News Column

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

January 22, 2014

Forward Looking Statements This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that are deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as "anticipate," "believe," "estimate," "seek," "goal," "expect," "forecast," "intend," "continue," "outlook," "plan," "project," "target," "strive," "can," "could," "may," "should," "will," "would," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to: future sales, earnings, cash flow, uses of cash, and other measures of financial performance; descriptions of our plans and expectations for future operations; the effect of economic downturns or growth in particular regions; the effect of changes in the level of activity in particular industries or markets; the availability and cost of materials, components, services, and supplies; the scope, nature, or impact of acquisition activity and integration of such acquisitions into our businesses; the development, production, and support of advanced technologies and new products and services; new business opportunities; restructuring and alignment costs and savings; our plans, objectives, expectations and intentions with respect to recent acquisitions and expected business opportunities that may be available to us; the outcome of contingencies; future repurchases of common stock; future levels of indebtedness and capital spending; and pension plan assumptions and future contributions. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including: a decline in business with, or financial distress of, our significant customers; the continued global economic uncertainty and instability in the financial markets; our ability 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 business pressures; the long sales cycle, customer evaluation process, and implementation period of some of our products and services; our ability to implement and realize the intended effects of any restructuring and alignment efforts; our ability to successfully manage competitive factors, including prices, promotional incentives, industry consolidation, and commodity and other input cost increases; our ability to manage our expenses and product mix while responding to sales increases or decreases; the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all; 28 -------------------------------------------------------------------------------- our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities; our ability to integrate acquisitions and manage costs related thereto; our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements; risks related to our U.S. Government contracting activities, including liabilities resulting from legal and regulatory proceedings, inquiries, or investigations related to such activities; the potential of a significant reduction in defense sales due to decreases in the amount of U.S. Federal defense spending, including the impacts of the sequestration of appropriations under the Budget Control Act of 2011 (the "Budget Act"), or other specific budget cuts impacting defense programs in which we participate; changes in government spending patterns and/or priorities; future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets; future results of our subsidiaries; environmental liabilities related to manufacturing activities and/or real estate acquisitions; our continued access to a stable workforce and favorable labor relations with our employees; physical and other risks related to our operations and suppliers, including natural disasters, which could disrupt production; our ability to successfully manage regulatory, tax, and legal matters (including product liability, patent, and intellectual property matters); risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate; fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets; our operations may be adversely affected by information systems interruptions or intrusions; and certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company. These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed under the caption "Risk Factors" in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the SEC (our "Form 10-K"), as updated from time to time in our subsequent Securities and Exchange Commission ("SEC") filings, and incorporated herein by reference. We undertake no obligation to revise or update any forward-looking statements for any reason. Unless we have indicated otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q (this "Form 10-Q") to "Woodward," "the Company," "we," "us," and "our" refer to Woodward, Inc. and its consolidated subsidiaries. Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-Q are in thousands, except per share amounts. This discussion should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K and the Condensed Consolidated Financial Statements and Notes included therein and in this report. 