—
—
—
—
—
0.14
0.69
0.17
0.86
4.88
(1) The gain on sale of properties, net of tax, includes (i) the gain of $16,798 on sale of the Duarte, California property,
and (ii) the gain of $1,753 on sale of the Loveland, Colorado property.
(2) The purchase accounting impacts related to the Woodward L’Orange amortization of the backlog intangible for the
fiscal year ended September 30, 2019.
(3) Merger and divestiture transaction costs, net of tax, include, as applicable, (i) transaction costs and integration
planning costs associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs
associated with the divestiture of the disposal group.
(4) The net gain on cross-currency interest rate swaps, net of tax, includes (i) the net gains of $29,841 realized on
termination of the instruments and (ii) the swap breakage fees of $2,937 associated with termination of the
instruments.
Adjusted Industrial segment earnings is defined by the Company as Industrial segment earnings excluding the purchase
accounting impacts related to the L’Orange amortization of the backlog intangible. The Company believes that these
purchase accounting impacts are short-term in nature, not related to the ongoing operations of the Industrial segment business
and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward’s Industrial segment
is performing. The Company believes adjusted Industrial segment earnings excluding the disposal group further illustrates
more clearly how the underlying business of Woodward’s Industrial segment is performing, as earnings for the disposal
group are no longer related to the ongoing operations of the Industrial segment business.
The reconciliation of Industrial segment earnings to adjusted Industrial segment earnings and adjusted Industrial
segment earnings excluding the disposal group for the fiscal years ended September 30, 2020 and September 30, 2019 are
shown in the table below.
Industrial segment earnings (U.S. GAAP)
Purchase accounting impacts1
Adjusted Industrial segment earnings (Non-U.S. GAAP)
Disposal group losses (earnings)
Adjusted Industrial segment earnings excluding disposal group (Non-U.S. GAAP)
Year Ended September 30,
2019
2020
100,321 $
—
100,321
(3,602 )
96,719 $
93,521
21,100
114,621
3,788
118,409
$
$
(1) The purchase accounting impacts relate to the Woodward L’Orange amortization of the backlog intangible for the
fiscal year ended September 30, 2019.
51
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 include additional 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 Duarte and
Loveland Campus 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 its disposal group, (iii) Duarte move related costs, (iv) the purchase accounting
impacts related to the amortization of the backlog intangible acquired in connection with the acquisition of Woodward
L’Orange on June 1, 2018 (the “L’Orange Acquisition”), (v) costs associated with the now-terminated merger agreement
with Hexcel, (vi) transaction costs associated with the completed divestiture of the disposal group, (vii) restructuring charges
related to the COVID-19 pandemic, (viii) acceleration of stock compensation expense related to restructuring activities, (ix)
the net gain on settlement of cross-currency interest rate swaps, and (x) costs related to the fourth quarter of fiscal year 2019
impairment of accounts receivable, inventory and certain other assets in connection with Senvion, a significant customer of
Woodward renewables business, which declared insolvency in fiscal year 2019. 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 for the fiscal years ended September 30, 2020 and September 30, 2019 were as follows:
Net earnings (U.S. GAAP)
Income tax expense
Interest expense
Interest income
EBIT (Non-U.S. GAAP)
Non-U.S. GAAP adjustments:
Gain on sale of properties1
Impairment from assets sold
Duarte move related costs
Purchase accounting impact2
Merger and divestiture transaction costs3
Restructuring charges related to COVID-19
Loss on sale of disposal group
Acceleration of stock compensation
Net gain on cross-currency interest rate swaps4
Impairment of Senvion related assets
Total non-U.S. GAAP adjustments
Adjusted EBIT (Non-U.S. GAAP)
Year Ended September 30,
2019
2020
240,395 $
41,486
35,811
(1,764 )
315,928
(24,653 )
37,902
—
—
16,355
22,216
515
2,376
(27,481 )
—
27,230
343,158 $
259,602
61,010
44,001
(1,413 )
363,200
—
—
27,089
21,100
—
—
—
—
—
12,601
60,790
423,990
$
$
(1) The gain on sale of properties includes (i) the gain of $22,323 on sale of the Duarte property, and (ii) the gain of
$2,330 on sale of the Loveland property.
(2) The purchase accounting impacts relate to the amortization of the backlog intangible, net of tax, acquired in
connection with the L’Orange Acquisition.
(3) Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs
associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the
divestiture of the disposal group.
(4) The net gain on cross-currency interest rate swaps includes (i) the net gains of $30,481 realized on termination of the
instruments, and (ii) the swap breakage fees of $3,000 associated with termination of the instruments.
52
EBITDA and adjusted EBITDA for fiscal years ended September 30, 2020 and September 30, 2019 were as follows:
Net earnings (U.S. GAAP)
Income tax expense
Interest expense
Interest income
Amortization of intangible assets
Depreciation expense
EBITDA (Non-U.S. GAAP)
Non-U.S. GAAP adjustments:
Gain on sale of properties1
Impairment from assets sold
Duarte move related costs
Merger and divestiture transaction costs2
Restructuring charges related to COVID-19
Loss on sale of disposal group
Acceleration of stock compensation
Net gain on cross-currency interest rate swaps3
Impairment of Senvion related assets
Total non-U.S. GAAP adjustments
Adjusted EBITDA (Non-U.S. GAAP)
Year Ended September 30,
2019
2020
240,395 $
41,486
35,811
(1,764 )
39,458
91,700
447,086
(24,653 )
37,902
—
16,355
22,216
515
2,376
(27,481 )
—
27,230
474,316 $
259,602
61,010
44,001
(1,413 )
56,022
85,982
505,204
—
—
27,089
—
—
—
—
—
12,601
39,690
544,894
$
$
(1) The gain on sale of properties includes (i) the gain of $22,323 on sale of the Duarte property, and (ii) the gain of
$2,330 on sale of the Loveland property.
(2) Merger and divestiture transaction costs include, as applicable, (i) transaction costs and integration planning costs
associated with the now-terminated merger agreement with Hexcel and (ii) transaction costs associated with the
divestiture of the disposal group.
(3) The net gain on cross-currency interest rate swaps includes (i) the net gains of $30,481 realized on termination of the
instruments, and (ii) the swap breakage fees of $3,000 associated with termination of the instruments.
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 with U.S. GAAP. As adjusted net earnings, adjusted net
earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude
certain financial information compared with net earnings, the most comparable U.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, adjusted Industrial segment earnings, 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-U.S. GAAP financial measures
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 to include cash proceeds from the sale of real property located at our former operations in Duarte, California,
and exclude, as applicable, 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 from our fiscal year 2018 decision
to relocate our Duarte, California operations to the renovated Drake Campus in Fort 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.
53
The use of these non-U.S. GAAP financial measure is not intended to be considered in isolation of, or as substitutes for,
the financial information prepared and presented in accordance with U.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 for the fiscal years ended September 30, 2020 and September 30, 2019 were
as follows:
Net cash provided by operating activities (U.S. GAAP)
Payments for property, plant and equipment
Free cash flow (Non-U.S. GAAP)
Cash proceeds from the sale of the Duarte facility
Cash paid for merger and divestiture transaction costs
Cash paid for restructuring charges
Net cash proceeds from cross currency interest rate swaps
Adjusted free cash flow (Non-U.S. GAAP)
Year Ended September 30,
2019
2020
$
$
$
349,491 $
(47,087 )
302,404 $
30,089
19,853
18,065
(55,191 )
315,220 $
390,608
(99,066 )
291,542
—
—
—
—
291,542
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity with U.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 Woodward’s 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.
Sales of Products
Woodward primarily generates revenue through the manufacture and sale of engineered aerospace and industrial
products, including revenue derived from maintenance, repair and overhaul (“MRO”) performance obligations performed on
products originally manufactured by Woodward and subsequently returned by original equipment manufacturer (“OEM”) or
other end-user customers. The majority of Woodward’s costs incurred to satisfy MRO performance obligations are related to
replacing and/or refurbishing component parts of the returned products to restore the units back to a condition generally
comparable to that of the unit upon its initial sale to an OEM customer. Therefore, Woodward considers almost all of its
revenue to be derived from product sales, including those related to MRO.
Many Woodward products include embedded software or firmware that is critical to the performance of the product as
designed. As the embedded software or firmware is essential to the functioning of the products sold it does not represent a
distinct performance obligation separate from the related tangible product in which the software or firmware is embedded.
Woodward does not generally sell or license software or firmware on a standalone basis. Software or firmware upgrades, if
any, are generally paid for by the customer and treated as separate performance obligations.
54
The products Woodward sells generally are not subject to risk of return, refund or other similar obligations.
Woodward’s sales include product warranty arrangements with customers which are generally assurance-type warranties,
rather than service-type warranties. Accordingly, Woodward accounts for warranty related promises to its customers as a
guarantee for which a warranty liability is recorded when the related product or service is sold, rather than as a distinct
performance obligation accounted for separately from the sale of the underlying product or service. Warranty liabilities are
accrued for based on specifically identified warranty issues that are probable to result in future costs, or on a non-specific
basis whenever past experience indicates that a normal and predictable pattern exists.
Revenue from shipping and handling activities charged to customers are included in net sales when invoiced to the
customer and the related costs are included in cost of goods sold. Shipping and handling costs relating to the sale of products
recognized at a point in time are recognized as incurred. Shipping and handling costs relating to the sale of products or
services recognized over time are accrued and recognized during the earnings process.
Material Rights and Costs to Fulfill a Contract
Customers sometimes pay consideration to Woodward for product engineering and development activities that do not
result in the immediate transfer of distinct products or services to the customer. There is an implicit assumption that without
the customer making such advance payments to Woodward, Woodward’s future sales of products or services to the customer
would be at a higher selling price; therefore, such payments create a “material right” to the customer that effectively gives the
customer an option to acquire future products or services, at a discount, that are dependent upon the product engineering and
development. Material rights are recorded as contract liabilities and will be recognized when control of the related products
or services are transferred to the customer.
Woodward capitalizes costs of product engineering and development identified as material rights up to the amount of
customer funding as costs to fulfill a contract because the costs incurred up to the amount of the customer funding
commitment are recoverable. Due to the uncertainty of the product success and/or demand, fulfillment costs in excess of the
customer funding are expensed as incurred.
Woodward recognizes the deferred material rights as revenue based on a percentage of actual sales to total estimated
lifetime sales of the related developed products as the customers exercise their option to acquire additional products or
services at a discount. Woodward amortizes the capitalized costs to fulfill a contract as cost of goods sold proportionally to
the recognition of the associated deferred material rights. Estimated total lifetime sales are reviewed at least annually and
more frequently when circumstances warrant a modification to the previous estimate.
Point in time and over time revenue recognition
Approximately one-half of Woodward’s customer contracts are recognized at the point in time when control of the
products transfers to the customer, generally upon shipment of products, consistent with Woodward’s historical revenue
recognition model. The remaining portion of Woodward’s revenues from sales of products and services to customers is
recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts and/or the type of
performance obligation being satisfied, as described below.
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. Woodward exercises judgment and considers 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, consistent with Woodward’s historical revenue
recognition model.
Performance obligations are satisfied and revenue is recognized over time if: (i) the customer receives the benefits as
Woodward performs 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 Woodward; and (ii) Woodward has an enforceable right to payment with a profit. For
products being produced for the customer that have no alternative use to Woodward and Woodward has an enforceable right
to payment with a profit, and where the products are substantially the same and have the same pattern of transfer to the
customer, revenue is recognized as a series of distinct products. As Woodward satisfies MRO performance obligations,
revenue is recognized over time, as the customer, rather than Woodward, controls the asset being enhanced. When services
are provided, revenue from those services is recognized over time because control is transferred continuously to customers as
Woodward performs the work. As a practical expedient, revenue for services that are short-term in nature are recognized
using an output method as the customer is invoiced, as the invoiced amount corresponds directly to Woodward’s performance
to date on the arrangement.
55
For services that are not short-term in nature, MRO, and sales of products that have no alternative use to Woodward and
an enforceable right to payment with a profit, Woodward uses 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). Woodward has concluded that
this measure of progress best depicts the transfer of assets to the customer, because incurred costs are integral to Woodward’s
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.
A change in one or more of these estimates could affect the timing of revenue recognition on these contracts.
Woodward reviews and updates its cost estimates regularly. Due to uncertainties inherent in the estimation process, it is
reasonably possible that completion costs may be different than those estimated. Such changes in cost estimates and the
related impact on the revenue recognized in the period in which the revisions are determined is recorded as a cumulative
catch-up adjustment. The production of products and MRO activities are generally shorter-term in nature and therefore, the
impacts of changes in estimates for these costs are considered immaterial.
If at any time the estimate of contract profitability indicates an anticipated loss on the contract, Woodward recognizes
provisions for estimated losses on uncompleted contracts in the period in which such losses are determined. In situations
where the creditworthiness of a customer becomes in doubt, Woodward ceases to recognize the over-time revenue on the
associated customer contract.
Occasionally Woodward sells maintenance or service arrangements, extended warranties, or other stand ready services.
Woodward recognizes revenue from such arrangements as a series of performance obligations over the time period in which
the services are available to the customer.
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. For discussion of the critical accounting estimates related to inventory provided by customers to Woodward,
which will be integrated into final products sold to those customers, see Note 3, Revenue, to the Notes to the Consolidated
Financial Statements included in “Item 8 – Financial Statements and Supplementary Data.”
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. Management monitors 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 $437,943 at September 30, 2020 and $516,836 at September 30, 2019. 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.
56
Reviews for impairment of goodwill and other indefinitely lived intangible assets
At September 30, 2020, we had $808,252 of goodwill representing of our total assets. Goodwill is tested for
impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that
indicate the fair value of a reporting unit may be below its carrying amount.
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the disposal group (see
Note 11, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at the time, Woodward determined that the remaining value of
the goodwill of the disposal group was not recoverable and an $8,640 non-cash impairment charge was recorded during fiscal
year 2020.
For purposes of performing the impairment test, we identify reporting units in accordance with U.S. GAAP. The
identification of reporting units and consideration of the aggregation of components into a single reporting unit 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, Woodward completed its annual goodwill impairment test as of July 31, 2020 for the fiscal
year ended September 30, 2020. The fair value of each of Woodward’s reporting units was determined using an income
approach based on a discounted cash flow method. This method represents a Level 3 input (based upon a fair value hierarchy
established by U.S. GAAP) and incorporates various estimates and assumptions, the most significant being projected revenue
growth rates, earnings margins, future tax rates and the present value, based on an estimated weighted-average cost of capital
(or the discount rate) and terminal growth rate, of forecasted cash flows. Management projects revenue growth rates,
earnings margins and cash flows based on each reporting unit’s current operational results, expected performance and
operational strategies over a five-year period. These projections are adjusted to reflect current economic conditions and
demand for certain products and require considerable management judgment.
Forecasted cash flows used in the July 31, 2020 impairment test were discounted using weighted-average cost of capital
assumptions ranging from 8.30% to 9.99%. The terminal values of the forecasted cash flows were calculated using the
Gordon Growth Model and assumed an annual compound growth rate after five years of 3.44%. These inputs, which are
unobservable in the market, represent management’s best estimate of what market participants would use in determining the
present value of the Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant
impact on the fair value of forecasted cash flows. Woodward evaluated the reasonableness of the reporting units resulting
fair values utilizing a market multiple method.
The results of Woodward’s annual goodwill impairment test performed as of July 31, 2020, indicated the estimated fair
value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed. The July 31, 2020
goodwill analysis indicated a premium of approximately 17% compared to the carrying value of one of our reporting units in
the Aerospace segment, which is primarily comprised of the thrust reverser actuation systems (“TRAS”) business and was
significantly impacted by the COVID-19 related declines in commercial OEM and aftermarket. We are not aware of any
facts, circumstances or triggering events that have arisen indicating that goodwill has been impaired or that the premium of
approximately 17% has changed significantly for this reporting unit since Woodward’s July 31, 2020 analysis.
We have one indefinitely lived intangible asset consisting of the Woodward L’Orange tradename. At September 30,
2020, the carrying value of the Woodward L’Orange tradename intangible asset was $68,094, representing 2% of our total
assets. The Woodward L’Orange tradename 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 the Woodward L’Orange intangible asset may be below
its carrying amount. The impairment test consists of comparing the fair value of the Woodward L’Orange tradename
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 the Woodward L’Orange tradename 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.
57
During the fourth quarter, Woodward completed its annual impairment test, for the fiscal year ended September 30,
2020, of the Woodward L’Orange tradename intangible asset as of July 31, 2020. The fair value of the Woodward L’Orange
tradename intangible assets was determined using discounted cash flows based on the relief from royalty method under the
income approach. This method represents a Level 3 input (based upon a fair value hierarchy established by U.S. GAAP) and
incorporates various estimates and assumptions, the most significant being projected revenue growth rates, royalty rates,
future tax rates and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and
terminal growth rate, of the forecasted cash flow. Management projects revenue growth rates and cash flows based on
Woodward L’Orange’s current operational results, expected performance and operational strategies over a five year period.
These projections are adjusted to reflect current economic conditions and demand for certain products and require
considerable management judgment.
The forecasted cash flow used in the July 31, 2020 impairment test was discounted using weighted-average cost of
capital assumption of 8.50%. The terminal value of the forecasted cash flow was calculated using the Gordon Growth Model
and assumed an annual compound growth rate after five years of 3.44%. These inputs, which are unobservable in the market,
represent management’s best estimate of what market participants would use in determining the present value of the
Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant impact on the fair
value of the forecasted cash flow. The results of impairment test performed as of July 31, 2020 indicated the estimated fair
value of the Woodward L’Orange tradename intangible asset was in excess of its carrying value, and accordingly, no
impairment existed.
As part of the Company’s ongoing monitoring efforts to assess goodwill and the Woodward L’Orange tradename
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 Woodward’s business. There can be no
assurance that our estimates and assumptions regarding forecasted cash flows of certain reporting units or the Woodward
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.
Postretirement benefits
The Company provides various benefits to certain employees through defined benefit pension plans and other
postretirement benefit plans. A September 30 measurement date is used to value plan assets and obligations for all
Woodward defined benefit pension and other postretirement benefit plans. Excluding the Woodward HRT Plan, which is
only partially frozen to salaried participants, the defined benefit plans in the United States were frozen in fiscal year 2007 and
no additional employees may participate in the U.S. plans and no additional service costs will be incurred.
For financial reporting purposes, net periodic benefits expense and related obligations are calculated using a number of
significant actuarial assumptions, including anticipated discount rates, rates of compensation increases, long-term return on
defined benefit plan investments, and anticipated healthcare cost increases. Based on these actuarial assumptions, at
September 30, 2020, our recorded assets and liabilities included a net liability of $40,914 for our defined benefit pension
plans and a net liability of $25,445 for our other postretirement benefit plans. Changes in net periodic expense or the
amounts of recorded assets and liabilities may occur in the future due to changes in these assumptions.
Estimates of the value of postretirement benefit obligations, and related net periodic benefits expense, are dependent on
actuarial assumptions, including future interest rates, compensation rates, mortality trends, healthcare cost trends, termination
and retirement rates, and returns on defined benefit plan investments. It should be noted that economic factors and conditions
often affect multiple assumptions simultaneously, and the effects of changes in assumptions are not necessarily linear due to
factors such as the 10% corridor applied to the larger of the postretirement benefit obligation or the fair market value of plan
assets used to determine the amortization of actuarial net gains or losses.
Mortality assumptions are based on published mortality studies developed primarily based on past experience of the
broad population and modified for projected longevity trends. The projected benefit obligations in the United States as of
September 30, 2020 were based on the Society of Actuaries (“SOA”) Pri-2012 Mortality Tables Report using the SOA’s
Mortality Improvement Scale MP-2019 (“MP-2019”) and projected forward using a custom projection scale based on MP-
2019 with a 5-year convergence period and a long-term rate of 0.75%. The projected benefit obligations in the United States
as of September 30, 2019 were based on the SOA RP-2014 Mortality Tables Report projected back to 2006 using the SOA’s
Mortality Improvement Scale MP-2014 (“MP-2014”) and projected forward using a custom projection scale based on MP-
2014 with a 10-year convergence period and a long-term rate of 0.75%. As of September 30, 2020, mortality assumptions in
Japan were based on the Standard rates 2020 and mortality assumptions for the United Kingdom pension scheme were based
on the Self-administered pension scheme (“SAPS”) S3“all” tables with a projected 1.5% annual improvement rate.
Compared to September 30, 2019, where mortality assumptions in Japan were based on the Standard rates 2014 and mortality
assumptions for the United Kingdom pension scheme were based on the Self-administered pension scheme (“SAPS”) S2
“all” tables with a projected 1.5% annual improvement rate. As of September 30, 2020, and September 30, 2019, mortality
assumptions in Germany were based on the Heubeck 2018 G mortality tables.
58
Primary actuarial assumptions for our defined benefit pension plans were determined as follows:
• The discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively
settled based upon the assumed timing of the benefit payments.
In the United States, Woodward uses a bond portfolio matching analysis based on recently traded, non-callable
bonds rated AA or better that have at least $50 million outstanding to determine the benefit obligations at year end.
In the United Kingdom, Germany and Japan, Woodward uses a high-quality corporate bond yield curve matched
with separate cash flows to develop a single rate to determine the single rate equivalent to settle the entire benefit
obligations in each jurisdiction. For the fiscal years ended September 30, 2020 and 2019, the discount rate used to
determine periodic service cost and interest cost components of the overall benefit costs was based on spot rates
derived from the same high-quality corporate bond yield curve used to determine the September 30, 2019 and 2018
benefit obligation, respectively, matched with separate cash flows for each future year.
These rates are sensitive to changes in interest rates.
Defined benefit pension benefits:
2021 Net Periodic Benefit Cost
2021 Projected Service and Interest Costs
Accumulated Post Retirement Benefit Obligation as of September 30, 2020
Change In Discount Rate
1% increase
1% decrease
$
(326 ) $
794
(41,668 )
1,578
(1,229 )
53,397
• Compensation increase assumptions, where applicable, are based upon historical experience and anticipated future
management actions. An increase in the rate would increase our obligation and expense.
• Mortality trends assumptions are based on published actuarial data and are sometimes modified to reflect projected
longevity trends. Increases in life expectancy of participants greater than assumed would increase our obligation
and expense.
•
In determining the long-term rate of return on plan assets, we consider the asset investment mix for each plan. For
example, fixed-income securities generally have a lower rate of return than equity securities. We assume that the
historical long-term compound growth rates of similar equity and fixed-income securities will predict the future
returns of investments in the various plan portfolios. We consider the potential impacts of changes in general
market conditions, but because our assumptions are based on long-term rates of return, short-term market
conditions generally have an insignificant effect on our assumptions. Changes in asset allocations are managed on
a plan-by-plan basis, taking into consideration factors such as the average age of the plan participants and the
projected timing of future benefit payments.
Defined benefit pension benefits:
2021 Net Periodic Benefit Cost
Change In Rate of Return on Plan
Assets
0.5% increase
0.5% decrease
$
(1,311 ) $
1,311
If, as of the beginning of the year, the net plan gain or loss recognized in accumulated other comprehensive income
exceeds 10% of the greater of the plan projected benefit obligation or the market-related value of plan assets, the amortization
out of accumulated other comprehensive income into current period expense is that excess divided by the average remaining
service period of employees expected to receive benefits under the plan.
Primary actuarial assumptions for our other postretirement benefit plans were determined as follows:
• The discount rate assumption is intended to reflect the rate at which the postretirement benefits could be effectively
settled based upon the assumed timing of the benefit payments.
In the United States, Woodward uses a bond portfolio matching analysis based on recently traded, non-callable
bonds rated AA or better that have at least $50 million outstanding to determine the benefit obligations at year end.
Outside the United States, Woodward uses a high-quality corporate bond yield curve matched with separate cash
flows to develop a single rate to determine the single rate equivalent to settle the entire benefit obligation.
These rates are sensitive to changes in interest rates.
59
Other postretirement benefits:
2021 Net Periodic Benefit Cost
2021 Projected Service and Interest Costs
Accumulated Post Retirement Benefit Obligation as of September 30, 2020
Change In Discount Rate
1% increase
1% decrease
$
115 $
175
(2,010 )
(198 )
(210 )
2,329
• Mortality trends assumptions are based on published actuarial data and are sometimes modified to reflect projected
longevity trends. Increases in life expectancy of participants greater than assumed would increase our obligation
and expense.
• The assumed health care trend rate represents the rate at which health care costs are assumed to increase and is
based on historical and expected experience. Changes in our projections of future health care costs due to general
economic conditions and those specific to health care (e.g., technology driven cost changes) will impact this trend
rate.
If, as of the beginning of the year, the net plan gain or loss recognized in accumulated other comprehensive income
exceeds 10% of the plan accumulated postretirement benefit obligation, the amortization out of accumulated other
comprehensive income into current period expense is that excess divided by the average remaining service period of
employees expected to receive benefits under the plan.
Variances from our fiscal year end estimates for these variables could materially affect our recognized postretirement
benefit obligation liabilities. On a near-term basis, such changes are unlikely to have a material impact on reported earnings,
as such adjustments are recorded to other comprehensive earnings and recognized into expense over a number of years.
Significant changes in estimates could, however, materially affect the carrying amounts of benefit obligation liabilities,
including accumulated benefit obligations, which could affect compliance with the provisions of our debt arrangements and
future borrowing capacity.
Income taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is
required in evaluating our tax positions and determining our provision for income taxes.
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. The provision for income taxes
includes the impact of reserve positions and changes to reserves that are considered appropriate. As of September 30, 2020
and September 30, 2019, unrecognized gross tax benefits for which recognition has been deferred were $9,851 and $10,305,
respectively.
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 valuation allowance was $1,833 as of September 30, 2020 and $3,638 as of
September 30, 2019.
60
Our effective tax rates differ from the U.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.
On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and
signing of the Tax Act. The Tax Act included significant changes to existing tax law, including a permanent reduction to the
U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition
Tax”), deductions, credits and business-related exclusions. Enactment of the Tax Act resulted in a discrete net charge to
Woodward’s income tax expense in the amount of $14,778, which was recorded in the three-months ended December 31,
2017. After adjustments to amounts made throughout fiscal year 2018, the net impact of the enactment of the Tax Act was
$10,860. Woodward finalized its assessment of the income tax effects of the Tax Act in the first quarter of fiscal year 2019.
On June 14, 2019, the Internal Revenue Service (“IRS”) issued final regulations that modified the Transition Tax
computation required by the Tax Act. As a result, in the three-months ended June 30, 2019, Woodward recognized
additional income tax expense related to the Transition Tax of $10,588.
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.
In addition, we are subject to examination of our income tax returns by the relevant tax authorities in the jurisdictions in
which we are subject to taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these
examinations will not have a significant effect on our operating results, financial condition, and cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt, and
our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign
currency transactions.
Interest Rate Risk
We use derivative instruments as risk management tools that involve little complexity, and are not used for trading or
speculative purposes. In June 2013, in connection with Woodward’s expected refinancing of current maturities on its
existing long-term debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualified
as a cash flow hedge under ASC Topic 815, “Derivatives and Hedging.” The objective of this derivative instrument was to
hedge the risk of variability in cash flows attributable to changes in the designated benchmark interest rate over a seven-year
period related to the future interest payments on a portion of anticipated future debt issuances.
A portion of our long and short-term debt is sensitive to changes in interest rates. As of September 30, 2020, our Series
J Notes of $50,000 and advances on our revolving credit facility are at interest rates that fluctuate with market rates. A
hypothetical 1% increase in the assumed effective interest rates that apply to the variable rate loan outstanding as of
September 30, 2020 and the average borrowings on our revolving credit facility in fiscal year 2020 would cause our annual
interest expense to increase approximately $2,727. A hypothetical 1% decrease in the assumed effective interest rates that
apply to the variable rate loan outstanding as of September 30, 2020 and the average borrowings on our revolving credit
facility in fiscal year 2020 would decrease our annual interest expense by approximately $2,727.
The discount rate and future return on plan asset assumptions used to calculate the funding status of our retirement
benefit plans are also sensitive to changes in interest rates. The weighted average discount rate assumption used to value the
defined benefit pension plans as of September 30, 2020 was 2.75% in the United States, 1.62% in the United Kingdom,
1.10% in Japan, and 0.97% in Germany. The weighted average discount rate assumption used to value the other
postretirement benefit plans was 2.45%.
61
In the United States, the discount rate used to determine the periodic benefit costs for the year ending September 30,
2020 is consistent with the discount rate used to determine the benefit obligation as of September 30, 2019, or 2.75%.
Woodward derives this discount rate from a bond portfolio matching analysis based on recently traded, non-callable bonds
rated AA or better that have at least $50 million outstanding.
In the United Kingdom, Japan, and Germany, Woodward utilizes the spot rate approach to calculate the service cost and
interest cost components for determining benefit costs for the year ending September 30, 2020. The weighted average
discount rate assumption used to value the service costs for the defined benefit pension plans will be 1.71% in the United
Kingdom, 1.33% in Japan and 1.11% in Germany. The weighted average discount rate assumption used to value the interest
costs for the defined benefit pension plans will be 1.41% in the United Kingdom, 0.74% in Japan and 0.76% in Germany.
The weighted average discount rate assumption used to value the periodic benefits costs for the other postretirement
plans in for the year ending September 30, 2020 is consistent with the discount rate used to determine the benefit obligation
as of September 30, 2019, or 2.45%.
The following information illustrates the sensitivity of the net periodic benefit cost and the projected accumulated
benefit obligation to a change in the discount rate assumed. Amounts relating to foreign plans are translated at the spot rate
on September 30, 2020. It should be noted that economic factors and conditions often affect multiple assumptions
simultaneously and the effects of changes in assumptions are not necessarily linear due to factors such as the 10% corridor
applied to the larger of the postretirement benefit obligation or the fair market value of plan assets when determining
amortization of actuarial net gains or losses.
Assumption
Defined benefit pension benefits:
Change in discount rate
Other postretirement benefits:
Change in discount rate
Increase/(Decrease) In
Accumulated
Post
Retirement
Benefit
Obligation
as of Sept.