29 -------------------------------------------------------------------------------- Non-U.S. GAAP Financial Measures Earnings before interest and taxes ("EBIT"), earnings before interest, taxes, depreciation and amortization ("EBITDA"), and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Earnings based non-U.S. GAAP financial measures 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. EBIT and EBITDA for the three-months ended December 31, 2013 and December 31, 2012 were as follows: Three-Months Ended December 31, 2013 2012 Net earnings $ 23,383 $ 27,368 Income taxes 9,561 11,169 Interest expense 6,062 6,456 Interest income (59) (68) EBIT 38,947 44,925 Amortization of intangible assets 8,484 7,667 Depreciation expense 10,632 10,273 EBITDA $ 58,063 $ 62,865 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 EBIT and 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 EBIT and 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 as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of Woodward's various business groups and evaluating cash levels. Securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. The use of this non-U.S. GAAP financial measure 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. Free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure. Free cash flow for the three-months ended December 31, 2013 and December 31, 2012 were as follows: Three-Months Ended December 31, 2013 2012 Net cash provided by operating activities $ 44,433 $ 39,974 Payments for property, plant and equipment (37,149) (29,894) Free cash flow $ 7,284 $ 10,080 30 -------------------------------------------------------------------------------- OVERVIEW Operational Highlights Net sales for the first quarter of fiscal year 2014 were $429,042 , compared to $408,339 for the first quarter of the prior fiscal year. Organic net sales, which excludes the Duarte Business discussed below, were $397,610 for the first quarter of fiscal year 2014, a decrease of 2.6% from the first quarter of the prior fiscal year. Historically, sales in the first quarter of our fiscal year have generally been lower than the final three quarters of the fiscal year due to the observance of various holidays and scheduled plant shutdowns for annual maintenance, as well as variability in customer buying patterns. EBIT for the first quarter of fiscal year 2014 was $38,947 , down 13.3% from $44,925 in the same period of fiscal year 2013. Net earnings for the first quarter of fiscal year 2014 were $23,383 , or $0.34 per diluted share, compared to $27,368 , or $0.39 per diluted share, for the first quarter of fiscal year 2013. On December 27, 2012 , Woodward entered into a definitive asset purchase agreement with GE Aviation Systems LLC (the "Seller") and General Electric Company for the acquisition of substantially all of the assets and certain liabilities related to the Seller's thrust reverser actuation systems business located in Duarte, California (the "Duarte Business") for an aggregate purchase price of $200,000 . The sale was completed on December 28, 2012 , and, based on preliminary purchase adjustments, we paid cash at closing in the amount of $198,900 . The Duarte Business develops and manufactures motion control technologies and platforms, more specifically thrust reverser actuation systems. The Duarte Business serves customers such as Airbus, Boeing, General Electric, Safran and the U.S. Government . Its products are used primarily on commercial aircraft, such as the Boeing 737, 747 and 777, and the Airbus A320. The Duarte Business has been integrated into Woodward's Aerospace segment and included in our operating results since the acquisition. Due to the timing of the closing of the acquisition, the Duarte Business had no impact on net sales, and except for acquisition costs of $1,707 , had no impact on EBIT or net earnings for the first quarter of fiscal year 2013. Liquidity Highlights Net cash provided by operating activities for the first quarter of fiscal year 2014 was $44,433 , compared to $39,974 for the same period of fiscal year 2013. Free cash flow for the first quarter of fiscal year 2014 was $7,284 , compared to free cash flow of $10,080 for the same period of fiscal year 2013. EBITDA decreased by $4,802 to $58,063 for the first quarter of fiscal year 2014 from $62,865 for the same period of fiscal year 2013, primarily due to decreased net earnings. On October 1, 2013 , we entered into a note purchase agreement (the "2013 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. We issued the Series G, H and I Notes on October 1, 2013 in an aggregate principal amount of $100,000 and used the proceeds to repay all of the outstanding balance on the Series B Notes due October 1, 2013 . We issued the Series J, K and L Notes in an additional $150,000 aggregate principal amount on November 15, 2013 and used the proceeds to partially repay the uncommitted line of credit discussed below. In connection with the acquisition of the Duarte Business on December 21, 2012 , we entered into the Line of Credit, which provided for unsecured loans to the Company of up to $200,000 on a revolving basis. The Line of Credit was repaid in full and terminated on December 20, 2013 . At December 31, 2013 , we held $54,590 in cash and cash equivalents, and had total outstanding debt of $594,000 with additional borrowing availability of $500,647 under our $600,000 revolving credit facility, net of outstanding letters of credit. There was additional borrowing capacity of $28,063 under various foreign lines of credit and foreign overdraft facilities. 