30,
2020
2021
Projected
Service and
Interest
Costs
2021 Net
Periodic
Change
Benefit Cost
1% increase
1% decrease
$
(326 ) $
1,578
794 $
(1,229 )
(41,668 )
53,397
1% increase
1% decrease
115
(198 )
175
(210 )
(2,010 )
2,329
Foreign Currency Exchange Rate Risk and Related Hedging Activities
We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the
currency in which product and manufacturing costs were incurred. The functional currencies and our purchasing and sales
activities primarily include USD, EUR, RMB, JPY and GBP. We may also be impacted by changes in the relative buying
power of our customers, which may impact sales volumes either positively or negatively. As these currencies fluctuate
against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing
transactions, and labor. Foreign currency exchange rate risk is reduced through the maintenance of local production facilities
in the markets we serve, which we believe creates a natural hedge to our foreign currency exchange rate exposure. For the
years ended September 30, 2020 and 2019, the percentages of our net sales denominated in a currency other than the USD
were as follows:
Percentage of Net Sales
Percentage of Net Sales
For the Year Ended September 30, 2020 For the Year Ended September 30, 2019
Functional currency:
EUR
RMB
JPY
GBP
All other foreign currencies
14.7 %
6.8 %
1.7 %
2.2 %
1.3 %
26.7 %
16.0 %
5.7 %
2.2 %
2.1 %
1.3 %
27.3 %
62
Currency exchange rates vary daily and often one currency strengthens against the USD while another currency
weakens. Because of the complex interrelationship of our worldwide supply chains and distribution channels, it is difficult to
quantify the impact of a particular change in exchange rates.
From time to time, we will enter into a foreign currency exchange rate contract to hedge against changes in foreign
currency exchange rates on liabilities expected to be settled at a future date. Market risk arises from the potential adverse
effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We minimize this
market risk by establishing and monitoring parameters that limit the types of, and degree to which we enter into, derivative
instruments. We enter into derivative instruments for risk management purposes only. We do not enter into or issue
derivatives for trading or speculative purposes. As of September 30, 2020 and 2019, we had no open foreign currency
exchange rate contracts and all previous exchange rate derivative instruments were settled or terminated.
In connection with the incurrence of the additional debt used to finance the L’Orange acquisition, we entered into a
cross currency interest rate swap agreement that synthetically converts the $167,420 floating-rate debt under our existing
revolving credit agreement to Euro denominated floating-rate debt. A corresponding Euro denominated intercompany loan
receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal
cross currency interest rate swap, was entered into by Woodward Barbados Financing SRL (“Barbados”), a wholly owned
subsidiary of Woodward, and is designated as a fair value hedge. The objective of the derivative instrument is to hedge
against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany
loan.
In addition, we entered into five cross currency interest rate swap agreements that synthetically converts an aggregate
principal amount of $400,000 of fixed-rate debt associated with the private placement notes entered into in May 2018 (the
“2018 Notes”) to Euro denominated fixed-rate debt. Five corresponding intercompany loans receivable, with identical terms
and amounts of each tranche of the 2018 Notes and reciprocal cross currency interest rate swaps were entered into by
Woodward Barbados, which are designated as cash flow hedges. The objective of these derivative instruments is to hedge
the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and
interest payments associated with the Euro denominated intercompany loans over a fifteen year period.
In May 2020, as a result of the COVID-19 pandemic and uncertainties in future cash flows, Woodward terminated the
Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps. At the date of settlement, the total notional
value of the Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps was $108,823 and $400,000,
respectively. Woodward received net cash proceeds of $59,571, which includes $58,191 related to the fair value of the
derivative assets and $4,380 of net accrued interest, less payment of $3,000 for fees to terminate the swap agreements. The
proceeds received for the fair value of the instruments is recorded in “Other”, while net accrued interest is recorded in
“Other” and “Accrued liabilities”, respectively, in cash flows provided by operating activities of Woodward’s Consolidated
Statements of Cash Flows. The fees to terminate the swap agreements were recorded as incurred and presented in the line
item “Selling, general and administrative” expenses in Woodward’s Consolidated Statements of Earnings.
Changes in the fair values of the cross-currency swaps designated as cash flow hedges are recognized in accumulated
other comprehensive income (“OCI”) and reclassified to foreign currency transaction gain or loss included in “Selling,
general and administrative costs” in Woodward’s Consolidated Statements of Earnings. Reclassifications out of accumulated
OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro
denominated intercompany loan, including associated interest. For the derivative instruments designated as fair value
hedges, the change in the fair value related to the cross-currency basis spread, or excluded component, of the derivative
instrument is recognized in accumulated OCI. The remaining change in the fair value of the derivative instrument is
recognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s
Consolidated Statements of Earnings. The change in the fair value of the derivative instrument in foreign currency
transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro denominated loan, with the
initial cost of the cross currency basis spread recorded in earnings each period through the swap accrual process. In the year
ended September 30, 2020, we recognized a loss related to the cross-currency swaps of $18,262 in accumulated OCI as
compared to a gain of $47,759 in the year ended September 30, 2019. The associated earnings reclassification of $2,206 for
the year ended September 30, 2020 and $31,374 in the year ended September 30, 2019 were recorded as a foreign currency
transaction gain and loss, respectively, included in “Selling, general and administrative costs” in the Consolidated Statements
of Earnings. For both the year ended September 30, 2020 and 2019, the gain or loss included in “Selling, general and
administrative costs” offset the reciprocal loss or gain recognized on the spot remeasurement of the underlying Euro
denominated intercompany loans resulting in a net impact to earnings in the respective periods of zero.
63
On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of
Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), entered into note purchase agreements
relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured
notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s
Series M Senior Notes due September 23, 2026. Woodward designated the €40,000 Series M Notes as a hedge of a foreign
currency exposure of Woodward’s net investment in its EUR denominated functional currency subsidiaries. Foreign
exchange losses on the Series M Notes of $3,199 for the fiscal year ended September 30, 2020, a gain of $2,682 for the fiscal
year ended September 30, 2019 and gains of $838 for the fiscal year ended September 30, 2018, are included in foreign
currency translation adjustments within total comprehensive earnings.
For more information on derivative instruments, see Note 9, Derivative instruments and hedging activities, in the Notes
to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data.”
Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted
by changes in foreign currency exchange rates. The assets and liabilities of substantially all of our subsidiaries outside the
United States are translated at period end rates of exchange for each reporting period. Earnings and cash flow statements are
translated at weighted-average rates of exchange. Although these translation changes have no immediate cash impact, the
translation changes may impact future borrowing capacity, debt covenants, and the overall value of our net assets. In
addition, we also have assets and liabilities, specifically accounts receivable, accounts payable and current inter-company
receivables and payables, whose carrying amounts approximate their fair value, which are denominated in currencies other
than their relevant functional currencies. Foreign currency exchange rate risk is mitigated through several means, including
the invoicing of customers in the same currency as the source of the products, and the prompt settlement of inter-company
balances utilizing a global netting system. We recognized a net foreign currency gain of $194 in fiscal year 2020 and a net
foreign currency loss of $1,018 in fiscal year 2019 in “Selling, general, and administrative expenses” of our Consolidated
Statements of Earnings related to these assets and liabilities.
64
Item 8.
Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Woodward, Inc.
Fort Collins, Colorado
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Woodward, Inc. and subsidiaries (the "Company") as of
September 30, 2020 and 2019, the related consolidated statements of earnings, comprehensive earnings, shareholders' equity,
and cash flows, for each of the three years in the period ended September 30, 2020, and the related notes and the schedule
listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity
with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated November 20, 2020, expressed an unqualified opinion on the Company's internal control
over financial reporting.
Change in Accounting Principle
As discussed in Note 5 to the financial statements, effective October 1, 2019, the Company adopted FASB Accounting
Standards Update 2016-02, Leases (Topic 842), using the modified retrospective transition method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements
that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures
that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
65
Goodwill — Refer to Notes 1 and 14 to the financial statements
Critical Audit Matter Description
The Company tests goodwill for impairment at the reporting unit level on an annual basis or at any time there is an indication
goodwill may be impaired. The Company completed its annual goodwill impairment test as of July 31, 2020. The results of
the goodwill impairment tests performed as of July 31, 2020 did not indicate impairment of any reporting units. The
Company’s July 31, 2020 goodwill analysis indicated a premium of approximately 17% compared to the carrying value of
one of its reporting units in the Aerospace segment, which is primarily comprised of the thrust reverser actuation systems
("TRAS") business and was significantly impacted by the COVID-19 related declines in commercial OEM and aftermarket
during fiscal year 2020. Of the $808.3 million of Goodwill as of September 30, 2020, $78.5 million was allocated to this
reporting unit.
The fair value of each of Woodward’s reporting units was determined using a discounted cash flow method. This method
incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins,
and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and terminal growth rate.
Management projects revenue growth rates and cash flows based on each reporting unit’s current operational results,
expected performance and operational strategies over a five-year period. These projections are adjusted to reflect current
economic conditions and demand for certain products, and require considerable management judgment. Changes in these
estimates and assumptions can have a significant impact on the fair value of forecasted cash flows.
We identified the fair value of this reporting unit as a critical audit matter because of the relatively low premium of fair value
over carrying value, and the significant judgments and assumptions management makes related to the projection of revenue
growth rates, earnings margins, and the selection of the discount rate and terminal growth rate. This required a high degree of
auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing
audit procedures to evaluate the reasonableness of management’s projection of revenue growth rates, earnings margins, and
selection of the discount rate and terminal growth rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future revenue and earnings margin, and the selection of the discount rate and
terminal growth rate used in determining the fair value of this reporting unit included the following, among others:
• We tested the effectiveness of controls over the fair value of the reporting unit, including those over the projection of
revenue and earnings margin growth rates and the selection of the discount rate and terminal growth rate.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate and terminal growth
rate by:
− Testing the source information underlying the determination of the discount rate and terminal growth rate and
recalculating the mathematical accuracy of management’s calculation of the discount rate.
− Developing a range of independent estimates over each assumption and comparing those to the discount rate and
terminal growth rate selected by management.
• We evaluated the reasonableness of management’s projected revenue growth rates and earnings margins by:
− Comparing management’s projections to:
− Historical results for the reporting unit
−
Internal communications to management and the board of directors
− Analyst and industry reports
− Considering the impact of changes in the regulatory environment on management’s forecasts.
− Considering the impact of changes in management’s projections from the July 31, 2020, annual assessment date, to
September 30, 2020 by comparing actual results for the period to management projections within the original
valuation model.
66
Intangible Assets, net - tradename — Refer to Notes 1 and 15 to the financial statements
Critical Audit Matter Description
The Company has one indefinitely lived intangible asset consisting of the Woodward L’Orange tradename (“tradename”).
As of September 30, 2020, the carrying value of the tradename is $68.1 million. The tradename is tested for impairment on
an annual basis and more often if an event occurs or circumstances change that indicate the fair value of the tradename may
be below its carrying amount. The Company completed its annual impairment test of the tradename as of July 31, 2020. The
results of impairment test indicated the estimated fair value of the tradename was in excess of its carrying value, and
accordingly, no impairment existed.
The fair value of the tradename was determined using discounted cash flows based on the relief from royalty method under
the income approach. This method incorporates various estimates and assumptions, the most significant being projected
revenue growth rates, royalty rates, and the present value of the forecasted cash flows based on the discount rate and terminal
growth rate. The Company projects revenue growth rates and cash flows based on Woodward L’Orange’s current operational
results, expected performance and operational strategies over a five-year period. These projections are adjusted to reflect
current economic conditions and demand for certain products and require considerable management judgment. Changes in
these estimates and assumptions can have a significant impact on the fair value.
We identified the fair value of the tradename as a critical audit matter because of the significant judgments and assumptions
management makes related to the projection of revenue growth rates and the selection of the discount rate, terminal growth
rate, and royalty rate. This required a high degree of auditor judgment and an increased extent of effort, including the need to
involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s
projection of revenue growth rates and selection of the discount rate, terminal growth rate, and royalty rate.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the projection of revenue growth rates and selection of the discount rate, terminal growth rate,
and royalty rate used in determining the fair value of the tradename included the following, among others:
• We tested the effectiveness of controls over the fair value of the tradename, including those over the projection of
revenue growth rates and the selection of the discount rate, terminal growth rate, and royalty rate.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate, terminal growth
rate, and royalty rate by:
− Testing the source information underlying the determination of the discount rate, terminal growth rate, and royalty
rate and recalculating the mathematical accuracy of management’s calculation of the discount rate.
− Developing a range of independent estimates over each assumption and comparing those to the discount rate,
terminal growth rate, and royalty rate selected by management.
• We evaluated the reasonableness of management’s projected revenue growth rates by:
− Comparing management’s projections to:
− Historical revenue results for Woodward L’Orange
−
Internal communications to management and the board of directors
− Analyst and industry reports
− Considering the impact of changes in the regulatory environment on management’s forecasts.
− Considering the impact of changes in management’s projections from the July 31, 2020, annual assessment date to
September 30, 2020 by comparing actual results for the period to management projections within the original
valuation model.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
November 20, 2020
We have served as the Company's auditor since 2008.
67
WOODWARD, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
Net sales
Costs and expenses:
Cost of goods sold
Selling, general and administrative expenses
Research and development costs
Impairment of assets sold
Restructuring charges
Gain on cross-currency interest rate swaps, net
Interest expense
Interest income
Other (income) expense, net
Total costs and expenses
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share:
Basic earnings per share
Diluted earnings per share
Weighted Average Common Shares Outstanding:
Basic
Diluted
Year Ended September 30,
2019
2,900,197 $
2020
2,495,665 $
$
2018
2,325,873
1,855,422
217,710
133,134
37,902
22,216
(30,481 )
35,811
(1,764 )
(56,166 )
2,213,784
281,881
41,486
240,395 $
2,192,654
211,205
159,107
–
–
–
44,001
(1,413 )
(25,969 )
2,579,585
320,612
61,010
259,602 $
1,722,802
193,736
148,279
–
17,013
–
40,465
(1,674 )
(14,326 )
2,106,295
219,578
39,200
180,378
3.86 $
3.74 $
4.19 $
4.02 $
2.93
2.82
62,267
64,209
61,950
64,498
61,493
63,876
$
$
$
See accompanying Notes to Consolidated Financial Statements
68
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
WOODWARD, INC.
(In thousands)
Net earnings
Other comprehensive earnings:
Foreign currency translation adjustments
Net (loss) gain on foreign currency transactions designated as hedges of net
investments in foreign subsidiaries
Taxes on changes on foreign currency translation adjustments
Foreign currency translation and transactions adjustments, net of tax
Unrealized (loss) gain on fair value adjustment of derivative instruments
Reclassification of net realized losses (gains) on derivatives to earnings
Taxes on changes on derivative transactions
Derivative adjustments, net of tax
Minimum retirement benefit liability adjustments:
Net gain (loss) arising during the period
Prior service cost arising during the period
Loss due to settlement or curtailment arising during the period
Amortization of:
Prior service cost
Net loss
Foreign currency exchange rate changes on minimum retirement benefit liabilities
Taxes on changes on minimum retirement benefit liability adjustments
Total comprehensive earnings
$
Year Ended September 30,
2019
2018
2020
$
240,395 $
259,602 $
180,378
15,668
(16,554 )
(12,985 )
(3,199 )
75
12,544
2,682
476
(13,396 )
(18,262 )
2,134
626
(15,502 )
47,759
(31,446 )
(326 )
15,987
20,179
—
—
(43,817 )
(601 )
—
962
2,523
(1,672 )
(5,522 )
16,470
253,907 $
704
955
1,318
10,531
(30,910 )
231,283 $
838
(367 )
(12,514 )
(23,000 )
1,467
456
(21,077 )
13,805
—
59
551
985
367
(3,932 )
11,835
158,622
See accompanying Notes to Consolidated Financial Statements
69
WOODWARD, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, September 30,
2020
2019
Current assets:
ASSETS
Cash and cash equivalents, including restricted cash of $3,497 and $1,500, respectively
$
Accounts receivable, less allowance for uncollectible amounts of $6,889 and $7,908, respectively
Inventories
Income taxes receivable
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings
Current portion of long-term debt
Accounts payable
Income taxes payable
Accrued liabilities
Total current liabilities
Long-term debt, less current portion
Deferred income tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 23)
Stockholders' equity:
$
$
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued
Additional paid-in capital
Accumulated other comprehensive losses
Deferred compensation
Retained earnings
Treasury stock at cost, 10,277 shares and 11,040 shares, respectively
Treasury stock held for deferred compensation, at cost, 199 shares and 211 shares, respectively
Total stockholders' equity
Total liabilities and stockholders' equity
$
See accompanying Notes to Consolidated Financial Statements
153,270 $
537,987
437,943
28,879
52,786
1,210,865
997,415
808,252
606,711
14,658
265,435
3,903,336 $
— $
101,634
134,242
4,662
151,794
392,332
736,849
163,573
617,905
1,910,659
—
106
231,936
(89,794 )
9,222
2,427,905
2,579,375
(577,476 )
(9,222 )
1,992,677
3,903,336 $
99,073
591,529
516,836
8,099
55,691
1,271,228
1,058,775
797,853
611,992
18,161
198,517
3,956,526
220,000
—
240,460
18,849
228,127
707,436
864,899
151,362
506,088
2,229,785
—
106
207,120
(103,306 )
9,382
2,224,919
2,338,221
(602,098 )
(9,382 )
1,726,741
3,956,526
70
WOODWARD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended September 30,
2019
2018
2020
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
240,395 $
259,602 $
180,378
Depreciation and amortization
Impairment of assets sold
Net (gain) loss on sales of assets and businesses
Net (gain) on cross-currency interest rate swaps
Stock-based compensation
Deferred income taxes
Gain due to curtailment of postretirement plan
Changes in operating assets and liabilities:
Trade accounts receivable
Unbilled receivables (contract assets)
Costs to fulfill a contract
Inventories
Accounts payable and accrued liabilities
Contract liabilities
Income taxes
Retirement benefit obligations
Other
Net cash provided by operating activities
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment
Proceeds from sale of assets
Proceeds from business divestiture
Proceeds from sales of short-term investments
Payments for purchases of short-term investments
Business acquisitions, net of cash acquired
Net cash (used in) investing activities
Cash flows from financing activities:
Cash dividends paid
Proceeds from sales of treasury stock
Payments for repurchases of common stock
Borrowings on revolving lines of credit and short-term borrowings
Payments on revolving lines of credit and short-term borrowings
Proceeds from issuance of long-term debt
Payments of long-term debt and finance lease obligations
Payments for debt financing costs
Payments for forward option derivative instrument
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, including restricted cash, at beginning of year
Cash and cash equivalents, including restricted cash, at end of period
131,158
37,902
(23,598 )
(30,481 )
22,902
1,311
—
52,095
(22,028 )
(27,446 )
61,019
(153,318 )
25,882
(37,099 )
(3,777 )
74,574
349,491
142,004
—
1,925
—
18,146
(10,065 )
—
841
(31,353 )
(20,656 )
(49,185 )
48,004
29,082
2,083
(3,705 )
3,885
390,608
116,131
—
(1,106 )
—
18,229
(30,177 )
(330 )
(6,494 )
—
—
(7,660 )
(2,284 )
(1,596 )
35,641
(4,653 )
3,213
299,292
(47,087 )
30,173
10,443
12,700
(13,109 )
—
(6,880 )
(99,066 )
1,010
—
22,252
(26,723 )
—
(102,527 )
(127,140 )
1,923
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9,088
(9,323 )
(771,115 )
(896,567 )
(37,664 )
24,969
(13,346 )
(39,066 )
36,044
(110,311 )
(34,003 )
9,132
—
1,248,135 1,683,542 1,930,261
(1,510,746 ) (1,690,035 ) (1,691,934 )
400,000
(421 )
(1,494 )
(5,543 )
605,998
(12,681 )
(3,958 )
87,552
83,594
—
(1,590 )
—
—
(290,242 )
1,828
54,197
99,073
153,270 $
—
(143,535 )
(2,238 )
—
(265,599 )
(7,003 )
15,479
83,594
99,073 $
$
See accompanying Notes to Consolidated Financial Statements
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WOODWARD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Note 1. Operations and summary of significant accounting policies
Basis of presentation
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include the accounts of Woodward, Inc. and its subsidiaries (collectively
“Woodward” or “the Company”). Dollar amounts contained in these Consolidated Financial Statements are in thousands,
except per share amounts.
Nature of operations
Woodward is an independent designer, manufacturer, and service provider of energy control and optimization solutions.
Woodward designs, produces and services reliable, efficient, low-emission, and high-performance energy control products
for diverse applications in challenging environments. Woodward has significant production and assembly facilities in the
United States, Europe and Asia, and promotes its products and services through its worldwide locations.
Woodward’s 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 Woodward serves. Woodward’s customers look to it to optimize the efficiency, emissions and
operation of power equipment in both commercial and defense operations. Woodward’s core technologies leverage well
across its markets and customer applications, enabling it to develop and integrate cost-effective and state-of-the-art fuel,
combustion, fluid, actuation and electronic systems. Woodward focuses its solutions and services primarily on serving
original equipment manufacturers (“OEMs”) and equipment packagers, partnering with them to bring superior component
and system solutions to their demanding applications. Woodward also provides aftermarket repair, maintenance, replacement
and other service support for its installed products.
Woodward’s 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. Woodward’s innovative motion, fluid, combustion and electrical energy control
systems help its customers offer more cost-effective, cleaner, and more reliable equipment.
In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus ("COVID-19") outbreak a
global pandemic. When combined with the various measures enacted by governments and private organizations to contain
COVID-19 or slow its spread, the pandemic has adversely impacted global activity and contributed to significant declines
and volatility in financial markets; and the Company has likewise been significantly impacted by the global COVID-19
pandemic. Despite recent promising announcements regarding various vaccines in development and their potential safety
and efficacy, there can be no assurance as to whether any vaccine will in fact be safe and efficacious, or as to when any
vaccines will be approved by appropriate regulatory authorities and become widely available. Thus, the COVID-19
pandemic could continue to have a material adverse impact on economic and market conditions and trigger an extended
period of global economic slowdown, and the full extent of its impact on the Company’s future business is currently
unknown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse
impact of the COVID-19 pandemic, including impacts to estimates and assumptions used by management for the reported
amounts of assets and liabilities. The pandemic presents uncertainty and risk with respect to the Company and its
performance and financial results. See Note 17, Accrued liabilities, for specific restructuring actions taken by the Company
related to the COVID-19 pandemic.
Summary of significant accounting policies
Principles of consolidation: These Consolidated Financial Statements are prepared in accordance with U.S. GAAP and
include the accounts of Woodward and its wholly and majority-owned subsidiaries. Transactions within and between these
companies are eliminated.
73
Use of estimates: The preparation of the Consolidated Financial Statements requires management to make use of
estimates and assumptions that affect the reported amount of assets and liabilities, at the date of the financial statements and
the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures.
Significant estimates include allowances for uncollectible amounts, net realizable value of inventories, customer rebates
earned, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, identifiable
intangible assets and goodwill, the provision for income tax and related valuation reserves, the valuation of assets and
liabilities acquired in business combinations, assumptions used in the determination of the funded status and annual expense
of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees,
and contingencies. Actual results could differ from those estimates.
Foreign currency exchange rates: The assets and liabilities of substantially all subsidiaries outside the United States
are translated at fiscal year-end rates of exchange, and earnings and cash flow statements are translated at weighted-average
rates of exchange. The exchange rate in effect at the time of the cash flow is used for significant or infrequent cash flows,
such as payments for a business acquisition, for which the use of weighted-average rates of exchange would result in a
substantially different cash flow. Translation adjustments are accumulated with other comprehensive (losses) earnings as a
separate component of stockholders’ equity and are presented net of tax effects in the Consolidated Statements of
Stockholders’ Equity. The effects of changes in foreign currency exchange rates on loans between consolidated subsidiaries
that are considered permanent in nature are also accumulated with other comprehensive earnings, net of tax.
The Company is exposed to market risks related to fluctuations in foreign currency exchange rates because some sales
transactions, and certain assets and liabilities of its domestic and foreign subsidiaries, are denominated in foreign currencies.
Selling, general, and administrative expenses include a net foreign currency gain of $194 in fiscal year 2020, a net foreign
currency loss of $1,018 in fiscal year 2019, and a net foreign currency loss of $1,608 in fiscal year 2018.
Revenue recognition: Revenue is recognized on contracts with Woodward’s 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. Woodward has determined that it is the principal in its
sales transactions, as Woodward is primarily responsible for fulfilling the promised performance obligations, has discretion
to establish the selling price, and generally assumes the inventory risk. A performance obligation is a promise in a contract
with a customer to transfer a distinct product or service to the customer. Woodward recognizes revenue for performance
obligations within a customer contract when control of the associated product or service is transferred to the customer. Some
of Woodward’s 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
Woodward does 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 distinct 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, Woodward generally uses 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, Woodward allocates 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, Woodward considers 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. Woodward’s contracts with customers generally do not
include a financing component. Woodward regularly reviews its estimates of variable consideration on the transaction price
and recognizes 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. In the fiscal years ended September
30, 2020 and 2019, Woodward did not recognize a significant amount of revenue due to changes in transaction price from
performance obligations that were satisfied, or partially satisfied, in prior periods.
Customers sometimes trade in used products in exchange for new or refurbished products. In addition, Woodward’s
customers sometimes provide inventory to Woodward which will be integrated into final products sold to those customers.
Woodward obtains control of these exchanged products and customer provided inventory, and therefore, both are forms of
noncash consideration. Noncash consideration paid by customers on overall sales transactions is additive to the transaction
price. Woodward’s net sales and cost of goods sold include the value of such noncash consideration for the same amount,
with no resulting impact to earnings before income taxes. Upon receipt of such inventory, Woodward recognizes an
inventory asset and a contract liability.
74
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. Woodward exercises judgment and considers 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,
consistent with Woodward’s historical revenue recognition model.
Performance obligations are satisfied and revenue is recognized over time if: (i) the customer receives the benefits as
Woodward performs 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 Woodward; and (ii) Woodward has an enforceable right to payment with a profit. For
products being produced for the customer that have no alternative use to Woodward and Woodward has an enforceable right
to payment with a profit, and where the products are substantially the same and have the same pattern of transfer to the
customer, revenue is recognized as a series of distinct products. As Woodward satisfies MRO performance obligations,
revenue is recognized over time, as the customer, rather than Woodward, controls the asset being enhanced. When services
are provided, revenue from those services is recognized over time because control is transferred continuously to customers as
Woodward performs the work. As a practical expedient, revenue for services that are short-term in nature are recognized
using an output method as the customer is invoiced, as the invoiced amount corresponds directly to Woodward’s performance
to date on the arrangement.
For services that are not short-term in nature, MRO, and sales of products that have no alternative use to Woodward and
an enforceable right to payment with a profit, Woodward uses 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). Woodward has concluded that
this measure of progress best depicts the transfer of assets to the customer, because incurred costs are integral to Woodward’s
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.
A change in one or more of these estimates could affect the timing of revenue recognition on these contracts. Woodward
reviews and updates its cost estimates regularly. Due to uncertainties inherent in the estimation process, it is reasonably
possible that completion costs may be different than those estimated. Such changes in cost estimates and the related impact
on the revenue recognized in the period in which the revisions are determined is recorded as a cumulative catch-up
adjustment. The production of products and MRO activities are generally shorter-term in nature and therefore, the impacts of
changes in estimates for these costs are considered immaterial.
If at any time the estimate of contract profitability indicates an anticipated loss on the contract, Woodward recognizes
provisions for estimated losses on uncompleted contracts in the period in which such losses are determined. In situations
where the creditworthiness of a customer becomes in doubt, Woodward ceases to recognize the over-time revenue on the
associated customer contract. Occasionally
Woodward sells maintenance or service arrangements, extended warranties, or other stand ready services. Woodward
recognizes revenue from such arrangements as a series of performance obligations over the time period in which the services
are available to the customer.
Material Rights and Costs to Fulfill a Contract: Customers sometimes pay consideration to Woodward for product
engineering and development activities that do not result in the immediate transfer of distinct products or services to the
customer. There is an implicit assumption that without the customer making such advance payments to Woodward,
Woodward’s future sales of products or services to the customer would be at a higher selling price; therefore, such payments
create a “material right” to the customer that effectively gives the customer an option to acquire future products or services, at
a discount, that are dependent upon the product engineering and development. Material rights are recorded as contract
liabilities and will be recognized when control of the related products or services are transferred to the customer.
75
Woodward capitalizes costs of product engineering and development identified as material rights up to the amount of
customer funding as costs to fulfill a contract because the costs incurred up to the amount of the customer funding
commitment are recoverable. Due to the uncertainty of the product success and/or demand, fulfillment costs in excess of the
customer funding are expensed as incurred. Woodward recognizes the deferred material rights as revenue based on a
percentage of actual sales to total estimated lifetime sales of the related developed products as the customers exercise their
option to acquire additional products or services at a discount. Woodward amortizes the capitalized costs to fulfill a contract
as cost of goods sold proportionally to the recognition of the associated deferred material rights. Estimated total lifetime
sales are reviewed at least annually and more frequently when circumstances warrant a modification to the previous estimate.
Woodward does not record incremental costs of obtaining a contract, as Woodward does not pay sales commissions or
incur other incremental costs related to contracts with Woodward’s customers for arrangements in which quantities and
pricing are fixed and/or determinable.
Contract liabilities: Advance payments and billings in excess of revenue recognized represent contract liabilities and are
recorded as deferred revenues when customers remit contractual cash payments in advance of Woodward satisfying
performance obligations under contractual arrangements, including those with performance obligations satisfied over time.
Woodward generally receives advance payments from customers related to maintenance or service arrangements, extended
warranties, or other stand ready services, which it recognizes over the performance period. Contract liabilities are
derecognized when revenue is recognized and the performance obligation is satisfied. Advance payments and billings in
excess of revenue recognized are included in deferred revenue, which is classified as current or noncurrent based on the
timing of when Woodward expects to recognize revenue.
Customer payments: Woodward occasionally agrees to make payments to certain customers in order to participate in
anticipated sales activity. Payments made to customers are accounted for as a reduction of revenue unless they are made in
exchange for identifiable goods or services with fair values that can be reasonably estimated. Reductions in revenue
associated with these customer payments are recognized immediately to the extent that the payments cannot be attributed to
anticipated future sales, and are recognized in future periods to the extent that the payments relate to anticipated future sales.
Such determinations are based on the facts and circumstances underlying each payment.
Stock-based compensation: Compensation cost relating to stock-based payment awards made to employees and
directors is recognized in the financial statements using a fair value method. Non-qualified stock option awards and
restricted stock awards are issued under Woodward’s stock-based compensation plans. The cost of such awards, measured at
the grant date, is based on the estimated fair value of the award.
Forfeitures are estimated at the time of each grant in order to estimate the portion of the award that will ultimately vest.
The estimate is based on Woodward’s historical rates of forfeitures and is updated periodically. The portion of the award that
is ultimately expected to vest is recognized as expense over the requisite service periods, which is generally the vesting
period of the awards.
Research and development costs: Company funded expenditures related to new product development, and significant
product enhancement and/or upgrade activities are expensed as incurred and are separately reported in the Consolidated
Statements of Earnings.
Income taxes: Deferred income taxes are provided for the temporary differences between the financial reporting basis
and the tax basis of Woodward’s assets, liabilities, and certain unrecognized gains and losses recorded in accumulated other
comprehensive (losses) earnings. Woodward provides for taxes that may be payable if undistributed earnings of overseas
subsidiaries were to be remitted to the United States, except for those earnings that it considers to be indefinitely invested.
Cash equivalents: Highly liquid investments purchased with an original maturity of three months or less are considered
to be cash equivalents.
Cash and cash equivalents are maintained with multiple financial institutions. Generally, these deposits may be
redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit
risk. Woodward holds cash and cash equivalents at financial institutions in excess of amounts covered by the Federal
Depository Insurance Corporation (the “FDIC”), sometimes invests excess cash in money market funds or other highly liquid
investments not insured by the FDIC, and holds cash and cash equivalents outside the United States that are not insured by
the FDIC.
76
Accounts receivable: Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are
recorded at the amount invoiced and are generally not collateralized. In the normal course of business, not all accounts
receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal to the amount that
Woodward believes ultimately will not be collected, either from credit risk or other adjustments to the original selling price
or anticipated cash discounts. In establishing the amount of the allowance related to the credit risk of accounts receivable,
customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings,
deterioration in the customer’s operating results or financial position, and current economic conditions. Bad debt losses are
deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed
uncollectible. Recoveries of accounts receivable previously written off are recognized when received. The allowance
associated with anticipated other adjustments to the selling price or cash discounts is also established and is included in the
allowance for uncollectible amounts. In establishing this amount, both customer-specific information as well as historical
experience is considered.
In coordination with its customers and when terms are considered favorable to Woodward, Woodward from time to
time transfers ownership to collect amounts due to Woodward for outstanding accounts receivable to third parties in
exchange for cash. When the transfer of accounts receivable meets the criteria of Financial Accounting Standards Board
(“FASB”) ASC Topic 860-10, “Transfers and Servicing,” and are without recourse, it is recognized as a sale and the accounts
receivable is derecognized.
Consistent with common business practice in China, Woodward’s Chinese subsidiaries accept bankers’ acceptance
notes from Chinese customers in settlement of certain customer billed accounts receivable. Bankers’ acceptance notes are
financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial
institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing
financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’
acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy
to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of Woodward’s receipt of
such draft. Woodward has elected to adopt the practical expedient to not adjust the promised amounts of consideration for
the effects of a significant financing component at contract inception as the financing component associated with accepting
bankers’ acceptance notes has a duration of less than one year. Woodward’s contracts with customers generally have no
other financing components.
Unbilled receivables (contract assets) arise when the timing of billing differs from the timing of revenue recognized,
such as when contract provisions require revenue to be recognized over time rather than at a point in time. Unbilled
receivables primarily relate to performance obligations satisfied over time when the cost-to-cost method is utilized and the
revenue recognized exceeds the amount billed to the customer as there is not yet a right to payment in accordance with
contractual terms. Unbilled receivables are recorded as a contract asset when the revenue associated with the contract is
recognized prior to billing and derecognized when billed in accordance with the terms of the contract.
For composition of accounts receivable, see Note 3, Revenue.
Inventories: Inventories are valued at the lower of cost or net realizable value, with cost being determined using
methods that approximate a first-in, first-out basis.
Short-term investments: From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in
short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the
deposit. Woodward believes that the investments are with creditworthy financial institutions. Amounts with maturities of
less than 365 days are classified as “Other current assets.”
Property, plant, and equipment: Property, plant, and equipment are recorded at cost and are depreciated over the
estimated useful lives of the assets. Assets are generally depreciated using the straight-line method. Assets are tested for
recoverability whenever events or circumstances indicate the carrying value may not be recoverable.
Estimated lives over which fixed assets are generally depreciated at September 30, 2020 were as follows:
Land improvements
Buildings and improvements
Leasehold improvements
Machinery and production equipment
Computer equipment and software
Office furniture and equipment
Other
3
3
1
3
1
3
3
–
–
–
–
–
–
–
20
40
10
20
10
10
10
years
years
years
years
years
years
years
77
Included in computer equipment and software are Woodward’s enterprise resource planning (“ERP”) systems, which
have an estimated useful life of 10 years. All other computer equipment and software is generally depreciated over three
years to five years.
Purchase accounting: Business combinations are accounted for using the purchase method of accounting. Under the
purchase method, assets and liabilities, including intangible assets, are recorded at their fair values as of the acquisition date.
Acquisition costs in excess of amounts assigned to assets acquired and liabilities assumed are recorded as goodwill.
Transaction-related costs associated with business combinations are expensed as incurred.
Goodwill: Woodward tests goodwill for impairment at the reporting unit level on an annual basis and more often if an
event occurs or circumstances change that indicates the fair value of a reporting unit may be below its carrying amount.
Based on the relevant U.S. GAAP authoritative guidance, Woodward aggregates components of a single operating segment
into a reporting unit, if appropriate. The impairment test consists of comparing the implied fair value of each reporting unit
with its carrying amount that includes goodwill. If the carrying amount of the reporting unit exceeds its implied fair value,
Woodward compares the implied fair value of goodwill with the recorded carrying amount of goodwill. 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.
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the renewable power
systems business and other related businesses (as described more fully in Note 11, Sale of businesses, and defined therein as
the “disposal group”) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at the time, Woodward determined that the remaining value of
the goodwill of the disposal group was not recoverable and an $8,640 non-cash impairment charge was recorded during the
year ended September 30, 2020.
Based on the results of Woodward’s annual goodwill impairment testing, no additional impairment charges were
recorded in the year ended September 30, 2020 or since the goodwill was originally recorded due to the annual goodwill
impairment test.
Other intangibles: Other intangibles are recognized apart from goodwill whenever an acquired intangible asset arises
from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and
sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or
liability. Woodward amortizes the cost of other intangibles over their useful lives unless such lives are deemed indefinite.
The cost of amortizable other intangibles are amortized over their respective useful life using patterns that reflect the periods
over which the economic benefits of the assets are expected to be realized. Amortization expense is allocated to cost of
goods sold and selling, general, and administrative expenses based on the nature of the intangible asset. Amortizable other
intangible assets are reviewed for impairment whenever an event occurs or circumstances change indicating that the related
carrying amount of the other intangible asset may not be recoverable. Impairment losses are recognized if the carrying
amount of an intangible is both not recoverable and exceeds its fair value.
Based on Woodward’s plan to divest the disposal group, Woodward determined that the remaining value of the
intangible assets of the disposal group was not recoverable, and a $200 non-cash impairment charge was recorded for the
year ended September 30, 2020.
Woodward has recorded no additional impairment charges related to its other intangibles as of September 30, 2020 or
since the other intangibles were originally recorded due to the annual goodwill impairment test.
Estimated lives over which intangible assets are amortized at September 30, 2020 were as follows:
Customer relationships and contracts
Intellectual property
Process technology
Other
9
10
8
3
–
–
–
–
30
17
30
15
years
years
years
years
Woodward has one other indefinitely lived intangible asset consisting of the Woodward L’Orange tradename. The
Woodward L’Orange tradename 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 the Woodward L’Orange intangible asset may be below its
carrying amount. The impairment test consists of comparing the fair value of the Woodward L’Orange tradename intangible
asset, determined using discounted cash flows, with its carrying amount. If the carrying amount of the Woodward L’Orange
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.
78
Impairment of long-lived assets: Woodward reviews the carrying amount of its long-lived assets or asset groups to be
used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be
recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or
manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the
value of the asset, or a significant decline in the observable market value of an asset, among others.
If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by
determining if the carrying amount of the asset group exceeds the sum of the projected undiscounted cash flows expected to
result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset
group. If the recoverability test indicates that the carrying amount of the asset group is not recoverable, the Company will
estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an
estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying
amount and its estimated fair value.
On the approval of the divestiture plan and subsequent marketing of the disposal group (as described more fully in Note
11, Sale of businesses, and defined therein as the “disposal group”), Woodward determined that based on the current market
conditions, the carrying value of the disposal group’s remaining held for sale net assets exceeded the fair value. As a result,
Woodward recorded a non-cash impairment charge associated with the long-lived assets of $22,900 attributable to the
disposal group for the year ended September 30, 2020.
Investment in marketable equity securities: Woodward holds marketable equity securities related to its deferred
compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity securities are
classified as trading securities. The trading securities are reported at fair value, with realized gains and losses recognized in
“Other (income) expense, net.” The trading securities are included in “Other assets.” The associated obligation to provide
benefits under the deferred compensation program is included in “Other liabilities.”
Investments in unconsolidated subsidiaries: Investments in, and operating results of, entities in which Woodward does
not have a controlling financial interest or the ability to exercise significant influence over the operations are included in the
financial statements using the cost method of accounting. Investments and operating results of entities in which Woodward
does not have a controlling interest but does have the ability to exercise significant influence over operations are included in
the financial statements using the equity method of accounting.
Deferred compensation: The Company maintains a deferred compensation plan, or “rabbi trust,” as part of its overall
compensation package for certain employees.
Deferred compensation obligations will be settled either by delivery of a fixed number of shares of Woodward’s
common stock (in accordance with certain eligible members’ irrevocable elections) or in cash. Woodward has contributed
shares of its common stock into a trust established for the future settlement of deferred compensation obligations that are
payable in shares of Woodward’s common stock. Common stock held by the trust is reflected in the Consolidated Balance
Sheets as “Treasury stock held for deferred compensation” and the related deferred compensation obligation is reflected as a
separate component of equity in amounts equal to the fair value of the common stock at the dates of contribution. These
accounts are not adjusted for subsequent changes in the fair value of the common stock. Deferred compensation obligations
that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the underlying contract and
are reflected in the Consolidated Balance Sheet as “Other liabilities.”
Derivatives: The Company is exposed to various global market risks, including the effect of changes in interest rates,
foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices. From
time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives
designated as accounting hedges and/or those utilized as economic hedges. Woodward uses interest rate related derivative
instruments to manage its exposure to fluctuations of interest rates. Woodward does not enter into or issue derivatives for
trading or speculative purposes.
By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to
credit risk and market risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to
perform under the terms of the derivative and/or hedging instrument. When the fair value of a derivative contract is positive,
the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering
into transactions only with counterparties that are believed to be creditworthy. Market risk arises from the potential adverse
effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or
foreign currency exchange rates. Woodward minimizes this market risk by establishing and monitoring parameters that limit
the types and degree of market risk that may be undertaken.
79
To mitigate interest rate risk, the Company has utilized derivative instruments, such as treasury lock agreements to lock
in fixed rates on future debt issuances, which qualify as cash flow or fair value hedges to mitigate the risk of variability in
cash flows related to future interest payments attributable to changes in the designated benchmark rate. The Company
records all such interest rate hedge instruments on the Consolidated Balance Sheets at fair value. Cash flows related to the
instrument designated as a qualifying hedge are reflected in the accompanying Consolidated Statements of Cash Flows in the
same categories as the cash flows from the items being hedged. Accordingly, cash flows relating to the settlement of interest
rate derivatives hedging the forecasted future interest payments on debt have been reflected upon settlement as a component
of financing cash flows. The resulting gain or loss from such settlement is deferred to other comprehensive income and
reclassified to interest expense over the term of the underlying debt. This reclassification of the deferred gains and losses
impacts the interest expense recognized on the underlying debt that was hedged and is therefore reflected as a component of
operating cash flows in periods subsequent to settlement. The periodic settlement of interest rate derivatives hedging
outstanding variable rate debt is recorded as an adjustment to interest expense and is therefore reflected as a component of
operating cash flows.
From time to time, in order to hedge against foreign currency exposure, Woodward designates certain non-derivative
financial instrument loans as net investment hedges. Foreign exchange gains or losses on these loans are recognized in
foreign currency translation adjustments within total comprehensive (losses) earnings. Also, to hedge against the foreign
currency exposure attributable to the spot remeasurement its Euro denominated intercompany loans, Woodward has entered
into derivative instruments in fair value hedging relationships, and derivative instruments in cash flow hedging relationships
to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future
principal and interest payments associated with its Euro denominated intercompany loans.
Further information on net investment hedges and derivative instruments in fair value and cash flow hedging
relationships, including the Company’s policy in accounting for these derivatives, can be found at Note 9, Derivative
instruments and hedging activities.
Financial instruments: The Company’s financial instruments include cash and cash equivalents, short-term
investments, investments in the deferred compensation program, notes receivable from municipalities, investments in term
deposits, cross-currency interest rate swaps and debt. Because of their short-term maturity, the carrying amount of cash and
cash equivalents, and short-term debt approximate fair value. The fair value of investments in the deferred compensation
program are adjusted to fair value based on the quoted market prices for the investments in the various mutual funds owned.
The fair value of the long-term notes from municipalities are estimated based on a model that discounts future principal and
interest payments received at interest rates available to the Company at the end of the period for similarly rated municipal
notes of similar maturity. The fair value of term deposits is estimated based on a model that discounts future principal and
interest payments received at interest rates available to the Company at the end of the period for similar term deposits with
the same maturity in the same jurisdictions. The fair value of the cross-currency interest rate swaps is determined using a
market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates,
currency rates, and other market factors. The fair value of long-term debt is estimated based on a model that discounts future
principal and interest payments at interest rates available to the Company at the end of the period for similar debt with the
same maturity. Further information on the fair value of financial instruments can be found at Note 8, Financial instruments
and fair value measurements.
Financial assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon a
fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following
levels:
Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement
date.
Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are
observable and can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing
the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation
of the instruments.
80
Postretirement benefits: The Company provides various benefits to certain current and former employees through
defined benefit pension and postretirement plans. For financial reporting purposes, net periodic benefits expense and related
obligations are calculated using a number of significant actuarial assumptions. Changes in net periodic expense and funding
status may occur in the future due to changes in these assumptions. The funded status of defined pension and postretirement
plans recognized in the statement of financial position is measured as the difference between the fair market value of the plan
assets and the benefit obligation. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation;
for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated
benefit obligation. Any over-funded status is recognized as an asset and any underfunded status is recognized as a liability.
Projected benefit obligation is the actuarial present value as of the measurement date of all benefits attributed by the
plan benefit formula to employee service rendered before the measurement date using assumptions as to future compensation
levels if the plan benefit formula is based on those future compensation levels. The accumulated benefit obligation is the
actuarial present value of benefits (whether vested or unvested) attributed by the plan benefit formula to employee service
rendered before the measurement date and based on employee service and compensation, if applicable, prior to that date. The
accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future
compensation levels.
Note 2. New accounting standards
From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new
accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through
issuance of an Accounting Standards Update (“ASU”).
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting.” The purpose of ASU 2020-04 is to provide optional guidance for a limited
time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.
In response to concerns about structural risks of interbank offered rates, and, in particular, the risk of cessation of the London
Interbank Offered Rate (LIBOR), reference rate reform refers to a global initiative to identify alternative reference rates that
are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 is effective for all entities as of
March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU 2020-04 for contract
modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is
subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March
12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry
subtopic, the amendments in ASU 2020-04 must be applied prospectively for all eligible contract modifications for that topic
or industry subtopic.
An entity may elect to apply the amendments in ASU 2020-04 to eligible hedging relationships existing as of the
beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the
beginning of the interim period that includes March 12, 2020. If an entity elects to apply any of the amendments for an
eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments
as a result of those elections must be reflected as of the beginning of that interim period and recognized in accordance with
the guidance in reference rate reform subtopics 848-30, 848-40, and 848-50 (as applicable). If an entity elects to apply any of
the amendments for a new hedging relationship entered into between the beginning of the interim period that includes March
12, 2020, any adjustments as a result of those elections must be reflected as of the beginning of the hedging relationship and
recognized in accordance with the guidance in reference rate reform subtopics 848-30, 848-40, and 848-50 (as applicable).
Woodward is currently assessing the accounting and financial impact of reference rate reform, particularly the impact it
may have on its hedging relationships and will consider applying the optional guidance of ASU 2020-04 accordingly.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions
for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting
standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for fiscal years beginning
after December 15, 2020 (fiscal year 2022 for Woodward). Upon adoption, the amendments in ASU 2019-12 should be
applied on a prospective basis to all periods presented. Early adoption is permitted. Woodward is currently assessing the
impact of the adoption of the new guidance under ASU 2019-12 and expects to adopt it in fiscal year 2022.
81
In August 2018, the FASB issued ASU 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans –
General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU
2018-14 amends ASC 715 to add, remove, and modify disclosure requirements related to defined benefit pension and other
postretirement plans. The ASU’s changes to disclosures aim to improve the effectiveness of ASC 715’s disclosure
requirements under the FASB’s disclosure framework project. ASU 2018-14 is effective for public entities for fiscal years
ending after December 15, 2020 (fiscal year 2022 for Woodward). Upon adoption, the amendments in ASU 2018-14 should
be applied on a retrospective basis to all periods presented and early adoption is permitted. Woodward elected to early adopt
the new guidance as of September 30, 2020. Adoption of ASU 2018-14 resulted in elimination of the following disclosures
(a) the amounts expected to be amortized from accumulated other comprehensive income and reported as a component of net
periodic benefit cost during the following fiscal year, and (b) the effects of a one-percentage-point change in the assumed
health care cost trend rates on the aggregate projected service and interest cost and accumulated postretirement benefit
obligation; and additional disclosures explaining the reasons for significant gains and losses related to the change in benefit
obligations for the period. See Note 21, Retirement benefits, for further discussion of the Company’s defined benefit pension
plans.
In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 allows a reclassification from
accumulated other comprehensive income (“OCI”) to retained earnings for stranded tax effects resulting from the enactment
of tax reform under H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on
the Budget for Fiscal Year 2018” (the “Tax Act”) (also known as “The Tax Cuts and Jobs Act”), and provides guidance on
the disclosure requirements regarding the stranded tax effects. Woodward adopted ASU 2018-02 on October 1, 2019 and has
elected not to reclassify the income tax effects of the Tax Act from accumulated OCI to retained earnings.
In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of
Assets Other than Inventory.” ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of
intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered
through use. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for
Woodward), including interim periods within the year of adoption. Woodward adopted the new guidance on October 1,
2018. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of
the beginning of the period of adoption. The cumulative impact of the adoption of ASU 2016-16 of $1,005 was recognized at
the date of adoption as a decrease to both retained earnings and other current assets in the Consolidated Balance Sheet. As a
result of adoption, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s
tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in
consolidation.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-
13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather
than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained
earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December
15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption. Early adoption is permitted
for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those
fiscal years. Woodward expects to elect the modified retrospective adoption method resulting in a cumulative-effect
adjustment to retained earnings on October 1, 2020.
Woodward is currently assessing the impact this guidance will have on its Consolidated Financial Statements,
including how Woodward’s existing accounts receivable, unbilled receivables (contract assets), and other financial assets will
be impacted by the new guidance. In anticipation of adopting ASU 2016-13 on October 1, 2020, Woodward has developed a
comprehensive project plan to assess the current credit loss allowance methods and the associated impact on the Company.
The project plan includes reviewing various financial assets for potential expected credit losses under the CECL impairment
model and updating Woodward’s business processes and controls to meet the requirements of ASU 2016-13, as necessary.
Woodward expects the most significant effects of the adoption of ASU 2016-13 will be changes to the accounting for the
Company’s expected credit loss reserve on billed receivables and unbilled receivables (contract assets). Bad debt expense for
all trade accounts receivable in fiscal year 2020 was $884. As of September 30, 2020, and 2019, the allowance for
uncollectible accounts receivable was $6,889 and $7,908, respectively.
82
In May 2019, the FASB issued ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition
Relief,” which provides transition relief for entities adopting ASU 2016-13. Specifically, ASU 2019-05 amends ASU 2016-
13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments.
For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after
December 15, 2019, including interim periods therein. Woodward expects to adopt ASU 2019-05 in fiscal year 2021.
Woodward does not expect to elect the fair value option for its financial instruments upon the adoption of both ASU 2016-13
and ASU 2019-05.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” and has subsequently issued supplemental
and/or clarifying ASUs (collectively “ASC 842”). The purpose of ASC 842 is to increase transparency and comparability
among organizations by recognizing lease right-of-use (“ROU”) assets and lease liabilities for substantially all leases on the
balance sheet, and provide additional disclosure information about leasing arrangements. ASC 842 modifies the definition of
a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an
identified asset.
Woodward adopted ASC 842 on October 1, 2019 using the modified retrospective transition method under which prior
periods were not restated and the cumulative effect of initial adoption was recognized in retained earnings on the date of
initial application, October 1, 2019. Consequently, financial information will not be updated and the disclosures required
under ASC 842 will not be provided for dates and periods before October 1, 2019.
The new guidance under ASC 842 provides a number of optional practical expedients in transition. Woodward elected
the "package of practical expedients," which allowed Woodward not to reassess under the new guidance our prior
conclusions about lease identification, lease classification and initial direct costs. Accordingly, Woodward carried forward
its existing conclusions on lease classification for leases existing as of the adoption date. Additionally, embedded lease
arrangements were assessed under the prior guidance of ASC 840 lease framework for transition on October 1, 2019 in
accordance with the leases policy outlined below. The new lease accounting guidance under ASC 842 has been applied for
all arrangements commencing or modified on or after October 1, 2019.
Woodward also elected as a practical expedient to not record qualifying short-term leases with a term of twelve months
or less (inclusive of reasonably certain renewals and termination options) at the inception of the contract on the balance sheet
and instead recognizes those lease payments in the Consolidated Statements of Comprehensive Earnings on a straight-line
basis over the lease term. This practical expedient may not be applied to short-term leases that contain a purchase option that
is reasonably certain of exercise.
Woodward has also elected the practical expedient to not separate lease and non-lease components for its lease
arrangements when it is the lessee. The application of this practical expedient is discussed at Note 5, Leases.
The adoption of ASC 842 resulted in recognition of additional operating ROU assets and operating lease liabilities on
the Consolidated Balance Sheet as of October 1, 2019 of $18,894 and $18,851, respectively. See Note 5, Leases, for
disclosures and further information related to implementation and adoption of ASC 842.
Note 3. Revenue
Sales of Products
Woodward primarily generates revenue through the manufacture and sale of engineered aerospace and industrial
products, including revenue derived from maintenance, repair and overhaul (“MRO”) performance obligations performed on
products originally manufactured by Woodward and subsequently returned by original equipment manufacturer (“OEM”) or
other end-user customers. The majority of Woodward’s costs incurred to satisfy MRO performance obligations are related to
replacing and/or refurbishing component parts of the returned products to restore the units back to a condition generally
comparable to that of the unit upon its initial sale to an OEM customer. Therefore, Woodward considers almost all of its
revenue to be derived from product sales, including those related to MRO.
Revenue from manufactured products, MRO, and services represented 86%, 12%, and 2%, respectively, of Woodward’s
net sales for the years ended September 30, 2020 and September 30, 2019.
Point in time and over time revenue recognition
The amount of revenue recognized as point in time or over time follows:
Point in time
Over time
Total net sales
For the Year Ended September 30, 2020 For the Year Ended September 30, 2019
Aerospace Industrial Consolidated Aerospace Industrial Consolidated
$ 590,817 $ 592,157 $ 1,182,974 $ 762,042 $ 634,219 $ 1,396,261
1,000,146
1,503,936
$ 1,590,963 $ 904,702 $ 2,495,665 $ 1,880,520 $ 1,019,677 $ 2,900,197
1,312,691 1,118,478
312,545
385,458
83
Material Rights and Costs to Fulfill a Contract
For the fiscal years ended September 30, 2020 and September 30, 2019, Woodward recognized an increase in revenue
of $6,784 and $6,017, respectively, and cost of goods sold of $6,638 and $9,580, respectively, related to changes in estimated
total lifetime sales. Other than amounts related to changes in estimate, for the fiscal years ended September 30, 2020 and
September 30, 2019, Woodward amortized $1,241 and $376, respectively, of costs to fulfill contracts with customers to cost
of goods sold and amortized $1,664 and $719, respectively, of contract liabilities to revenue. As of September 30, 2020,
other assets included $133,349 of capitalized costs to fulfill contracts with customers, compared to $105,206 as of September
30, 2019.
Accounts Receivable and Contract assets
Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (contract
assets) and are included in “Accounts receivable” in Woodward’s Consolidated Balance Sheets. Amounts are billed in
accordance with contractual terms, which are generally tied to shipment of the products to the customer, or as work
progresses in accordance with contractual terms. Billed accounts receivable are typically due within 60 days. Woodward’s
contracts with customers generally have no financing components.
Accounts receivable consisted of the following:
Billed receivables
Trade accounts receivable
Other (Chinese financial institutions)
Less: Allowance for uncollectible amounts
Net billed receivables
Current unbilled receivables (contract assets), net
Total accounts receivable, net
September 30,
2020
September 30,
2019
$
$
307,914 $
56,640
(6,889 )
357,665
180,322
537,987 $
381,942
42,171
(7,908 )
416,205
175,324
591,529
As of September 30, 2020, “Other assets” on the Consolidated Balance Sheets includes $16,751 of unbilled receivables
not expected to be invoiced and collected within a period of twelve months, compared to $1,573 as of September 30, 2019.
Unbilled receivables not expected to be invoiced and collected within a period of twelve months are primarily attributable to
customer delays for deliveries on firm orders in the Aerospace segment due to the impacts of the COVID-19 pandemic.
Billed and unbilled accounts receivable from the U.S. Government were less than 10% of total billed and unbilled
accounts receivable at September 30, 2020 and September 30, 2019.
Contract liabilities
Contract liabilities consisted of the following:
Deferred revenue from material rights from GE joint venture
formation
Deferred revenue from advanced invoicing and/or prepayments from
customers
Liability related to customer supplied inventory
Deferred revenue from material rights related to engineering and
development funding
Net contract liabilities
September 30, 2020
September 30, 2019
Current
Noncurrent Current
Noncurrent
$
4,066 $
234,240 $
8,317 $
230,588
3,239
14,955
85
—
4,554
13,396
141
—
2,360
24,620 $
132,317
366,642 $
1,624
27,891 $
106,436
337,165
$
The current portion of contract liabilities is included in “Accrued liabilities” and the noncurrent portion is included in
“Other liabilities” of Woodward’s Consolidated Balance Sheets. Woodward recognized revenue of $29,579 in the year
ended September 30, 2020 from contract liabilities balances recorded as of September 30, 2019, compared to $21,658 in the
year ended September 30, 2019 from contract liabilities balances recorded as of October 1, 2018.
Woodward recognized revenue of $79,569 for the fiscal year 2020, compared to $98,061 for the fiscal year 2019 related
to noncash consideration received from customers. The Aerospace segment recognized $78,179 for the fiscal year ended
September 30, 2020, compared to $96,762 for the fiscal year ended September 30, 2019, while the Industrial segment
recognized $1,390 for the fiscal year ended September 30, 2020 compared to $1,299 for the fiscal year ended September 30,
2019.
84
Remaining performance obligations
Remaining performance obligations related to the aggregate amount of the total contract transaction price of firm orders
for which the performance obligation has not yet been recognized in revenue as of September 30, 2020 was $1,454,406,
compared to $1,527,437 as of September 30, 2019, the majority of which in both periods relate to Woodward’s Aerospace
segment. Woodward expects to recognize almost all of these remaining performance obligations within two years after
September 30, 2020.
Remaining performance obligations related to material rights that have not yet been recognized in revenue as of
September 30, 2020 was $465,668, of which $6,983 is expected to be recognized in fiscal year 2021, and the balance is
expected to be recognized thereafter. Woodward expects to recognize revenue from performance obligations related to
material rights over the life of the underlying programs, which may be as long as forty years.
Disaggregation of Revenue
Woodward designs, produces and services reliable, efficient, low-emission, and high-performance energy control
products for diverse applications in markets throughout the world. Woodward reports financial results for each of its
Aerospace and Industrial reportable segments. Woodward further disaggregates its revenue from contracts with customers by
primary market and by geographical area as Woodward believes this best depicts how the nature, amount, timing and
uncertainty of its revenue and cash flows are affected by economic factors.
Revenue by primary market for the Aerospace reportable segment was as follows:
Commercial OEM
Commercial aftermarket
Defense OEM
Defense aftermarket
Total Aerospace segment net sales
Year Ended
September 30,
2020
2019
434,306
399,843
526,264
230,550
1,590,963 $
659,336
497,795
529,940
193,449
1,880,520
$
Revenue by primary market for the Industrial reportable segment was as follows:
Reciprocating engines
Industrial turbines
Renewables1
Total Industrial segment net sales
Year Ended
September 30,
2020
2019
$
$
632,555 $
222,366
49,781
904,702 $
751,136
210,064
58,477
1,019,677
(1) Sales in the renewables market were discontinued as of May 1, 2020 following the closing of the divestiture of the
disposal group (see Note 11, Sale of businesses).
The customers who account for approximately 10% or more of net sales of each of Woodward’s reportable segments for
the fiscal year ended September 30, 2020 are as follows:
Aerospace
Industrial
Customer
The Boeing Company, General Electric Company, Raytheon Technologies
Rolls-Royce PLC, Weichai Westport, General Electric Company
85
Net sales by geographic area, as determined based on the location of the customer, were as follows:
United States
Germany
Europe, excluding Germany
China
Asia, excluding China
Other countries
Total net sales
Note 4. Earnings per share
Year Ended September 30, 2019
Year Ended September 30, 2020
Aerospace Industrial Consolidated Aerospace Industrial Consolidated
$ 1,231,004 $ 195,450 $ 1,426,454 $ 1,415,880 $ 212,184 $ 1,628,064
302,084
431,416
214,829
164,488
118,959
159,316
$ 1,590,963 $ 904,702 $ 2,495,665 $ 1,880,520 $ 1,019,677 $ 2,900,197
72,907 229,177
233,965
336,971 178,905 252,511
47,492 167,337
209,885
37,991 126,497
140,069
31,971
148,321 127,345
52,635 181,330
122,938 214,033
38,359 171,526
27,068 113,001
29,362
Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-
average number of shares of common stock outstanding for the period.
Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive
effect of stock options and restricted stock.
The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:
Numerator:
Net earnings
Denominator:
Basic shares outstanding
Dilutive effect of stock options and restricted stock units
Diluted shares outstanding
Income per common share:
Basic earnings per share
Diluted earnings per share
Year Ended September 30,
2019
2018
2020
$
240,395 $
259,602 $
180,378
62,267
1,942
64,209
61,950
2,548
64,498
$
$
3.86 $
3.74 $
4.19 $
4.02 $
61,493
2,383
63,876
2.93
2.82
The following stock option grants were outstanding during the fiscal years ended September 30, 2020, 2019 and 2018,
but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.