31 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS The following tables set forth selected consolidated statements of earnings data as a percentage of net sales for each period indicated: Three-Months Ended December December 31, 2013 % of Net Sales 31, 2012 % of Net Sales Net sales $ 429,042 100 % $ 408,339 100 % Costs and expenses: Cost of goods sold 315,466 73.5 289,573 70.9 Selling, general, and administrative expenses 37,328 8.7 36,418 8.9 Research and development costs 29,424 6.9 30,018 7.4 Amortization of intangible assets 8,484 2.0 7,667 1.9 Interest expense 6,062 1.4 6,456 1.6 Interest income (59) 0.0 (68) 0.0 Other (income) expense, net (607) (0.1) (262) (0.1) Total costs and expenses 396,098 92.3 369,802 90.6 Earnings before income taxes 32,944 7.7 38,537 9.4 Income tax expense 9,561 2.2 11,169 2.7 Net earnings $ 23,383 5.5 $ 27,368 6.7 Other select financial data: December 31, September 30, 2013 2013 Working capital $ 637,809 $ 541,183 Short-term borrowings 10,000 - Total debt 594,000 550,000 Total stockholders' equity 1,130,132 1,142,545 Net Sales Consolidated net sales for the first quarter of fiscal year 2014 increased by $20,703 , or 5.1%, compared to the same period in fiscal year 2013. Details of the changes in consolidated net sales are as follows: Consolidated net sales for the period ended December 31, 2012 $ 408,339 Aerospace organic volume (17,526) Energy volume 1,281 Price and sales mix 5,032 Duarte Business acquisition 31,432 Effects of changes in foreign currency rates 484 Consolidated net sales for the period ended December 31, 2013 $ 429,042 32 -------------------------------------------------------------------------------- The increase in net sales for the first quarter of fiscal year 2014 was attributable to the Duarte Business acquisition. Organic net sales, which excludes the Duarte Business, decreased primarily due to decreased volumes in defense sales, partially offset by increased commercial original equipment manufacturer ("OEM") sales in our Aerospace segment. Sales for the Energy segment were relatively consistent when compared to the prior year. Price changes: Increases in selling prices were driven primarily by our Aerospace segment markets. Foreign currency exchange rates: During the first quarter of fiscal year 2014, our net sales were positively impacted by $484 due to favorable fluctuations in foreign currency exchange rates compared to the same period of fiscal year 2013. Our worldwide sales activities are primarily denominated in U.S. dollars ("USD"), European Monetary Units (the "Euro"), Great Britain pounds ("GBP"), Japanese yen ("JPY"), and Chinese yuan ("CNY"). As the USD, Euro, GBP, JPY, and CNY fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. If the CNY, which the Chinese government has not historically allowed to fluctuate significantly against USD, is allowed to fluctuate against USD in the future, we would be exposed to gains or losses on sales transactions denominated in CNY. Costs and Expenses Cost of goods sold increased by $25,893 to $315,466 for the first quarter of fiscal year 2014 from $289,573 for the first quarter of fiscal year 2013, primarily related to increased sales. Gross margins (as measured by net sales less cost of goods sold, divided by net sales) were 26.5% for the first quarter of fiscal year 2014, compared to 29.1% for the same period of the prior year. The decrease in gross margin is primarily attributable to the decrease in organic sales volume in the Aerospace segment and unfavorable product mix, particularly the decrease in defense aftermarket sales, partially offset by improved operational performance. Selling, general, and administrative expenses increased by $910 or 2.5%, to $37,328 for the first quarter of fiscal year 2014 as compared to $36,418 for the same period of fiscal year 2013. Selling, general and administrative expenses decreased as a percentage of net sales to 8.7% for the first quarter of fiscal year 2014 as compared to 8.9% for the same period of fiscal year 2013. The increase in expenses was primarily related to increased variable compensation related to long-term management incentive programs, partially offset by a net decrease in costs related to the Duarte Business, as transaction costs of $1,707 were recorded in the prior year's first quarter. Research and development costs decreased by $594 , or 2.0%, to $29,424 for the first quarter of fiscal year 2014 as compared to $30,018 for the same period of fiscal year 2013. Research and development costs decreased as a percentage of net sales to 6.9% for the first quarter of fiscal year 2014 as compared to 7.4% for the same period of fiscal year 2013. Research and development costs as a percent of net sales decreased primarily due increased sales. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development as programs continue. Amortization of intangible assets increased to $8,484 for the first quarter of fiscal year 2014 compared to $7,667 for the same period of fiscal year 2013. As a percentage of net sales, amortization of intangible assets increased to 2.0% for the first quarter of fiscal year 2014 as compared to 1.9% for the same period of fiscal year 2013. The amortization of intangible assets increased due to the intangible assets acquired in the Duarte Business acquisition. Interest expense decreased to $6,062 , or 1.4% of net sales, for the first quarter of fiscal year 2014 compared to $6,456 , or 1.6% of net sales, for the same period of fiscal year 2013. Income taxes were provided at an effective rate on earnings before income taxes of 29.0% for the first quarter of fiscal year 2014 compared to 29.0% for the same period of fiscal year 2013. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following: Three-Month Period Effective tax rate for the period ended December 31, 2012 29.0 % Research credit (0.7) Adjustment of prior period tax items 0.7 Effective tax rate for the period ended December 31, 2013 29.0 % 33 -------------------------------------------------------------------------------- Segment Results The following table presents sales by segment: Three-Months Ended December 31, 2013 2012 Net sales: Aerospace $ 229,872 53.6 % $ 211,389 51.8 % Energy 199,170 46.4 196,950 48.2 Consolidated net sales $ 429,042 100.0 % $ 408,339 100.0 % The following table presents earnings by segment: Three-Months Ended December 31, 2013 2012 Aerospace $ 22,549 $ 31,568 Energy 27,071 23,908 Total segment earnings 49,620 55,476 Nonsegment expenses (10,673) (10,551) Interest expense, net (6,003) (6,388) Consolidated earnings before income taxes 32,944 38,537 Income tax expense (9,561) (11,169) Consolidated net earnings $ 23,383 $ 27,368 The following table presents earnings by segment as a percent of segment net sales: Three-Months Ended December 31, 2013 2012 Aerospace 9.8% 14.9% Energy 13.6% 12.1% Aerospace Aerospace segment net sales increased by $18,483 , or 8.7%, to $229,872 for the first quarter of fiscal year 2014 from $211,389 for the same period of fiscal year 2013. Segment net sales excluding the acquired Duarte Business were $198,440 for the first quarter of fiscal year 2014, a decrease of $12,949 , or 6.1%, compared to the same quarter of the prior year. Organic segment sales, which exclude the acquired Duarte Business, for fiscal year 2014 were lower compared to fiscal year 2013, driven primarily by significantly lower defense sales in both aftermarket and OEM, partially offset by increases in commercial OEM and aftermarket sales. Defense aftermarket sales variability due to budget uncertainties was due to the timing of contracts, orders and upgrade programs during the first quarter of fiscal year 2014. Defense aftermarket spare parts and repair sales decreased significantly, particularly related to sales for rotorcraft programs. Defense OEM sales also declined, but not as significantly. We anticipate that these continued budget uncertainties may result in quarterly variability in our defense sales for the remainder of fiscal year. During our second quarter of fiscal year 2013, the sequestration of U.S. federal government appropriations took effect under the Budget Act. The impact of the sequester has been tempered by Congressional agreement, but it continues to result in budget uncertainties. We will continue to monitor any potential long-term effects of the Budget Act on our business. 34 -------------------------------------------------------------------------------- Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft have continued to increase based on improved airline demand and new product introduction. The commercial aftermarket showed improvement as global passenger traffic growth continues to drive aircraft utilization. Aerospace segment earnings decreased by $9,019 , or 28.6%, to $22,549 for the first quarter of fiscal year 2014, compared to the same period of fiscal year 2013 due to the following: Three-Month Period Earnings for the period ended December 31, 2012 $ 31,568 Organic sales volume (8,726) Price and sales mix (825) Other, net 532 Earnings for the period ended December 31, 2013 $ 22,549 Segment earnings as a percentage of sales decreased to 9.8% in the first quarter of fiscal year 2014 compared to 14.9% for the same period of fiscal year 2013. The decrease in Aerospace segment earnings in the first quarter of fiscal year 2014 compared to the same period of fiscal year 2013 was primarily the result of reduced organic sales volume and unfavorable product mix. Energy Energy segment net sales increased $2,220 , or 1.1%, to $199,170 for the first quarter of fiscal year 2014 from $196,950 for the same period of fiscal year 2013. Energy segment sales reflected the continued uncertainty in our energy markets. Strong marine and solid aero-derivative sales were partially offset by continuing softness in heavy frame turbine power generation systems. Energy segment earnings increased by $3,163 , or 13.2%, to $27,071 for the first quarter of fiscal year 2014 as compared to the same period of fiscal year 2013 due to the following: Three-Month Period Earnings for the period ended December 31, 2012 $ 23,908 Sales volume 487 Price, sales mix and productivity 4,183 Effects of changes in foreign currency rates (1,171) Other, net (336) Earnings for the period ended December 31, 2013 $ 27,071 Segment earnings as a percentage of sales increased to 13.6% in the first quarter of fiscal year 2014 compared to 12.1% for the same period of fiscal year 2013. The increase in the Energy segment earnings for the first quarter of fiscal year 2014 as compared to the same period of fiscal year 2013 was driven primarily by continuing manufacturing productivity gains. Foreign currency exchange rates had an unfavorable impact of $1,171 for the first quarter of fiscal year 2014 compared to the same period of fiscal year 2013. Nonsegment expenses Nonsegment expenses were consistent at $10,673 and $10,551 for the first quarter of fiscal year 2014 and 2013, respectively. Nonsegment expenses as a percentage of net sales decreased slightly to 2.5% of net sales for the first quarter of fiscal year 2014, compared to 2.6% of net sales for the same period of fiscal year 2013. 