Options
Weighted-average option price
Year Ended September 30,
2019
2018
2020
$
660
104.45 $
25
96.54 $
760
78.72
The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the
weighted-average treasury stock shares held for deferred compensation obligations of the following:
Year Ended September 30,
2019
2018
2020
Weighted-average treasury stock shares held for deferred compensation
obligations
211
208
198
Note 5. Leases
Woodward adopted ASC 842 on October 1, 2019 using the modified retrospective transition method under which prior
periods were not restated and the cumulative effect of initial adoption was recognized in retained earnings on the date of
initial application, October 1, 2019.
Woodward is primarily a lessee in lease arrangements but has some embedded lessor arrangements.
86
Lessee arrangements
Woodward has entered into operating leases for certain facilities and equipment with terms in excess of one year under
agreements that expire at various dates. Some leases require the payment of property taxes, insurance, maintenance costs, or
other similar costs in addition to rental payments. Woodward has also entered into finance leases for equipment with terms
in excess of one year under agreements that expire at various dates.
Woodward determines if an arrangement for the use of property, plant and equipment is a lease at inception. Under
ASC 842, an arrangement contains a lease if the arrangement conveys the right to control the use of plant, property or
equipment (identified asset) for a period of time in exchange for consideration. For arrangements determined to be a lease
under this criteria, Woodward assesses lease classification as either an operating or finance lease whenever the new lease is
executed or an existing lease requires reclassification based on changes in the lease’s terms and conditions. Lease
classification impacts the treatment of the lease on the income statement and amortization of the lease ROU asset. In
determining lease classification, Woodward considers both qualitative and quantitative factors when performing the
following classification tests: (i) transfer of ownership at the end of the lease term, (ii) existence of a bargain purchase option,
(iii) the lease term, (iv) minimum lease payments, and (v) whether the leased asset is so customized to Woodward’s needs as
to effectively have utility only to Woodward.
Woodward applies the following thresholds when performing the classification tests: (i) 75% or greater is considered to
be the majority of the asset’s remaining economic life, (ii) the exercise of the renewal option or the non-exercise of a
termination option is reasonably certain if it has at least a 75% likelihood of occurring (in arriving at the percentage
likelihood, Woodward considers its plans as to whether to renew the lease and the economic factors that may impact the
decision to renew and Woodward will include a renewal option or non-exercise of a termination option in the lease term only
if the Company has an economic incentive to extend the lease), and (iii) the present value of the future minimum lease
payments is considered to exceed substantially all of the fair value of the underlying asset if the payments exceed 90% of the
asset’s fair value. Woodward considers the exercise of the option to purchase a leased asset as reasonably certain if it has at
least a 75% likelihood of being exercised or, among other things, a significant economic incentive exists for exercising the
option.
Lease components are elements of an arrangement that provide the customer with the right to use an identified asset.
The right to use an underlying asset is a separate lease component if: (i) the lessee can benefit from the right to use the
underlying asset either on its own or together with other resources that are readily available, and (ii) the right to use the
underlying asset is neither highly dependent on nor highly interrelated with other rights to use other underlying assets in the
arrangement. Woodward may enter into lessee arrangements that contain a lease component but also contain other non-lease
components. When the non-lease component in an arrangement relates to inventory, as inventory is outside the scope of
ASC 842, the payment Woodward makes for inventory is accounted for and expensed separately and apart from lease
expense, rather than as a lease component. For all other classes of underlying assets in lessee arrangements, Woodward has
elected to combine lease and non-lease components and to account for them as lease expense.
ROU assets represent Woodward’s right to use an underlying asset for the lease term, and lease liabilities represent
Woodward’s obligation to make lease payments arising from the lease. ROU assets include any initial direct costs
(incremental costs of a lease that would not have been incurred had the lease not been executed) and lease prepayments made,
and are reduced by any lease incentives received. Leases with an initial term of 12 months or less and leases with only
variable lease payments are not recorded on the balance sheet.
ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of
the remaining fixed lease payments over the lease term. In determining the estimated present value of lease payments,
Woodward discounts the fixed lease payments using the rate implicit in the agreement or, if the implicit rate is not known,
using the incremental borrowing rate. As of September 30, 2020, none of Woodward’s leases have been discounted using the
implicit rate as it could not be readily determined. Woodward’s incremental borrowing rate is based on the information
available at the lease commencement date, with consideration given to Woodward’s recent debt issuances as well as publicly
available data for instruments with similar characteristics.
When measuring lease liabilities, Woodward only uses lease payments remaining throughout the remainder of the lease
term and only includes the amount that is probable of being owed under significant residual value guarantees, if any. Lease
liabilities are subject to the same considerations as Woodward’s debt instruments in classifying them as current or noncurrent
in the Consolidated Balance Sheets.
87
For operating leases, lease expense is recognized over the expected lease term and classified as a cost of goods sold or
selling, general and administrative expense based on the nature of the underlying leased asset. For finance leases, the ROU
asset is recognized over the shorter of the useful life of the asset, consistent with Woodward’s normal depreciation policy, or
the lease term, and is classified as a cost of goods sold, selling, general and administrative expense, or research and
development expense, based on the nature and use of the underlying leased asset. Interest expense is recorded in connection
with the finance lease liability using the effective interest rate method and is classified as interest expense.
Certain of Woodward’s operating lease agreements include variable payments that are passed through by the landlord,
such as insurance, taxes, and common area maintenance, payments based on the usage of the asset, and rental payments
adjusted periodically for inflation. Pass-through charges, payments due to changes in usage of the asset, and payments due to
changes in indexation are included within variable rent expense and are recognized in the period in which the variable
obligation for the payments was incurred.
None of Woodward’s lease agreements contain significant residual value guarantees, restrictions, or covenants. As of
September 30, 2020, Woodward has not entered into any lease arrangements that have not yet commenced but would create
significant rights and obligations. Woodward does not have any lease transactions between related parties.
Lease-related assets and liabilities follows:
Classification on the Condensed Consolidated Balance Sheets
September 30, 2020
Assets:
Operating lease assets
Finance lease assets
Total lease assets
Current liabilities:
Operating lease liabilities
Finance lease liabilities
Noncurrent liabilities:
Operating lease liabilities
Finance lease liabilities
Total lease liabilities
Other assets
Property, plant and equipment, net
Accrued liabilities
Current portion of long-term debt
Other liabilities
Long-term debt, less current portion
$
$
18,918
1,201
20,119
4,925
1,634
14,569
1,173
22,301
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the renewable power
systems business and other related businesses (as described more fully in Note 11, Sale of businesses, and defined therein as
the “disposal group”) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of
the ROU assets of the disposal group were not recoverable, and a $639 non-cash impairment charge was recorded during the
fiscal year ended September 30, 2020.
Supplemental lease-related information follows:
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Lease-related expenses for the fiscal year ended September 30, 2020 were as follows:
Operating lease expense
Amortization of financing lease assets
Interest on financing lease liabilities
Variable lease expense
Short-term lease expense
Sublease income1
Total lease expense
September 30, 2020
5.5 years
2.1 years
3.2 %
3.0 %
Year Ended
September 30,
2020
6,164
476
87
1,101
466
(697 )
7,597
$
$
(1) Relates to two separate subleases Woodward has entered into for a leased manufacturing building in Niles, Illinois.
88
Lease-related supplemental cash flow information for the fiscal year ended September 30, 2020 follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases
Operating cash flows for finance leases
Financing cash flows for finance leases
Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases
Finance leases
Maturities of lease liabilities as of September 30, 2020 follows:
Year Ending September 30:
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: imputed interest
Total lease obligations
Year Ended
September 30, 2020
$
5,622
87
1,590
6,501
1,244
Operating Leases Finance Leases
1,687
739
325
136
—
—
2,887
(80 )
2,807
5,485
4,255
3,186
2,230
1,939
4,232
21,327
(1,833 )
19,494 $
$
Comparable future minimum rental payment under operating and finance leases that have initial or remaining non-
cancelable lease terms in excess of one year as previously disclosed under ASC 840 as of September 30, 2019 follows:
Year Ending September 30:
2020 (full twelve months)
2021
2022
2023
2024
Thereafter
Total minimum lease payments under ASC 840
Operating Leases Finance Leases
213
$
98
33
3
—
—
347
6,667 $
5,119
3,823
2,899
2,378
6,033
26,919 $
$
In the fiscal years ended September 30, 2019 and September 30, 2018, total rental payments charged to expense for
operating leases under ASC 840 were $7,578 and $8,348, respectively.
Lessor arrangements
Woodward enters into various customer supply agreements, customer sales agreements, and/or product development
agreements (collectively, “manufacturing contracts”) with customers to provide highly specialized products. In certain of
these manufacturing contracts, the property, plant and equipment used to manufacture the products is used only for the
benefit of one customer. This is primarily driven by the demand for customer products, which can be so great that it is
economically beneficial to dedicate the plant and equipment to just one customer. Additionally, this can be driven by the set-
up of the property, plant and equipment required to produce specified product and/or the specialized nature of the property,
plant and equipment such that it is not economically feasible to use the plant, property and equipment to manufacture other
products.
Woodward has assessed its manufacturing contracts and concluded that certain of the contracts for the manufacture of
customer products met the criteria to be considered a leasing arrangement (“embedded leases”) with Woodward as the lessor.
The specific manufacturing contracts that met the criteria were those that utilized Woodward property, plant and equipment
and which is substantially (more than 90%) dedicated to the manufacturing of the product(s) for a single customer.
Woodward has dedicated manufacturing lines with three of its customers representing embedded leases, all of which
qualified as operating leases with undefined quantities of future customer purchase commitments. Woodward’s customers
for which embedded lessor arrangements have been identified do not have contractual long-term commitments to purchase
specified quantities of related products or services from Woodward, although Woodward expects to continue selling to such
customers into the future and is presently unaware of any economic penalties, or other factors, which would further define a
lease term on such arrangements. Although Woodward expects to allocate some portion of future net sales to these
customers to embedded lessor arrangements, it cannot provide expected future undiscounted lease payments from property,
plant and equipment leased to customers as of September 30, 2020.
89
If in the future customers reduce purchases of related products from Woodward, the Company believes it will derive
additional value from the underlying equipment by repurposing its use to support other customer arrangements. Woodward
will continue to assess its future manufacturing contracts and monitor its current manufacturing contracts for changes which
may trigger additional embedded leases under ASC 842.
A manufacturing contract with a customer that contains an embedded lease will generally include lease components,
such as the equipment, and non-lease components, such as other inputs used in the manufacture of the customer’s product. In
evaluating its embedded leases, Woodward first identified and separated its lease and non-lease components. Woodward has
determined that for its current embedded leases, the property, plant and equipment used by Woodward represents lease
components and all other inputs that Woodward uses to develop, manufacture and sell the customer product represents non-
lease components. Woodward allocates revenue from contracts with customers between lease and non-lease components by
imputing a reasonable rate of return based on the estimated fair value of the dedicated property, plant and equipment.
Under ASC 842, consistent with the previous guidance, Woodward will continue to recognize property, plant and
equipment in embedded lessor arrangements on its Consolidated Balance Sheets in property, plant and equipment, net. The
property, plant and equipment will continue to be depreciated as normal.
Woodward recognizes revenue from the embedded lessor arrangements based on the value of the underlying dedicated
property, plant, and equipment. There are no fixed payments that the customers under the embedded lessor arrangements are
obligated to pay. Therefore, all the customer payments under the embedded lessor arrangements are considered variable with
the associated leasing revenue recognized when the revenue from underlying product sale related to variable lease payment is
recognized. Revenue from contracts with customers that included embedded operating leases, which is included in “Net
sales” at the Consolidated Statements of Earnings, was $6,823 for the fiscal year ended September 30, 2020.
Other than the embedded leases identified, Woodward is not the lessor in any other leasing arrangements. None of the
embedded leases identified by Woodward qualify as a sales-type or direct finance lease. None of the operating leases for
which Woodward is the lessor include options for the lessee to purchase the underlying asset at the end of the lease term or
residual value guarantees, nor are any such operating leases with related parties.
The carrying amount of property, plant and equipment leased to others through embedded leasing arrangements,
included in “Property, plant and equipment, net” at the Consolidated Balance Sheets, follows:
Property, plant and equipment leased to others through embedded leasing arrangements
Less accumulated depreciation
Property, plant and equipment leased to others through embedded leasing arrangements, net
September 30, 2020
76,655
$
(29,819 )
46,836
$
Note 6. Business acquisition
In fiscal year 2018, the Company, and its wholly-owned subsidiary, Woodward Aken GmbH (collectively, the
“Purchasers”), entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH
(“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC
(“Rolls-Royce”). Pursuant to the L’Orange Agreement, the Purchasers agreed to acquire all of the outstanding shares of
stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the
outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for
total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately
$811,000 based on the foreign currency exchange rate as of the date Woodward executed cross currency swaps in connection
with the financing of the transaction as described in Note 9, Derivative instruments and hedging activities. The transactions
contemplated by the L’Orange Agreement were completed on June 1, 2018 (the “ L’Orange Closing”) and L’Orange became
a subsidiary of the Company. Following the Closing, L’Orange was renamed “Woodward L’Orange.”
In connection with the Closing, MTU and a subsidiary of Rolls-Royce, and Woodward L’Orange, entered into a long-
term supply agreement, dated June 1, 2018 (the “LTSA”). Pursuant to the terms of the LTSA, Woodward L’Orange will
continue to supply to MTU and its affiliates within Rolls-Royce certain liquid fuel injection systems, injectors, pumps and
other associated parts and components for industrial diesel, heavy fuel oil and dual-fuel engines in a manner consistent with
the supply of such products prior to the transaction. The LTSA has an initial term that extends through December 31,
2032. During the term of the LTSA, MTU will continue to purchase certain of these products exclusively from Woodward
L’Orange, subject to certain limitations specified therein, at pricing negotiated at arms-length.
90
ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions
under U.S. GAAP. The purchase price of L’Orange, prepared consistent with the required ASC 805 framework, is allocated
as follows:
Cash paid to Sellers
Less acquired cash and restricted cash
Total purchase price
$
$
780,401
(9,286 )
771,115
The cash consideration was financed through the use of cash on hand, the issuance of an aggregate principal amount of
$400,000 of senior unsecured notes in a series of private placement transactions and $167,420 borrowed under Woodward’s
revolving credit agreement (see Note 16, Credit facilities, short-term borrowings and long-term debt). In connection with
these borrowings, the Company entered into cross currency swap transactions, which effectively lowered the interest rate on
each tranche of the senior unsecured notes and the borrowings under the Company’s revolving credit agreement (see Note 9,
Derivative instruments and hedging activities).
The allocation of the purchase price to the assets acquired and liabilities assumed was finalized as of June 30, 2019
using the purchase method of accounting in accordance with ASC 805. Assets acquired and liabilities assumed in the
transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were
expensed as incurred. Woodward’s allocation was based on an evaluation of the appropriate fair values and represents
management’s best estimate based on available data.
The following table, which is final as of June 30, 2019, summarizes the estimated fair values of the assets acquired and
liabilities assumed at the Closing.
Accounts receivable
Inventories (1)
Other current assets
Property, plant, and equipment
Goodwill
Intangible assets
Total assets acquired
Other current liabilities
Deferred income tax liabilities
Other noncurrent liabilities
Total liabilities assumed
Net assets acquired
$
$
26,538
72,392
1,385
89,772
257,447
573,427
1,020,961
41,997
166,927
40,922
249,846
771,115
(1) Inventories include a $16,324 adjustment to state work in progress and finished goods inventories at their fair value
as of the acquisition date. The entire inventory fair value adjustment was recognized as a noncash increase to cost of
goods sold ratably over the estimated inventory turnover period during the fiscal year ended September 30, 2018.
The final purchase price allocation resulted in the recognition of $257,447 of goodwill. Only the portion of goodwill
that relates to the U.S. operations of Woodward L’Orange is deductible for tax purposes. The Company has included all of
the goodwill in its Industrial segment. The goodwill represents the estimated value of potential expansion with new
customers, the opportunity to further develop sales opportunities with new customers, other synergies including supply chain
savings expected to be achieved through the integration of Woodward L’Orange with Woodward’s Industrial segment, and
intangible assets that do not qualify for separate recognition, such as the value of the assembled Woodward L’Orange
workforce that is not included within the estimated value of the acquired backlog and customer relationship intangible assets.
In connection with the acquisition of L’Orange, Woodward assumed the defined benefit pension obligations of the
L’Orange defined benefit pension plans (the “Woodward L’Orange Pension Plans”). Woodward’s assumption of the liability
associated with the Woodward L’Orange Pension Plans was part of the total consideration paid by Woodward to acquire
L’Orange and thus reduced Woodward’s cash payment for the transaction. As of the Closing, the total liability recognized by
the Company associated with the Woodward L’Orange Pension Plans was $39,257, of which $1,143 was considered current.
91
A summary of the intangible assets acquired, weighted-average useful lives, and amortization methods follows:
Intangible assets with finite lives:
Customer relationships and contracts
Process technology
Backlog
Other
Intangible asset with indefinite life:
Trade name
Total
Estimated
Amounts
Weighted-
Average
Useful Life
Amortization
Method
$
$
388,705
74,260
42,932
232
67,298
573,427
22 years
22 years
1 year
3 years
Straight-line
Straight-line
Accelerated
Straight-line
Indefinite
Not amortized
Pro forma results for Woodward giving effect to the L’Orange acquisition
The following unaudited pro forma financial information presents the combined results of operations of Woodward and
Woodward L’Orange as if the acquisition had been completed as of the beginning of the fiscal year prior to the year the
acquisition took place, or October 1, 2016. The unaudited pro forma financial information is presented for informational
purposes and is not indicative of the results of operations that would have been achieved if the acquisition and related
borrowings had taken place on October 1, 2016, nor is it indicative of future results.
The unaudited pro forma financial information for the fiscal year ended September 30, 2019 includes Woodward’s
results, including the post-acquisition results of Woodward L’Orange, since June 1, 2018. The unaudited pro forma financial
information for the fiscal year ended September 30, 2018 combines Woodward’s results with the pre-acquisition results of
L’Orange for the period prior to June 1, 2018, and the post-acquisition results of Woodward L’Orange since June 1, 2018.
Prior to the L’Orange acquisition by Woodward, L’Orange was a wholly owned subsidiary of Rolls-Royce, and as such
was not a standalone entity for financial reporting purposes. Accordingly, the historical operating results of L’Orange may
not be indicative of the results that might have been achieved, historically or in the future, if L’Orange had been a standalone
entity.
The unaudited pro forma results for fiscal years ended September 30, 2019 and September 30, 2018 were as follows:
Net sales
Net earnings
Earnings per share:
Basic earnings per share
Diluted earnings per share
Year Ended
September 30, 2019
As
reported
Year Ended
September 30, 2018
As
reported
Pro forma
Pro forma
$ 2,900,197 $ 2,900,197 $ 2,325,873 $ 2,549,874
225,800
180,378
267,649
259,602
$
4.19 $
4.02
4.32 $
4.15
2.93 $
2.82
3.67
3.53
The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and
transactions that would have been incurred had the acquisition been completed as of October 1, 2016, including amortization
charges for acquired intangible assets, elimination of intercompany transactions, adjustments for acquisition transaction costs,
adjustments for depreciation expense for property, plant, and equipment, and adjustments to interest expense. These
adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.
The operating results of Woodward L’Orange have been included in Woodward’s operating results for the periods
subsequent to the completion of the acquisition on June 1, 2018. Woodward L’Orange contributed net sales of $332,009 for
the fiscal year ended September 30, 2019, and net sales of $102,905 for the fiscal year ended September 30, 2018.
Woodward L’Orange contributed net income before income taxes of $47,246 for the fiscal year ended September 30, 2019,
and a net loss before income taxes of $9,334 for the fiscal year ended September 30, 2018.
Woodward incurred acquisition financing related costs of $14,823 for the fiscal year ended September 30, 2019 as
compared to $4,904 for the fiscal year ended September 30, 2018. The acquisition financing related costs are included in
“Interest expense” in the Consolidated Statements of Earnings.
92
Note 7. Joint venture
On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit,
consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to develop, manufacture and
support fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty
thousand pounds.
Unamortized deferred revenue from material rights in connection with the JV formation included:
Accrued liabilities
Other liabilities
September 30, 2020 September 30, 2019
8,317
$
230,588
4,066 $
234,240
Amortization of the deferred revenue (material right) recognized as an increase to sales was $5,493 for the fiscal year
ended September 30, 2020, $7,652 for the fiscal year ended September 30, 2019, and $5,854 for the fiscal year ended
September 30, 2018.
Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual
consent of both parties. Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE
do have the ability to significantly influence the operating and financial decisions of the JV. Therefore, Woodward is
accounting for its 50% ownership interest in the JV using the equity method of accounting. The JV is a related party to
Woodward. In addition, GE will continue to pay contingent consideration to Woodward consisting of fifteen annual
payments of $4,894 each, which began on January 4, 2017, subject to certain claw-back conditions. Woodward received its
third and fourth annual payments of $4,894 during the three-months ended March 31, 2019 and March 31, 2020, respectively,
which were recorded as deferred income and included in Net cash provided by operating activities on the Consolidated
Statements of Cash Flows. Neither Woodward nor GE contributed any tangible assets to the JV.
Other income related to Woodward’s equity interest in the earnings of the JV was as follows:
Other income
For the Year
Ended September 30,
2019
2018
2020
$
15,580 $
12,932 $
3,339
Cash distributions to Woodward from the JV, recognized in Net cash provided by operating activities on the
Consolidated Statements of Cash Flows, from the JV include:
Cash distributions
Net sales to the JV were as follows:
Net sales1
Year Ended
September 30,
2019
2018
2020
$
14,000 $
15,000 $
—
For the Year
Ended September 30,
2019
2018
2020
$
48,222 $
60,955 $
72,511
(1) Net sales include a reduction of $23,904 for the fiscal year ended September 30, 2020, $34,236 for the fiscal year
ended September 30, 2019, and $26,023 for the fiscal year ended September 30, 2018 related to royalties owed to
the JV by Woodward on sales by Woodward directly to third party aftermarket customers.
The Consolidated Balance Sheets include “Accounts receivable” related to amounts the JV owed Woodward, “Accounts
payable” related to amounts Woodward owed the JV, and “Other assets” related to Woodward’s net investment in the JV, as
follows:
Accounts receivable
Accounts payable
Other assets
September 30, 2020 September 30, 2019
5,906
$
4,270
7,543
3,062 $
1,502
9,123
93
Woodward records in “Other liabilities” amounts invoiced to the JV for support of the JV’s engineering and
development projects as an increase to contract liabilities, and records in “Other assets” related incurred expenditures as costs
to fulfill a contract. Woodward’s contract liabilities classified as “Other liabilities” included amounts invoiced to the JV as of
September 30, 2020 of $70,618 compared to $69,079 as of fiscal year ended September 30, 2019. Woodward’s costs to
fulfill a contract included in “Other assets” related to JV activities were $70,618 as of September 30, 2020 and $69,079 as of
fiscal year ended September 30, 2019. In the fiscal year ended September 30, 2020, Woodward recognized a $6,609
reduction in the contract liability in “Other liabilities” and a $6,261 reduction in costs to fulfill a contract in “Other assets”
related to the termination of a JV engineering and development project previously recognized as a material right, compared to
a $2,774 reduction in the cost to fulfill a contract in “Other assets” but a reduction of $2,790 in the contract liability in “Other
liabilities” for the fiscal year ended September 30, 2019.
Note 8. Financial instruments and fair value measurements
The table below presents information about Woodward’s financial assets and liabilities that are measured at fair value
on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such
fair value.
At September 30, 2020
At September 30, 2019
Level 1 Level 2 Level 3 Total
Level 1 Level 2 Level 3 Total
Financial assets:
Cash
Investments in reverse repurchase agreements
Investments in term deposits with foreign banks
Equity securities
Cross currency interest rate swaps
Total financial assets
Financial liabilities:
Cross currency interest rate swaps
Total financial liabilities
— — —
$ 112,817 $ — $ — $ 112,817 $ 52,971 $ — $ — $ 52,971
886
—
40,453 — — 40,453 45,216 — — 45,216
25,381 — — 25,381 20,504 — — 20,504
— 24,758 — 24,758
—
$ 178,651 $ — $ — $ 178,651 $ 119,577 $ 24,758 $ — $ 144,335
886 — —
— — —
$
$
— $ 51,387 $ — $ 51,387 $
— $ 51,387 $ — $ 51,387 $
— $ — $ — $
— $ — $ — $
—
—
Investments in reverse repurchase agreements: Woodward sometimes invests excess cash in reverse repurchase
agreements. Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of
securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement. At an
agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities
at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse
repurchase agreement. Woodward believes that the investments in these reverse repurchase agreements are with
creditworthy financial institutions and that the funds invested are highly liquid. The investments in reverse repurchase
agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in
“Cash and cash equivalents” in the Consolidated Balance Sheets. Since the investments are generally overnight, the carrying
value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value
as of the end of each fiscal quarter. During the second quarter of fiscal year 2020, the Company terminated its existing
investments in reverse repurchase agreements.
Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in
various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions. Such
investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in
earnings. The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair
value given the highly liquid nature of the investments.
Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to
its deferred compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity
securities are classified as trading securities. The trading securities are reported at fair value, with realized gains and losses
recognized in “Other (income) expense, net” on the Consolidated Statements of Earnings. The trading securities are included
in “Other assets” in the Consolidated Balance Sheets. The fair values of Woodward’s trading securities are based on the
quoted market prices for the net asset value of the various mutual funds.
94
Cross currency interest rate swaps: Woodward holds cross currency interest rate swaps, which are accounted for at fair
value. The swaps in an asset position are included in “Other assets,” and swaps in a liability position are included in “Other
liabilities” in the Consolidated Balance Sheets. The fair values of Woodward’s cross currency interest rate swaps are
determined using a market approach that is based on observable inputs other than quoted market prices, including contract
terms, interest rates, currency rates, and other market factors. As of September 30, 2020, swaps in a liability position in the
amount of $51,387 were included in “Other liabilities” in the Consolidated Balance Sheets. As of September 30, 2019,
swaps in an asset position in the amount of $24,758 were included in “Other assets” in the Consolidated Balance Sheets.
Trade accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the
carrying cost of each approximates its respective fair value. The estimated fair values and carrying costs of other financial
instruments that are not required to be remeasured at fair value in the Consolidated Balance Sheets were as follows:
At September 30, 2020 At September 30, 2019
Fair Value
Hierarchy
Level
Estimated
Fair
Value
Carrying
Cost
Estimated
Fair
Value
Carrying
Cost
Assets:
Notes receivable from municipalities
Note receivable from sale of disposal group
Investments in short-term time deposits
Liabilities:
Long-term debt
2
2
2
2
$ 13,413 $ 11,846 $ 13,100 $ 12,346
—
13,509
6,341
6,061
13,678 13,671
—
13,468
$ 935,610 $ 840,654 $ 928,618 $ 867,377
In connection with certain economic incentives related to Woodward’s development of a second campus in the greater-
Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate
headquarters in Fort Collins, Colorado, Woodward received long-term notes from municipalities within the states of Illinois
and Colorado. The fair value of the long-term notes was estimated based on a model that discounted future principal and
interest payments received at an interest rate available to the Company at the end of the period for similarly rated municipal
notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to
estimate the fair value of the long-term notes were 1.2% at September 30, 2020 and 1.7% at September 30, 2019.
In connection with the sale of the disposal group (See Note 11, Sale of businesses), Woodward received a long-term
promissory note from the buyer for deferral of a portion of the purchase price. The fair value of the long-term note was
estimated based on a model that discounted future principal and interest payments received at an interest rate available to
Woodward at the end of the period for similarly rated promissory notes of similar maturity, which is a level 2 input as
defined by the U.S. GAAP fair value hierarchy. The interest rate used to estimate the fair value of the long-term note was
2.3% at September 30, 2020.
From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a
fixed maturity date of longer than three months but less than one year from the date of the deposit. Woodward believes that
the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was
estimated based on a model that discounted future principal and interest payments to be received at an interest rate available
to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity. This was
determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair
value of the short-term time deposits was 4.4% at September 30, 2020 and 5.7% at September 30, 2019.
The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments
at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a level 2
input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest rates used to estimate the fair value of
long-term debt were 1.5% at September 30, 2020 and 2.5% at September 30, 2019.
95
Note 9. Derivative instruments and hedging activities
Derivative instruments not designated or qualifying as hedging instruments
In May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convert $167,420
of floating-rate debt under Woodward’s then existing revolving credit agreement to Euro denominated floating-rate debt in
conjunction with the L’Orange acquisition (the “Floating-Rate Cross Currency Swap”). Also in May 2018, Woodward
entered into cross currency interest rate swap agreements that synthetically convert an aggregate principal amount of
$400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined in Note 16, Credit facilities short-
term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross Currency Swaps”). The
cross currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and floating-rate debt
under the 2018 Notes (as defined in Note 16, Credit facilities short-term borrowings and long-term debt) and Woodward’s
then existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s
Consolidated Statements of Earnings.
In May 2020, as a result of the COVID-19 pandemic and uncertainties in future cash flows, Woodward terminated the
Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps. At the date of settlement, the total notional
value of the Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps was $108,823 and $400,000,
respectively. Woodward received net cash proceeds of $59,571, which includes $58,191 related to the fair value of the
derivative assets and $4,380 of net accrued interest, less payment of $3,000 for fees to terminate the swap agreements. The
proceeds received for the fair value of the instruments is recorded in “Other”, while net accrued interest is recorded in
“Other” and “Accrued liabilities”, respectively, in cash flows provided by operating activities of Woodward’s Consolidated
Statements of Cash Flows. The fees to terminate the swap agreements were expensed as incurred and presented in the line
item “Selling, general and administrative” expenses in Woodward’s Consolidated Statements of Earnings.
Upon termination and settlement of the instruments, Woodward entered into a new floating-rate cross-currency interest
rate swap (the “2020 Floating-Rate Cross-Currency Swap”), with a notional value of $45,000, and five fixed-rate cross-
currency interest rate swap agreements (the “2020 Fixed-Rate Cross-Currency Swaps”), with an aggregate notional value of
$400,000, which effectively reduce the interest rates on the underlying fixed and floating-rate debt under the 2018 Notes and
Woodward’s existing revolving credit agreement, respectively. The net interest income of the cross-currency interest rate
swaps is recorded as a reduction to “Interest expense” in Woodward’s Consolidated Statements of Earnings. As of
September 30, 2020, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and 2020 Fixed-Rate Cross-
Currency Swaps was $41,250 and $400,000, respectively. See Note 8, Financial Instruments and fair value measurements,
for the related fair value of the derivative instruments as of September 30, 2020.
Derivatives instruments in fair value hedging relationships
Concurrent with the entry into the Floating-Rate Cross Currency Swap, a corresponding Euro denominated
intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate
debt, with a reciprocal cross currency interest rate swap, was entered into by Woodward Barbados Financing SRL
(“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge under the criteria prescribed
in ASC Topic 815, Derivatives and Hedging (“ASC 815”). The objective of the derivative instrument is to hedge against the
foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan.
In May 2020, Woodward settled the Euro denominated intercompany loan receivable with identical terms and notional
value to the Floating-Rate Cross-Currency Swap and reciprocal intercompany cross-currency interest rate swap. The fair
value hedge designated on these instruments was discontinued at the date of settlement and resulted in a reclassification of
$1,719 of previously unrecognized losses from accumulated OCI into earnings. The loss on discontinuation of the fair value
hedging relationship is recognized in “Gain on cross-currency interest rate swaps, net” in Woodward’s Condensed
Consolidated Statements of Earnings.
Concurrent with settlement of the Floating-Rate Cross-Currency Swap and discontinuation of the previous fair value
hedging relationship, a US dollar denominated intercompany loan payable with identical terms and notional value as the 2020
Floating-Rate Cross-Currency Swap, together with a reciprocal intercompany floating-rate cross-currency interest rate swap,
was entered into by Woodward Barbados Euro Financing SRL (“Euro Barbados”), a wholly owned subsidiary of Woodward.
The US dollar denominated intercompany loan and reciprocal intercompany floating-rate cross-currency interest rate swap is
designated as a fair value hedge under the criteria prescribed in ASC 815. The objective of the derivative instrument is to
hedge against the foreign currency exchange risk attributable to the spot remeasurement of the US dollar denominated
intercompany loan, as Euro Barbados maintains a Euro functional currency.
96
For each floating-rate intercompany cross-currency interest rate swap, only the change in the fair value related to the
cross-currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated OCI. The
remaining change in the fair value of the derivative instrument is recognized in foreign currency transaction gain or loss
included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings. The
change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot
remeasurement of the intercompany Euro and US dollar denominated loans. Hedge effectiveness is assessed based on the
fair value changes of the derivative instrument, after excluding any fair value changes related to the cross-currency basis
spread. The initial cost of the cross-currency basis spread is recorded in earnings each period through the swap accrual
process. There are no credit-risk-related contingent features associated with the intercompany floating-rate cross-currency
interest rate swap.
Derivative instruments in cash flow hedging relationships
In conjunction with the entry into the Fixed-Rate Cross Currency Swaps, five corresponding intercompany loans
receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of
fixed-rate debt, and reciprocal cross currency interest rate swaps were entered into by Barbados, which are designated as cash
flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of
variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest
payments associated with the Euro denominated intercompany loans over a fifteen year period.
In May 2020, Woodward settled the Euro denominated intercompany loans receivable with identical terms and notional
value to the Fixed-Rate Cross-Currency Swaps and reciprocal cross-currency interest rate swaps. The cash flow hedges
designated on these instruments were discontinued at the date of settlement and resulted in a reclassification of $32,200 of
previously unrecognized gains from accumulated OCI into earnings. The gain on discontinuation of the cash flow hedging
relationships is recognized in “Gain on cross-currency interest rate swaps, net” in Woodward’s Condensed Consolidated
Statements of Earnings.
Concurrent with settlement of the Fixed-Rate Cross-Currency Swaps and the discontinuation of the previous cash flow
hedging relationships, five corresponding US dollar intercompany loans payable, with identical terms and notional values of
each tranche of the 2020 Fixed-Rate Cross-Currency Swaps, together with reciprocal fixed-rate intercompany cross-currency
interest rate swaps were entered into by Euro Barbados, which are designated as cash flow hedges under the criteria
prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows
attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the
US dollar denominated intercompany loans over a thirteen-year period, as Euro Barbados maintains a Euro functional
currency.
For each of the fixed-rate intercompany cross-currency interest rate swaps, changes in the fair values of the derivative
instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in
“Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.
Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the
spot rate remeasurement of the Euro and US dollar denominated intercompany loans, including associated interest. Hedge
effectiveness is assessed based on the fair value changes of the derivative instruments and such hedges are deemed to be
highly effective in offsetting exposure to variability in foreign exchange rates. There are no credit-risk-related contingent
features associated with these fixed-rate cross-currency interest rate swaps.
In June 2013, in connection with Woodward’s expected refinancing of current maturities on its then existing long-term
debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualified as a cash flow hedge
under ASC 815. The objective of this derivative instrument was to hedge the risk of variability in cash flows attributable to
changes in the designated benchmark interest rate over a seven year period related to the future principal and interest
payments on a portion of anticipated future debt issuances. The treasury lock agreement was terminated in August 2013 and
the resulting gain of $507 was recorded as a reduction to accumulated OCI, net of tax, and is being recognized as a decrease
to interest expense over a seven-year period.
97
Derivatives instruments in net investment hedging relationships
On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of
Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement
(the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal
amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000
aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026 (the “Series M Notes”).
Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its
Euro denominated functional currency subsidiaries. Related to the Series M Notes, included in foreign currency translation
adjustments within total comprehensive (losses) earnings are net foreign exchange losses of $3,199 for the fiscal year ended
September 30, 2020, compared to net foreign exchanges gains of $2,682 for the fiscal year ended September 30, 2019 and net
foreign exchange gains of $838 for the fiscal year ended September 30, 2018.
Impact of derivative instruments designated as qualifying hedging instruments
The following table discloses the impact of derivative instruments designated as qualifying hedging instruments on
Woodward’s Consolidated Statements of Earnings:
Derivatives in:
Cross currency interest rate swap agreement
designated as fair value hedges
Cross currency interest rate swap agreements
designated as cash flow hedges
Treasury lock agreement designated as cash flow
hedge
Year Ended September 30, 2020
Amount of
(Gain) Loss
Recognized
in
Accumulated
OCI on
Amount of
(Income)
Expense
Recognized
in Earnings
on
Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings
Derivative
Derivative
$
4,592 $
4,832 $
5,396
(3,190 )
13,430
(3,190 )
Location
Selling, general and
administrative expenses
Selling, general and
administrative expenses
Interest expense
$
(72 )
1,330 $
—
18,262 $
(72 )
2,134
Year Ended September 30, 2019
Amount of
(Gain) Loss
Recognized
in
Accumulated
OCI on
Amount of
(Income)
Expense
Recognized
in Earnings
on
Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings
Derivative
Derivative
$
(9,394 ) $
(8,317 ) $
(8,356 )
(23,018 )
(39,442 )
(23,018 )
(72 )
(32,484 ) $
—
(47,759 ) $
(72 )
(31,446 )
$
Derivatives in:
Cross currency interest rate swap agreement
designated as fair value hedges
Cross currency interest rate swap agreements
designated as cash flow hedges
Treasury lock agreement designated as cash flow
hedge
Location
Selling, general and
administrative expenses
Selling, general and
administrative expenses
Interest expense
98
Derivatives in:
Cross currency interest rate swap agreement
designated as fair value hedges
Cross currency interest rate swap agreements
designated as cash flow hedges
Treasury lock agreement designated as cash flow
hedge
Location
Selling, general and
administrative expenses
Selling, general and
administrative expenses
Interest expense
Year Ended September 30, 2018
Amount of
(Gain) Loss
Recognized
in
Accumulated
OCI on
Amount of
(Income)
Expense
Recognized
in Earnings
on
Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings
Derivative
Derivative
$
472 $
1,034 $
472
1,067
21,966
1,067
$
(72 )
1,467 $
—
23,000 $
(72 )
1,467
The remaining unrecognized gains and losses in Woodward’s Consolidated Balance Sheets associated with derivative
instruments that were previously entered into by Woodward, which are classified in accumulated OCI were net losses of
$21,132 as of September 30, 2020 and net losses of $5,004 as of September 30, 2019.
Note 10. Supplemental statement of cash flows information
$
Interest paid, net of amounts capitalized
Income taxes paid
Income tax refunds received
Non-cash activities:
Purchases of property, plant and equipment on account
Impact of the adoption of ASC 606
Impact of the adoption of ASC 842 (Note 5)
Impact of the adoption of ASU 2016-16
Common shares issued from treasury to settle benefit obligations (Note 22)
Purchases of treasury stock on account
Note 11. Sale of businesses
Year Ended September 30,
2019
2018
2020
27,148 $
94,088
17,653
3,076
—
255
—
14,748
—
39,909 $
68,112
1,454
8,737
38,700
—
1,005
14,846
4,204
29,677
44,831
1,976
11,982
—
—
—
14,741
—
In the first quarter of fiscal year 2020, Woodward’s board of directors (“the Board”) approved a plan to divest
Woodward’s renewable power systems business, protective relays business, and other businesses within the Company’s
Industrial segment (collectively, the “disposal group”).
Woodward determined that the approved plan to divest the disposal group represented a triggering event requiring (i)
the net assets of the disposal group to be classified as held for sale and (ii) the long-lived assets attributable to the disposal
group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the value of
the long-lived assets of the disposal group, including goodwill, intangible assets, ROU assets and property, plant, and
equipment, were not recoverable and a $22,900 non-cash impairment charge was recorded during the fiscal year ended
September 30, 2020. The non-cash impairment charge removed all the goodwill, intangible assets, ROU assets and property,
plant, and equipment associated with the disposal group from the Consolidated Balance Sheets as of June 30, 2020.
Further, on the approval of the divestiture plan and subsequent marketing of the disposal group, Woodward determined
that based on the current market conditions, the carrying value of the disposal group’s remaining held for sale net assets
exceeded the fair value. As a result, Woodward recorded a valuation allowance to reduce the carrying value of the net assets
of the disposal group to their fair value. The non-cash impairment charge associated with the long-lived assets, and related
valuation allowance for the other remaining net assets attributable to the disposal group, resulted in a total impairment charge
of $37,902.
99
In determining the amount by which the carrying value of the disposal group’s remaining net assets exceeded their fair
value, Woodward considered primarily the market value of the assets held for sale based on negotiations it had entered into
with affiliates of the AURELIUS Group for the sale of the majority of the disposal group. On January 31, 2020, Woodward
entered into a definitive agreement to sell the majority of the disposal group to affiliates of the AURELIUS Group for
$23,400, subject to customary purchase price adjustments, consisting of cash and a $6,000 promissory note. The assets were
primarily located in Germany, Poland and Bulgaria and accounted for approximately $88,000 of sales in fiscal year 2019.
The valuation reserve recorded to reduce the carrying value of the net assets held for sale was based on the estimated selling
price pursuant to the definitive agreement reduced by the estimated working capital adjustments, transaction costs, and
anticipated losses on assets held for sale that were not included in the disposal group to be sold to the AURELIUS Group.
During the third and fourth quarter of fiscal year 2020, Woodward recognized an additional loss on sale of the disposal
group, resulting in a net loss of $515 as a result of working capital adjustments realized upon closing of the sale. The net loss
on sale of the disposal group is recorded in the line item “Other (income) expense, net” in the Consolidated Statements of
Earnings.
The transactions consummating the sale of the disposal group were completed on April 30, 2020. The carrying value of
the assets and liabilities sold were as follows:
Assets:
Accounts receivable
Inventories
Other current assets
Other assets
Total assets
Liabilities:
Accounts payable
Accrued liabilities
Other liabilities
Total liabilities
Note 12. Inventories
Raw materials
Work in progress
Component parts (1)
Finished goods
Customer supplied inventory
On-hand inventory for which control has transferred to the customer
June 30, 2020
$
$
17,637
441
796
51
18,925
7,633
2,998
450
11,081
September 30,
2020
September 30,
2019
$
$
123,626 $
92,934
255,980
66,889
14,955
(116,441 )
437,943 $
134,878
133,885
287,128
59,051
13,396
(111,502 )
516,836
(1) Component parts include items that can be sold separately as finished goods or included in the manufacture of other
products.
Note 13. Property, plant, and equipment
Land and land improvements
Buildings and building improvements
Leasehold improvements
Machinery and production equipment
Computer equipment and software
Office furniture and equipment
Other
Construction in progress
Less accumulated depreciation
Property, plant, and equipment, net
September 30,
2020
September 30,
2019
$
$
83,095 $
551,540
18,610
776,884
123,903
41,177
19,814
36,367
1,651,390
(653,975 )
997,415 $
94,976
587,541
17,446
731,159
124,201
39,934
19,346
57,624
1,672,227
(613,452 )
1,058,775
100
In the second quarter of fiscal year 2018, the Company announced its decision to relocate its Duarte, California
operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado, and in fiscal year 2019, finalized the
relocation. On December 30, 2019, the Company closed on the sale of one of two parcels of real property at the Duarte
facility and recorded a pre-tax gain on sale of assets of $13,522. On August 11, 2020, the Company closed on the sale of the
final parcel of real property at the Duarte facility and recorded a pre-tax gain on sale of assets of $8,801 (see Note 19, Other
(income) expense, net).
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the disposal group (see
Note 11, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of
the plant, property and equipment of the disposal group was not recoverable, and a $13,421 non-cash impairment charge was
recorded during fiscal year 2020.
On September 25, 2020 the Company closed on the sale of its Loveland, Colorado campus with a concurrent purchase
of a new property in Windsor, Colorado for future operations, resulting in recognition of a pre-tax gain on sale of assets of
$2,330 (see Note 19, Other (income) expense, net).
For the fiscal years ended September 30, 2020, 2019, and 2018, Woodward had depreciation expense as follows:
Depreciation expense
Year Ended September 30,
2019
2018
2020
$
91,700 $
85,982 $
71,389
For the fiscal years ended September 30, 2020, 2019, and 2018, Woodward capitalized interest that would have
otherwise been included in interest expense of the following:
Capitalized interest
Note 14. Goodwill
Aerospace
Industrial
Consolidated
Aerospace
Industrial
Consolidated
Year Ended September 30,
2019
2018
2020
$
136 $
779 $
2,187
September 30,
2019
Impairment
Charges
Additions
$
$
455,423 $
342,430
797,853 $
— $
(8,640 )
(8,640 ) $
September 30,
2018
Impairment
Charges
Additions
$
$
455,423 $
357,827
813,250 $
— $
—
— $
Effects of
Foreign
Currency
Translation
— $
19,039
19,039 $
— $
—
— $
Effects of
Foreign
Currency
Translation
— $
(15,397 )
(15,397 ) $
— $
—
— $
September 30,
2020
455,423
352,829
808,252
September 30,
2019
455,423
342,430
797,853
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the disposal group (see
Note 11, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at the time, Woodward determined that the remaining value of
the goodwill of the disposal group was not recoverable and an $8,640 non-cash impairment charge was recorded during the
fiscal year ended September 30, 2020.
101
Woodward tests goodwill for impairment at the reporting unit level on an annual basis or at any time there is an
indication goodwill may be impaired, commonly referred to as triggering events. Woodward completed its annual goodwill
impairment test as of July 31, 2020 during the quarter ended September 30, 2020. The fair value of each of Woodward’s
reporting units was determined using a discounted cash flow method. This method represents a level 3 input and incorporates
various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, future tax
rates, and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and terminal growth
rate, of forecasted cash flows. Management projects revenue growth rates, earnings margins and cash flows based on each
reporting unit’s current operational results, expected performance and operational strategies over a ten year period. These
projections are adjusted to reflect current economic conditions and demand for certain products, and require considerable
management judgment.
Forecasted cash flows used in the July 31, 2020 impairment test were discounted using weighted-average cost of capital
assumptions ranging from 8.30% to 9.99%. The terminal values of the forecasted cash flows were calculated using the
Gordon Growth Model and assumed an annual compound growth rate after five years of 3.44%. These inputs, which are
unobservable in the market, represent management’s best estimate of what market participants would use in determining the
present value of the Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant
impact on the fair value of forecasted cash flows. Woodward evaluated the reasonableness of the reporting units’ resulting
fair values utilizing a market multiple method.
The results of Woodward’s goodwill impairment test performed as of July 31, 2020 did not indicate impairment of any
of Woodward’s reporting units. Woodward’s July 31, 2020 goodwill analysis indicated a premium of approximately 17%
compared to the carrying value of one of its reporting units in the Aerospace segment, which is primarily comprised of the
thrust reverser actuation systems (“TRAS”) business and was significantly impacted by the COVID-19 related declines in
commercial OEM and aftermarket. Woodward is not aware of any facts, circumstances or triggering events that have arisen
indicating that goodwill has been impaired or that the premium of approximately 17% has changed significantly for this
reporting unit since Woodward’s July 31, 2020 analysis.
Note 15. Intangible assets, net
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace
Industrial
Total
Intellectual property:
Aerospace
Industrial
Total
Process technology:
Aerospace
Industrial
Total
Other intangibles:
Aerospace
Industrial
Total
Intangible asset with indefinite life:
Tradename:
Aerospace
Industrial
Total
Total intangibles:
Aerospace
Industrial
Consolidated Total
September 30, 2020
September 30, 2019
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Value
Accumulated
Amortization
Net
Carrying
Amount
$ 281,683 $
429,249
$ 710,932 $
(196,520 ) $ 85,163 $ 281,683 $
(57,045 ) $ 372,204 407,683
(253,565 ) $ 457,367 $ 689,366 $
(181,995 ) $ 99,688
(43,986 ) 363,697
(225,981 ) $ 463,385
$
$
— $
15,778
15,778 $
— $
(15,640 ) $
(15,640 ) $
— $
— $
138 19,201
138 $ 19,201 $
— $
(18,705 )
(18,705 ) $
—
496
496
$
76,371 $
90,945
$ 167,316 $
(63,956 ) $ 12,415 $ 76,371 $
(22,300 ) $ 68,645 92,820
(86,256 ) $ 81,060 $ 169,191 $
(59,913 ) $ 16,458
(24,926 ) 67,894
(84,839 ) $ 84,352
$
$
$
$
— $
235
235 $
— $
(183 )
(183 ) $
— $
52
52 $
— $
1,541
1,541 $
— $
(1,249 )
(1,249 ) $
—
292
292
— $
68,094
68,094 $
— $
— $
— $
— $ 68,094 63,467
— $ 68,094 $ 63,467 $
— $
—
— 63,467
— $ 63,467
$ 358,054 $
647,738
$ 1,005,792 $
(260,476 ) $ 97,578 $ 358,054 $
(138,605 ) $ 509,133 625,212
(399,081 ) $ 606,711 $ 983,266 $
(241,908 ) $ 116,146
(129,366 ) 495,846
(371,274 ) $ 611,992
102
Indefinite lived intangible assets
The Woodward L’Orange tradename 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 the Woodward L’Orange intangible asset may be below
its carrying amount. The impairment test consists of comparing the fair value of the Woodward L’Orange tradename
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 the Woodward L’Orange tradename 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 for this asset.
During the fourth quarter, Woodward completed its annual impairment test of the Woodward L’Orange tradename
intangible asset as of July 31, 2020 for the fiscal year ended September 30, 2020. The fair value of the Woodward L’Orange
tradename intangible assets was determined using discounted cash flows based on the relief from royalty method under the
income approach. This method represents a Level 3 input (based upon a fair value hierarchy established by U.S. GAAP) and
incorporates various estimates and assumptions, the most significant being projected revenue growth rates, royalty rates,
future tax rates and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and
terminal growth rate, of the forecasted cash flow. Management projects revenue growth rates and cash flows based on
Woodward L’Orange’s current operational results, expected performance and operational strategies over a five year period.
These projections are adjusted to reflect current economic conditions and demand for certain products, and require
considerable management judgment.
The forecasted cash flow used in the July 31, 2020 impairment test was discounted using weighted-average cost of
capital assumption of 8.5%. The terminal value of the forecasted cash flow was calculated using the Gordon Growth Model
and assumed an annual compound growth rate after five years of 3.44%. These inputs, which are unobservable in the market,
represent management’s best estimate of what market participants would use in determining the present value of the
Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant impact on the fair
value of the forecasted cash flow. The results of impairment test performed as of July 31, 2020 indicated the estimated fair
value of the Woodward L’Orange tradename intangible asset was in excess of its carrying value, and accordingly, no
impairment existed.
Finite lived intangible assets
In the first quarter of fiscal year 2020, Woodward determined that the approved plan to divest of the disposal group (see
Note 11, Sale of businesses) represented a triggering event requiring the long-lived assets attributable to the disposal group be
assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of
the intangible assets of the disposal group was not recoverable and a $200 non-cash impairment charge was recorded for the
fiscal year ended September 30, 2020.
For the fiscal years ended September 30, 2020, 2019, and 2018, Woodward recorded amortization expense associated
with intangibles of the following:
Amortization expense
Year Ended September 30,
2019
2018
2020
$
39,458 $
56,022 $
44,742
Future amortization expense associated with intangibles is expected to be:
Year Ending September 30:
2021
2022
2023
2024
2025
Thereafter
$
$
40,388
38,275
37,224
33,472
28,257
361,001
538,617
103
Note 16. Credit facilities, short-term borrowings and long-term debt
As of September 30, 2020, Woodward’s short-term borrowings and availability under its various short-term credit
facilities follows:
Revolving credit facility
Foreign lines of credit and overdraft facilities
Foreign performance guarantee facilities
Revolving credit facility
$
Total availability
$
1,000,000 $
7,567
511
1,008,078 $
Outstanding
letters of credit
and guarantees
Outstanding
borrowings
Remaining
availability
(11,771 ) $
—
(256 )
(12,027 ) $
— $
—
—
— $
988,229
7,567
255
996,051
Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among
Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent (the “Revolving
Credit Agreement”). The Revolving Credit Agreement provided for the option to increase available borrowings up to
$1,500,000, subject to lenders’ participation. Borrowings under the Revolving Credit Agreement can be made by Woodward
and certain of its foreign subsidiaries in U.S. dollars or in foreign currencies other than the U.S. dollar and generally bear
interest at LIBOR plus 0.875% to 1.75%. The Revolving Credit Agreement matures on June 19, 2024. Under the Revolving
Credit Agreement, there were no borrowings outstanding as of September 30, 2020, and $262,297 in principal amount of
borrowings outstanding as of September 30, 2019, at an effective interest rate of 3.01%.
The Revolving Credit Agreement contains certain covenants customary with such agreements, which are generally
consistent with the covenants applicable to Woodward’s long-term debt agreements, and contains customary events of
default, including certain cross default provisions related to Woodward’s other outstanding debt arrangements in excess of
$60,000, the occurrence of which would permit the lenders to accelerate the amounts due thereunder. In addition, the
Revolving Credit Agreement includes the following financial covenants: (i) a maximum permitted leverage ratio of
consolidated net debt to consolidated earnings before interest, taxes, depreciation, stock-based compensation, and
amortization, plus any usual non-cash charges to the extent deducted in computing net income and transaction costs
associated with permitted acquisitions (incurred within six-months of the permitted acquisition), minus any usual non-cash
gains to the extent added in computing net income (“Leverage Ratio”) for Woodward and its consolidated subsidiaries of 3.5
to 1.0, which ratio, subject to certain restrictions, may increase to 4.0 to 1.0 for each period of four consecutive quarters
during which a permitted acquisition occurs, and (ii) a minimum consolidated net worth of $1,156,000 plus (a) 50% of
Woodward’s positive net income for the prior fiscal year and (b) 50% of Woodward’s net cash proceeds resulting from
certain issuances of stock, subject to certain adjustments.
Woodward’s obligations under the Revolving Credit Agreement are guaranteed by Woodward FST, Inc., Woodward
MPC, Inc., and Woodward HRT, Inc., each of which is a wholly owned subsidiary of Woodward.
As of September 30, 2020, there were no borrowings outstanding under the Revolving Credit Agreement, and as of
September 30, 2019, $220,000 of the borrowings under the Revolving Credit Agreement were classified as short-term
borrowings based on Woodward’s intent and ability to pay this amount in the next twelve months.
Management believes that Woodward was in compliance with the covenants under the Revolving Credit Agreement at
September 30, 2020.
Short-term borrowings
Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are
generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial
institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities
are limited in use to providing performance guarantees to third parties. There were no borrowings outstanding on
Woodward’s foreign lines of credit and foreign overdraft facilities as of both September 30, 2020 and September 30, 2019.
104
Long-term debt
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.875% - 1.75%),
due June 19, 2024; unsecured
Series G notes – 3.42%, due November 15, 2020; unsecured
Series H notes – 4.03%, due November 15, 2023; unsecured
Series I notes – 4.18%, due November 15, 2025; unsecured
Series J notes – Floating rate (LIBOR plus 1.25%), due November 15, 2020; unsecured
Series K notes – 4.03%, due November 15, 2023; unsecured
Series L notes – 4.18%, due November 15, 2025; unsecured
Series M notes – 1.12% due September 23, 2026; unsecured
Series N notes – 1.31% due September 23, 2028; unsecured
Series O notes – 1.57% due September 23, 2031; unsecured
Series P notes – 4.27% due May 30, 2025; unsecured
Series Q notes – 4.35% due May 30, 2027; unsecured
Series R notes – 4.41% due May 30, 2029; unsecured
Series S notes – 4.46% due May 30, 2030; unsecured
Series T notes – 4.61% due May 30, 2033; unsecured
Finance leases (Note 5)
Unamortized debt issuance costs
Total long-term debt
Less: Current portion of long-term debt
Long-term debt, less current portion
$
$
The Notes
September 30,
2020
September 30,
2019
— $
50,000
25,000
25,000
50,000
50,000
50,000
46,962
90,401
50,484
85,000
85,000
75,000
75,000
80,000
2,807
(2,171 )
838,483
101,634
736,849 $
42,297
50,000
25,000
25,000
50,000
50,000
50,000
43,770
84,257
47,053
85,000
85,000
75,000
75,000
80,000
—
(2,478 )
864,899
—
864,899
On October 1, 2013, Woodward entered into a note purchase agreement relating to the sale by Woodward of an
aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions.
Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on October 1, 2013. Woodward issued the Series
J, K and L Notes (the “Second Closing Notes” and with the First Closing Notes, collectively the “USD Notes”) on November
15, 2013. On November 15, 2020, Woodward paid the entire principal balance of $100,000 on the Series G and J Notes
using cash on hand and proceeds from borrowings under its existing revolving credit facility.
On September 23, 2016, Woodward and the BV Subsidiary each entered into note purchase agreements (the “2016 Note
Purchase Agreements”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of
€160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 Series M Notes.
The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series
N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes”
and together with the Series M Notes and the Series N Notes, the “2016 Notes”).
On May 31, 2018, Woodward entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to
the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes comprised of (a) $85,000
aggregate principal amount of its Series P Senior Notes (the “Series P Notes”), (b) $85,000 aggregate principal amount of its
Series Q Senior Notes (the “Series Q Notes”), (c) $75,000 aggregate principal amount of its Series R Senior Notes (the
“Series R Notes”), (d) $75,000 aggregate principal amount of its Series S Senior Notes (the “Series S Notes”), and (e)
$80,000 aggregate principal amount of its Series T Senior Notes (the “Series T Notes”, and together with the Series P Notes,
the Series Q Notes, the Series R Notes, and the Series S Notes, the “2018 Notes,” and, together with the USD Notes and 2016
Notes, the “Notes”), in a series of private placement transactions.
In connection with the issuance of the 2018 Notes, the Company entered into cross currency swap transactions in
respect of each tranche of the 2018 Notes, which effectively reduced the interest rates on the Series P Notes to 1.82% per
annum, the Series Q Notes to 2.15% per annum, the Series R Notes to 2.42% per annum, the Series S Notes to 2.55% per
annum and the Series T Notes to 2.90% per annum (see Note 9, Derivative instruments and hedging activities).
105
Interest on the remaining First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and
October 1 of each year until all principal is paid. Interest on the 2016 Notes is payable semi-annually on March 23 and
September 23 of each year, until all principal is paid. Interest on the Series J Notes is payable quarterly on January 1, April
1, July 1 and October 1 of each year until all principal is paid. As of September 30, 2020, the Series J Notes bore interest at
an effective rate of 1.52%. Interest on the 2018 Notes is payable semi-annually on May 30 and November 30 of each year
until all principal is paid.
None of the Notes were registered under the Securities Act of 1933 and they may not be offered or sold in the United
States absent registration or an applicable exemption from registration requirements. Holders of the Notes do not have any
registration rights. All of the issued Notes are held by multiple institutions.
Woodward’s payment and performance obligations under the Notes, including without limitation the obligations for
payment of all principal, interest and any applicable prepayment compensation amount, are guaranteed by (i) Woodward
FST, Inc., Woodward MPC, Inc., and Woodward HRT, Inc., each of which is a wholly owned subsidiary of Woodward, and
(ii) in the case of the BV Subsidiary’s Series N and O Notes, by Woodward. Woodward’s obligations under the Notes rank
equal in right of payment with all of Woodward’s other unsecured unsubordinated debt, including its outstanding debt under
its revolving credit facility.
The Notes contain restrictive covenants customary for such financings, including, among other things, covenants that
place limits on Woodward’s ability to incur liens on assets, incur additional debt (including a leverage or coverage based
maintenance test), transfer or sell Woodward’s assets, merge or consolidate with other persons and enter into material
transactions with affiliates. Under the financial covenants contained in the note purchase agreement governing each series of
the Notes, Woodward’s priority debt may not exceed, at any time, 25% of its consolidated net worth. Woodward’s Leverage
Ratio cannot exceed 4.0 to 1.0 during any material acquisition period, or 3.5 to 1.0 at any other time on a rolling four quarter
basis. In the event that Woodward’s Leverage Ratio exceeds 3.5 to 1.0 during any material acquisition period, the interest
rate on each series of Notes will increase. For the Series G, H, I, J, K, L, M, N, and O notes, Woodward’s consolidated net
worth must at all times equal or exceed $1,156,000 plus 50% of Woodward’s positive net income for each completed fiscal
year beginning with the fiscal year ending September 30, 2016. For the 2018 Notes, Woodward’s consolidated net worth
must at all times equal or exceed $1,156,000 plus (i) 50% of Woodward’s positive net income for each completed fiscal year
beginning with the fiscal year ending September 30, 2018 and (ii) 50% of the net cash proceeds received by Woodward on or
after May 31, 2018 from the issuance of capital stock, other than issuances pursuant to employee stock option or ownership
plans.