35 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES We believe liquidity and cash generation are important to our strategy of self-funding our ongoing operating needs. Historically, we have been able to satisfy our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility, will be sufficient to fund our continuing operating needs, including capital expansion funding. Our aggregate cash and cash equivalents were $54,590 and $48,556 , and our working capital was $637,809 and $541,183 at December 31, 2013 and September 30, 2013 , respectively. Of the $54,590 of cash and cash equivalents held at December 31, 2013 , $42,935 was held by our foreign subsidiaries. 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 , 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 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 not practicable to determine the income tax liability that might be incurred if these funds were to be repatriated. Consistent with business practice common in China , Woodward's Chinese subsidiary has accepted, in settlement of certain customer accounts receivable from Chinese customers, bank drafts authorized by large, creditworthy Chinese banks. These bank drafts represent a promise to pay the balance of the receivable at a future date, albeit under payment terms that can be longer than traditional payment terms. At December 31, 2013 and September 30, 2013 , Woodward had bank drafts of $67,012 and $72,954 , respectively, recorded as accounts receivable on its condensed consolidated balance sheets. Woodward only accepts bank drafts authorized by large, creditworthy banks where the credit risk associated with the bank draft is assessed to be minimal. On October 1, 2013 , we entered into the 2013 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. We issued the Series G, H and I Notes on October 1, 2013 in an aggregate principal amount of $100,000 and used the proceeds to repay all of the outstanding balance on the Series B Notes due October 1, 2013 . We issued the Series J, K and L Notes in an additional $150,000 aggregate principal amount on November 15, 2013 . The notes issued under the 2013 Note Purchase Agreement have not been 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 under the 2013 Note Purchase Agreement are not entitled to any registration rights. For further discussion of the 2013 Note Purchase Agreement, see Note 12, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q. Our revolving credit facility, which we entered into on July 10, 2013 , matures in July 2018 and provides a borrowing capacity of up to $600,000 with the option to increase total available borrowings to up to $800,000 , subject to lenders' participation. We can borrow against our $600,000 revolving credit facility as long as we are in compliance with all of our debt covenants. 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 stock, payments of dividends, and acquisitions. In addition, 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 the Revolving Credit Agreement and our other credit facilities, see Note 12, Credit facilities and short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q. At December 31, 2013 , we had total outstanding debt of $594,000 with additional borrowing availability of $500,647 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $28,063 under various foreign credit facilities. In connection with the acquisition of the Duarte Business on December 21, 2012 , we entered into the Line of Credit. The Line of Credit provided for unsecured loans to the Company of up to $200,000 on a revolving basis. Loans made under the Line of Credit bore interest at a floating rate based, at the Company's option, on either the prime rate or an adjusted LIBOR . The Line of Credit was repaid in full and terminated on December 20, 2013 . 36 -------------------------------------------------------------------------------- At December 31, 2013 , we had $94,000 borrowings outstanding on our revolving credit facility, of which $84,000 was classified as long-term, and no borrowings outstanding on our foreign credit facilities. Revolving credit facility and short-term borrowing activity during the three-months ended December 31, 2013 was as follows: Maximum daily balance during the period $ 123,602 Average daily balance during the period $ 47,087 Weighted average interest rate on average daily balance 1.82% We believe we were in compliance with all our debt covenants at December 31, 2013 . 