The Company, at its option, is permitted at any time to prepay all or any part of the then-outstanding principal amount
of any series of the Notes at 100% of the principal amount of the series of the Notes to be prepaid (but, in the case of partial
prepayment, not less than $1,000 for each the USD Notes and the 2018 Notes and not less than €1,000 for the 2016 Notes),
together with interest accrued on such amount to be prepaid to the date of prepayment, plus any applicable prepayment
compensation amount. The prepayment compensation amount, as to the USD Notes and 2018 Notes, other than the Series J
Notes, is computed by discounting the remaining scheduled payments of interest and principal of the USD Notes and/or 2018
Notes being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of U.S. Treasury securities
having a maturity equal to the remaining average life of the USD Notes and/or 2018 Notes being prepaid. The prepayment
compensation amount, as to the Series J Notes, generally is computed as a percentage of the principal amount of the Series J
Notes equal to 0% after November 15, 2015. The prepayment compensation amount as to the 2016 Notes that is not subject
to a swap agreement is computed by discounting the remaining scheduled payments of interest and principal of such notes
being prepaid at a discount rate equal to the sum of 50 basis points and the yield to maturity of the German Bund having a
maturity equal to the remaining average life of the 2016 Notes being prepaid. The prepayment compensation amount as to a
2016 Notes that is subject to a swap agreement entered into by the holder of such note under which the holder will receive
payment in U.S. dollars in exchange for scheduled Euro payments of principal and interest on the Euro denominated 2016
Notes, adjusted for theoretical holder returns foregone on hypothetical reinvestments in U.S. Treasury securities (the
“Swapped Notes”) is equal to the excess of an amount equal to the remaining scheduled payments to be paid in respect of
such called principal under such swap agreement discounted at a rate equal to 50 basis points and the yield to maturity of
U.S. Treasury securities having a maturity equal to the remaining average life of the Swapped Notes being prepaid over the
amount of payments in U.S. dollars that would be paid to the holder of the Swapped Note in respect of the called principal
under the swap agreement, which amount will be increased or reduced, as applicable, in an amount equal to any net gain or
loss realized by the holder of such Swapped Note on swap transactions under such swap agreement as a result of such
prepayment.
106
Required future principal payments of the Notes as of September 30, 2020 are as follows:
Year Ending September 30:
2021
2022
2023
2024
2025
Thereafter
$
$
100,000
—
—
75,000
85,000
577,846
837,846
Certain financial and other covenants under Woodward’s debt agreements contain customary restrictions on the
operation of its business. Management believes that Woodward was in compliance with the covenants under the long-term
debt agreements at September 30, 2020.
Debt Issuance Costs
Amounts recognized as interest expense from the amortization of debt issuance costs were $892 in fiscal year 2020,
$1,094 in fiscal year 2019, and $1,256 in fiscal year 2018. Unamortized debt issuance costs associated with the Notes of
$2,171 as of September 30, 2020 and $2,478 as of September 30, 2019 were recorded as a reduction in “Long-term debt, less
current portion” in the Consolidated Balance Sheets. Unamortized debt issuance costs associated with Woodward’s
Revolving Credit Agreements of $2,242 as of September 30, 2020 and $2,840 as of September 30, 2019 were recorded as
“Other assets” in the Consolidated Balance Sheets. Amortization of debt issuance costs is included in operating activities in
the Consolidated Statements of Cash Flows.
Note 17. Accrued liabilities
Salaries and other member benefits
Warranties
Interest payable
Accrued retirement benefits
Current portion of loss reserve on contractual lease commitments
Net current contract liabilities (Note 3)
Restructuring charges
Taxes, other than income
Other
Warranties
At September 30,
2020
2019
50,850 $
18,972
15,281
3,051
—
24,620
3,395
13,925
21,700
151,794 $
115,649
27,309
13,808
3,587
1,245
27,891
507
15,708
22,423
228,127
$
$
Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements.
Accruals are established for specifically identified warranty issues that are probable to result in future costs. Warranty costs
are accrued as revenue is recognized on a non-specific basis whenever past experience indicates a normal and predictable
pattern exists. Changes in accrued product warranties were as follows:
Twelve-Months Ended September 30,
2019
2018
2020
Warranties, beginning of period
Increases due to acquisition of L'Orange
Impact from adoption of ASC 606
Expense, net of recoveries
Reductions for settling warranties
Foreign currency exchange rate changes
Warranties, end of period
$
$
27,309 $
—
—
8,687
(17,422 )
398
18,972 $
20,130 $
—
705
14,559
(7,540 )
(545 )
27,309 $
13,597
6,045
—
5,158
(4,413 )
(257 )
20,130
107
Restructuring charges
In fiscal year 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the
Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort
Collins, Colorado. The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s
Aerospace segment. The remaining restructuring charges recognized during the fiscal year ended September 30, 2018 consist
of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the
Company’s Industrial segment, with the then current market conditions. All of the restructuring charges recorded during the
fiscal year ended September 30, 2018 were recorded as nonsegment expenses and were paid as of September 30, 2020.
During the third quarter of fiscal year 2020, the Company committed to a plan of termination (the “Termination Plan”),
as well as other cost savings actions, in response to the ongoing global economic challenges resulting from the COVID-19
pandemic and its impact on the Company’s business. The Termination Plan involved the termination and/or furlough of
employees and contractors at certain of the Company’s operating facilities, primarily in the United States. As a result of the
Termination Plan and other related actions, the Company incurred $23,673 of restructuring charges for employee severance
and benefits costs as of September 30, 2020, with the majority of the cash expenditures being paid by September 30, 2020.
All of the restructuring charges recorded during the fiscal year ended September 30, 2020 were recorded as nonsegment
expenses and the remaining unpaid amounts are expected to be paid within one year of the balance sheet date.
The summary of activity in accrued restructuring charges during the fiscal years ended September 30, 2020 and
September 30, 2019 is as follows:
Period Activity
Balances
as of
September 30,
2019
Charges Payments
Foreign
currency
exchange
rate
changes
Balances
as of
September 30,
2020
Non-cash
activity
Workforce management costs associated with:
Duarte plant relocation
Industrial turbomachinery business realignment
COVID-19 pandemic
Total
$
$
440 $
67
—
(440 ) $
(67 )
(18,065 )
507 $ 23,673 $ (18,572 ) $
— $
—
23,673
— $
—
77
77 $
— $
—
(2,290 )
(2,290 ) $
—
—
3,395
3,395
Period Activity
Balances
as of
September 30,
2018
Charges Payments
Foreign
currency
exchange
rate
changes
Balances
as of
September 30,
2019
Non-cash
activity
Workforce management costs associated with:
Duarte plant relocation
Industrial turbomachinery business realignment
Total
$
$
12,504 $
4,018
16,522 $
(8,685 ) $
— $
—
(3,760 )
— $ (12,445 ) $
— $
—
— $
(3,379 ) $
(191 )
(3,570 ) $
440
67
507
108
Note 18. Other liabilities
Net accrued retirement benefits, less amounts recognized within accrued liabilities
Total unrecognized tax benefits
Noncurrent income taxes payable (1)
Deferred economic incentives (2)
Loss reserve on contractual lease commitments (3)
Cross-currency swap derivative liability (4)
Noncurrent operating lease liabilities
Net noncurrent contract liabilities (5)
Other
At September 30,
2020
2019
114,013 $
10,230
18,322
9,105
—
51,387
14,569
366,642
33,637
617,905 $
111,257
10,644
20,251
11,535
1,754
—
—
337,165
13,482
506,088
$
$
(1) See Note 20, Income taxes for more information on the noncurrent income taxes payable.
(2) Woodward receives certain economic incentives from various state and local authorities related to capital expansion
projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax
expense over the economic lives of the related capital expansion projects.
(3) In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a lease facility
in Skokie, Illinois, and recorded a loss reserve on the estimated remaining contractual lease commitment, net of
anticipated sublease income. As of September 30, 2019, the current portion of the accrued loss reserve on
contractual lease commitments was included in “accrued liabilities” (see Note 17, Accrued liabilities). Woodward
adopted ASC 842 on October 1, 2019, which requires that any pre-adoption liabilities related to exit or disposal cost
obligations reduce the amount of the ROU asset recognized upon adoption. Accordingly, as of October 1, 2019,
Woodward recognized a finance lease liability of $2,688 consisting of the future lease component payments, with no
corresponding ROU asset recognized, and reduced the current and noncurrent portions of the loss reserve on
contractual lease commitments to zero. The amount of the finance lease liability will be reduced in an amount equal
to the lease payments made over the remaining term of the lease, which ends in 2022. Future non-lease component
payments on the lease and future sublease income received will be recognized in the periods in which they are
earned.
(4) See Note 8, Financial instruments and fair value measurements for more information on the cross currency swap
derivative liability.
(5) See Note 3, Revenue, for more information on net noncurrent contract liabilities.
Note 19. Other (income) expense, net
Equity interest in the earnings of the JV (Note 7)
Net (gain) loss on sales of assets and businesses (1)
Rent income
Net (gain) loss on investments in deferred compensation program
Loss on forward option derivative instrument
Other components of net periodic pension and other postretirement benefit,
excluding service cost and interest expense
Other
Year Ended September 30,
2019
2018
2020
$
$
(15,580 ) $
(23,598 )
(1,403 )
(3,376 )
—
(11,809 )
(400 )
(56,166 ) $
(12,932 ) $
1,925
(245 )
(942 )
—
(12,965 )
(810 )
(25,969 ) $
(3,339 )
(1,106 )
(170 )
(1,661 )
5,543
(12,801 )
(792 )
(14,326 )
(1) Included in net (gain) loss on sale of assets and businesses for the fiscal year ended September 30, 2020 was the pre-
tax gain on sale of Duarte real property in the amount of $22,323, the pre-tax gain on sale of the Loveland campus
of $2,330, and a net loss on divestiture of the disposal group of $515.
109
Note 20. Income taxes
Income taxes consisted of the following:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Year Ended September 30,
2019
2018
2020
$
$
15,976 $
1,383
22,588
10,784
(547 )
(8,698 )
41,486 $
40,173 $
2,402
34,660
(2,015 )
(2,948 )
(11,262 )
61,010 $
39,979
3,697
25,968
(10,519 )
(3,784 )
(16,141 )
39,200
Earnings before income taxes by geographical area consisted of the following:
United States
Other countries
Year Ended September 30,
2019
2018
2020
$
$
180,753 $
101,128
281,881 $
211,267 $
109,345
320,612 $
181,671
37,907
219,578
Significant components of deferred income taxes presented in the Consolidated Balance Sheets are related to the
following:
Deferred tax assets:
Defined benefit plans, other postretirement
Foreign net operating loss carryforwards
Inventory
Stock-based and other compensation
Defined benefit plans, pension
Deferred revenue net of unbilled receivables
Other reserves
Tax credits and incentives
Lease obligations
Other
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Goodwill and intangibles - net
Property, plant and equipment
Right of use assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
At September 30,
2020
2019
$
$
6,238 $
6,106
53,867
35,919
5,624
39,990
10,119
14,340
5,764
9,223
(1,833 )
185,357
(218,900 )
(107,862 )
(4,837 )
(2,673 )
(334,272 )
(148,915 ) $
6,535
6,836
51,740
45,839
11,399
32,310
11,571
13,580
—
5,611
(3,638 )
181,783
(212,926 )
(97,469 )
—
(4,589 )
(314,984 )
(133,201 )
Woodward has recorded a net operating loss (“NOL”) deferred tax asset of $6,106 as of September 30, 2020 and $6,836
as of September 30, 2019. A portion of these NOL carryforwards started to expire in 2019 and are currently offset by a
valuation allowance. Woodward has placed valuation allowances against all other NOL carryforwards that are less than 50
percent likely to be realized.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Both positive and negative evidence are
considered in forming Woodward’s judgment as to whether a valuation allowance is appropriate, and more weight is given to
evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances
that may cause a change in judgment. The change in the valuation allowance was primarily the result of the expiration of net
operating losses at a wholly owned subsidiary.
110
At September 30, 2020, Woodward has not provided for taxes on undistributed foreign earnings of $296,165 that it
considered indefinitely reinvested. These earnings could become subject to income taxes if they are remitted as dividends,
are loaned to Woodward or any of Woodward’s subsidiaries located in the United States, or if Woodward sells its stock in the
foreign subsidiaries. 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.
On December 22, 2017 the U.S. enacted the Tax Act. The Tax Act included significant changes to prior tax law,
including a permanent reduction to the U.S federal corporate income tax rate of 35% to 21%, a one-time repatriation tax on
deferred foreign income (“Transition Tax”), deemed inclusions of foreign low tax earnings, limitations on certain deductions,
adjusted foreign tax credits, and business-related exclusions.
Enactment of the Tax Act during December 2017 resulted in a net change to Woodward’s income tax expense in the
amount of $14,778, which was recorded in the three-months ended December 31, 2017. After adjustments to amounts made
throughout fiscal year 2018, the net impact of the enactment of the Tax Act was $10,860. Woodward finalized its assessment
of the income tax effects of the Tax Act in the first quarter of fiscal year 2019.
On June 14, 2019, the Internal Revenue Service (“IRS”) issued final regulations that modified the Transition Tax
computation required by the Tax Act. As a result, in the three-months ended June 30, 2019, Woodward recognized
additional income tax expense related to the Transition Tax of $10,588.
The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% was effective January 1, 2018
(the “Effective Date”). When a U.S. federal tax rate change occurs during a taxpayer’s fiscal year, taxpayers are required to
compute a weighted daily average rate for the fiscal year of enactment. As a result of the Tax Act, Woodward calculated a
U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and applied this rate
in computing the income tax provision for the fiscal year ended September 30, 2018. The U.S. federal statutory corporate
income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35%
applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate
of 21% applicable to the 2018 fiscal year after the Effective Date. The U.S. federal statutory rate is 21% for the fiscal years
ended September 30, 2020 and September 30, 2019.
The following is a reconciliation of the U.S. Federal statutory tax 21% in the fiscal year ended September 30, 2020,
21.0% in fiscal year ended September 30, 2019 and 24.5% in the fiscal year ended September 30, 2018 to Woodward’s
effective income tax rate:
Percent of pretax earnings
Statutory tax rate
State income taxes, net of federal tax benefit
Taxes on international activities
Research credit
Net excess income tax benefit from stock-based compensation
Domestic production activities deduction
Adjustments of prior period tax items
Effect of U.S. federal corporate rate reduction on net beginning U.S. deferred
tax liability
Transition Tax
Increased deferred tax liability associated with anticipated repatriation taxes
Effect of U.S. federal corporate rate reduction on net current year U.S. deferred
tax activity
Other items, net
Effective tax rate
Year Ending September 30,
2019
2018
2020
21.0 %
0.3
(2.1 )
(3.6 )
(2.8 )
—
1.0
—
—
—
—
0.9
14.7 %
21.0 %
(0.1 )
0.2
(3.3 )
(3.5 )
–
0.9
–
3.3
–
–
0.5
19.0 %
24.5 %
(0.5 )
(1.8 )
(4.8 )
(1.4 )
(1.6 )
(5.0 )
(5.0 )
6.2
3.7
2.0
1.6
17.9 %
In determining the tax amounts in Woodward’s financial statements, estimates are sometimes used that are subsequently
adjusted in the actual filing of tax returns or by updated calculations. In addition, Woodward occasionally has resolutions of
tax items with tax authorities related to prior years due to the conclusion of audits and the lapse of applicable statutes of
limitations. Such adjustments are included in the “Adjustments of prior period tax items” line in the above table. The
majority of these adjustments are related to the conclusion of audits, effective settlement, and lapse of applicable statutes of
limitations in various tax jurisdictions.
111
The decrease in the effective tax rate for fiscal year 2020 compared to fiscal year 2019 is primarily attributable to (i) the
additional income tax expense resulting from Transition Tax regulations issued by the IRS on June 14, 2019 which did not
repeat in the current fiscal year and (ii) increased foreign earnings in a lower tax jurisdiction taxed at a lower rate resulting
from the net gain on termination of the cross-currency interest rate swaps termination. This decrease was partially offset by a
smaller favorable net excess income tax benefits from stock-based compensation.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:
Beginning balance
Additions to current year tax positions
Reductions to prior year tax positions
Additions to prior year tax positions
Lapse of applicable statute of limitations
Ending balance
Year Ending September 30,
2019
2018
2020
$
$
10,305 $
1,890
(2,415 )
71
—
9,851 $
8,364 $
1,930
–
11
–
10,305 $
20,132
2,675
(14,458 )
15
–
8,364
Included in the balance of unrecognized tax benefits were $4,730 as of September 30, 2020 and $4,411 as of September
30, 2019 of tax benefits that, if recognized, would affect the effective tax rate. At this time, Woodward estimates that it is
reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $84 in the next twelve months
due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward accrues
for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax
payments in tax expense. Woodward had accrued gross interest and penalties of $489 as of September 30, 2020 and $437 as
of September 30, 2019.
In March 2020, the U.S. Congress passed the “Coronavirus Aid, Relief, and. Economic Security Act” (the “CARES
Act”). The CARES Act provides relief from the certain economic impacts of COVID-19 to companies and individuals.
Non-income tax impacts of the CARES Act include (i) extension of payment deadliness for certain U.S. payroll taxes and (ii)
tax credits for certain qualifying costs incurred by the Company in connection with certain facility closures due to COVID-
19. Non-income tax credits are generally recognized as a reduction to the related costs that generated the credits. The non-
income tax impacts of the CARES Act were insignificant to the results of operations for the fiscal year ended September 30,
2020.
Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at
various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of
limitation may result in changes to tax expense. Woodward’s fiscal years remaining open to examination for U.S. Federal
income taxes include fiscal years 2018 and thereafter. In fiscal year 2020, Woodward concluded its U.S. Federal income tax
examination through fiscal year 2017, which included a foreign tax carryback to fiscal year 2016. Woodward’s fiscal years
remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter.
Woodward closed various audits in foreign jurisdictions in the second and third quarters of fiscal year 2019. Consequently,
fiscal years remaining open to examination in significant foreign jurisdictions include 2016 and thereafter.
Note 21. Retirement benefits
Woodward provides various retirement benefits to eligible members of the Company, including contributions to various
defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and
postretirement life insurance benefits. Eligibility requirements and benefit levels vary depending on employee location.
Defined contribution plans
Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan. The U.S.
defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal
401(k) accounts. The Company makes matching contributions to eligible employee accounts, which are also deferred for
employee personal income tax purposes. Certain non-U.S. employees are also eligible to participate in similar non-U.S.
plans.
112
Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward
stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. In the
second quarters of fiscal years 2020, 2019, and 2018, Woodward fulfilled its annual Woodward stock contribution obligation
using shares held in treasury stock by issuing a total of 124 shares of common stock for a value of $14,748 in fiscal year
2020, 158 total shares of common stock for a value of $14,846 in fiscal year 2019, and 202 shares of common stock for a
value of $14,741 in fiscal year 2018. The Woodward Retirement Savings Plan (the “WRS Plan”) held 3,199 shares of
Woodward stock as of September 30, 2020 and 3,623 shares as of September 30, 2019. The shares held in the WRS Plan
participate in dividends and are considered issued and outstanding for purposes of calculating basic and diluted earnings per
share. Accrued liabilities included obligations to contribute shares of Woodward common stock to the WRS Plan of $11,230
as of September 30, 2020 and $11,701 as of September 30, 2019.
The amount of expense associated with defined contribution plans was as follows:
Company costs
Defined benefit plans
Year Ended September 30,
2019
2018
2020
$
33,769 $
35,510 $
34,084
Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the
United Kingdom, Japan, and Germany. Woodward also provides other postretirement benefits to its employees including
postretirement medical benefits and life insurance benefits. Postretirement medical benefits are provided to certain current
and retired employees and their covered dependents and beneficiaries in the United States and the United Kingdom. Life
insurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to
current employees. A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s
defined benefit pension and other postretirement benefit plans.
On October 26, 2018, the High Court of Justice in the United Kingdom (the “High Court”) issued a ruling (the “Court
Ruling”) requiring defined benefit plan sponsors in the United Kingdom to equalize benefits payable to men and women
under its United Kingdom defined benefit pension plans by amending those plans to increase the pension benefits payable to
participants that accrued such benefits during the period from 1990 to 1997. In the Court Ruling, the High Court also
provided details on acceptable alternative methods of amending plans to equalize the pension benefits. Although final
guidance around the appropriate equalization methodology to be used has not yet been issued, Woodward has concluded that
Court Ruling is applicable to its defined benefit pension plan in the United Kingdom and has made the necessary plan
amendments. Woodward’s current estimate of the impact of the Court Ruling in the amount of $601 has been reflected in the
United Kingdom defined benefit pension plan’s obligation and assets as of September 30, 2019 was amortized as a net prior
service cost as of September 30, 2020. Woodward does not expect any changes to the estimate resulting from final guidance
around the appropriate equalization methodology to be used will be material to the United Kingdom defined benefit pension
plan’s obligation and assets.
In connection with the acquisition of L’Orange on June 1, 2018, Woodward assumed the unfunded defined benefit
pension obligations of the L’Orange defined benefit pension plans in Germany (the “L’Orange Pension Plans”).
Woodward’s assumption of the liability associated with the L’Orange Pension Plans was part of the total consideration paid
by Woodward to acquire L’Orange and thus reduced Woodward’s cash payment for the transaction. Woodward has
completed its valuation of the defined benefit pension obligations associated with the L’Orange Pension Plans and
determined the value of the associated unfunded obligation was $39,257, of which $1,143 was considered current as of the
June 1, 2018 acquisition date. The L’Orange Pension Plans had expenses of $3,000, $2,004 and $673 and Woodward made
$873, $782 and $219 of contributions to the L’Orange Pension Plans to pay participant benefits during the years ended
September 30, 2020, September 30, 2019 and September 30, 2018, respectively. The L’Orange Pension Plans are unfunded.
Excluding the Woodward HRT Plan, which is only partially frozen to salaried participants, the defined benefit plans in
the United States were frozen in fiscal year 2007 and no additional employees may participate in the U.S. plans and no
additional service costs will be incurred.
113
Pension Plans
The actuarial assumptions used in measuring the net periodic benefit cost and plan obligations of retirement pension
benefits were as follows:
United States:
Weighted-average assumptions to determine benefit obligation at September 30:
Discount rate
2.75%
3.25%
4.35%
2020
2019
2018
Weighted-average assumptions to determine periodic benefit costs for years
ended September 30:
Discount rate
Long-term rate of return on plan assets
3.25
7.39
4.35
7.39
3.80
7.39
The discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively settled
based upon the assumed timing of the benefit payments.
In the United States, Woodward uses a bond portfolio matching analysis based on recently traded, non-callable bonds
rated AA or better that have at least $50 million outstanding to determine the benefit obligations at year end.
United Kingdom:
Weighted-average assumptions to determine benefit obligation at September 30:
Discount rate
Rate of compensation increase
Weighted-average assumptions to determine periodic benefit costs for years
ended September 30:
Discount rate - service cost
Discount rate - interest cost
Rate of compensation increase
Long-term rate of return on plan assets
Japan:
Weighted-average assumptions to determine benefit obligation at September 30:
Discount rate
Rate of compensation increase
Weighted-average assumptions to determine periodic benefit costs for years
ended September 30:
Discount rate - service cost
Discount rate - interest cost
Rate of compensation increase
Long-term rate of return on plan assets
Germany:
Weighted-average assumptions to determine benefit obligation at September 30:
Discount rate
Rate of compensation increase
Weighted-average assumptions to determine periodic benefit costs for years
ended September 30:
Discount rate - service cost
Discount rate - interest cost
Rate of compensation increase
2020
2019
2018
1.62%
3.30
1.74%
3.50
2.68%
3.60
1.79
1.59
3.50
4.75
2.70
2.51
3.60
4.75
2.58
2.36
3.60
4.75
2020
2019
2018
1.10%
2.00
0.53%
2.00
0.62%
2.00
0.72
0.31
2.00
2.50
0.80
0.42
2.00
2.50
0.72
0.38
2.00
2.50
2020
2019
2018
0.97%
2.50
0.81%
2.50
1.87%
2.50
1.01
0.56
2.50
2.06
1.53
2.50
2.05
1.49
2.50
In the United Kingdom, Germany and Japan, Woodward uses a high-quality corporate bond yield curve matched with
separate cash flows to develop a single rate to determine the single rate equivalent to settle the entire benefit obligations in
each jurisdiction. For the fiscal years ended September 30, 2020 and 2019, the discount rate used to determine periodic
service cost and interest cost components of the overall benefit costs was based on spot rates derived from the same high-
quality corporate bond yield curve used to determine the September 30, 2019 and 2018 benefit obligation, respectively,
matched with separate cash flows for each future year.
114
Compensation increase assumptions, where applicable, are based upon historical experience and anticipated future
management actions.
In determining the long-term rate of return on plan assets, Woodward assumes that the historical long-term compound
growth rates of equity and fixed-income securities will predict the future returns of similar investments in the plan portfolio.
Investment management and other fees paid out of the plan assets are factored into the determination of asset return
assumptions.
Mortality assumptions are based on published mortality studies developed primarily based on past experience of the
broad population and modified for projected longevity trends. The projected benefit obligations in the United States as of
September 30, 2020 were based on the Society of Actuaries (“SOA”) Pri-2012 Mortality Tables Report using the SOA’s
Mortality Improvement Scale MP-2019 (“MP-2019”) and projected forward using a custom projection scale based on MP-
2019 with a 5-year convergence period and a long-term rate of 0.75%. The projected benefit obligations in the United States
as of September 30, 2019 were based on the SOA RP-2014 Mortality Tables Report projected back to 2006 using the SOA’s
Mortality Improvement Scale MP-2014 (“MP-2014”) and projected forward using a custom projection scale based on MP-
2014 with a 10-year convergence period and a long-term rate of 0.75%.
As of September 30, 2020, mortality assumptions in Japan were based on the Standard rates 2020 and mortality
assumptions for the United Kingdom pension scheme were based on the Self-administered pension scheme (“SAPS”) S3
“all” tables with a projected 1.5% annual improvement rate. Compared to September 30, 2019, where mortality assumptions
in Japan were based on the Standard rates 2014 and mortality assumptions for the United Kingdom pension scheme were
based on the Self-administered pension scheme (“SAPS”) S2 “all” tables with a projected 1.5% annual improvement rate. As
of September 30, 2020, and September 30, 2019, mortality assumptions in Germany were based on the Heubeck 2018 G
mortality tables.
Net periodic benefit costs consist of the following components reflected as expense in Woodward’s Consolidated
Statement of Earnings:
Service cost
Interest cost
Expected return on plan assets
Amortization of:
Net losses
Net prior service cost
Net periodic (benefit) cost
United States
2019
Year Ended September 30,
Other Countries
Total
2019
2018
2020
$ 1,659 $ 1,451 $ 1,643 $ 2,865 $ 2,036 $ 1,124 $ 4,524 $ 3,487 $ 2,767
5,590 6,384 6,004 1,278 1,906 1,526 6,868 8,290 7,530
(12,346 ) (11,986 ) (11,614 ) (2,827 ) (2,638 ) (2,780 ) (15,173 ) (14,624 ) (14,394 )
2020 2019 2018 2020
2018
1,430
936
283
598 1,046
23 — —
709
$ (2,731 ) $ (2,825 ) $ (2,660 ) $ 2,385 $ 1,587 $ 161 $
889
900
291 2,476
709
709
959
(346 ) $ (1,238 ) $ (2,499 )
617
709
115
The following tables provide a reconciliation of the changes in the projected benefit obligation and fair value of assets
for the defined benefit pension plans:
At or for the Year Ended September 30,
United States
2020
2019
Other Countries
2019
2020
Total
2020
2019
Changes in projected benefit obligation:
Projected benefit obligation at beginning of year
Plan amendment
Service cost
Interest cost
Net actuarial losses (gains)
Contribution by participants
Benefits paid
Settlements
Foreign currency exchange rate changes
Projected benefit obligation at end of year
Changes in fair value of plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Contributions by the Company
Contributions by plan participants
Benefits paid
Settlements
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Net over/(under) funded status at end of year
$ 175,595 $ 150,032 $ 121,535 $ 103,485 $ 297,130 $ 253,517
601
—
3,487
2,865
8,290
1,278
46,015
(4,841 )
9
9
(9,294 )
(3,434 )
—
(476 )
(5,495 )
6,610
$ 184,077 $ 175,595 $ 123,546 $ 121,535 $ 307,623 $ 297,130
—
4,524
6,868
2,970
100
(10,103 )
(476 )
6,610
601
2,036
1,906
22,174
9
(3,181 )
—
(5,495 )
—
1,451
6,384
23,841
—
(6,113 )
—
—
—
1,659
5,590
7,811
91
(6,669 )
—
—
11,327
—
—
(6,113 )
37,577
—
91
(6,669 )
—
—
$ 170,556 $ 165,342 $ 63,577 $ 62,380 $ 234,133 $ 227,722
16,448
1,697
9
(9,294 )
—
(2,449 )
$ 201,555 $ 170,556 $ 65,154 $ 63,577 $ 266,709 $ 234,133
(5,039 ) $ (58,392 ) $ (57,958 ) $ (40,914 ) $ (62,997 )
$ 17,478 $
38,153
2,272
100
(10,103 )
(476 )
2,630
576
2,272
9
(3,434 )
(476 )
2,630
5,121
1,697
9
(3,181 )
(2,449 )
—
At September 30, 2020, the Company’s defined benefit pension plans in the United Kingdom, Japan and Germany
represented $59,003, $10,119 and $54,424 of the total projected benefit obligation, respectively. At September 30, 2020, the
United Kingdom and Japan pension plan assets represented $53,557 and $11,597 of the total fair value of all plan assets,
respectively. The German pension plans are unfunded and have no plan assets.
The largest contributor to the net actuarial losses affecting the benefit obligation for the defined benefit pension plans in
the United States is due to a decrease in the discount rate, partially offset by return on plan assets significantly exceeding
expectations. The largest contributor to the net actuarial gains affecting the benefit obligation for the defined benefit pension
plans in the United Kingdom, Japan, and Germany is due to an increase in the discount rate, partially offset by lower than
expected return on plan assets.
The accumulated benefit obligations of the Company’s defined benefit pension plans at September 30, 2020 was
$184,077 in the United States, $58,198 in the United Kingdom, $9,266 in Japan, and $54,403 in Germany, and at
September 30, 2019 was $175,595 in the United States, $56,389 in the United Kingdom, $10,081 in Japan and $51,908 in
Germany.
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Plans with accumulated
benefit obligation in
excess of plan assets
At September 30,
Plans with accumulated
benefit obligation less
than plan assets
At September 30,
$
2020
(141,561 ) $
(140,623 )
79,963
2019
(286,495 ) $
(284,368 )
222,661
2020
(166,062 ) $
(165,321 )
186,746
2019
(10,635 )
(9,605 )
11,472
116
The following tables provide the amounts recognized in the statement of financial position and accumulated other
comprehensive losses for the defined benefit pension plans:
United States
2020
2019
Year Ended September 30,
Other Countries
2019
2020
Total
2020
2019
Amounts recognized in statement of financial
position consist of:
Other non-current assets
Accrued liabilities
Other non-current liabilities
Net over/(under) funded status at end of year
Amounts recognized in accumulated other
comprehensive income consist of:
Unrecognized net prior service cost
Unrecognized net losses
Total amounts recognized
Deferred taxes
Amounts recognized in accumulated other
comprehensive income
$ 19,064 $
—
(1,586 )
$ 17,478 $
838
— $
(1,539 )
(1,539 )
—
(62,295 )
(57,256 )
(5,039 )
(5,039 ) $ (58,392 ) $ (57,957 ) $ (40,914 ) $ (62,996 )
838 $ 20,540 $
(1,059 )
(60,395 )
1,476 $
(1,059 )
(58,809 )
$
4,814 $
9,317
14,131
(6,721 )
5,750 $
28,167
33,917
(11,577 )
583 $
30,794
31,377
(9,457 )
579 $
32,641
33,220
(10,029 )
5,397 $
40,111
45,508
(16,178 )
6,329
60,808
67,137
(21,606 )
$
7,410 $ 22,340 $ 21,920 $ 23,191 $ 29,330 $ 45,531
The following table reconciles the changes in accumulated other comprehensive losses for the defined benefit pension
plans:
United States
2020
2019
Year Ended September 30,
Other Countries
2019
2020
Total
2020
2019
$ 33,917 $ 10,744 $ 33,220 $ 14,529 $ 67,137 $ 25,273
44,190
601
(19,866 )
—
(17,420 )
—
19,691
601
24,499
—
(2,446 )
—
Accumulated other comprehensive losses at beginning
of year
Net (gain) loss
Prior service cost due to plan amendment
Amortization of:
Net losses
Prior service cost
(900 )
(1,430 )
(709 )
(936 )
(1,318 )
—
Accumulated other comprehensive losses at end of year $ 14,131 $ 33,917 $ 31,377 $ 33,220 $ 45,508 $ 67,137
Foreign currency exchange rate changes
(2,476 )
(959 )
1,672
(283 )
—
(1,318 )
(1,046 )
(23 )
1,672
(617 )
(709 )
—
Pension benefit payments are made from the assets of the pension plans. The German pension plans are unfunded;
therefore, benefit payments are made from Company contributions into these plans as required to meet the payment
obligations. Using foreign exchange rates as of September 30, 2020 and expected future service assumptions, it is anticipated
that the future benefit payments will be as follows:
Year Ending September 30,
2021
2022
2023
2024
2025
2026 – 2030
United States
$
7,650 $
8,280
8,809
9,283
9,647
51,942
Other
Countries
Total
3,493 $
3,347
3,952
3,841
3,792
20,898
11,143
11,627
12,761
13,124
13,439
72,840
Woodward expects its pension plan contributions in fiscal year 2021 will be $689 in the United Kingdom, $219 in Japan
and $1,021 in Germany. Woodward expects to have no pension plan contributions in fiscal year 2021 in the United States.
Pension plan assets
The overall investment objective of the pension plan assets is to earn a rate of return over time which, when combined
with Company contributions, satisfies the benefit obligations of the pension plans and maintains sufficient liquidity to pay
benefits.
117
As the timing and nature of the plan obligations varies for each Company sponsored pension plan, investment strategies
have been individually designed for each pension plan with a common focus on maintaining diversified investment portfolios
that provide for long-term growth while minimizing the risk to principal associated with short-term market behavior. The
strategy for each of the plans balances the requirements to generate returns, using investments expected to produce higher
returns, such as equity securities, with the need to control risk within the pension plans using less volatile investment assets,
such as debt securities. A strategy of more equity-oriented allocation is adopted for those plans which have a longer-term
investment plan based on the timing of the associated benefit obligations.
A pension oversight committee is assigned by the Company to each pension plan. Among other responsibilities, each
committee is responsible for all asset class allocation decisions. Asset class allocations, which are reviewed by the respective
pension committee on at least an annual basis, are designed to meet or exceed certain market benchmarks and align with each
plan’s investment objectives. In evaluating the asset allocation choices, consideration is given to the proper long-term level
of risk for each plan, particularly with respect to the long-term nature of each plan’s liabilities, the impact of asset allocation
on investment results and the corresponding impact on the volatility and magnitude of plan contributions and expense and the
impact certain actuarial techniques may have on the plans’ recognition of investment experience. From time to time, the
plans may move outside the prescribed asset class allocation in order to meet significant liabilities with respect to one or
more individuals approaching retirement.
Risks associated with the plan assets include interest rate fluctuation risk, market fluctuation risk, risk of default by debt
issuers and liquidity risk. To manage these risks, the assets are managed by established, professional investment firms and
performance is evaluated regularly by the Company’s pension oversight committee against specific benchmarks and each
plan’s investment objectives. Liability management and asset class diversification are central to the Company’s risk
management approach and overall investment strategy.
The assets of the U.S. plans are invested in actively managed mutual funds. The assets of the plans in the United
Kingdom and Japan are invested in actively managed pooled investment funds. Each individual mutual fund or pooled
investment fund has been selected based on the investment strategy of the related plan, which mirrors a specific asset class
within the associated target allocation. The plans in Germany are unfunded and have no plan assets. Pension plan assets at
September 30, 2020 and 2019 do not include any direct investment in Woodward’s common stock.
The asset allocations are monitored and rebalanced regularly by investment managers assigned to the individual pension
plans. The actual allocations of pension plan assets and target allocation ranges by asset class, are as follows:
United States:
Asset Class
Equity Securities
Debt Securities
Other
United Kingdom:
Asset Class
Equity Securities
Debt Securities
Other
Japan:
Asset Class
Equity Securities
Debt Securities
Other
At September 30,
2020
2019
Percentage
of Plan
Assets
Target Allocation
Ranges
Percentage
of Plan
Assets
Target Allocation
Ranges
64.4 %
35.0 %
0.6 %
100.0 %
39.6 %
60.1 %
0.3 %
100.0 %
39.7 %
59.4 %
0.9 %
100.0 %
41.7 % —
28.3 % —
81.7 %
48.3 %
0.0%
50.0 % —
45.0 % —
90.0 %
70.0 %
0.0%
36.0 % —
55.0 % —
0.0 % —
44.0 %
63.0 %
2.0 %
60.6 %
37.9 %
1.5 %
100.0 %
41.6 %
57.8 %
0.6 %
100.0 %
41.4 %
57.7 %
0.9 %
100.0 %
41.4 % —
28.6 % —
81.4 %
48.6 %
0.0%
30.0 % —
45.0 % —
60.0 %
70.0 %
0.0%
36.0 % —
55.0 % —
0.0 % —
44.0 %
63.0 %
2.0 %
Actual allocations to each asset class can vary from target allocations due to periodic market value fluctuations,
investment strategy changes, and the timing of benefit payments and contributions.
118
The following table presents Woodward’s pension plan assets using the fair value hierarchy established by U.S. GAAP
as of September 30, 2020 and September 30, 2019.
Level 1
Level 2
Level 3
At September 30, 2020
Asset Category:
Cash and cash equivalents
Mutual funds:
$ 1,115 $
270 $
— $
— $
— $
— $ 1,385
United
States
Other
Countries
United
States
Other
Countries
United
States
Other
Countries Total
U.S. corporate bond fund
U.S. equity large cap fund
International equity large cap growth fund
70,492
65,025
64,923
Pooled funds:
Japanese equity securities
International equity securities
Japanese fixed income securities
International fixed income securities
Global target return equity/bond fund
Index linked U.K. equity fund
Index linked international equity fund
Index linked U.K. corporate bonds fund
Index linked U.K. government securities fund
Index linked U.K. long-term government
securities fund
—
—
—
—
—
—
—
—
—
—
$ 201,555 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,470
—
2,135
—
5,151
—
—
1,734
— 13,002
2,878
—
—
5,351
— 18,055
5,767
—
—
—
—
—
—
—
—
—
—
—
—
—
— 70,492
— 65,025
— 64,923
2,470
—
2,135
—
5,151
—
—
1,734
— 13,002
2,878
—
—
5,351
— 18,055
5,767
—
—
270 $
8,341
—
— $ 64,884 $
—
— $
8,341
—
— $ 266,709
Level 1
Level 2
Level 3
At September 30, 2019
United
States
Other
Countries
United
States
Other
Countries
United
States
Other
Countries Total
$ 2,568 $
418 $
— $
— $
— $
— $ 2,986
Total assets
Asset Category:
Cash and cash equivalents
Mutual funds:
U.S. corporate bond fund
U.S. equity large cap fund
International equity large cap growth fund
64,514
56,829
46,645
Pooled funds:
Japanese equity securities
International equity securities
Japanese fixed income securities
International fixed income securities
Global target return equity/bond fund
Index linked U.K. equity fund
Index linked international equity fund
Index linked U.K. corporate bonds fund
Index linked U.K. government securities fund
Index linked U.K. long-term government
securities fund
Total assets
—
—
—
—
—
—
—
—
—
—
$ 170,556 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,518
—
2,226
—
4,915
—
—
1,710
— 12,488
3,738
—
—
5,438
— 16,737
5,491
—
—
—
—
—
—
—
—
—
—
—
—
—
— 64,514
— 56,829
— 46,645
2,518
—
2,226
—
4,915
—
—
1,710
— 12,488
3,738
—
—
5,438
— 16,737
5,491
—
—
418 $
—
7,898
— $ 63,159 $
—
— $
—
7,898
— $ 234,133
Cash and cash equivalents: Cash and cash equivalents held by the Company’s pension plans are held on deposit with
creditworthy financial institutions. The fair value of the cash and cash equivalents are based on the quoted market price of
the respective currency in which the cash is maintained.
Pension assets invested in mutual funds: The assets of the Company’s U.S. pension plans are invested in various mutual
funds which invest in both equity and debt securities. The fair value of the mutual funds is determined based on the quoted
market price of each fund.
119
Pension assets invested in pooled funds: The assets of the Company’s Japan and United Kingdom pension plans are
invested in pooled investment funds, which include both equity and debt securities. The assets of the United Kingdom
pension plan are invested in index-linked pooled funds which aim to replicate the movements of an underlying market index
to which the fund is linked. Fair value of the pooled funds is based on the net asset value of shares held by the plan as
reported by the fund sponsors. All pooled funds held by plans outside of the United States are considered to be invested in
international equity and debt securities. Although the underlying securities may be largely domestic to the plan holding the
investment assets, the underlying assets are considered international from the perspective of the Company.
There were no transfers into or out of Level 3 assets in fiscal years 2020 or 2019.
Other postretirement benefit plans
Woodward provides other postretirement benefits to its employees including postretirement medical benefits and life
insurance benefits. Postretirement medical benefits are provided to certain current and retired employees and their covered
dependents and beneficiaries in the United States and the United Kingdom. Benefits include the option to elect company
provided medical insurance coverage to age 65 and a Medicare supplemental plan after age 65. Life insurance benefits are
also provided to certain retirees in the United States under frozen plans which are no longer available to current employees.
A September 30 measurement date is utilized to value plan assets and obligations for Woodward’s other postretirement
benefit plans.
The postretirement medical benefit plans, other than the plan assumed in an acquisition in fiscal year 2009, were frozen
in fiscal year 2006 and no additional employees may participate in the plans. Generally, employees who had attained age 55
and had rendered 10 or more years of service before the plans were frozen were eligible for these postretirement medical
benefits.
Certain participating retirees are required to contribute to the plans in order to maintain coverage. The plans provide
postretirement medical benefits for approximately 455 retired employees and their covered dependents and beneficiaries and
may provide future benefits to 8 active employees and their covered dependents and beneficiaries, upon retirement, if the
employees elect to participate. All the postretirement medical plans are fully insured for retirees who have attained age 65.
The actuarial assumptions used in measuring the net periodic benefit cost and plan obligations of postretirement benefits
were as follows:
Weighted-average discount rate used to determine benefit obligation at September 30
Weighted-average discount rate used to determine net periodic benefit cost for years
ended September 30
2020
2019
2018
2.45 %
3.05 %
4.30 %
3.05
4.30
3.80
The discount rate assumption is intended to reflect the rate at which the postretirement benefits could be effectively
settled based upon the assumed timing of the benefit payments.
In the United States, Woodward used a bond portfolio matching analysis based on recently traded, non-callable bonds
rated AA or better that have at least $50 million outstanding to determine the benefit obligations at year end.
In the United Kingdom, Woodward uses a high-quality corporate bond yield curve matched with separate cash flows to
develop a single rate to determine the single rate equivalent to settle the entire benefit obligations in each jurisdiction.
Mortality assumptions are based on published mortality studies developed primarily based on past experience of the
broad population and modified for projected longevity trends. The projected benefit obligations in the United States as of
September 30, 2020 were based on the SOA Pri-2012 Mortality Tables Report using the SOA’s MP-2019 and projected
forward using a custom projection scale based on MP-2019 with a 5-year convergence period and a long-term rate of 0.75%.
The projected benefit obligations in the United States as of September 30, 2019 were based on the SOA’s RP-2014 Mortality
Tables Report projected back to 2006 using the SOA’s MP-2014 and projected forward using a custom projection scale based
on MP-2014 with a 10-year convergence period and a long-term rate of 0.75%.
As of September 30, 2020, mortality assumptions for the United Kingdom postretirement medical plan were based on
the SAP S3 “all” tables with a projected 1.5% annual improvement rate, whereas of September 30, 2019 mortality
assumptions for the United Kingdom postretirement medical plan were based on the SAP S2 “all” tables with a projected
1.5% annual improvement rate.
120
Assumed healthcare cost trend rates at September 30, were as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2020
2019
6.00 %
5.00 %
2025
6.25 %
5.00 %
2025
Net periodic benefit costs consist of the following components reflected as expense in Woodward’s Consolidated
Statements of Earnings:
Service cost
Interest cost
Amortization of:
Net losses
Net prior service cost (benefit)
Curtailment gain
Net periodic cost
Year Ended September 30,
2019
2018
2020
2 $
782
47
3
—
834 $
5 $
1,154
55
(5 )
—
1,209 $
7
1,165
94
(158 )
(330 )
778
$
$
The following table provides a reconciliation of the changes in the accumulated postretirement benefit obligation and
fair value of assets for the postretirement benefits for the fiscal years ended September 30:
Changes in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation at beginning of year
Service cost
Interest cost
Premiums paid by plan participants
Net actuarial gains
Benefits paid
Accumulated postretirement benefit obligation at end of year
Changes in fair value of plan assets:
Fair value of plan assets at beginning of year
Contributions by the company
Premiums paid by plan participants
Benefits paid
Fair value of plan assets at end of year
Funded status at end of year
Year Ended September 30,
2019
2020
$
$
$
$
$
26,671 $
2
782
1,088
(313 )
(2,785 )
25,445 $
— $
1,697
1,088
(2,785 )
— $
(25,445 ) $
27,985
5
1,154
1,192
(373 )
(3,292 )
26,671
—
2,100
1,192
(3,292 )
—
(26,671 )
The following tables provide the amounts recognized in the statement of financial position and accumulated other
comprehensive losses for the postretirement plans:
Amounts recognized in statement of financial position consist of:
Accrued liabilities
Other non-current liabilities
Funded status at end of year
Amounts recognized in accumulated other comprehensive income consist of:
Unrecognized net prior service cost (benefit)
Unrecognized net gains
Total amounts recognized
Deferred taxes
Amounts recognized in accumulated other comprehensive income
Year Ended September 30,
2019
2020
$
$
$
$
(1,992 ) $
(23,453 )
(25,445 ) $
(2,048 )
(24,623 )
(26,671 )
1 $
(363 )
(362 )
(324 )
(686 ) $
4
(3 )
1
(414 )
(413 )
Woodward pays plan benefits from its general funds; therefore, there are no segregated plan assets as of September 30,
2020 or September 30, 2019.
121
The accumulated benefit obligations of the Company’s postretirement plans were $25,445 at September 30, 2020 and
$26,671 at September 30, 2019. The largest contributor to the actuarial gains affecting the Company’s postretirement plans
accumulated benefit obligations were the claims experience being lower than expected and the adoption of updated mortality
tables, partially offset by the decrease in discount rate and actual participant benefits paid.
The following table reconciles the changes in accumulated other comprehensive losses for the other postretirement
benefit plans:
Accumulated other comprehensive losses at beginning of year
Net gain
Curtailment arising during the period
Amortization of:
Net losses
Prior service (cost) benefit
Accumulated other comprehensive losses at end of year
Year Ended September 30,
2019
2020
1 $
(313 )
—
(47 )
(3 )
(362 ) $
424
(373 )
—
(55 )
5
1
$
$
Using foreign currency exchange rates as of September 30, 2020 and expected future service, it is anticipated that the
future Company contributions to pay benefits, excluding participate contributions, will be as follows:
Year Ending September 30,
2021
2022
2023
2024
2025
2026 – 2030
Multiemployer defined benefit plans
$
3,113
3,078
3,017
2,949
2,867
12,690
Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan. The
amounts of contributions associated with the multiemployer defined benefit plans were as follows:
Company contributions
Year Ended September 30,
2019
2018
2020
$
417 $
252 $
334
The plan in the Netherlands is a quasi-mandatory plan that covers all of Woodward’s employees in the Netherlands and
is part of the Dutch national pension system.
The Company may elect to withdraw from its multiemployer plan in Japan, although it has no plans to do so. If the
Company elects to withdraw from the Japanese plan, it would incur an immaterial one-time contribution cost. Changes in
Japanese regulations could trigger reorganization of or abolishment of the Japanese multiemployer plan, which could impact
future funding levels.
Note 22. Stockholders’ equity
Common Stock
Holders of Woodward’s common stock are entitled to receive dividends when and as declared by Woodward’s board of
directors and have the right to one vote per share on all matters requiring stockholder approval.
Dividends declared and paid during 2020, 2019 and 2018 fiscal years were:
Dividends declared and paid
Dividend per share amount
Year Ended September 30,
2019
2018
2020
$
37,664 $
0.6050
39,066 $
0.6300
34,003
0.5525
122
Stock repurchase program
In the first quarter of fiscal year 2017, Woodward’s board of directors terminated the Company’s prior stock repurchase
program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of
common stock on the open market or in privately negotiated transactions over a three year period that ended in November
2019 (the “2017 Authorization”). Effective upon the expiration of the 2017 Authorization in November 2019, Woodward’s
board of directors approved a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of
common stock on the open market or in privately negotiated transactions over a three year period that will end in 2022 (the
“2019 Authorization”). In fiscal year 2020, Woodward purchased 124 shares of its common stock for $13,346 under the 2019
Authorization. In fiscal year 2019, Woodward repurchased 1,102 shares of common stock for $110,311 under the 2017
Authorization. Woodward repurchased no common stock in fiscal year 2018 under the 2017 Authorization.
Stock-based compensation
Non-qualified stock option awards and restricted stock awards are granted to key management members and directors of
the Company. The grant date for these awards is used for the measurement date. Vesting would be accelerated in the event
of retirement, disability, or death of a participant, or change in control of the Company, as defined in the individual stock
option agreements. These awards are valued as of the measurement date and are amortized on a straight-line basis over the
requisite vesting period for all awards, including awards with graded vesting. Stock for exercised stock options and for
restricted stock awards is issued from treasury stock shares.
Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan, as amended
from time to time (the “2017 Plan”) and the 2006 Omnibus Incentive Plan (the “2006 Plan”), as applicable.
The 2017 Plan was approved by Woodward’s stockholders in January 2017 and is a successor plan to the 2006 Plan. As
of September 14, 2016, the effective date of the 2017 Plan, Woodward’s board of directors delegated authority to administer
the 2017 Plan to the compensation committee of the board of directors (the “Committee”), including, but not limited to, the
power to determine the recipients of awards and the terms of those awards. On January 29, 2020, Woodward’s stockholders
approved an additional 1,000 shares of Woodward’s common stock to be made available for future grants. Under the 2017
Plan, there were approximately 1,972 shares of Woodward’s common stock available for future grants as of September 30,
2020.
Stock options
Woodward believes that stock options align the interests of its employees and directors with the interests of its
stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the
date the grants are awarded, a ten year term, and generally have a four year vesting schedule at a rate of 25% per year.
The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation
model using the assumptions in the following table. Woodward calculates the expected term, which represents the average
period of time that stock options granted are expected to be outstanding, based upon historical experience of plan
participants. Expected volatility is based on historical volatility using daily stock price observations. The estimated dividend
yield is based upon Woodward’s historical dividend practice and the market value of its common stock. The risk-free rate is
based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.
Weighted-average exercise price per share
Weighted-average grant date market value of
Woodward stock
Expected term (years)
Estimated volatility
Estimated dividend yield
Risk-free interest rate
Year Ended September 30,
$
$
2020
90.52
90.52
6.4 -
25.7 % -
0.4 % -
0.4 % -
2019
79.84
79.84
6.5 -
25.7 % -
0.6 %
1.5 % -
8.7
35.1 %
0.9 %
1.7 %
2018
78.91
8.7
31.0 %
0.8 %
3.1 %
78.91
6.4 - 8.7
29.1 % - 32.7 %
0.6 % - 0.8 %
2.1 % - 2.8 %
The weighted average grant date fair value of options granted follows:
Weighted-average grant date fair value of options
$
25.41 $
24.12 $
25.66
Year Ended September 30,
2019
2018
2020
123
The following is a summary of the activity for stock option awards during the fiscal year ended September 30, 2020:
Balance at September 30, 2019
Options granted
Options exercised
Options forfeited
Options expired
Balance at September 30, 2020
Number
Weighted-
Average Exercise
Price Per Share
53.73
90.52
33.26
95.55
72.79
62.00
5,387 $
912
(756 )
(94 )
(6 )
5,443
Exercise prices of stock options outstanding as of September 30, 2020 range from $25.57 to $127.84.
Changes in non-vested stock options during the fiscal year ended September 30, 2020 were as follows:
Balance at September 30, 2019
Options granted
Options vested
Options forfeited
Balance at September 30, 2020
Weighted-
Average Grant
Date Fair Value
Per Share
Number
2,068 $
912
(808 )
(94 )
2,078
23.43
25.41
21.57
26.84
24.69
Information about stock options that have vested, or are expected to vest, and are exercisable at September 30, 2020 was
as follows:
Options outstanding
Options vested and exercisable
Options vested and expected to vest
Other information follows:
Total fair value of stock options vested
Total intrinsic value of options exercised
Cash received from exercises of stock options
Excess tax benefit realized from exercise of stock options
Restricted stock units
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Life in Years
Aggregate
Intrinsic
Value
Number
5,443 $
3,365
5,362
62.00
49.63
61.72
6.0 $
4.6
5.9
114,139
103,059
113,399
$
Year Ended September 30,
2019
2018
2020
17,423 $
50,059
24,969
9,399
15,863 $
70,866
36,044
13,416
13,944
16,690
9,132
3,524
Restricted stock units have been granted to certain employees of L’Orange (at acquisition) and other current Woodward
members in key management positions. Each restricted stock unit entitles the holder to one share of the Company’s common
stock upon vesting. The restricted stock units were granted with a two year vesting schedule and vest on the one and two
year anniversaries of the grant date at a rate of 50% per year. The restricted stock units do not participate in dividends during
the vesting period. The fair value of restricted stock units granted were estimated using the closing price of Woodward
common stock on the grant date.
124
A summary of the activity for restricted stock units in the fiscal year ended September 30, 2020:
Balance at September 30, 2019
Units granted
Units vested
Units forfeited
Balance at September 30, 2020
Stock-based compensation expense
Number
Weighted-
Average Grant
Date Fair Value
per Unit
9 $
—
(7 )
—
2
91.55
n/a
87.30
n/a
103.53
Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period.
Pursuant to form stock option agreements used by the Company, with terms approved by the administrator of the applicable
plan, the requisite service period can be less than the four year vesting period based on grantee’s retirement eligibility. As
such, the recognition of stock-based compensation expense associated with some stock option grants can be accelerated to a
period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.
Stock-based compensation expense recognized was as follows:
Employee stock-based compensation expense
$
22,903 $
18,146 $
18,229
Year Ended September 30,
2019
2018
2020
At September 30, 2020, there was approximately $10,302 of total unrecognized compensation expense related to non-
vested stock-based compensation arrangements, including both stock options and restricted stock awards. The pre-vesting
forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0% for
members of Woodward’s board of directors and 9% for all others. The remaining unrecognized compensation cost is
expected to be recognized over a weighted-average period of approximately 1.9 years.
Preferred stock rights
On April 5, 2020, the Board declared a dividend distribution of one right (a “Right”) for each outstanding share of
common stock of the Company to stockholders of record as of the close of business on April 16, 2020 (the “Record Date”).
Each Right entitles the registered holder, upon the occurrence of specified events, to purchase from the Company one one
thousandth of a share of Series B Participating Preferred Stock, par value $0.003 per share (the “Preferred Stock”), of the
Company at an exercise price of $480.00 (the “Exercise Price”). In addition, each Right entitles the registered holder (other
than any person or group that acquires 15% or more of the Company’s common stock without the approval of the Board),
following the occurrence of other specified events, to purchase common stock of the Company or stock of any acquirer of the
Company at a substantial discount. The complete terms of the Rights are set forth in a Preferred Stock Rights Agreement (the
“Rights Agreement”), dated as of April 5, 2020, between the Company and American Stock Transfer & Trust Company,
LLC, as rights agent.
The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In
general terms, it works by imposing a significant penalty upon any person or group that acquires 15% or more of the common
stock of the Company without the approval of the Board. As a result, the overall effect of the Rights Agreement and the
issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business
combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the
Rights should interfere with any merger, tender or exchange offer, or other business combination approved by the Board.
The Rights expire on the earliest of (i) on April 5, 2021 (unless such date is extended) or (ii) the redemption or
exchange of the Rights pursuant to the Rights Agreement.
Note 23. Commitments and contingencies
Woodward enters into unconditional purchase obligation arrangements (i.e. issuance of purchase orders, obligations to
transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as "take-or-
125
pay" contracts) in the normal course of business to ensure that adequate levels of sourced product are available to Woodward.
Future minimum unconditional purchase obligations are as follows:
Year Ending September 30,
2021
2022
2023
2024
2025
Thereafter
Total
$
$
343,480
49,457
6,389
27,308
1,859
1,811
430,304
The U.S. Government, and other governments, may terminate any of Woodward’s government contracts (and, in
general, subcontracts) at their convenience, as well as for default based on specified performance measurements. If any of
Woodward’s government contracts were to be terminated for convenience, the Company generally would be entitled to
receive payment for work completed and allowable termination or cancellation costs. If any of Woodward’s government
contracts were to be terminated for Woodward’s default, the U.S. Government generally would pay only for the work
accepted, and could require Woodward to pay the difference between the original contract price and the cost to re-procure the
contract items, net of the work accepted from the original contract. The U.S. Government could also hold Woodward liable
for damages resulting from the default.
Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations
and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product
liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and
alleged violations of various laws and regulations. Woodward accrues for known individual matters using estimates of the
most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and
such loss is reasonably estimable.
Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the
Consolidated Statements of Earnings.
Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined
amounts, above which third party insurance applies. Management regularly reviews the probable outcome of related claims
and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the
established accruals for liabilities.
While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with
certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not
have a material effect on Woodward’s liquidity, financial condition, or results of operations.
In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate
officers, Woodward may be required to pay termination benefits to any such officer if such officer’s employment is
terminated within two years following the change of control.
On April 9, 2019, Senvion, a German wind turbine manufacturer and a significant customer of Woodward’s renewables
business, announced that it filed for self-administration insolvency proceedings and declared it would be exploring options
for the sale or partial liquidation of the company. On September 16, 2019, Senvion agreed on exclusive talks with Siemens
Gamesa over the sale of a substantial part of its business consisting of certain services and onshore assets in Europe.
Concurrent with this announcement, Woodward management concluded that the remainder of the Senvion business would
not emerge from insolvency and therefore, in the fourth quarter of fiscal year 2019, Woodward impaired all of its accounts
receivable from Senvion as well as inventory and certain other current assets held specifically for Senvion programs. The
total amount of the impairment charged to both selling, general and administrative and cost of goods sold in the fourth
quarter of fiscal year 2019 was $12,601.
Note 24. Segment information
Woodward serves the aerospace and industrial markets through its two reportable segments - Aerospace and Industrial.
When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments. Woodward uses
operating segment information internally to manage its business, including the assessment of operating segment performance
and decisions for the allocation of resources between operating segments. Woodward L’Orange has been included in
Woodward’s Industrial segment results since the closing of the L’Orange Acquisition.
The accounting policies of the reportable segments are the same as those of the Company. Woodward evaluates
segment profit or loss based on internal performance measures for each segment in a given period. In connection with that
126
assessment, Woodward generally excludes matters such as certain charges for restructuring, interest income and expense,
certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses.
A summary of consolidated net sales and earnings by segment follows:
Segment external net sales:
Aerospace
Industrial
Total consolidated net sales
Segment earnings:
Aerospace
Industrial
Nonsegment expenses (1)
Interest Expense, net
Consolidated earnings before income taxes
Year Ended September 30,
2019
2018
2020
1,590,963 $
904,702
2,495,665 $
1,880,520 $
1,019,677
2,900,197 $
1,557,988
767,885
2,325,873
310,137 $
100,321
(94,530 )
(34,047 )
281,881 $
389,126 $
93,521
(119,447 )
(42,588 )
320,612 $
308,553
49,894
(100,078 )
(38,791 )
219,578
$
$
$
$
(1) Nonsegment expenses for the fiscal year ended September 30, 2020 and September 30, 2018 includes restructuring
charges of $22,216 and $17,013, respectively. See Note 17, Accrued liabilities for further details.
Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other
intangibles, net. A summary of consolidated total assets, consolidated depreciation and amortization, and consolidated
capital expenditures follows:
Segment assets:
Aerospace
Industrial
Unallocated corporate property, plant and equipment, net
Other unallocated assets
Consolidated total assets
Segment depreciation and amortization:
Aerospace
Industrial
Unallocated corporate amounts
Consolidated depreciation and amortization
Segment capital expenditures:
Aerospace
Industrial
Unallocated corporate amounts
Consolidated capital expenditures
Year Ended September 30,
2019
2018
2020
1,752,516 $
1,529,411
106,380
515,029
3,903,336 $
1,900,657 $
1,561,441
114,887
379,541
3,956,526 $
1,805,892
1,642,462
102,083
240,212
3,790,649
63,530 $
57,444
10,184
131,158 $
60,710 $
71,173
10,121
142,004 $
26,148 $
10,631
10,308
47,087 $
56,525 $
30,195
12,346
99,066 $
54,828
51,695
9,608
116,131
98,358
17,109
11,673
127,140
$
$
$
$
$
$
Sales to Boeing were made by Woodward’s Aerospace segment and totaled approximately 14% of net sales in fiscal
year 2020, 15% of net sales in fiscal year 2019, and 12% of net sales in fiscal year 2018. Sales to GE were made by both of
Woodward’s reportable segments and totaled approximately 11% of net sales in fiscal year 2020, 14% of net sales in fiscal
year 2019, and 16% of net sales in fiscal year 2018.