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 stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash. We are currently developing a second campus in the greater- Rockford, Illinois area for our aerospace business. This campus is intended to support the growth expected over the next ten years and beyond stimulated by our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. We anticipate investing approximately $275,000 over the next five years in land, buildings and equipment between our two Rockford area campuses. These investments are expected to result in future productivity gains for our existing and new business. However, given the significance of the anticipated volumes associated with the new system platforms, we still expect our Rockford area workforce to increase substantially, by as much as 70%-90% from current levels, by the end of 2021. We are also developing a new campus at our corporate headquarters in Fort Collins, Colorado to support the continued growth of our energy business by supplementing our existing Colorado manufacturing facilities and corporate headquarters. We anticipate investing approximately $150,000 over the next five years in land, buildings and equipment for this new campus in Colorado . We believe we have adequate access to contractually committed borrowings and other available credit facilities. However, we could be adversely affected if the banks supplying our borrowing requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. While we believe the lending institutions participating in our credit arrangements are financially stable, events in the global credit markets, including the failure, takeover or rescue by various government entities of major financial institutions, have created uncertainty with respect to credit availability. 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. Cash Flows Three-Months Ended December 31, 2013 2012 Net cash provided by operating activities $ 44,433 $ 39,974 Net cash used in investing activities (37,109) (228,743) Net cash provided by (used in) financing activities (1,959) 195,286 Effect of exchange rate changes on cash and cash equivalents 669 1,110 Net change in cash and cash equivalents 6,034 7,627 Cash and cash equivalents at beginning of period 48,556 61,829 Cash and cash equivalents at end of period $ 54,590 $ 69,456 37 -------------------------------------------------------------------------------- Net cash flows provided by operating activities for the first quarter of fiscal year 2014 was $44,433 compared to $39,974 in the same period of fiscal year 2013. Net cash flows provided by operating activities was relatively consistent with the prior year. Net cash flows used in investing activities for the first quarter of fiscal year 2014 was $37,109 compared to $228,743 in the same period of fiscal year 2013. The decrease in cash used compared to the same period of the last fiscal year is due primarily to the acquisition of the Duarte Business in the first quarter of fiscal year 2013, which utilized $198,860 of cash. In addition, payments for property, plant and equipment increased by $7,255 to $37,149 in the first quarter of fiscal year 2014 as compared to $29,894 in the same period of fiscal year 2013 related mainly to the development of a second campus in the greater- Rockford, Illinois area, a new facility in Niles, Illinois , and a new campus at our headquarters in Fort Collins, Colorado . Net cash flows provided by financing activities for the first quarter of fiscal year 2014 was $1,959 compared to $195,286 for the same period of fiscal year 2013. During the first quarter of fiscal year 2014, we had net short and long-term borrowings of $44,000 compared to net debt borrowings of $197,796 in the prior year. The higher borrowings in the first quarter of fiscal year 2013 were primarily attributable to the acquisition of the Duarte Business. We utilized $43,616 to repurchase 1,037 shares of our common stock in the first quarter of fiscal year 2014 under our existing stock repurchase program. In the first quarter of fiscal year 2013, we did not utilize any cash to repurchase any of our common stock under the stock repurchase program. Contractual Obligations We have various contractual obligations, including obligations related to long-term debt, operating leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K. There have been no material changes to our various contractual obligations during the first three months of fiscal year 2014 other than our entering into the 2013 Note Purchase Agreement as discussed in Note 12, Credit facilities and short-term borrowings and long-term debt, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Critical Accounting Policies 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 Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K include the discussion of estimates used for revenue recognition, purchase accounting, inventory valuation, postretirement benefit obligations, reviews for impairment of goodwill, and our provision for income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported. 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 are communicated through issuance of an Accounting Standards Update. 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 Condensed Consolidated Financial Statements upon adoption. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, Recent accounting pronouncements, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.


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Source: Edgar Glimpses


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