Accounts receivable from Boeing totaled approximately 13% of accounts receivable at September 30, 2020 and 14% of
accounts receivable at September 30, 2019. Accounts receivable from GE totaled approximately 9% of accounts receivable
at September 30, 2020 and 8% of accounts receivable at and September 30, 2019.
127
U.S. Government related sales from Woodward’s reportable segments were as follows:
Fiscal year ended September 30, 2020
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Fiscal year ended September 30, 2019
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Fiscal year ended September 30, 2018
Aerospace
Industrial
Total net external sales
Percentage of total net sales
Direct U.S.
Government
Sales
Indirect U.S.
Government
Sales
Total U.S.
Government
Related Sales
149,416 $
5,867
155,283 $
6 %
536,424 $
17,473
553,897 $
22 %
685,840
23,340
709,180
28 %
118,334 $
4,491
122,825 $
4 %
545,306 $
13,810
559,116 $
19 %
663,640
18,301
681,941
23 %
84,252 $
2,547
86,799 $
4 %
429,386 $
8,658
438,044 $
19 %
513,638
11,205
524,843
23 %
$
$
$
$
$
$
For net sales by geographical area for the year ended September 30, 2020 and 2019, refer to Note 3, Revenue. Net sales
by geographical area for the year ended September 30, 2018, as determined by the location of the customer invoiced, were as
follows:
United States
Germany
Europe, excluding Germany
Asia
Other countries
Consolidated net sales
Year Ended September 30,
2018
$
$
1,350,708
230,834
323,109
283,031
138,191
2,325,873
Property, plant, and equipment, net by geographical area, as determined by the physical location of the assets, were as
follows:
United States
Germany
Other countries
Consolidated property, plant and equipment, net
At September 30,
2020
2019
$
$
885,501 $
89,826
22,088
997,415 $
926,370
107,975
24,430
1,058,775
Note 25. Supplemental quarterly financial data (unaudited)
Quarterly results for the fiscal years ended September 30, 2020 and September 30, 2019 follow:
Net sales
Gross margin (1)
Earnings before income taxes (2)(3)(4)(5)
Net earnings (2)(3)(4)(5)
Earnings per share
Basic earnings per share (2)(3)(4)(5)
Diluted earnings per share (2)(3)(4)(5)
Cash dividends per share
First
2020 Fiscal Quarters
Third
Second
Fourth
$
720,355 $
185,438
61,548
53,373
720,220 $
202,706
107,199
91,318
523,826 $
128,315
45,016
38,465
0.86
0.83
0.1625
1.47
1.41
0.2800
0.62
0.61
0.0813
531,264
123,784
68,118
57,239
0.92
0.89
0.0813
128
Net sales
Gross margin (1)(6)(7)
Earnings before income taxes (6)(7)(8)
Net earnings (6)(7)(8)(9)
Earnings per share
Basic earnings per share (6)(7)(8)(9)
Diluted earnings per share (6)(7)(8)(9)
Cash dividends per share
Notes:
First
2019 Fiscal Quarters
Third
Second
Fourth
$
652,811 $
160,637
61,515
49,120
758,844 $
192,003
90,168
77,579
752,005 $
189,489
92,314
66,107
0.79
0.77
0.1425
1.25
1.20
0.1625
1.07
1.02
0.1625
736,537
165,414
76,615
66,796
1.08
1.03
0.1625
1. Gross margin represents net sales less cost of goods sold.
2. Associated with our decision to relocate our Duarte, California operations to the newly renovated Drake Campus in
Fort Collins, Colorado, we closed on the sale of our Duarte real property and recorded a pre-tax gain on sale of
assets in the amount of $13,522 in the first quarter of fiscal year 2020 and $8,801 in the fourth quarter of fiscal year
2020.
3.
In the first quarter of fiscal year 2020, Woodward approved a plan to divest the disposal group, which resulted in
the recognition of the associated assets and liabilities as held for sale. Concurrently, Woodward determined that
the assets held for sale, net of any liabilities held for sale, were impaired and recognized a non-cash impairment
charge of $37,902, representing the write down of the associated net assets held for sale to their fair market value
as of December 31, 2019.
4. Results in the third and fourth quarter of fiscal year 2020 include pre-tax restructuring charges totaling $19,040
and $3,176, respectively, which relate to the Company’s response to the ongoing global economic challenges
resulting from the COVID-19 pandemic and its impact on the Company’s business.
5.
In the third quarter of fiscal year 2020, as a result of the COVID-19 pandemic and future cash flow uncertainties,
Woodward elected to terminate and settle its existing cross-currency interest rate swap derivative instruments.
Concurrent with settlement of the derivative instruments, Woodward discontinued the related foreign currency
hedging relationships associated with the instruments. As a result of the termination of the instruments, and related
hedging relationships, a pre-tax gain of $30,481 and swap breakage fee of $3,000 were recorded.
6. Results for the fourth quarter of fiscal year 2019 include pre-tax, non-cash charges of $12,601 related to the
impairment of receivables, inventory and certain other assets in connection with Senvion, a significant customer of
Woodward renewables business, which declared insolvency in fiscal year 2019.
7. Results for the first through third quarters of fiscal year 2019 include pre-tax non-cash charges of $9,511, $8,985,
$2,604, respectively. These costs are associated with the purchase accounting impacts related to the revaluation of
the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible.
8. Results for the first through fourth quarters of fiscal year 2019 include, pre-tax Duarte move related costs of $6,963,
$9,161, $7,035, and $3,930, respectively.
9.
In the third quarter of fiscal year 2019, Woodward recognized additional income tax expense of $10,588 related to
the repatriation tax on deferred foreign income related to the December 2017 U.S. Tax legislation.
129
Segment external net sales:
Aerospace
Industrial
Total
Segment earnings:
Aerospace
Industrial
Nonsegment expenses (1)(2)(3)(4)
Interest expense, net
Consolidated earnings before income taxes
Segment external net sales:
Aerospace
Industrial (5)
Total
Segment earnings:
Aerospace
Industrial (5)
Nonsegment expenses (6)(7)
Interest expense, net
Consolidated earnings before income taxes
Notes:
First
2020 Fiscal Quarters
Third
Second
Fourth
473,925 $
246,430
720,355 $
474,236 $
245,984
720,220 $
306,494 $
217,332
523,826 $
336,308
194,956
531,264
92,911 $
28,230
(51,071 )
(8,522 )
61,548 $
117,638 $
25,972
(28,131 )
(8,280 )
107,199 $
41,096 $
27,438
(15,158 )
(8,360 )
45,016 $
58,492
18,681
(170 )
(8,885 )
68,118
First
2019 Fiscal Quarters
Third
Second
Fourth
392,887 $
259,924
652,811 $
482,954 $
275,890
758,844 $
498,775 $
253,230
752,005 $
505,904
230,633
736,537
72,854 $
29,169
(29,001 )
(11,507 )
61,515 $
101,722 $
27,128
(27,496 )
(11,186 )
90,168 $
103,238 $
26,240
(26,713 )
(10,451 )
92,314 $
111,312
10,984
(36,237 )
(9,444 )
76,615
$
$
$
$
$
$
$
$
1. Nonsegment expenses for the first quarter and fourth quarter of fiscal year 2020 include a pre-tax gain on the sale
of assets of $13,522 and $8,801, respectively, associated with our decision to relocate our Duarte, California
operations to the newly renovated Drake Campus in Fort Collins, Colorado.
2. Nonsegment expenses in the first quarter of fiscal year 2020, include a non-cash impairment charge of $37,902,
representing the write down of the associated net assets held for sale to their fair market value as of December 31,
2019 related to Woodward’s approved a plan to divest the disposal group.
3. Nonsegment expenses in the third quarter of fiscal year 2020 include a pre-tax gain of $30,481 and a swap
breakage fee of $3,000, as a result of terminating and settling our existing cross-currency interest rate swap
derivative instruments.
4. Nonsegment expenses in the third quarter and fourth quarter of fiscal year 2020 include a pre-tax restructuring
charges totaling $19,040 and $3,176, respectively, which relate to the Company’s response to the ongoing global
economic challenges resulting from the COVID-19 pandemic and its impact on the Company’s business.
5.
Industrial segment earnings for the first through third quarters of fiscal year 2019 include pre-tax non-cash charges
of $9,511, $8,985, $2,604, respectively. These costs are associated with the purchase accounting impacts related to
the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog
intangible.
6. Nonsegment expenses for the fourth quarter of fiscal year 2019 include pre-tax, non-cash charges of $12,601
related to the impairment of receivables, inventory and certain other assets in connection with Senvion.
7. Nonsegment expenses for the first through fourth quarters of fiscal year 2019 include, pre-tax Duarte move related
costs of $6,963, $9,161, $7,035, and $3,930, respectively.
130
Item 9.
Changes in and Disagreements with Accountants
There have been no disagreements or any reportable events requiring disclosure under Item 304(b) of Regulation S-K.
Item 9A. Controls and Procedures
We have established disclosure controls and procedures, which are designed to ensure that information required to be
disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded,
processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to
be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including
our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and
Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman and Chief Financial Officer), as
appropriate, to allow timely decisions regarding required disclosures.
Thomas A. Gendron and Robert F. Weber, Jr. evaluated the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this Form 10-K. Based on their evaluations, they concluded that our disclosure controls
and procedures were effective as of September 30, 2020.
During the quarterly period ended December 31, 2019, we adopted the new lease guidance of ASC 842. We designed
new business policies and procedures to assist in the adoption and ongoing application of the new guidance, provided
training, and designed and applied new internal controls related to impacted accounting and disclosures. Other than the
implementation of new internal controls upon adoption of ASC 842, there have been no other changes in our internal control
over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act
during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting for the Company.
We have evaluated the effectiveness of internal control over financial reporting using the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
and, based on that evaluation, have concluded that the Company’s internal control over financial reporting was effective as of
September 30, 2020, the end of the Company’s most recent fiscal year.
Deloitte & Touche LLP, an independent registered public accounting firm, conducted an audit of Woodward’s internal
control over financial reporting as of September 30, 2020 as stated in their report included in “Item 9A. – Controls and
Procedures.”
Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive
and principal financial officers, or persons performing similar functions, and effected by our Board of Directors,
management, and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorization of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
There have been no changes in our internal control over financial reporting during the fourth fiscal quarter ended
September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
131
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Woodward, Inc.
Fort Collins, Colorado
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Woodward, Inc. and subsidiaries (the “Company”) as of
September 30, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established
in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended September 30, 2020, of the Company and our
report dated November 20, 2020, expressed an unqualified opinion on those financial statements and included an explanatory
paragraph regarding the Company’s adoption of a new accounting standard.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
November 20, 2020
132
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this item relating to our directors and nominees, regarding compliance with Section 16(a)
of the Securities Act of 1934, and regarding our Audit Committee is included under the captions “Board of Directors,”
“Board Meetings and Committees – Audit Committee” (including information with respect to audit committee financial
experts), “Stock Ownership of Management,” and, if applicable “Delinquent Section 16(a) Reports” in our Proxy Statement
related to the Annual Meeting of Stockholders to be held virtually on January 27, 2021 and is incorporated herein by
reference. There have been no material changes to the procedures by which security holders may recommend nominees to
our board of directors.
The information required by this item relating to the identities and background of our executive officers and other
corporate officers is included under the caption “Executive Officers of the Registrant” in Item 1 of this report.
We have adopted a code of ethics that applies to all of our employees, including our principal executive officer and our
principal financial and accounting officer. This code of ethics is posted on our Website. The Internet address for our
Website is www.woodward.com, and the code of ethics may be found from our main Web page by clicking first on
“Investors” and then on “Corporate Governance,” and then on “Woodward Codes of Business Conduct and Ethics.”
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of this code of ethics by posting such information to our Website, at the address and location specified
above.
Item 11. Executive Compensation
Information regarding executive compensation is under the captions “Board Meetings and Committees – Director
Compensation,” “Board Meetings and Committees – Compensation Committee Interlocks and Insider Participation,”
“Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” and “Board
Meetings and Committees – Compensation Committee – Risk Assessment” in our Proxy Statement, and is incorporated
herein by reference, except the section captioned “Compensation Committee Report on Compensation Discussion and
Analysis” is hereby “furnished” and not “filed” with this Form 10-K.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management and related stockholder matters
is under the tables captioned “Stock Ownership of Management,” “Persons Owning More Than Five Percent of Woodward
Stock,” and “Executive Compensation – Equity Compensation Plan Information” in our Proxy Statement, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under “Board Meetings and Committees – Related Person Transaction Policies and
Procedures,” “Board of Directors” and “Audit Committee Report to Stockholders” in our Proxy Statement and is
incorporated herein by reference except the section captioned “Audit Committee Report” is hereby “furnished” and not
“filed” with this Form 10-K.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is under the captions “Audit Committee Report to
Stockholders – Audit Committee’s Policy on Pre-Approval of Services Provided by Independent Registered Public
Accounting Firm” and “Audit Committee Report to Stockholders – Fees Paid to Independent Registered Public Accounting
Firm” in our Proxy Statement, and is incorporated herein by reference.
133
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings for the fiscal years ended September 30, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Earnings for the fiscal years ended September 30, 2020,
2019, and 2018
Consolidated Balance Sheets at September 30, 2020 and 2019
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2020, 2019, and
2018
Consolidated Statements of Stockholders’ Equity for the fiscal years ended September 30, 2020,
2019, and 2018
Notes to Consolidated Financial Statements
(a) (2) Consolidated Financial Statement Schedule:
Valuation and Qualifying Accounts
Page Number in
Form 10-K
65
68
69
70
71
72
73
139
Financial statements and schedules other than those listed above are omitted for the reason that they are not applicable,
are not required, or the information is included in the financial statements or the footnotes.
(a) (3)
Exhibits Filed as Part of This Report:
‡
2.1
‡
3.1
‡
3.2
‡
3.3
‡
3.4
‡
‡
3.5
4.1
†‡ 10.1
†‡ 10.2
†‡ 10.3
†‡ 10.4
†‡ 10.5
Share Purchase Agreement relating to the sale and purchase of all shares in L’Orange GmbH and Fluid
Mechanics LLC dated April 8, 2018, filed as Exhibit 2.1 to Quarterly Report on Form 10-Q, filed on August
8, 2018
Restated Certificate of Incorporation, as amended October 3, 2007, filed as Exhibit 3(i)(a) to Annual Report
on Form 10-K filed November 20, 2008
Bylaws of Woodward, Inc., as amended and restated on January 11, 2020, filed as Exhibit 3.2 to Annual
Report on Form 10-K filed November 12, 2015
Certificate of Amendment of Certificate of Incorporation, dated January 23, 2008, filed as Exhibit 3(i)(b) to
Annual Report on Form 10-K filed November 20, 2008
Certificate of Amendment of the Restated Certificate of Incorporation, dated January 26, 2011, filed as
Exhibit 3.1 to Current Report on Form 8-K filed January 28, 2011
Certificate of Designation of Rights, Preferences and Privileges of Series B Preferred Stock
Preferred Stock Rights Agreement dated as of April 5, 2020, by and between Woodward, Inc. and American
Stock Transfer & Trust Company, LLC, as rights agent
Long-Term Management Incentive Compensation Plan, filed as Exhibit 10(c) to Annual Report on Form 10-
K filed December 22, 2000
Summary Description of the Woodward Variable Incentive Plan, filed as Exhibit 10.2 to Annual Report on
Form 10-K filed November 16, 2016
2002 Stock Option Plan, effective January 1, 2002, filed as Exhibit 10(iii) to Quarterly Report on Form 10-Q
filed May 9, 2002
Form of Outside Director Stock Purchase Agreement with James L. Rulseh, filed as Exhibit 10(j) to Annual
Report on Form 10-K filed December 9, 2002
2006 Omnibus Incentive Plan, effective January 25, 2006, filed as Exhibit 4.1 to Registration Statement on
Form S-8 filed April 28, 2006
134
†‡ 10.6
†‡ 10.7
†‡ 10.8
†‡ 10.9
†‡ 10.10
†‡ 10.11
†‡
10.12
†‡ 10.13
‡
10.14
‡
10.15
‡
10.17
‡
10.18
‡
10.19
‡
10.20
‡
10.21
‡
10.22
‡
10.23
†‡ 10.24
†‡ 10.25
†‡ 10.26
Amendment No. 1 to the Woodward, Inc. 2006 Omnibus Incentive Plan, effective as of January 26, 2011,
filed as Exhibit 10.10 to Annual Report on Form 10-K filed November 16, 2011
Material Definitive Agreement with A. Christopher Fawzy, filed as Exhibit 10.12 to Quarterly Report on
Form 10-Q filed July 25, 2007
Form of Non-Qualified Stock Option Agreement, filed as Exhibit 99.2 to Current Report on Form 8-K filed
November 21, 2007
Form of Non-Qualified Stock Option Agreement, filed as Exhibit 10.12 to Annual Report on Form 10-K
filed November 15, 2012
Form of Non-Qualified Stock Option Agreement, filed as Exhibit 10.13 to Annual Report on Form 10-K
filed November 14, 2013
Form of Restricted Stock Agreement, filed as Exhibit 10.1 to Quarterly Report on Form 10-Q filed January
22, 2014
2017 Omnibus Incentive Plan, effective September 14, 2016, filed as Exhibit 10.1 to Quarterly Report on
Form 10-Q filed January 25, 2017
Form of Non-Qualified Stock Option Agreement, filed as Exhibit 10.2 to Quarterly Report on Form 10-Q
filed January 25, 2017
Credit Agreement, dated as of July 10, 2013, by and among the Company, the foreign subsidiary borrowers
party thereto, the institutions party thereto as lenders, and Wells Fargo Bank, National Association, as
administrative agent, filed as Exhibit 10.1 to Current Report on Form 8-K filed July 16, 2013
Amendment No. 1 to Credit Agreement, dated April 28, 2015, and the conformed Credit Agreement by and
among the Company, certain foreign subsidiary borrowers of the Company from time to time parties thereto,
the institutions from time to time parties thereto, as lenders, Wells Fargo Bank, National Association, as
administrative agent, filed as Exhibit 10.1 to Quarterly Report on Form 10-Q filed July 21, 2015
Note Purchase Agreement, dated October 1, 2008, by and among the Company and the purchasers named
therein, filed as Exhibit 10.2 to Current Report on Form 8-K filed October 7, 2008
Amendment No. 1 to 2008 Note Purchase Agreement, dated as of October 1, 2013, by and among the
Company and the noteholders named therein, filed as Exhibit 10.2 to Current Report on Form 8-K filed
October 4, 2013
Note Purchase Agreement, dated April 3, 2009, by and among the Company and the purchasers named
therein, filed as Exhibit 10.2 to Current Report on Form 8-K filed April 8, 2009
Amendment No. 1 to 2009 Note Purchase Agreement, dated as of October 1, 2013, by and among the
Company and the noteholders named therein, filed as Exhibit 10.3 to Current Report on Form 8-K filed
October 4, 2013
Note Purchase Agreement, dated October 1, 2013, by and among the Company and the purchasers named
therein, filed as Exhibit 10.1 to Current Report on Form 8-K filed October 4, 2013
Note Purchase Agreement, dated September 23, 2016, by and among the Company and the purchasers
named therein, filed as Exhibit 10.20 to Annual Report on Form 10-K filed November 16, 2016
Note Purchase Agreement, dated September 23, 2016, by and among Woodward International Holding B.V.
and the purchasers named therein, filed as Exhibit 10.21 to Annual Report on Form 10-K filed November 16,
2016
Form of Change in Control Agreement for the Company’s principal executive officer and other executive
officers other than the Company’s principal financial officer, filed as Exhibit 10.25 to Annual Report on
Form 10-K filed November 12, 2014
Form of Change in Control Agreement for the Company’s principal financial officer, filed as Exhibit 10.26
to Annual Report on Form 10-K filed November 12, 2014
Executive Benefit Plan, as amended and restated as of September 18, 2013, filed as Exhibit 10.31 to Annual
Report on Form 10-K filed November 14, 2013
135
†‡ 10.27
†‡ 10.28
†‡ 10.29
‡
10.31
‡
10.32
‡
10.35
‡
10.36
‡
10.37
‡
10.38
‡
10.39
‡
10.40
Sagar Patel employment letter, dated June 17, 2011, filed as Exhibit 10.2 to Quarterly Report on Form 10-Q
filed July 26, 2011
Woodward Retirement Savings Plan, as amended and restated effective as of January 1, 2016, filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q filed February 9, 2016
Thomas G. Cromwell employment offer letter, dated January 30, 2019, filed as exhibit 10.1 to Quarterly
Report on Form 10-Q filed May 8, 2019
Purchase and Sale Agreement between Woodward, Inc. and General Electric Company dated January 4,
2016 filed as Exhibit 2.1 to Current Report on Form 8-K filed January 8, 2016
Amended and Restated Limited Liability Company Agreement of Convergence Fuel Systems, LLC, dated
January 4, 2016 filed as Exhibit 10.1 to Current Report on Form 8-K filed January 8, 2016
Frame Development and Purchase Agreement between MTU Friedrichshafen GmbH and L’Orange GmbH,
filed as Exhibit 10.1 to Quarterly Report on Form 10-Q, filed August 8, 2018
Note Purchase Agreement, dated May 31, 2018, by and among Woodward, Inc. and the purchasers named
therein, filed as Exhibit 10.1 to Current Report on Form 8-K, filed June 4, 2018
Amendment No. 1 to 2013 Note Purchase Agreement, dated as of May 31, 2018, by and among Woodward,
Inc. and the noteholders names therein, filed as Exhibit 10.2 of the Company’s Current Report on Form 8-K,
filed June 4, 2018
Amendment No. 1 to 2016 Series M Note Purchase Agreement, dated as of May 31, 2018, by and among
Woodward, Inc. and the noteholders names therein filed as Exhibit 10.3 of the Company’s Current Report on
Form 8-K, filed June 4, 2018
Amendment No. 1 to 2016 Series N and O Note Purchase Agreement, dated as of May 31, 2018, by and
among Woodward International Holding B.V., Woodward, Inc. and the noteholders names therein, filed as
Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed June 4, 2018
Amended and Restated Credit Agreement dated June 19, 2019, by and among the Company, certain foreign
subsidiaries borrowers of the Company from time to time parties thereto, the institutions from time to time
party thereto, as lenders, Wells Fargo Bank, National Association, as administrative agent, filed as Exhibit
10.1 on Form 10-Q, filed August 12, 2019
†
†
*
*
*
*
*
*
*
*
*
*
*
*
*
10.41
Form of Restricted Stock Unit Agreement, filed as Exhibit 10.39 on Form 10-K, filed November 13, 2018
10.42
Form of Non-Qualified Stock Option Agreement filed as Exhibit 10.40 on Form 10-K, filed November 13,
2018
10.43
Outside Director Compensation Policy
21.1
23.1
31.1
31.2
32.1
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron
Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.
Section 1350 certifications
101.INS
Inline XBRL Instance Document.
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and Contained in Exhibit 101)
136
Attached as Exhibit 101 to this report are the following materials from Woodward, Inc.’s Annual Report on Form 10-K
for the year ended September 30, 2020 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Statements of Earnings, (ii) the Consolidated Statements of Comprehensive Earnings, (iii) the
Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of
Stockholders’ Equity, and (vi) the Notes to the Consolidated Financial Statements.
Management contract or compensatory plan or arrangement.
Incorporated by reference as an exhibit to this Report (file number 000-08408, unless otherwise indicated).
Filed as an exhibit to this Report.
†
‡
*
Item 16. Form 10-K Summary
Not applicable.
137
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: November 20, 2020
Date: November 20, 2020
WOODWARD, INC.
/s/ Thomas A. Gendron
Thomas A. Gendron
Chairman of the Board, Chief Executive Officer, and President
(Principal Executive Officer)
/s/ Robert F. Weber, Jr.
Robert F. Weber, Jr.
Vice Chairman and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ John D. Cohn
John D. Cohn
/s/ Paul Donovan
Paul Donovan
/s/ Eileen P. Drake
Eileen P. Drake
/s/ Thomas A. Gendron
Thomas A. Gendron
/s/ Daniel G. Korte
Daniel G. Korte
/s/ Mary L. Petrovich
Mary L. Petrovich
/s/ Ronald M. Sega
Ronald M. Sega
/s/ Gregg C. Sengstack
Gregg C. Sengstack
Title
Director
Director
Director
Chairman of the Board
and Director
Director
Director
Director
Director
Date
November 19, 2020
November 19, 2020
November 18, 2020
November 19, 2020
November 18, 2020
November 19, 2020
November 18, 2020
November 19, 2020
138
WOODWARD, INC. AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 2020, 2019, and 2018
(in thousands)
Column A
Column B
Column C
Additions
Column D
Column E
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts (a) Deductions (b)
Balance at
End of Year
Description
Fiscal year 2020
Allowance for uncollectible accounts
Deferred tax asset valuation allowance
Fiscal year 2019
Allowance for uncollectible accounts
Deferred tax asset valuation allowance
Fiscal year 2018
$
$
7,908 $
3,638
4,293 $
12
3,938 $
4,522
4,899 $
19
Allowance for uncollectible accounts
Deferred tax asset valuation allowance
3,776
3,714
207
73
Notes:
30 $
—
251 $
—
466
553
(5,342 ) $
(1,818 )
(1,180 ) $
(903 )
(511 )
182
6,889
1,832
7,908
3,638
3,938
4,522
(a) Includes recoveries of accounts previously written off.
(b) Represents accounts receivable written off against the allowance for uncollectible accounts and releases of valuation
reserves to income tax expense. Also included are foreign currency exchange rate adjustments. Currency
translation adjustments resulted in a decrease in the reserves of $123 in fiscal year 2020, an increase in the reserves
of $112 in fiscal year 2019, and an increase in the reserves of $96 in fiscal year 2018.
139
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CORPORATE INFORMATION
BOARD OF DIRECTORS
JOHN D. COHN
President, CrossBorder Strategic
Solutions, LLC
PAUL DONOVAN
Retired Executive Vice President
and Chief Financial Officer,
Wisconsin Energy Corporation
EILEEN P. DRAKE
Chief Executive Officer and President,
Aerojet Rocketdyne Holdings, Inc.
OFFICERS *
THOMAS A. GENDRON
Chairman, Chief Executive Officer
and President
THOMAS G. CROMWELL
Vice Chairman,
Chief Operating Officer
ROBERT F. WEBER, JR.
Vice Chairman
and Chief Financial Officer
PAUL BENSON
Corporate Vice President,
Human Resources
INVESTOR INFORMATION
WOODWARD, INC.
Corporate Headquarters
1081 Woodward Way
Fort Collins, CO 80524
1-970-482-5811
www.woodward.com
INVESTOR INFORMATION
Investor.Relations@woodward.com
1-970-498-3580
TRANSFER AGENT AND REGISTRAR
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American Stock Transfer
& Trust Company
Shareholder Services
6201 15th Avenue
Brooklyn, NY 11219
1-800-937-5449
www.astfinancial.com
STOCK EXCHANGE
NASDAQ Global Select Market
Ticker Symbol: WWD
SEC filings are available on our
website at www.woodward.com
THOMAS A. GENDRON
Chairman, Chief Executive Officer
and President, Woodward, Inc.
DANIEL G. KORTE
Global Vice President, Aerospace
PPG Industries, Inc.
MARY L. PETROVICH
Senior Advisor–Private Equity, Carlyle
Group and American Security Partners
JAMES R. RULSEH*
Retired President, JRR & Associates, LLC
RONALD M. SEGA
Chief Technology Officer,
U.S. Army Futures Command
GREGG C. SENGSTACK
Chairman of the Board and Chief Executive
Officer, Franklin Electric Co., Inc.
*Mr.RulsehretiredfromtheBoardofDirectors
effectiveNovember19,2020
DANIEL M. BOWMAN
Corporate Vice President, Strategy
and Business Development
A. CHRISTOPHER FAWZY
Corporate Vice President, General
Counsel, Corporate Secretary and
Chief Compliance Officer
SAGAR A. PATEL
President, Aerospace Aftermarket
and Hydraulic Systems
MATTEO R. PISCIOTTA
Corporate Vice President,
Global Sourcing
CHAD R. PREISS**
President, Engine Systems
JOHN D. TYSVER
Corporate Vice President,
Technology
*OfficertitlesasofOctober31,2020
**Mr.Preissannouncedthathewillretire
fromthecompanyeffectiveJanuary8,2021
STOCKHOLDER ACCOUNT ASSISTANCE
ANNUAL MEETING
The Annual Meeting of Stockholders
will be held virtually on January 27,
2021, at 8:00 a.m. MST.
EQUAL OPPORTUNITY
EMPLOYER STATEMENT
It is Woodward’s policy to provide equal
employment opportunity for all qualified
members and applicants without regard
to race, color, religion, age, sex, gender
identity, national origin, disability,
veteran’s or marital status, genetic
information, or other protected class,
and to base all employment decisions
so as to further this principle of equal
employment opportunity.
Stockholders who wish to change
the address or ownership of stock,
report lost certificates, eliminate
duplicate mailings, or for other account
registration procedures and assistance,
should contact the Transfer Agent at the
address or phone number on this page.
DIVIDEND REINVESTMENT PLAN
AND DIRECT DEPOSIT OF DIVIDENDS
Woodward offers stockholders of record
a convenient Dividend Reinvestment and
Direct Stock Purchase and Sale Plan.
Through this Plan, shareholders have
options to purchase or sell shares of
Woodward stock, have their dividends
automatically reinvested in Woodward,
and to make periodic supplemental
cash payments to purchase additional
shares. For further information and an
authorization form, contact the Transfer
Agent at the address or phone number
on this page.
B U S I N E S S D E S C R I P T I O N
WOODWARD IS AN INDEPENDENT DESIGNER,
MANUFACTURER, AND SERVICE PROVIDER OF
CONTROL SOLUTIONS FOR THE AEROSPACE
AND INDUSTRIAL MARKETS.
The company’s innovative fluid energy, combustion control,
electrical energy, and motion control systems help customers
offer cleaner, more reliable and more efficient equipment.
O U R A E R O S PA C E systems and components optimize the
performance of commercial, business and military aircraft,
missiles and weapons, ground vehicles and other equipment.
O U R I N D U S T R I A L systems and components enhance
the performance of gas and steam turbines, reciprocating
engines, compressors, generator sets and other
energy-related industrial equipment.
O U R C U S TO M E R S include leading original equipment
manufacturers and end users of their products.
W W W. W O O D W A R D . C O M
1081 Woodward Way, PO Box 1519
Fort Collins, Colorado 80524-1519
970-482-5811
ALWAYS INNOVATING FOR A BETTER FUTURE